In the last four years, Irda has not given any new licence. Besides new licences, even the raising of capital by existing companies by way of IPOs or new investors goes through a complex process, and it can take more than six months. Is this the way we want to attract capital, increase employment and insurance penetration?
The writer is a Biju Janata Dal Rajya Sabha MP2022 marks the 22nd year of liberalisation of India’s insurance sector. It has witnessed significant participation from domestic and foreign investors in both life and general insurance. However, even after more than two decades, India still lags the world average in terms of penetration and density. This is especially true for general insurance, where India’s penetration (premium to GDP) has been about 0.94%, and touched 0.97-1% last year as GDP saw negative growth. The world average is 3.35% for life and 3.88% for non-life insurance. The insurance density (premium to population) was similarly very low, at $77 (₹5,729) in 2019, in which life is $58 (₹4,316) and non-life only $19 (₹1,414). Globally, it was $379 (₹28,200) and $439 (₹32,665) for life and non-life, respectively.
While very strong solvency norms have ensured that no insurance company has gone bust in last 20 years, now is the time for the Insurance Regulatory and Development Authority (Irda) and GoI to increase competition, enhance ease of doing business and make India’s market more aatmanirbhar.
Approval of retail products takes too long, with Irda steeped in bureaucracy. In most countries, if there are customer complaints, the product is picked up for scrutiny and insurance companies are taken to task if it isn’t customer-friendly. Managing by exceptions is a much better way. This also shifts the compliance burden to the insurance company rather than to the regulator, thus decreasing upfront compliance costs and time significantly. This can especially be done for products of shorter duration – up to one year, for starters. These products can be modified any time and customer is also not stuck for the long term. Irda, however, doesn’t even publish its turnaround time for product approval.
Last year in Britain and Singapore, regulators allowed insurance companies to cover death due to Covid in personal accident policies. Faster introduction of products and experimentation are required to increase insurance penetration. The relative ease of entry of companies and products can be wrapped in stiff penalties in case of post-entry non-compliance of norms, mis-selling or other market failure-inducing practices, thus keeping accountability firmly in focus.
A lot of capital has come into India, and more is in the pipeline, especially in insurance. In the last four years, Irda has not given any new licence. One can increase the minimum capital requirement to ₹500 crore, but make the process of obtaining licences much faster. Besides new licences, even the raising of capital by existing companies by way of IPOs or new investors goes through a complex process, and it can take more than six months. Is this the way we want to attract capital, increase employment and insurance penetration?
Banks and original equipment manufacturers (OEMs) – vehicle makers – are two channels that have a stranglehold on life, health and motor insurance. Mis-selling is rampant and customers are forced to buy insurance at high rate. Auto manufacturers should have no say in any attachment product given with a loan, or in insurance pricing and claims. In most countries, banks are imposed heavy fines for selling attachment products. Unfortunately, not in India.
Banks and NBFCs bundle insurance products that cost anywhere from 1-3% of the loan amount, where the commission can be as high as 60%. One only has to see the dramatic increase in fee incomes of banks and NBFCs due to insurance distribution in the last 10 years.
The Covid second wave had shown how dependent life insurance companies are on international reinsurers. What has Irda done to develop Indian reinsurance companies? Apart from the General Insurance Corporation (GIC), none exists. Irda has also disallowed Indian insurance companies from the reinsurance treaty business and has, thus, decreased competition. India is the only country that has prohibited its own insurers from the reinsurance business, thereby making it so dependent on international reinsurers.
Technology and analytics play a big role. Today, insurance companies cannot merge with, or buy, non-insurance companies. This reduces their ability to scale up, and access new technology and skill sets. This should be permitted. Similarly, the strict distinction between life and health insurance is becoming less relevant. There is a need to think about short-term and long-term covers rather than on which type of insurance.
The role of the Irda has to be seen in a new way. Otherwise, it will be yet another government body that doesn’t develop the industry or protect its customers. The role of IRDAI can be enhanced only by ensuring regulation coupled with robust sectoral development.