Irdai head rues low insurance reach, hints at sandbox for untested products

Subhash Khuntia says will allow testing of new products in limited geography or on limited set of policyholders, warns climate change, the ageing population will be biggest challenge for insurers

With the country's Gross Domestic Product (GDP) growth rate touted to be the one fastest in the world, projected at 7.4 per cent for FY2019 by the Reserve Bank of India (RBI), there is ample room for expansion of the insurance industry, noted Subhash Khuntia, Chairman, Insurance Regulatory and Development Authority of India (Irdai). 

"As GDP grows, savings rate will grow, which can be channelised to different financial products. With higher GDP growth rate, we will see large growth in the insurance industry. Today, the insurance industry contributes a lot to the GDP, as the assets under management for insurance stand at Rs 35 trillion, compared to the mutual funds industry where total AuM stands at Rs 23 trillion,” Khuntia said. 

During his speech Khuntia touched upon how insurance products are not being sold effectively to the younger generation and how insurance companies are lagging behind in terms of creating awareness. 

“Penetration is the biggest issue. We are under-insured in both life and general insurance products. In the motor segment, around 65 per cent of two-wheelers and at least 45 per cent of four-wheelers do not have insurance, and in Kerala, we are seeing that the penetration of property insurance is very low,” he said. 

Overall insurance penetration in India stands at 3.69 per cent of GDP as compared to the world average of 6.2 per cent of GDP. For life insurance, penetration in India stands at 2.76 per cent of GDP as compared to the world average of 3.33 per cent of GDP. 

General insurance penetration is even worse, standing at 0.93 per cent of GDP in India as opposed to the world average of 2.8 per cent of GDP. 

Speaking at the 11th Global Insurance Summit, organised by Assocham in Mumbai, Khuntia also said that the regulator would launch a ‘regulatory sandbox’ soon.

“The sandbox will be used for new products that have not been tested. For example, some companies may want to experiment with innovative products, therefore through the ‘sandbox’ method, we will allow to them to test the product in a limited geography or on a limited number of policyholders,” he said. 

Khuntia did not specify a date by when the guidelines for the regulatory sandbox will be published. 

He further noted the need for catastrophic disaster insurance products that companies and state governments can buy in the event of natural calamities like the recent floods in Nagaland and Kerala, as well as in Chennai, Uttarakhand, Jammu and Kashmir and Assam in recent years. 

At the summit, VK Sharma, present Chairman of the Life Insurance Corporation of India said that there are serious challenges to insurance companies across the world. 

The first challenge is climate change, which is a critical challenge for the whole world and India. 

“I do not know how long insurance companies and in what way they will be able to sustain. If one Kerala happens the industry can manage, but if the same situation happens every year in different parts of the country it is a matter of concern,” Sharma said. 

“It is time for insurance companies to think to invest positively in companies or industries that are able to solve climate change,” he said. 

The second challenge in the future for insurance companies is how they balance their long-term liabilities and long-term assets. There is a need for insurers to create long-term assets in order to secure their long-term liabilities, he explained. 

“More than insurance products, I believe that the kind of investments insurance companies will make, will become a critical issue in the future. In developed countries more than 30 per cent of the instruments are long-term bonds. Whereas developing countries, like India, have not developed long-term bonds beyond 10 years. This creates volatility and insurance companies may not be able to deliver the promised returns,” Sharma said. 

The third challenge he said was that many countries have an ageing population and even though India will face that problem only after a two decades, insurance companies must think about they will have to provide adequate returns or pensions to people. 

“Even after collecting money for 30 to 40 working years, once the person retires the funds that they have collected becomes very minuscule within a few years and does not serve the ageing population adequately,” he said.