Transforming Insurance: From Monopolistic to Competitive

    03-Mar-2021   
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Till the late 1990s’, Bharat’s insurance industry was running as a nationalised business where LIC’s monopoly was unchallenged. On the flip side, this meant limited market penetration. Therefore, Union Finance Minister Nirmala Sitharaman’s latest Budget, proposing an increase in the FDI limit in insurance to 74 percent, is a welcome relief for a large number of our countrymen uncovered by insurance

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Bridging the gap: Union Finance Minister Nirmala Sitharaman with Budget
 
As per international comparison of insurance penetration, 66% of Indians have still not been adequately insured (Figure 1). Foreign insurance providers are keen to invest in the Indian insurance market. But, foreign investment happens when both investor and beneficiary think that this investment will be beneficial and better than other offers (Hindley & Smith, 1984). Another argument submitted in favour of removing FDI cap is to relieve the financial burden on domestic operators by sharing the load with foreign insures especially in the pension and saving sector. In the current scenario, opening up the insurance sector may contribute to make India a $5 trillion economy.
 
Indian Insurance Market snapshot
 
The Indian insurance sector is booming with massive growth potential and has become considerably important with its significant contribution of 3.69 per cent in nation’s GDP (IBEF, 2019). The Indian insurance industry is likely to touch US$ 280 billion by 2020. (IBEF, 2019) It is predicted that in the next three to five years, the life insurance segment would grow by 12-15 percent annually (IBEF, 2019). The rapidly growing segments observed US$ 94.48 billion of gross premiums in FY18 (IBEF, 2019). The contribution from life insurance and non-life was US$ 71.1 billion and US$ 23.38 billion, respectively (IBEF, 2019). The industry is progressing with the growing participation of private companies. Till FY19, the market share of private players reached to 54.68 percent in life and 33.74 percent in non-life segment (IBEF, 2019). But the industry is not limited to life and non-life segments. The crop insurance is showing a progressive growth of 7.63 percent every year (IBEF, 2019). With Pradhan Manti Suraksha Bima Yojna (PMSBY) the health sector has reached 130.41 million in 2017-18. And as the automotive industry is growing sharply, the motor insurance is sure to progress.
 
A Widening Gap
 
The insurance industry of India was running as a nationalised business till the late ’90s. The Life Insurance Corporation of India (LIC) had a monopoly in the market. The outcomes of the monopolistic market led to limited market penetration and poor service standards. So to safeguard consumer’s interest, it was ideal to transform the market from monopolistic to competitive. The waves of reforms were introduced and an Insurance Regulatory and Development Authority of India (IRDAI) was constituted in 1999. It was only under the regulations of IRDAI that the insurance industry was opened for foreign players from 2000 onwards for company ownership up to 26 percent. Till the recent past, the insurance company could have a stake till 26 percent through automatic route. But to attract FDI’s in December 2014, the government raised the equity cap up to 49 percent. Despite the government's initiatives of liberalising the insurance sector, a considerable gap exists between demand and supply. The country is still considered as under-insured, thus leaving a vast scope for industry players to penetrate untapped market.
 
The waves of reforms were introduced and an Insurance Regulatory and Development Authority of India (IRDAI) was constituted in 1999. It was only under the regulations of IRDAI that the insurance industry was opened for foreign players from 2000 onwards for company ownership up to 26 percent 
Scope for Low Income Groups
 
The digitisation and growing interest of people towards new products have pushed the demand. The new business premium from FY12-18 has increased by 14.44 percent for life and 16.65 percent for non-life. The market reach is still low providing an extraordinary opportunity for other players. The industry players have vast scope to offer products to low-income groups both in urban and rural India. The government of India is willing to support existing as well as new entrant by continual reforms in policies. Tax benefits are provided on insurance products. The Insurance Bill has given full control to IRDAI to make guidelines for the sector. With IRDAI sincere attempts of providing clarity, the industry was able to raise US$ 6.7 billion through public issues in 2017.
 
