Insurance questions

Far-reaching changes afoot in a vital sector

At the recent Business Standard Insurance Round Table, the leaders of the industry signalled that far-reaching changes were afoot in the sector. New foreign direct investment regulations have been notified that will allow foreigners to buy 49 per cent of insurance companies through the automatic route; the Foreign Investment Promotion Board has also cleared several big-ticket investments. The Budget, too, made welcome attempts to bring in transparency and funding to the sector, in particular through the possibility that public sector general insurance giants would be listed on the stock exchanges. As this newspaper reports, a plan is afoot to offload up to 10 per cent equity of state-owned general insurance companies through an initial public offering. These are welcome signs. But, in the midst of this energy, open questions remain. For example, the government has pushed several social security schemes on to the insurance sector, and they will need to be very carefully structured to both maintain fiscal prudence and to avoid destabilising this vital industry.

The Budget announced two schemes. Of these, the National Health Protection Scheme (NHPS) offers health insurance at a highly subsidised rate. The NHPS has a capped premium and capped payout of up to Rs 1 lakh per family, with Rs 30,000 more for senior citizens. The Budget provision has been raised, from Rs 595 crore to Rs 1,500 crore, "to protect one-third of India's population against hospitalisation". The other scheme, the Pradhan Mantri Fasal Bima Yojana (PMFBY), modifies existing crop insurance schemes. Unfortunately, crop claims will still be triggered on every holding in a region, a problem in past schemes that has not been remedied. The Centre and respective states will subsidise PMFBY equally, picking up almost all the premium. The premiums will range from two per cent for kharif crops, 1.5 per cent for rabi crops and five per cent for commercial crops. The earlier Modified National Agricultural Insurance Scheme had a premium of around 2.7 to three per cent for many years; the official documentation claimed that premium rates should be between 1.5 per cent and three per cent, with additional premium subsidies for small farmers.

Read more from our special coverage on "INSURANCE"

• Banks keen to tie up with multiple insurers
• PMs Jan Suraksha schemes suffer from fraudulent claims
• Non-life insurers offer cover against loans
• Organised crime touches new high in insurance
• Bajaj Allianz Life launches Principal Gain, a Ulip with assured returns

But, while few of the structural holes in the schemes have been addressed, an ambitious broadening of scope is planned. Only 20 million of India's 140 million farmers had crop insurance in 2014-15. The value covered was only about 5.5 per cent of crops across about 23 per cent of total area under cultivation. The PMFBY aims to expand insurance cover to 50 per cent of farmers, and half of land under cultivation by 2018-19. Unlike previous crop insurance schemes, which had capped liabilities, the PMFBY is uncapped and also covers a far wider range of adverse events. In effect, the Centre picks up almost half the premium. The Centre will also bear a large share of claims payouts. The PMFBY Budget provision of Rs 5,500 crore will help set up systems and subsidise premiums. But it will not necessarily be enough to cover claims, which could be very large. Last year for example, 200-odd districts in nine states suffered drought with crop losses estimated at over Rs 25,000 crore from drought alone. Floods, cyclones, and so on are also common. Claims could add up to huge amounts. The question is whether the impact on the general insurance sector has been properly calculated. Social security schemes must be carefully structured so as to maintain sustainability if claims skyrocket, as seems possible with the PMBSY. The sector has many other roles in a market economy - it is a vital source of long-term capital, for example. It must not be hobbled by such an over-emphasis on the social sector that it cannot fulfil its other roles.