Increasing the penetration of non-life insurance is required for supporting Gross Domestic Product (GDP) growth and liberal markets. Detariffing will contribute in a big way, but additional steps required would include elimination of Quasi Fiscal Activities (QFAs) by PSU non-life insurers, listing of PSU insurers, migration to centralized IT systems, implementation of Quality and Information Security, adoption of outsourcing and diversification into offshore processing opportunities.

In the current economic scenario, there is a general consensus amongst the government, industry and other economic agents on the need to achieve rapid economic growth of 8-10% per annum. However, a cursory comparison with the major Organization for Economic Cooperation and Development (OECD) and emerging economies reveals that there is a strong correlation between economic growth in liberal democracies and insurance penetration. Intuitively, it could be interpreted that since security of life and property is the bedrock of democracy and capitalism, we could treat insurance penetration (life and non-life) as proxy indicators of the same. Therefore, India's efforts to attain economic growth of around 10% in the 11^th plan period may not yield the desired results unless, insurance penetration is multiplied from current levels particularly in non-life where it was an abysmal 0.65% of GDP in 2004.

An important cause of the low penetration of non-life insurance has been (a) the distortions in non-life insurance pricing and (b) the Quasi Fiscal Activities (QFAs) imposed on the Public Sector Non-life Insurers (PSNI). "Due to pricing distortions arising out of the administered pricing/tariff regime, motor and health which are the No.1 and No.3 products of the non-life insurance sector commanding 42% and 11%, respectively of the gross premium, are loss-making portfolios." And being 100% owned by the Government of India (GoI), PSNIs are burdened with the QFA responsibilities of the state like providing mandatory third party motor cover and health insurance cover at subsidized premiums. The detariffing regime that is being ushered in from January 1, 2007, will be a major reform of the insurance pricing regime and is likely to introduce a paradigm change in the non-life sector. However, several other reform measures including that of affixing the responsibility for QFAs, need to be undertaken to step up the insurance penetration.

Second Generation Insurance Reforms, Non-Life Sector, Blueprint for Higher Insurance Penetration, Gross Domestic Product, GDP, Quasi Fiscal Activities, QFAs, Organization for Economic Cooperation and Development, OECD, Public Sector Non-life Insurers, PSNI, Government of India, GoI, Life Insurance Corporation of India, LIC, United Progressive Alliance, UPA, Financial Development .