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Government insurance companies versus Private Insurance companies

Government insurance companies versus private insurance companies

A simple walk down the memory lane and you will be overwhelmed by the market share that LIC enjoyed a decade or so earlier. To its advantage, LIC is a state-owned insurance company and it did not have much competition back in the day. However, things have changed a lot in the past few years. A lot of new private insurance players have entered the market. This brings in an obvious question which is better, a government insurance company or a private insurance company?

The debate

One of the fore front points of discussions when it comes to public versus private companies in insurance space is the trust level. A large portion of the population just doesn’t have enough confidence in private insurers and thus keep going back to public insurers. Though there is nothing wrong with that, there are a few things that one needs to be aware of before drawing any such conclusions regarding private insurers. The following are some such pointers.

    IRDAI

The Insurance Regulatory and Development Authority of India is a governing body that considers all the aspects of the insurance sector. It takes a keen interest in the formation and operation of all insurers and has strict guidelines which they must follow. These rules and regulations hold good for both public as well as private companies. IRDAI gives more preference to customers than companies. Thus, as far as rules and regulations are concerned, all the companies must adhere to the same set.

  • Dissolve

Each of the insurers needs to maintain a specific solvency margin to operate without any issues. The solvency margin refers to assets that account above and more than all the liabilities that the company has. What this primarily does it provide a blanket even before getting remotely close to bankruptcy if something goes wrong. If the liabilities increase dramatically due to some reason, the solvency margin will help a company to curb those. In fact, insurers need to have a 150% solvency margin to operate in our country. Meaning for every Rs.1000 that the company insures, it must have Rs.1500 as a reserve.

  • Formation

The IRDAI imposes very strict norms making it difficult for small players to enter or exit the market. In order to set up an insurance firm, one needs to deposit Rs.100 crore with the regulatory body. Given the increase in costs of almost everything ever since the body was set up (in the year 1999) IRDAI has indicated that the cost could go up to twice of the existing margin. These high costs ensure that not anyone and everyone can enter the insurance space. And that company only worth enough financially will try to enter.

  • Merge

If getting into the insurance sector is difficult, getting out of it is a herculean task in itself. IRDAI does not allow companies to simply abandon their business and walk away from the customers. According to IRDAI guidelines, if a company cannot continue its operations due to unavoidable reasons, it must merge with another existing insurance player. Implementation of this step ensures that customers of the existing company are not left in a limbo state.

IRDAI has taken the onus on itself to provide with a strong system that ensures all the companies, be it public or private deal with their customers respectfully. If you are among those people who do not have enough faith in private insurers, the above points should be enough to convince you otherwise. Do remember IRDAI is working round the clock to make things better for the people.

A casual discussion with a friend revealed that the premium he paid to one of the public insurers is about three to five times more than what private insurers would normally charge. This is not to point fingers at any insurer but rather to give you clarity in your decisions. You as an end user have a lot more options now, than what your predecessors had a few years ago. With the backing of IRDAI, you should not be worried much and look at the other options. If you have access to similar features at a relatively lower price point, there is no harm in considering those.

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