Friday, March 13, 2015

Insurance for all should become a reality

This article was first published in the business section of www.rediff.com on March 13, 2015
More than a decade ago, just after liberalisation of the insurance sector, India was the 12th largest economy in the world and had the 19th largest insurance industry. 
Come 2014-15, India is the fourth largest economy in the world (on the brink of becoming the third largest) but it is still has the 19th largest insurance industry. 
Talking in absolute terms, the premiums have grown, number of players has grown, claims have grown, and even the penetration has gone up. 
But relative to other nations, the insurance penetration in India is very low at 3.9 per cent as against the world average of 6.3 per cent. General insurance penetration is lower than one percent.
The low penetration is glaring especially because of the need for insurance. 
A few very obvious reasons for the need are:  
India is prone to natural disasters due to its climate and topography. The penetration is even lower for property insurance.
The economic losses due to events like Cyclone Hudhud and Uttarakhan Floods run into thousands of crores. Insurance helps in rehabilitation and reduces the burden to the victims.
The Environmental Burden of Diseases for India, as per a report of World Health Organization (WHO), is very high due to environmental factors like water, sanitation, air pollution and hygiene.
Chronic Obstructive Pulmonary Disease (COPD), vector-borne diseases, diarrhoea, respiratory infections and cardiovascular diseases are all very common in India. Lack of insurance results in very high out of the pocket expenditure.
Road fatalities in India are among the highest in the world, as per the World Bank. Road safety is a major concern in India. In spite of it, more than 50 percent of the vehicles on Indian roads do not even carry the mandatory Third Party Insurance, as per the Insurance Information Bureau of India. 
While awareness is one of the major reasons, lack of network and reach are also reasons for poor penetration. The government and the regulator, realises the need for a thrust to the insurance industry. 
T S Vijayan, Chairman, IRDAI, recently enumerated the need for capital infusion of about Rs 60,000 crore (Rs 600 billion) into the industry.
The Insurance Laws (Amendment) Bill, 2015 would certainly make that capital infusion easier by way of increased foreign direct investment from the current 26% to 49% (inclusive of foreign portfolio investments). 

The control, management and policy decision making would still reside with the Indian owners, as per the Bill.
The Indian partner in the joint venture, at least a few of them, would benefit from the infusion of further capital and technology. A few may not need the capital though as they are promoted by corporate houses with deep pockets.  
Apart from raising the FDI to 49 percent, the Bill has made health insurance a separate line of business. This would bring the much needed focus to the health insurance business. 
Health insurance in India has been growing at a cumulative annual growth rate of 17% in the last decade. 
Yet, the percentage of population covered by any form of insurance (including government schemes) would be only about 17-30%, depending on which report one would like to rely on. 
Focus on health as a separate line of business should bring in greater capital, competition and competence into the sector.
The Bill also states that agents can now be directly appointed by the insurers, without the requirement of licensing with IRDA.  This would ease the process of hiring agents. Insurance is very much a push-based product in India. 
Hence, agents play a very important role in selling. However, the challenge is to get the right people to avoid mis-selling! 
The provision for high penalties in case of contravention of the provision of the Act should ensure the recruitment of right people as agents by the insurers.
There is greater emphasis on rural and social sector obligations that should help increase the penetration amongst people who actually need insurance the most. 
Public Sector Undertakings like New India Assurance, United Insurance, Oriental Insurance and National Insurance (Companies where the central government has atleast 51 percent shareholding) would be able to raise their capital for increasing their business in rural and social sectors, to meet solvency margin and such other purposes.
The Insurance Laws (Amendment) Bill, 2015 was passed in the Rajya Sabha on March 12th, with the support of the opposition parties Congress, AIADMK, NCP and BJD. It was earlier passed by the Lok Sabha on March 4th. 
A similar bill was originally brought to the lower house of the parliament by the then ruling UPA government in 2008. However, it was not passed due to lack of consensus in the house. The seven years wait has finally paid off for the foreign partners of many private Insurance companies, who see great potential for the Insurance Industry in India.
The Insurance Laws (Amendment) Bill, 2015 amends the Insurance Act, 1938 (the Act), the General Insurance Business (Nationalisation) Act, 1972 and the Insurance Regulatory and Development Authority (IRDA) Act, 1999 and will be deemed to have come into force on the 26th day of December, 2014, the day the Insurance Laws (Amendment) Ordinance, 2014 was passed by the President Pranab Mukherjee.
The Insurance Laws (Amendment) Bill, 2015, is a legislation that the Industry was looking forward to. And the government has done well to get it passed. 
It will soon be an Act. But really, this is no magic wand. Insurance should be made available for all. There is a need to create awareness for insurance. 
Innovative products must be introduced that will appeal to people. The insurance sector also needs specific skilled workforce. There is need for risk based underwriting. And much more!
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