OPENING MOVE

(GS 3: Indian economy, resource and planning) 

Context:

• The Union cabinet has approved changes to the Insurance Act 1938, for increasing the foreign direct investment (FDI) limit to 74 per cent from the present 49 per cent.
• With the cabinet’s nod, the changes will be introduced in Parliament for approval. Once the Parliament approves the changes, the process to bring an applicable framework would start.
• In her Budget speech for 2021-22, Finance Minister Nirmala Sitharaman had proposed the increase to allow foreign ownership and control with safeguards.

Insurance penetration in India:

• Insurance penetration in India continues to lag far behind other Asian economies, despite the presence of a large number of insurance companies.
• There are 24 life insurance companies and 34 non-life insurance companies in the country.
• Insurance penetration continues to be a challenge as it only marginally improved to 3.76 per cent in 2019 from 2.71 per cent in 2001, the Economic Survey 2020-21 shows.
• Insurance penetration is calculated as percentage of insurance premium to GDP.
• The penetration in non-life segment, in fact, slipped to 0.94 per cent from 0.97 per cent in 2018.
• The life insurance segment recorded higher penetration at 2.82 per cent from 2.74 in 2018.
• In contrast, insurance penetration in Asian countries such as Malaysia, Thailand and China stood at 4.72, 4.99 and 4.30 per cent, respectively in 2019.
• Globally insurance penetration was 3.35 per cent for the life segment and 3.88 per cent for the non-life segment in 2019.
• Although the penetration is lower in India for both, it is particularly low for non-life insurance as compared to other countries.
• The insurance density, which is calculated as ratio of insurance premium to population, reached to $78 in 2019. It was at $11.5 in 2001.
• Density for life insurance is $58 and non-life insurance is much lower at $19 in 2019 in India.
• Globally, insurance density was $379 for the life segment and $439 for the non-life segment respectively in 2019.

Reasons for low insurance penetration:

• Reason for low penetration can be traced to the fact that increasing coverage is a costly proposition considering the capital requirements imposed on insurance firms. 
• There is lack of education amongst the customers
• Customers consider insurance as a cost rather a long-term asset which may come to rescue one fine day.
• The low penetration can also be attributed to lot of paperwork; hence digitisation will help in improving the same.
• Complicated policy is also not helping the cause. Simple policies with benefit rather than indemnity could also help in deeper penetration.

Benefits of increase in FDI limit:

• Government’s move to increase the FDI limit will further attract foreign capital where required.
• It also ensures higher penetration and brings a new wave of transformative change to create a more value-based affordable healthcare for all Indians.
• It provides companies with committed funds to improve the penetration of insurance in the country.
• It will also bring in better technical know-how, innovation, and new products to the advantage of the consumers.
• The FDI limit increase is also expected to provide access to fresh capital to some of the insurance companies, which are struggling to raise capital from their existing promoters.
• This would not only increase the solvency position for some insurers but would provide long-term growth capital for other companies to invest in newer technologies.
• These technologies would not only help in managing losses but also in customer acquisition and thus insurance penetration.
• Further, the foreign partner would be more willing to transfer its technology once it becomes a majority shareholder.
• The additional funds could be used to invest into technology to adapt to the evolving customer needs like responsive service through digital platforms,
• Policyholders in tier II and tier III cities are also likely to get a leg up via this move, as the funds infused are expected to help in bridging the demand-supply gap in insurance.
• Moreover, the funds infusion will also help in digitization and technology integration in the sector, which is the need of the hour for empowering insurance
• It will also develop the insurance industry as a big channel for generating long-term money for development of the economy and creating long-term assets.

Possible issues:

• Higher FDI will expose the sector to short-term volatility, possibility of sudden pullout of funds by foreign companies and putting hard-earned savings of policy holders at risk.
• Private companies have focused on unit linked insurance policies (ULIP) where returns are dependent on the stock markets, which imply that the risk is borne by the person seeking insurance. 
• The ultimate yardstick to judge the performance of an insurance company is to see how quickly it settles claims.
• The LIC is perhaps the best in the world in this regard.The private sector repudiated very less claims. The regulator must address this issue.
• The average annual premium for a policy issued by the private insurers is much higher than public insurance company.
• The lapsation ratio (A lapse ratio measures the percentage of an insurance company’s policies that have not been renewed by customers) of private insurance companies is much higher
• Policies lapse because the buyers, after paying the first premium, find that it does not suit their requirements.
• And, to make matters worse, the company can keep the money after misleading the consumer.

Conclusion:

• Thus, a more liberal FDI policy will certainly attract higher amounts of foreign capital, which will aid in increasing insurance penetration in India.
• It will also provide an impetus to the insurance industry to scale up and build more digital and infrastructure capabilities in the post pandemic era.