Even after more than 10 years of liberalisation, insurance penetration measured in terms of premium income to GDP was less than 4% in India and the total sum assured to GDP ratio was 55% compared to 150-250% in developed nations.
"Demand for banking products has been fast-paced while demand for insurance has been tepid," Chidambaram said highlighting the challenges lying ahead of insurers.
"It's a pity that India is one of the most under-insured markets. The reason why insurance sector has stumbled is because of mis-selling of products and complex products," he said at a function to mark the entry of Punjab National Bank in insurance with a 30% stake in a joint venture with Metlife India.
What was needed, he said was "simpler" products which can be easily understood by the consumers.
Irda has come up with the guidelines for simpler products in November last year and insurers are yet to come up with such products.
The statement comes amid a dismal show by insurers since last year when total life insurance premium collection dropped 3% year-on-year to R2.83 lakh crore during 2011-12. The total new business premium collected by all the insurers were R1.14 lakh crore last fiscal compared with R1.26 lakh crore in 2010-11, a decline of around 10%. During April-November, the first year premium collection was down by 2.9% year-on-year to R60,624 crore, according to latest data available with sectoral regulator Irda.
There has been a perceptible shift from unit-linked insurance plans towards traditional product as fund value of investors fell below the invested amounts in many cases due to choppy market conditions. Linked new business saw a significant drop of 67% year-on-year to R17,455 crore in 2011-12 compared with R52,739 crore in 2010-11 and non-linked new business premium showed a 32% year-on-year growth to R96,224 crore as on March 2012.
The decline in insurance premium contributed to the decline in the household financial savings to 22.3% of GDP in 2011-12 from 23.5% in the previous year even as the country's overall gross savings rate fell to 8-year low of 30.8% of GDP last fiscal from 34% in 2010-11.