Avinash Iyer
India being viewed as a land of contradictions is a fairly common refrain. From bustling metropolises to lightless villages, there is a huge variance in different aspects of life. Nowhere is this variance as amply clear as it is in the insurance sector in India. Consider this, with 52 insurance companies, India’s insurance sector is one of the largest in the world in terms of volumes of money involved. And yet, insurance is yet not as pervasive in India as it should be, as only about 25 percent of the people have general insurance cover. This dichotomy of market-size and market cover is the biggest lacunae in the sector, a lacunae that the government hopes to fill through privatization.
Yet, the road to FDI is fraught with many roadblocks. Successive governments have failed in opening up the sector, despite numerous attempts, leading to lot of confusion and conundrum. As a result the whole sector is in a flux.
Even so, the insurance sector is projected to grow at a compounded annual growth rate ("CAGR") of 12-15 per cent in the next five years, according to the India Brand Equity Foundation. LIC is the only public sector insurance company in India and going by the life insurance premiums collected in FY 2013, it was a leader with a whopping 72.7 per cent market share.
Opening up of the sector
The insurance sector opened up in 2001, with the foreign direct investment ("FDI") limit being set to 26 per cent. According to various reports this sector has subsequently witnessed two phases: one that saw high growth between 2001 and 2010 and the other, a dormant period between 2010 and 2012. However, apart from these periods of rapid and moderate growth, the industry has also seen product and operational innovations, given the increase in competition.
As of FY 13, the total market size of this sector was US$ 66.4 billion and is expected to touch US$ 350-400 billion by 2020. According to experts, while India’s insurance industry is no doubt growing and is poised to grow further, it is also facing profitability issues on account of distribution and operating models. It pegs the cumulative losses to private life insurers in the excess of Rs 187 billion till March 2012. Slow growth, rising costs and stalled reforms are further hindering the steady growth of this industry.
Make way for reforms
If the announcement made in the Union Budget 2014-15 is anything to go by, the future of this sector looks optimistic. Taking a reformative step, new finance minister Arun Jaitley had proposed increasing the FDI cap in the insurance sector to 49 per cent. To this effect, in July 2014, the Cabinet Committee on Economic Affairs ("CCEA") approved 49% FDI in insurance, thus green-flagging reforms in the sector. This is a welcome move for the insurance industry which was looking to raise more capital from overseas for quite some time now.
The proposal to hike FDI in insurance is pending since 2008. The Insurance Laws (Amendment) Bill was introduced by the previous UPA government. However it could not be taken up in the Rajya Sabha as it faced severe opposition from several quarters. However, with the new government pushing for reforms, the investment-starved sector has definitely got a boost.
Insurance penetration in India is on a decline. In 2010, insurance penetration was 4.4 per cent, which further dipped to 3.17 per cent in 2012-13, according to Insurance Regulatory and Development Authority’s ("IRDA") annual report (2012-13). For insurance penetration to increase, the sector will need huge amounts of capital investment and the hike in FDI cap will only make this easier.
"For long, the insurance sector has been waiting for adequate funds for its expansion. Increasing the FDI cap in this sector will definitely give it the much needed fillip," says Rajeev Saxena, Insurance sector expert, Mazars. "As the sector expands, it will also lead to job creation in the sector."
As more capital flows into the insurance sector and the manpower increases, it will be easier for insurance companies to tap under-insured markets.
The road ahead
By 2020, India’s insurable population is expected to touch 75 crore. As a result, the importance of life insurance in financial planning is only set to increase.
With the new government’s stress on reforms, steps taken by IRDA to make insurance more consumer-friendly and India’s favourable demographic, the future of India’s insurance industry looks good.
However, it remains to be seen how this sector impacts the unbanked sections of India, in the years to come.
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