Under the governance of IRDAI, the insurance industry is divided into life insurance, general insurance, specialised insurers, standalone health insurance, re-insurance and foreign reinsurers.
 
The above chart states how the share of private players has notably increased over the years.
 
The IRDAI regulates the insurance sector in India. To safeguard interest of domestic insurance companies and citizens, IRDAI has set specific guidelines for Foreign Direct Investment (FDI). The foreign investor could not hold the equity of more than 49 percent in any Indian insurance company (DIPP, 2017). The investment of up to 49 percent of the total paid-up equity is permitted on the ordered route subject to verification by IRDAI
 
The reach of the insurance sector has widened by the appearance of a new distribution channel. The tie-up with banks, online distribution, e-commerce majors partnering with companies to offer mobile insurance (Flipkart partnering with Bajaj Allianz) is some of the trends which would help in deeper market penetration.
 
The private insurance sectors are leaving no stone unturned to make the best use of available opportunities in the Indian insurance industry. In January 2019, Turtlemint raised funding of US$ 25 million (IBEF, 2019). HDFD Ergo is in progressive talks to acquire Apollo Munich Health insurance at a valuation of US$ 370.05 million (IBEF, 2019). WestBridge Capital had announced earlier in 2018, its plans of acquiring Star Health and Allied Insurance at an estimated value of US$ 1 billion (IBEF, 2019). Warburg Pincus in June 2018, had invested a growth capital of US$ 104 million in IndiaFirst Life Insurance (IBEF, 2019). In 2017, the industry had witnessed 10 mergers and acquisitions worth US$ 903 million (IBEF, 2019). Also, IRDAI permitted private equity investors to be promoters in unlisted insurance companies.
 
Indian Regulatory Framework
 
The IRDAI regulates the insurance sector in India. To safeguard interest of domestic insurance companies and citizens, IRDAI has set specific guidelines for Foreign Direct Investment (FDI). The foreign investor could not hold the equity of more than 49 percent in any Indian insurance company (DIPP, 2017). The investment of up to 49 percent of the total paid-up equity is permitted on the ordered route subject to verification by IRDAI. All foreign investments in this industry shall comply with the provisions of the Insurance Act, 1938. All the companies that receive FDI shall have the necessary approval from IRDAI for commissioning insurance and related activities. As per the regulations, the ownership and control of the insurance company shall remain in the hands of the Indian residents (DIPP, 2017). The foreign portfolio investments shall be administered by the Regulations of Foreign Exchange Management Act (FEMA), 2000 and Securities and Exchange Board of India (SEBI)’s (Foreign Investors) Regulations, 2014. Department of Industrial Policy & Promotion was.... (DIPP, 2017)
 
Any increase in the foreign investment shall be in unity with the pricing guidelines of Reserve Bank of India (RBI) under the FEMA regulations. The equity investment cap of 49 percent applies to insurance intermediaries. (DIPP, 2017) According to Organisation forEconomic Cooperation and Development (OECD), the Indian insurance industry is the most restricted globally (139 percent more restrictions than the global average).
 
“Insurance ensures one's social and economic security. Unfortunately, its penetration rate in India is very low. In addition, at the time of the epidemic, the middle class seriously felt the necessity of the Medical health policy. Increasing the FDI in the Insurance sector will serve mainly for infrastructure development. Subsequently the premium reduction will also be available for attracting more masses and it will make India's insurance industry more competitive.” stated Dr PS Vohra, an expert on financial matters.
 
In 2021 Budget, Union Finance Minister Nirmala Sitharaman has proposed to enhance the FDI limit in insurance to 74 percent. Thus, opening up of FDI in the insurance sector may bring India on par with global standards and provide insurance to the 66% of Indians who are still not adequately insured.
 
(The writer is the Pentland-Churchill fellow (2018) for Global Public Policy leadership at New York University (NYU) and University College London (UCL). This is a snippet of his research work at NYU and UCL)