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Insurance reforms hurdle in Modi's financial inclusion plan

Gyanendra Keshri, Features Editor, INCLUSION

In his maiden Independence Day address to the nation Prime Minister Narendra Modi announced an ambitious financial inclusion plan called “Pradhan Mantri Jan Dhan Yojana” that seeks to provide bank accounts with debit cards and Rs 1 lakh insurance cover to all unbanked households. 

The aim is to universalise banking access. The government envisages opening 150 million accounts, two each for 75 million unbanked households. Modi has rightly chosen insurance to club with bank accounts as financial inclusion won’t be complete without it. If someone has wealth but no insurance cover, he/she can’t be sure about his/her future as the wealth can be eroded overnight. 

However, the continued impasse over insurance reforms is a potential hurdle to the financial inclusion plan. India’s insurance industry seems to be in a state of flux. Balance sheet of most of the insurance companies is in the red. After registering an average 31 per cent annual growth between 2001 and 2010, new business premium of life insurance has been stagnant in the past three years. Slow economic growth, stalled reforms, rising costs and inefficient distribution structures have hit the industry hard. Private insurers have posted cumulative loss of around $190 billion and the industry is fund starved. 

Insurance penetration is poor in the country. Less than 5 per cent of India’s 1.25 billion people have insurance cover. Over 50 district headquarters do not have any insurance company branch. 

The industry needs fund and liberalised policy for expansion. The government is trying to push for the amendments in insurance laws that seek to enhance foreign equity holding cap in the sector to 49 per cent from the current 26 per cent. 

The Insurance Laws (Amendment) Bill also seeks to allow overseas companies to invest in reinsurance companies, which are basically firms that insure insurance companies. It also aims at removing archaic and redundant provisions in the legislations and incorporating certain provisions to provide Insurance Regulatory Development Authority (IRDA) with flexibility to discharge its functions effectively and efficiently. The overall objective is to further deepen the reform process in the sector. 

Modi Government has not been able to push though the bill in the Budget Session of parliament due to inadequate numbers in Rajya Sabha. The ruling National Democratic Alliance (NDA) has only 57 seats in 245-member upper house, while it has 334 seats in 545-member lower house of parliament - Lok Sabha. 

The bill that seeks to amend the Insurance Act,1938 the General Insurance Business (Nationalisation) Act, 1972 and the Insurance Regulatory and Development Authority Act, 1999, will now go to a parliamentary committee that will submit its report later this year. 

In fact, the bill is pending since 2008 and it was drafted and introduced by the Congress party-led United Progressive Alliance (UPA) government. When  BJP was in the opposition it had opposed the bill. Now the table has turned. The Congress party is trying to stall the bill, while BJP is trying to push it forward. 

Opposition to the bill is, clearly, for the sake of opposition. Here the question is not which party is right and which one is wrong. The real issue is the availability of funds for expansion of the sector. Insurance companies badly need funds for expansion. 

Indian insurance industry is still in the nascent stage and dominated by state-run firms. The government-run Life Insurance Corporation of India controls more than two-thirds of the life insurance business in the country. First year premium of life insurance dropped to Rs 1,142 billion in financial year 2012-13, nearly 10 percent down from the previous year Rs 1,258 billion. 

Although the non-life insurance industry has posted over 20 per cent annual growth in the past two years, the penetration remain abysmally low – just 0.7 per cent of the GDP. 

There is need for fundamental change in approach to insurance in the country. The growth so far in the industry is largely dependent on tax incentives, mandatory buying for sales and push from the agents and other stakeholders. There is very little customer pull. This will come from increasing savings and disposable income and financial awareness. 

As per the government estimates, raising FDI cap to 49 per cent will result in overseas equity inflows of $6-7 billion in the sector. This would help in expansion and increase in penetration of insurance. Expansion of insurance business would potentially stimulate economic growth by generating long-term funds for infrastructure projects. Market size of India’s insurance sector was $66.4 billion in fiscal 2013-14 and it is projected to touch $400 billion by 2020. 

Typically, investment in insurance and pension is done with a time horizon of 20-30 year. This money is then invested in long-term instruments such as government securities and corporate bonds and also in stock markets. Insurance and funds globally play instrumental role in financing long-term infrastructure projects. This must happen in India also that requires more than $1 trillion investments in infrastructure over the next five years. 

Considering the country’s demography and low penetration prospects of insurance industry in India looks bright. India’s insurable population is estimated to touch 750 million by 2020. This, perhaps, is the main reason for the keenness of the foreign insurers to expand in the Indian markets. 

Major foreign firms including Britain’s Standard Life and Prudential; Germany’s Allianz and MetLife of US are operating in India through joint ventures with local companies. They have shown keenness to beef up investments in their Indian units. 

Challenge for the government is to ensure that the majority of the population that are left out be brought under the insurance cover. Typically, private companies, including foreign firms, try to maximise profits and show less concern about the poor or financial inclusion. They would prefer selling policies to relatively well off, as it is generally more profitable. 

(Gyanendra Keshri can be reached at gyanendra@skoch.in)

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