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The Indian Insurance Sector and Amendments made in the Bill

Posted by Admin on September 3, 2014 | Comment

Indian insurance sector has had its share of ups and downs, witnessing both galloping growth and a long period of lull. The journey that began in the pre-independence era has been replete with challenges and opportunities. With all eyes set on the much-awaited Insurance Laws (Amendment) Bill, the industry seems to be at the brink of yet another change.

The Indian Insurance Sector and Amendments made in the Bill

Early Years of Indian Insurance Sector

The nineteenth century India saw emergence of two insurance players – Oriental Life Insurance Company in 1818 and Bombay Mutual Life Assurance Society in 1870. The oldest existing insurance company in India is National Insurance Company, which was established in 1906. The Life Insurance Companies Act and the Provident Fund Act were passed in 1912, to regulate insurance business. The Indian government nationalised the Life Insurance sector in 1956 and Life Insurance Corporation (LIC) was founded. LIC took over 245 insurance companies operating in India. The General insurance business got nationalised in 1972 with the passage of General Insurance Business Act. The General Insurance Corporation of India (GIC) started operations in 1973.

Life Insurance Sector in India

The life insurance business has seen one of the fastest growths in this sector. Apart from Life Insurance Corporation, there are 23 other private life insurance players including Aviva Life Insurance, Bajaj Allianz Life, ICICI Prudential Life Insurance, and Tata AIA Life. Currently, most of the private insurance companies are in the form of joint ventures between Indian groups and global insurance giants.

According to the Life Insurance Council, the sector is likely to witness a compounded annual growth rate (CAGR) of 12 to 15 percent in the coming five years. The council is optimistic about 5 percent of annual growth in Life insurance penetration by 2020, which would be an impressive rise from the current 3.2 percent.

General Insurance Sector in India

The GIC was formed in 1972 as a direct outcome of the government’s decision to nationalise the general insurance business. 55 Indian insurance firms and 52 other general insurance operations of other companies were brought under the state’s control. The assets and operations of these nationalised companies were transferred to GIC.

Ever since this consolidation happened, GIC was re-organised with four state-owned general insurance companies – New India Assurance (Mumbai), National Insurance (Kolkata), United India Insurance (Chennai) and Oriental Insurance (New Delhi). Recently, the employee unions of these four state-owned general insurance firms called for a merger of all the four firms into a single entity to strengthen their market share and “serve rural and social sectors better.” These four companies reportedly have a cumulative asset base of Rs 1, 02,000 crore, reserves of Rs 15,000 crore and the capital of Rs 550 crore.

Laws & Regulations in Indian Insurance Sector

Indian Insurance sector is governed by several Acts and was subjected to several phases of regulation, de-regulation and again partial deregulation. The main regulator for insurance sector in India is the Insurance Regulatory and Development Authority (IRDA). After the enactment of Insurance Act of 1938 and General Insurance Business Act of 1972, the IRDA Act was introduced in 1999.

Growth of Indian Insurance Sector

It goes without saying that Indian insurance sector has seen a significant change since its liberalisation in the year 2000. It broke free from the monopoly of a single player to at least 24 players in 13 years. According to analyst estimate, the gross direct premium has grown from Rs 11,446 crore in FY02 to Rs 57,964 crore in FY12. It indicates a CAGR of 17.6 percent. Insurance density (ratio of premium underwritten in a year to the total population) has also increased from USD 2.4 in 2001 to USD 10 in 2011. The exponential growth of the sector was backed by “innovative products and aggressive expansion of distribution.”

The growth in insurance sector was accompanied by emergence of issues, which include market conduct and complaints of management. It called for “course correction for the long-term health of the industry.” The government introduced regulatory changes in the past few years compelling life insurance companies to adopt customer-centric practices.

Challenges Facing Insurance Sector

According to a reputed consulting firm, less than 1 percent of the total population of India are covered under Mediclaim, whereas in countries like US about 75 percent of the population is covered under health insurance. The life insurance sector is yet to reinvent itself to a new generation of customers. It remains heavily dependent on traditional method of “consultative selling” instead of adopting a multi-channel approach.

Presently, Indian insurers lag behind when it comes to identifying models and implementing new product solutions that can facilitate fast response to changes in consumer demand. Although there have been few insurers who tried to identify niche segments (women-oriented products, children future protection, etc.), yet there has been a lack of consistency. For most of the insurance players, profit has dwindled in the face of high operating losses “primarily on account of distribution and operating models.”

Proposed Amendment to Insurance Act

With the proposed bill seeking to hike FDI cap to 49 per cent, the government is optimistic about getting “additional investment”, “more expertise” and “more capital” for the insurance sector. Besides more funds, the industry will witness different kinds of products competing against each other. It’s to be noted that the Bill comes with a rider that the “management control rests in the hands of Indian promoter.”

Criticism on FDI Hike in Insurance Sector

The FDI hike proposal has triggered a spate of protests among trade unions as they flagged concern over “foreign capital coming into the most sensitive zone of the economy”. According to the Communist Party of India (CPI), if private insurance companies are allowed in India, it will “seriously compromise the interest of investors” and “impair upon the safety of long-term investment in life insurance.”

Global Firms Eyeing Indian Insurance Market

As government awaits a parliamentary nod on increasing FDI limit in insurance sector to 49 percent from the current 26 percent, global insurance giants are mulling over their plans to enter the “under-penetrated” Indian market. According to media reports, the insurance players are likely to make a beeline in Indian market with the new government moving fast on raising the FDI limit. Earlier, the inordinate delay on the government’s part was forcing overseas insurers to drop their plans.