In October 2021, the Reserve Bank of India prescribed scale-based regulation for non-banking financial companies (NBFCs), considering that the country’s shadow banking sector has witnessed significant growth over the years in terms of size, scale of activities, and complexity.

After issuing clarifications on various provisions of the scale-based regulation (SBR), RBI implemented the revised regulatory framework for NBFCs with effect from October 1, 2022, keeping in view their growing importance in credit intermediation, changing risk profile and heterogeneity.

The revised framework, based on the principle of proportionality, is categorised by the NBFC’s size, activity, complexity, and interconnectedness, among other factors.

Following the implementation of SBR framework, the NBFC sector has witnessed strong growth and demonstrated resilience, with credit growth for the sector often outpacing that of the banking sector. Industry players have benefited from SBR as it helped them mitigate systemic risks and reduce compliance burden.

Can the scale-based regulation framework be implemented in India’s insurance sector to turbocharge its growth to fulfil the ‘insurance for all by 2047’ objective for the nation?

Customised approach

The time may be ripe for applying this framework suitably to the insurance sector, which has so far been regulated largely by a one-size-fits-all regime, opine industry insiders and experts. They note that the SBR framework would be beneficial for the better functioning and supervision of the sector, promote growth, resilience, and sustainability for the insurers.

Although India’s insurance market has continued its upward trajectory, low insurance penetration (which declined from 4 per cent in FY23 to 3.7 per cent in FY24) remains a major cause for concern.

“With an overall insurance penetration rate of 3.7 per cent, below the global average of 7 per cent, there is a notable gap in coverage...Additionally, insurance density in India is relatively low compared to global standards,” according to the Economic Survey 2024-25.

Insurance penetration is calculated as the percentage of insurance premiums paid in a year to the country’s gross domestic product, while insurance density is calculated as the ratio of insurance premium to population.

For life insurance, overall premium income would be a reasonable indicator for adopting a scale-based regulation framework. And, in the context of general insurance, gross direct premium income would serve as a suitable metric for implementing this framework, suggests domestic rating agency ICRA.

“A scale-based regulatory approach can bring risk-based supervision to the insurance sector. Since insurers vary in size, complexity, and risk profile, differentiated regulation would help in ensuring stronger oversight and at the same time enabling medium and smaller players to grow efficiently,” Rushabh Gandhi, MD & CEO, IndiaFirst Life Insurance, told businessline.

He observed that the SBR framework can be applied in areas such as solvency and capital requirements, and risk management practices along with differentiated approach for technology governance, including information and cybersecurity and stress testing based on an insurer’s scale and risk profie.

Gandhi said, “Overall, it enables in creating a stronger ecosystem for insurers.”

Financial security

Notably, for India, life insurance protection gap rose to 87 per cent in 2023 from 83 per cent in 2019, posing a serious threat to financial security and aspirations of familes. The gap is even more pronounced among those aged between 18 and 35, exceeding 90 per cent.

In the face of this alarming scenario, the insurance sector is transitioning from a traditional rule-based regulatory framework to a principle-based approach, which is aimed at facilitating ease of doing business and fostering growth opportunities.

IRDAI, the country’s insurance regulator, has approved many principle-based regulations in the last three years with the objective of universalising insurance.

“To solidify a principle-based regulatory framework, IRDAI is also developing and implementing a Risk Based Supervisory framework for the Indian insurance industry. IRDAI aims to promote robust supervision focused on consumer protection. This initiative represents a significant shift towards global best practices, emphasizing proportionality, materiality, and a comprehensive analysis of the activities of regulated entities,” the insurance regulator said in its latest annual report.

Tailored rules

The current one-size-fits-all framework treats a new entrant with 1 per cent market share and an incumbent with 40 per cent market share as identical, says a senior executive at a private sector general insurance company.

“That limits innovation and forces smaller players to spend disproportionate effort on compliance instead of customer service. A scale-based framework will bring proportionate oversight, allowing IRDAI to tailor regulation to an insurer’s size, complexity, and risk profile.

“It will strengthen the industry, encourage competition, and align well with the goal of Insurance for All by 2047,” underscored the executive, requesting anonymity.

According to Neha Parikh, Vice President, Sector Head - Financial Sector Ratings, ICRA, implementation of the scale-based regulation in the insurance sector would help in strengthening the interest of policyholders and market development.

“The SBR approach would be beneficial for better functioning and supervision of the sector as it will bring more focus on risk management and disclosures for larger companies,” Parikh told businessline.

She emphasised that through SBR, more flexibility can be provided to smaller insurers around Expense of Management (EOM) norms, capital buffers as well as lesser regulatory burden, which could foster growth and create a more diverse market.

Rules for expenses

Industry observers say the EoM regulations, introduced to put a lower cap on commission paid to the agents and intermediaries of both non-life and life insurance companies, has been a challenge for small and new players, raising concern that it favours some of the old and scale players.

They pointed out that big players have already reached a scale where their EoM has come down, but for smaller players or newer players, it is very difficult to comply with the expenses limit norms.

“During the year 2023-24, out of 26 life insurers, 17 were compliant with the aforementioned regulations. Eight life insurers had exceeded the limits of expenses on an overall basis in Par and Non-Par (including Linked) business and their request for forbearance is under examination,” IRDAI noted in its annual report.

So, the time may be opportune for introducing SBR for insurers, large and small, so that they grow in a risk-adjusted manner, furthering the goal of ‘Insurance For All’ by 2047.

Published on October 13, 2025