Taking cues from the recent global financial woes, the Economic Survey today suggested the creation of a firewall to prevent the spread of crisis from one financial sector to the other.
"Inter-linkages between the insurance and banking sectors are a matter of concern, with many insurance companies being part of financial conglomerates," said Economic Survey 2011-12 tabled in Parliament today by Finance Minister Pranab Mukherjee.
"Efforts therefore have to be made towards building firewalls to prevent contagion from one sector to another, especially in times of stress," it said, adding that any financial stability issue regarding banks in the conglomerate may have an amplifying effect on the insurer.
The ability to raise capital and adequate reinsurance capacity are expected to be important determinants for the insurance sector's continued stability, the Survey said.
Some of the banks which promote insurance ventures include SBI, ICICI Bank, Bank of Baroda, Bank of India, Allahabad Bank and Indian Overseas Bank.
Noting that a healthy insurance sector is of vital importance to every modern economy, the Survey said, the insurance business has in the past remained under-developed with low levels of penetration.
Post liberalisation, the sector has succeeded in raising the levels of insurance penetration from 2.3 in 2000 to 5.1 in 2010, it said. Insurance penetration is defined as the ratio of premium underwritten in a given year to the gross domestic product (GDP).
Since the opening up of the sector, the number of participants in the Insurance industry has gone up from seven (including LIC, four public-sector general insurers, one specialised insurer, and the General Insurance Corporation as the national re-insurer) in 2000 to 49 insurers as on September 30, 2011.
Highlighting policy initiatives for the development of the insurance sector, the report said, micro insurance regulations issued by the IRDA have provided a fillip to propagating micro insurance as a conceptual issue.
Besides, it said, the government introduced the Insurance Laws (Amendment) Bill 2008 in the Rajya Sabha on December 22, 2008. The Bill aimed to amend the Insurance Act 1938, the General Insurance Business (Nationalisation) Act 1972, and the Insurance Regulatory and Development Authority Act 1999.
The Standing Committee on Finance has submitted its report to Parliament on December 13, 2011. The report of the Committee is under examination by the government, it said.