We do seem to be close to the denouement of the most heavily politicised economic issue as the IRDA Bill is tabled in parliament this session for it to pass muster. Pass muster it will, feel the most confirmed cynics, even in the Rajya Sabha—with the ruling party committed to pushing ahead with financial sector reforms, and the Congress unlikely to project itself as staunch crusader for leftist issues. A local wag came uncommonly close to clairvoyance when he observed that it was high time India opened up its insurance sector—-if for no other reason but that the only other countries in the world that are keeping it company in its insularity were Myanmar, North Korea and Cuba. That might have been the unkindest cut of all—but it does tell us that India is the biggest of the world’s few remaining insurance markets still characterised by a state monopoly and sends us into serious introspection about the pace our financial sector reforms, especially in insurance.

Why do we need to open up? With private sector players having accepted the 26 per cent equity ceiling, and with the public sector insurance sector chairmen having given open assurances that there would be no job cuts but only re-deployment, it might seem nothing short of xenophobia to cling on.On the other hand, it makes sound logic to open up now since UK is almost saturated, China is still cautious in many respects about opening up,Thailand and Vietnam have liberalised—but with restrictions, and Japan, the most mature of the Asian markets, is reeling under the combined effect of falling income, low investment returns and an economic shakeout. An even more primordial need that is being voiced ad nauseum for the past five years is the huge gap in funds required for infrastructure—life insurance funds, by dint of being long tenure funds are a particularly ideal fit. The Rakesh Mohan Committee estimated the total need for infrastructure investments at around Rs 400,000 to Rs 450,000 crore (USD 115-130 billion) between 1996-2001, and Rs 750,000 crore (USD 215 billion( between 2001-2006.

With foreign direct investment much lower than in China, this would barely be able to meet a fraction of this sum. In most countries, it is the insurance industry through which household savings have been channelised into infrastructure. The Indian scenario, where the domestic savings rate is 26 per cent, there is a high degree of investment concentration in non productive assets like gold and silver. In Brazil, pension funds (which tap household savings) running into billions of dollars have been channelised into infrastructure sector. Pensions, in contrast, is a virgin sector in India, accounting for only 20-25 per cent even in even in the corporate sector and barely 2 per cent of individual policies. That’s the gap that needs to be filled.

But will market potential match the need? Its difficult to say yet;absence of reliable demographically classified statistics, alien cultural norms will make proper quantification formidable for the foreign players, at least, but the world over, insurance potential is gauged in terms of certain differences. Consider: life insurance premium as a percentage of gross domestic savings is 6 per cent in India as against 24 per cent in the US, 41 per cent in the UK, 32 per cent in South Korea and 31 per cent in Japan. Life insurance penetration is 1.39 per cent as against 2.43 per cent in Hong Kong, 9.42 per cent in Malaysia and 11.63 per cent in South Korea. Other statistical pointers reveal the potential of the market, too: studies have shown that the agewise structure of the insurable population (20-59) will gradually increase from 57.7 per cent of total population in 1992 to 62.3 per cent in 2025. LIC’s present coverage of the insurable population (30.2 million as of March 1998), is a meagre 37 .28 per cent. Growth rates are good indicators, too: the growth in GIC’s gross written premiums has beem 15 per cent at an average over the past four years, and it is envisaged that the compounded average growth rate (CAGR) will be 20-25 per cent even in a closed market.

Product paucity

But these reasons seem almost altruistic:dissenters would argue that whatever the gap, the uninsured population may not exactly mind living without insurance,—as they have been doing all along, in fear of poor service. ”That’s where the crux of the matter lies—the public sector insurance market does not lack width—it lacks depth. Mediclaim has already brought in flexibility it did not have earlier — the separate ceilings on room, drugs, doctors fees have been dismantled and a consolidated flexible ceiling given. Similar improvements need to be brought in in products like fire, which today covers risk to a building, factory premises and pre-decided allied perils, but will not extend it to other allied perils even if the insured is willing to pay a higher premium.Take managed healthcare. The convenience of walking into hospitals without having to pay deposits would be a major attractive feature. Costs would also come down because check-ups would be selective, and under a doctor’s guidance.”But there’s a seamy side to it, to, as in the US. Patients who genuinely need prolonged medical care are sent back early, because less referrals and lower bed occupancy gets supervising doctors higher incentives from insurance companies; in India we have to guard against this,” says a senior executive with a private sector aspirant.

Despite these glitches, there’s no doubt that new products and improvisations are a must. Consultants today are pointing out to their clients from both the public and the private sector the need to tie up product development with greater flexibility and better marketing.For example, an excellent scheme’The Birthright Policy’covering congenital defect risks (where the premium is a onetime payment of Rs 1500 for a Rs 75,000 cover), hardly has any takers because of poor marketing.Or, Take LIC’s Ashadeep, which offers critical cover for four dreaded diseases in addition to endowment. The policy could go in for greater flexibility and not insist on a policyholder who already has various types of endowment cover on taking it and thereby paying a higher premium.

