Capital markets, mutual funds, pensions as well as the insurance sector are witnessing ‘reforms’ on the micro as well as macro front. A lot has been said and written about the changes, such as the increase in the Foreign Direct investment (FDI), but at the end of the day, it all boils down to you and me asking questions such as , “What’s in it for me ?”. “Would all the sweeping changes leave me better off or worse off ?”
This apprehension is more so in the insurance sector. Unlike other areas, such as mutual funds, insurance contracts are very long-term in nature. Hence, there is a likelihood of policy-holders being more significantly affected by any impending changes. So far, it appeared that despite the sector’s unarguable importance, the urgency to bring about sweeping change was lacking, although some tinkering around with policy features etc. was being undertaken off and on. However, it appears that the ‘powers-that-be’, are now keen to make up for lost time.
Few amendments to the Insurance Bill which may be of long-term importance to you and the sector:
* Reduction in the capital requirement from Rs 100 crore to Rs 50 crore for health insurance companies:
Health is a key sector and we require increased penetration of health insurance. This relaxation is expected to increase the number of focused new entrants. Anyway, lumping health insurance under the general insurance umbrella was an anachronism, which is now being remedied.
When three such focused players (Max, Star and Apollo) entered this arena a few years ago, customers were treated to a panoply of innovation, both on the product and service front. The entry of many more players will only enhance choices for customers and induce many more to be insured.
* Extension of health insurance to cover domestic as well as international travel is also a positive proposal. However, only time will tell whether the health insurance policy can supplant a travel insurance cover or not.
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Stand-alone health insurers may be at a slight disadvantage, as they may not be able to bundle together the other benefits of a travel cover (such as lost luggage cover) that ‘general insurance’ companies can offer. Also, while a travel cover is more akin to a ‘disposable’ insurance policy, extending this benefit to a regular health policy may lead to the policyholder paying a higher annual premium for something s/he may rarely avail of.
* In case the current regime of obligatory third-party motor insurance is done away with or significantly modified, it has the potential to be a true game-changer for companies and consumers. While opting for this insurance is vital, the ‘unlimited liability’ clause been a bone of contention for insurance companies as they believe that it encourages a ‘gold-digger’ mentality. Any cap on this will be welcomed by companies.
* The proposed ‘limitation clause’ of three years beyond which a policy cannot be repudiated ‘on any ground’, appears to be a heartening feature for policy-holders. This means the insurance company cannot reject a claim after three years stating that the policyholders had hidden facts. This assumes importance especially in case of health insurance policies. For instance, it is possible that the policyholder has developed a particular illness after h/she has taken the policy, or was genuinely unaware of the illness while taking the policy.
Even today, a variant of such a clause is present. However, it excludes ‘deliberate misstatement of facts’. The current clause is good enough and any further relaxation could open up new ground for moral hazard. This may result in an all-round increase in premia in the longer term if companies fall victim to many cases of willful fraud.
- It is good to see a thrust on improving the quality of insurance surveyors. Many a time, both, policy holders and companies are baffled by the surveyors’ valuations. The current statutory prescriptions have not helped much. Maybe enlightened regulations will do the trick.
- There are the usual noises on curbing mis-selling, levy of fines etc.
If properly defined and implemented, they are certain to benefit policy-holders.
Apart from those mentioned above, certain other new developments could also serve as catalysts:
- There is a lot of stress laid by Insurance Regulatory and Development Authority (Irda) on product simplicity and mulling the introduction of the “Use and File” system. This will result in companies being able to launch products without prior approval, as long as they conform to certain pre-specified conditions.
- It will be interesting to monitor how the Irda will ‘reduce the arbitrage between units and traditional products’. Each of these become popular at different points in time depending on market conditions.
- The acceptance of a common ‘Know Your Client’ (KYC) Number is going to benefit all the players in the financial sector, not least, the insurance companies.
- Allowing banking correspondents to sell micro-insurance products and the concept of insurance companies appointing ‘Mentoring Agents’ is a good idea if implemented effectively.
- Liberalisation of debt investment options for insurance companies.
- Reduction in service tax for premia payments.
- Clarity by the Central Board of Direct taxes on the issue of grandfathering the insurance policies that are currently outstanding. However, it is moot, whether these points will actually encourage consumers to adopt insurance products or merely benefit the few who are already availing of them. Hopefully, these changes will not remain as mere icing on a cake, which is consumed by too few.
The writer is vice president, Parag Parikh Financial Advisory Services