Insurance Reform - A Game Changer

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K R Sudhaman | 31 Mar, 2015
Insurance industry in India is a USD 250 billion industry, equivalent to four-fifth of the country's foreign exchange reserves. But its growth has been hampered because of the unusual delay in the passage of Insurance amendment bill, which 10 years after it was conceived was passed by Parliament recently.

Life insurance has potential to grow at 12 percent annually and general insurance by 22 percent in the next ten years as insurance penetration is one of the lowest in the world. But what was standing in the way was infusion of fresh capital, particularly foreign, which was possible only if the foreign direct investment cap is raised. The Insurance amendment bill has precisely done that by raising the FDI cap to 49 percent from the present 26 percent.

The last few years have been challenging for the industry with declining growth in life insurance premiums and significant challenges in non-life profitability. This was driven by a combination of macro-economic factors and structural challenges inherent in the insurance industry. Confederation of Indian Industry is of the view that this can be reversed by concerted action by industry players. The Insurance amendment bill also brings in regulatory reforms.

A CII report prepared in partnership with global consultancy firm McKinsey says the Insurance industry in India is at an inflexion point in its development. With Government's reformative drive and resolve, the industry can jointly achieve the vision of building a customer centric and value-creating industry over the next decade. The inclusive growth will enable India to become a global top 10 insurance market with a total Gross Written Premium size of USD 250 billion.

India had very poor penetration of life insurance cover accounting for less than one percent of population. With the opening up of the sector to private players and foreign direct investment up to 26 percent in the late 1990s, the life insurance cover has more than trebled to 3.7 percent of the population by 2012. With FDI cap being raised up to 49 percent now, the life insurance cover will nearly double to 6 percent of population in the next five years and to more than 10 percent by 2025. It is also not true to say that state-owned Life Insurance Corporation of India's growth has been stunted with the opening up. In fact opening up has helped LIC as new technologies and methods have come into the sector now and competition had made the state owned organization more aggressive. LIC's annual premium on life insurance has increased from Rs 19,000 crore at the turn of the century to 3.64 lakh crore by 2012.

To achieve the targets set for next five years, India needs nearly Rs 50,000 crore of additional capital in the sector, of which nearly half would have to come by way of foreign investment.

The Life Insurance industry has around 380 million policies in force and pays claims for around 12 percent of the total deaths in the country. It has a critical role given the limited social security avenues available and has also played a crucial role in inculcating the savings habit among a large mass of the population which has limited access to other forms of savings, the CII study says.

Over the last five decades, the industry has developed significantly on dimensions related to access, efficiency and structure. However, much of the gains of the first 10 years of insurance sector liberalisation have been wiped out in the past 4 years as the industry has been impacted significantly by macro-economic, regulatory and internal structural challenges. The industry is at the crossroads today, with a real risk of losing its relevance if the status quo continues. The insurance reform bill has therefore come at an appropriate time.

Take for instance health insurance cover. The amount of money individuals spent on medical treatment totaled to around Rs 3 lakh crore annually in India, of which only Rs 20,000 crore is through insurance cover. The rest Rs 2.8 lakh crore is spent on medical treatment particularly by the poor and lower middle class through their hard-earned savings or borrowing at high cost or by selling family silver. The general insurance cover, of which health and motor vehicle insurance formed part of it accounted for only 0.7 percent of the population. It is expected to double to nearly 2 percent in the next five years. With life and general insurance cover doubling in the next five to 10 years more than 700 million lives can be covered providing much needed social safety net hitherto not available to vast majority of the population. With Jan-Dhan Yojana, which has a mandatory accident insurance cover, can help in insurance penetration. Crop insurance is yet another area where there is a lot of potential.

The General Insurance industry has witnessed a strong performance with 18 percent growth between 2005 and 2014 and is now a USD 13 billion industry breaking into the top 20 industry globally. It currently provides cover of more than USD 17,000 billion.

But home insurance penetration is less than 1 percent; there is significant under-insurance in segments such as two-wheelers and personal health; corporate (property and indemnity), SME and rural risk coverage are substantially lower than global benchmarks. These are areas in which there could be significant growth in the next 5-10 years.

The government sponsored Rashtriya Swasthya Bima Yojana (RSBY) provides coverage to the population below the poverty line. The health insurance cover provided to poor in Tamil Nadu has worked wonders. It has not only helped poor get treatment but also helped government earn money through insurance claim. The Tamil Nadu government's popular health card scheme that provided insurance up to 2 lakh per family or individual has helped General Hospital in Chennai alone earn Rs 18 crore last year by way insurance claim for treatment of poor people covered under the scheme. This scheme could win-win for both government and poor people.

The government has recently announced that it would promote universal health coverage. There are several learnings from other markets as well. In Brazil 40 percent of the spending on health is through health insurance unlike in India where it is just 6-7 percent. Health insurance has potential to penetrate to more than 75 percent of 1.2 billion population in the country.

The Insurance Amendment Bill, passed by parliament also safeguards Indian ownership and control and provided Insurance regulator, Insurance Regulatory and Development Authority of India (IRDA) flexibility to discharge its functions more effectively and efficiently. The Bill amends the Insurance Act, 1938, the General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority (IRDA) Act, 1999.

The amended law, which replaces an ordinance enacted in December 2014, also enables foreign reinsurers to set up branches in India including top global re-insurance company Llyods.

It is not India alone opening up its insurance sector. Many countries allow foreign direct investment in the insurance sector as domestic companies do not have the wherewithal or resourced to meet insurance requirement of the entire population. Also reinsurance is critical for sharing the risk cover involving billions of dollars in the event of natural calamities and large accidents. In US, UK, Japan, France and Germany, FDI up to 100 percent is allowed in the sector. Even in China up to 50 percent FDI is allowed. In case of Indonesia it is 80 percent and Malaysia, it is 51 percent. Even after the opening up only up to 49 percent FDI is allowed in India.

Apart from deepening penetration, the opening up of insurance and pension sector helps Indian government and companies to access long-term funding for infrastructure projects, which require investment up to USD 1 trillion in the next five years. Only pension and insurance funds can provide long-term capital of 10-30 years duration as only they have access to such long term deposits. Unfortunately in India commercial banks fund infrastructure projects because access to long-term capital is now limited. Banks by nature get deposits short-to-medium term and hence lend short-to-medium term. Now by lending long term, banks in India have asset-liability mis-match. Access to pension and insurance funds will make it easier for long term funding of infra projects. Foreign insurance players operating in India will now provide access to pension and insurance funds of their parent companies. The US and Canadian pension and insurance funds are waiting to invest their huge capital in countries like India this insurance reform will pave the way.

*K R Sudhaman is a freelance Business Journalist and is a former Economics Editor, Press Trust of India, TickerNews and Financial Chronicle. The views expressed are personal. (Source: PIB Features)