Questions on insurance

Private insurers in India have just completed five years of existence. It is creditable that they have taken more than 26 per cent of the market in both the life and non-life segments, having contributed substantially to the faster spread of insurance cover. The state-owned players have been goaded by competition into re-examining their products and quality of service, and consumers now have more choice. Among other positives, the imminent entry of stand-alone health insurers and of players from the life segment into health, should help widen health coverage, while the inroads being made by "bancassurance" will facilitate the sale of insurance through bank branch networks in the small towns and villages, where there has been little insurance available so far. All in all, the opening up of insurance to the private sector has been a positive development, and the critics and politicians who delayed this for several years should ask themselves whether they should have allowed competition in this sector much earlier.

But there are some sobering thoughts as well: barely 10 per cent of Indian households have life insurance cover, and only 1 per cent has medical insurance. The life premium per capita is just Rs 720, and growth in this segment has been driven by a single product (the unit-linked insurance plan, or ULIP), which accounts for over 70 per cent of the incomes of most private life insurers. ULIPs appeal largely to a young, stock market-savvy clientele, and it isn't without significance that 2004-05 saw an 8 per cent drop in the number of policies sold. Health insurance hasn't taken off, either, despite health care being unaffordable for the vast majority. Nor has the system of third party administrators (TPAs), instituted to smoothen the cashless settlement of health insurance claims, been a success. Rapid growth itself could bring problems: with a projected annual growth rate of 15-20 per cent in business over the next five years, private insurers will need fresh doses of capital, which could be hard to raise unless they start earning profits.

Making money will not be easy, given that de-tariffication of general insurance is just a year away, and will bring in its wake genuine price competition. The Insurance Regulatory and Development Authority's recently unveiled roadmap for de-tariffication will, as IRDA Chairman C S Rao told Business Standard in an interview, fundamentally alter the way the business is conducted from January 2007. It will put an end to cross-subsidisation of motor and health insurance through profitable lines of business such as fire and engineering; each line of business will come to be conducted on a stand-alone basis, hidden costs will be eliminated and pricing will become more transparent. If de-control reduces some premium rates and raises others, it will also incentivise product innovation. But it will probably erode profitability, and those unable to build scale and market share will either fall by the wayside or be acquired (2005 saw the merest whiff of consolidation).

Progress there certainly has been, but there is also reason for unease about the slow pace of policy and regulatory change (the foreign investment cap, updated mortality data and new product approvals). On two points, in particular, greater clarity and movement are needed. The first is the issue of whether investments in insurance products will be taxed on the basis of the EET (exempt-exempt-tax) formula, as announced in the last Budget, for this would reduce the incentive for individuals to direct their savings into long-term instruments. Second, while the government may favour an increase in the cap on foreign ownership from 26 per cent to 49 per cent, it has made no move to amend the IRDA Act to give effect to such an increase. Those who opposed the entry of private insurers seem determined now to come in the way of the re-capitalisation of private insurance firms.