Insurance Amendment Bill: The need of the hour

Insurance companies are plagued by high risk due to the business’s capital-intensive nature and an unusually long break-even period that can vary anywhere between 7 years and 10 years.

By Sushil Modi

In yet another remarkable move, both the houses of Parliament have passed the Insurance Amendment Bill in the budget session. The Bill amends the Insurance Act 1938, increasing the FDI limit from 49% to 74%. In 2015, the Modi government increased it to 49% from 26%, and now, in 2021, it has been raised to 74%. In 1994, a committee headed by former RBI Governor RN Malhotra, formed by the then Congress government, recommended inclusion of private insurers and foreign collaborators. But, it wasn’t until 2000, under the Vajpayee government, that a Bill was passed to welcome private players and allow foreign investment up to 26%. This was the first time that insurance sector witnessed policy reforms.

Since 1994, in the three occasions when Congress governments came to power, they failed to pass any noteworthy reforms in the sector. The NDA government, which has persistently showcased aptitude for bold policy reforms through GST, Insolvency Bankruptcy code, Development finance institution and privatisation, has once more proven its strong political will in bringing about groundbreaking reforms through this amendment.

This amendment is an enabling provision. It is not mandatory to have 74% FDI in Indian insurance companies. However, if the company desires, then it may increase its foreign equity share up to 74%. We would be mistaken if we assumed that companies do not require expansion in FDI limit. Five private sector companies have already reached the 49% mark and therefore can benefit from the added increase.

The Bill carries several safeguards that ensure ultimate control lies with the Indian entity. Section 27 E of the Insurance Act ensures that funds of policyholders are within Indian boundaries—“No insurer shall directly or indirectly invest outside India the funds of policyholders”. The “Indian ownership and control” requirements under the Insurance Act have been amended. Half of board members and key management members (CEO, CFO, CRO, etc) have to be Indian residents. Furthermore, a fixed proportion of the income has to be kept in the general reserve to provide for policyholder claims regardless of foreign investor’s financial situation. Effectively, management control of the company would be with the Indian promoter.

The amendments have been formulated after an all-embracing consultation with 60 insurance companies carried out by the Insurance Regulatory and Development Authority of India, the regulatory body for the insurance sector in India. Apprehensions that foreign investors will invade the Indian companies can be put to rest as the insurance sector is highly regulated. IRDAI shoulders the responsibility of regulating and approving prices, products, marketing, investment and ownership.

In order to be on a par with its global counterparts, India requires healthier insurance penetration and density. The said metrics are symbolic of development of the insurance sector in the nation. Insurance penetration in India is 3.76%, which is lower than this is in countries like Malaysia (4.72%), Thailand (4.99%) and China (4.3%), and appallingly lower than the global average of 7.26%. Similarly, India’s insurance density performance is not encouraging either. India stands at $78 against a whopping global average of $818. Growing premium would aid in improving insurance penetration and density, and this can happen only if more funds are infused into the companies. India has 56 insurers, extremely low when compared to the US which has 5,965 insurance companies catering for diverse categories.

Insurance companies are plagued by high risk due to the business’s capital-intensive nature and an unusually long break-even period that can vary anywhere between 7 years and 10 years. Indian investors are not willing to capitalise companies to a magnitude that is essential to meet the solvency ratio and growth requirements of the sector. Instead, the promoters of the company are being pressurised to liquidate. Additionally, the ongoing pandemic and the ensuing state of the economy demand some financial respite. Given the complex nature of the business, it is only befitting to invite more foreign collaboration as and when need arises.

Like most other fields, privatisation in this area will go long way. The records of FY19 data suggests that 20 companies out of the 24 private life insurers that entered the market after 2000 have reported profit and only seven general insurers out of 21 reported loss. Today, the private sector insurance companies account for 42.2% of the premium in the insurance sector, thanks to the reform passed in 2000 by the Vajpayee government. They have recorded a solvency margin of more than 150%, an accomplishment that is held by only LIC (165%) in public sector. Public-sector United India Insurance (86%) and National Insurance (20%) are way below the minimum required solvency ratio recommended by IRDAI (150%), indicating financial stress. Besides, the private sector has engaged 24 lakh employees as of today, as against 17 lakh in public sector. More FDI will benefit private players and accentuate private participation.

In 1999, there were six insurance companies in the public sector and none in the private sector. Now, we have 70 insurance companies (including re-insurers). When the FDI limit was revised from 26% to 49% (in 2015), the sector observed an influx of Rs 26,000 crore. Nearly 40 insurers have FDI ranging from 26% to 49%. Insurance density spiked from $11.5 to $78. The demonstrated benefit from increasing the FDI limit from 26% to 49% paints a sanguine picture of the latest amendment. It is estimated that Rs 30,000 crore will get infused as a result of elevating FDI limit to 74%; Rs 13,500 crore has been set aside for the development of insurance sector because it is in dire need of funds. If foreign investment can supplant government-funding for the insurance sector, then, in future budgets, the money can be allotted to other development-focussed sectors such as infrastructure or defence.

Higher insurance penetration would imply accelerated competition, more products and services at lower costs, and amplified innovation. Insurance schemes have invariably registered long-term assets for the nation’s economy; for instance, the huge infrastructure investments made by LIC. The latest change will improve efficiency of household savings. Small insurance companies will benefit immensely from this. Boosted foreign collaborations would imply adaptation of global technology and practices.

Last but not the least, this will also boost employment opportunities. With only 56 insurance companies, we have nearly 41 lakh employees including agents, signifying enormous job creation potential. To bolster the insurance sector, we need a dozen more institutions like LIC. In the 21st century, we cannot hold a mindset that belongs to the 18th century. The way to Atmanirbhar Bharat is through radical measures, as the one taken by the NDA government for the insurance sector.

The author is former deputy chief minister of Bihar and Rajya Sabha member