Players also expect competition to bring in much-needed refinement in terms of taking nuances of difference into account while fixing premia for the non-tariffed sector, at least. For example, in developed markets, younger people often pay higher premia especially on motor insurance depending on what the colour of their cars are (red is supposed to suggestiveness of recklessness). Although very few expect narrow niche targetting as happens in the US, such as catering only to people of a certain age group, they do expect the expertise of foreign insurers, in particular, to offer knowhow to enable them to quantify, say, the different levels of risk different professionals are exposed to. What is perceived to be a more formidable problem is setting skewed commission policies right:new products which often offer a rebate are not marketed properly for the simple reason is that the rebate depresses an agent’s turnover in terms of premium mobilisation. Many of an agent’s incentives are linked to this turnover.

The potential can be exploited only when intermediaries market their products pro-actively. Also, to rationalise tariffs and minimise underwriting losses, players would need a centralised database such as the UK based Claims and Underwriting Exchange (CLUE) where all insurers can log on upon receiving a claim to find out about the claimant’s history. Suppression of facts from CLUE is a penal offence.

Rough terrain

But while a player’s expertise will largely determine the success of its products, there are extraneous factors that they would have to contend with. What sort of a liberalised scenario are the new private sector players expecting? Can the public sector dominance of GIC and LIC be challenged? No, aver the new players. For one, the public sector players are not what they were even two years ago— they are assiduously training their intermediaries and strengthening their distribution systems, which will pose the biggest challenge to the private sector. The sheer numbers overawe—while GIC has 4000 branches, 86,000 employees and 180,000 agents, the corresponding figures for LIC are 2000,125,000 and 500,000, respectively.

“Weaning away intermediaries is not going to be easy either— the commission has to be attractive enough to persuade them that it would be worth trading the comparative certainty of their present income for what could turn out to be a better one after the initial years of uncertainty. Foreign insurers have never dominated insurance markets; no matter how liberal the regulations have been —even in cases where high equity stakes are permitted,” points out one private sector player. China is a classic example (see box), where the three national insurers—People’s Insurance Company of China (PICC), Pinf An and China Pacific still dominate the market, though PICC is still the market leader.

The absence of reliable statistical databases—which makes it possible to structure rational premia especially in areas such as motor insurance, etc.,— will be another hurdle till regulations make it mandatory for all players to file statistics on claims ratios and other aspects of their operations with the regulator, as happens abroad. And its not just claims ratios, but a database of potential clients that has to be built up—this is where banks and financial institutions will have a headstart over others if they can use their databases well, and banking privacy laws do not obstruct their use. In Spain, bancassurance, where six of the top ten companies are bancassurers accounting for 32 per cent of premiums written today, took off only when the laws allowed use of this database.

Social norms and practices —which could seem alien to foreign insurers—are also going to be a daunting prospect. Breaking down inhibitions of potential rural female policy holders—who fear for their lives after a policy has been taken, or, selling a non savings-linked insurance product with ease purely on the strength of a risk cover at a time when 62 per cent of life products the world over are savings-linked, are going to be equally difficult. More relaxed and rational investment norms in the developed countries have enabled insurance companies to get around this problem of offering higher returns in the form of an interest-carrying savings component: in the US, while life companies have necessarily got to keep most of their investments in risk-free gilts and AAA rated bonds, accounting norms permit a “separate account”, which invests some part of the portfolio in high yield equity and even in junk bonds, though this portfolio is small. In India, companies will be hamstrung by the fact that investment relaxations may come in only when the debt markets get deeper, so that insurance companies can increase their portfolio yield without exposing themselves to risk for long tenures.

The early birds

Where do all these prospects of competition place the public sector players? If one goes by international experiences, competition has typically hit the non life sector harder than the life sector. One reason is that in non life, premiums are renewable annually, and when with adequate technological networking, customer swervice and new products do not make the public sector giants seem so formidable, there may be larger erosion in the margins of GIC and its subsidiaries than in LIC. A comparable case is Sri Lanka, where the non life market came down substantially, while the life market grew substantially. Also, Asians typically spend more than three times as much on life insurance as on non life cover. This is largely due to low per capita income which restricts personal lines of business, and an underdeveloped risk management culture amongst corporates. Also, life insurance is gradually becoming even more of a necessity in single-child families, which automatically boosts its potential.

Even so, LIC cannot remain insulated from competition either. Its underwriting standards need to improve in terms of pre-insurance medical check-ups, and greater flexibility of products. What might happen is that people in the high income bracket (sum assured : over Rs 1 lakh)—which constitutes 5 per cent of LIC’s portfolio —might switch loyalties. Depending on what the social obligations regulations are, LIC’s rural business, which is the largest policy component at 51 per cent, might take a small hit. Both public sector giants are gearing up fast for the competition, in terms of manpower motivation and training, product identification, technology and customer service. One hopes to see as much of a level playing field as possible with regard to privatisation of the public sector giants, which is the only one of the three important tenets of the Malhotra Committee report which has been ignored.