Second-generation insurance reforms on horizon

The government appears to be gearing up for second-generation reforms in the insurance sector.

When he resumed charge of the finance ministry, P Chidamabaram held a slew of meetings with the insurance regulator and captains of the industry in October 2012.

Also, at a meeting in Singapore recently, the finance minister told the global community that the government was committed to seeking parliamentary approval for increasing the FDI limit in the insurance and pension sectors to 49% from the current ceiling of 26%.

 

The reforms introduced in 1999 were focussed more on opening up of the sector, enabling private players to enter and for attracting FDI to support this highly capital-intensive industry. The new regulations served the industry well and, over a period of time, the country witnessed entry of as many as 44 insurance entities.

The contribution of the sector to the GDP increased to a record 5.1% in 2009-10, up from 2.9% in 1999. In the life sector, the number of intermediaries rose to a high of 2.9 million. As a result, the sector experienced a boom similar to the telecom sector during the best period of the economic reforms.

The industry reclaimed its role in the economy as an important component of development strategies. During 2010-11, however, the trend started weakening after almost a decade of fabulous growth in market penetration, distribution reach and product innovation.

The last two years were quite frustrating and the possibility of a revival seemed remote till the finance minister made the policy of the government explicit by announcing the 12-point programme for the life insurance sector and government’s views on the issues plaguing the non-life and health business in the backdrop of the limitations faced by the insurers due to regulatory pressures.

The spate of regulatory guidelines, aimed at protecting policyholders’ interest and curbing wasteful expenditure, did bring with them a trail of misery, putting many companies completely out of track. Such steps were motivated by the need to curb mis-selling, but coinciding with the global economic slowdown, the regulatory interventions drew curtains on the first phase of reforms.

The constraints faced by the insurers and their pain were noted by the finance minister during his interactions with the CEOs.

The 12-point programme for life insurers tries to address issues in the domain of taxation, product approval, revamping of the distribution channel, etc. For the non-life sector, the government has hinted at the need to bring more transparency and standardisation in terms and conditions of health insurance, urgency for reaching out to the poor and those in far-flung areas, and the need to create awareness among people for protecting themselves and their property against natural disasters.

It is felt that there is a huge opportunity in this sector as the penetration has remained constant at 0.7% for many years.

The ratio of non-life premium to life premium in India is far below the global average. This has further prompted the government to encourage fresh initiatives to deepen penetration of non-life insurance through more personal products going far beyond the statutory line of business like motor, fire, marine, etc.

The second-generation reforms are also warranted due to the emerging issues like initial public offerings by insurers, mergers and acquisitions, new investment imperatives like one allowing LIC to invest up to 30% in a single company and allowing Indian insurers to actively expand their footprints overseas, encashing on their experience in the Indian market, which provides numerous challenges created by the fast-changing demography on various parameters like economic, social, cultural, health and longevity.

Apart from these, much more needs to be done on the platform of financial inclusion through sustainable micro insurance, creating real value for the poor and BPL families.

The next round of reforms will also have to address insurers’ concerns regarding distribution channels, learning from the experience of the first decade. There is an urgent need to recognise the fact that the importance of distribution cannot be overlooked in the business of insurance and the channels must be carefully nurtured as the main driver of growth and stability in mobilising premium income.

There is a need to further stabilise and activate the grievance redressal mechanism so that the voice of the customers is heard with respect and is utilised as a valuable input.

The role of technology will have to be made more clear with suitable changes in law for facilitating buying of insurance products as well as for maintaining records in demat forms on scale larger than the existing one.

There is a need to strengthen corporate governance in the sector and closer regulatory supervision. The government may consider revamping the regulatory structure to deal with such issues more effectively by issuing necessary directives or legislative changes.

A strong political will, as pronounced by the immediate steps taken by the FM since October 2012 , and the issues likely to come up during the Budget session of Parliament may unleash the second generation of reforms in the insurance sector very soon.

The author is former MD & CEO, Star Union Dai-ichi Life Insurance

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