February 18, 2020
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The Insurance Paradox

Differences in the United Front may hold up attempts to liberalise the insurance sector yet again

The Insurance Paradox

THIS is the long distance race with the marathon wait. A wait which began in the early '90s, during the heady days of Manmohanomics, and still shows no sign of ending ,despite indications—which later amounted only to false starts—to the contrary.

When the United Front Government surprised everyone with its Common Minimum Programme (CMP), where it made clear that liberalisation of the insurance sector was on the agenda, industry thought that its long wait might come to an end, sooner rather than later. But the news seemed too good to be true. And sure enough, that's how things are turning out.

Differences within the UF coalition surfaced immediately, as the Left parties objected to opening up insurance. Communist Party of India (CPI) General Secretary A.B. Bardhan came out strongly against private sector and foreign participation in insurance in the June 26 issue of Outlook. Said he: "The Left parties have totally rejected the plans...for the insurance sector. We had rejected this (during discussions on the CMP)...and now we shall continue to oppose it as it has been included irrespective of our views." He added that the Left will even oppose autonomy to state-owned insurance companies.

The current yes-but-no situation fits in well with the story of Indian insurance reforms which began during Narasimha Rao's early days when his government decided to allow private participation in the sector. This got industry all excited, which saw insurance as the new El Dorado, and hoped it wasn't too far away. Says Ajay Shriram of DCM Shriram Consolidated Ltd, which has tied up with UK's Royal Insurance: "The potential is tremendous."

"The scope for insurance products in India is vast, considering that the Indian market is underinsured," says James McKerracher, business development manager of the UK-based Eagle Star, which has tied up with ITC to enter India's insurance sector. But the announcement faced severe criticism from Left parties and trade unions.

In April 1993, the Rao government set up a committee under former RBI governor R.N. Malhotra to look into reforms in this sector. The committee submitted its report in double quick time on January 7, 1994. But the government decided to sit on the report. The official line was: yes, but not now. "We fired our arrow," says Malhotra (see interview), but he still doesn't know whether the arrow has found its target.

And it was during this long, silent spell from the government that industrial houses were in a frenzy, working out the best possible tie-ups to get into the insurance business. The number of Memoranda of Understanding signed between major Indian cor-porates and insurance companies of the United States and United Kingdom has—at last count—touched the double digit mark. The list reads like a veritable who's who of corporate India and includes the Tatas, ITC,HDFC, Godrej, Bombay Dyeing, Peerless and State Bank of India.

Unwilling to take political risks in its last two years in office, the Rao government, however, did take two steps before its electoral defeat, accepting two recommendations of the Malhotra Committee. First, in December 1994, it set up a five-member committee headed by A.C. Mukherjee, former chairman, New India Assurance, to look into solvency margin requirements and evolve uniform, transparent methods to weigh assets and liabilities. The committee submitted its recommendations in May 1995. The government then set up the Insurance Regulatory Authority (IRA) in January, as per the recommendations of the Malhotra Committee. The IRA began its innings on the wrong foot when its chairman designate, M.P. Modi, preferred to chair the Telecom Regulatory Authority instead. Its two other members—K.C. Mittal and N.M. Goverdan—are hard at work and expect to have a draft legislation in place within six months (see interview).

The Left is intransigent on the insurance issue. And as it is more powerful than ever after this election, what does this mean for the future of insurance sector reform? Will Malhotra's arrow find its target? Will the plans of corporate houses and their foreign partners turn into reality? Will the Indian consumer, both individual and industrial, have the option of a wider choice of products, at possibly even better prices?

It's anybody's guess. And all that industry veterans like S.K. Mitra, former chief of General Insurance Corporation, and currently managing director of Birla Global Finance Ltd, are willing to say is: "All of us are waiting for the turn of events over the next few weeks." While McKerracher, like many others, is still hopeful. "By the year 2000, India will have a vibrant new insurance industry," he says. However, he does admit that "worldwide, insurance is the last sector in financial services to be liberalised".

What does allowing private participation in insurance really mean? "The benefits of insurance have reached just 22 per cent of the insurable population in India," says McKerracher. While Malhotra hopes that competition will improve the low level of penetration in India. Clearly, there is a lot of scope to improve

penetration, considering that the amount spent on premium on life insurance in India, as a percentage of GDP amounts to merely 1.22, while the figure stands at 7.54 per cent in the UK and 3.71 per cent in the US. The scenario is similar in the case of general insurance too, with premiums as a percentage of GDP amounting to merely 0.56 per cent, while in the UK and the US it amounts to 4.19 per cent and 5.18 per cent respectively. And the point to note is that the Indian life insurance market is growing at 14.5 per cent, among the fastest in the world. Contrast this with the UK and the US which are growing at 7.1 per cent and 7.9 per cent respectively. The Indian general insurance market, too, is among the fastest growing in the world at 10.3 per cent. In contrast, the general insurance markets in the UK and US are growing at eight per cent and 3.1 per cent respectively. So while a larger number of players will definitely expand the market faster and bring in more people under the insurance net, for insurers, there is enormous business potential to be tapped.

The scope for penetration and growth apart, the customer is also missing out on new technology which permits the introduction of new products. Says Shriram: "Foreign companies will bring in new technology to service the consumer better, by offering him new and more varied products and settling his claims faster." This becomes even more important in general insurance

where increased industrialisation has raised the demand for more sophisticated products to take care of new emerging risks, especially in sectors like telecom, information technology and other infrastructure areas. "An increase in insurance penetration will create a higher level of savings and that money will be a great help in developing infrastructure," says Mittal. For instance, in the UK, building societies either own insurance companies or have strong tie-ups with them in order to be able to access their funds. The need for long-term funds for infrastructure projects is particularly acute in India because even sovereign borrowings are made only at a maximum maturity period of 10 years. That is where life insurance companies—which have long-term funds available—could chip in.

But all this will have to wait till we can find a government which has the courage to act on what it says. Till then, the hopefuls will just have to wait, watch and hope. 

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