A parliamentary panel has suggested introducing a composite licence for insurance companies which will enable them to offer both life and non-life insurance products. Saikat Neogi explains how it will give insurers economies of scale and benefit customers at the same time
l Composite licence for insurers
A parliamentary panel headed by BJP leader Jayant Sinha has recommended that insurance companies should be allowed a composite licence to offer life and general insurance products, including health, under one entity. Prospective insurers can even apply for sub-class of business such as accident, health and motor insurance. However, reinsurers are prohibited from seeking registration of any other class of insurance business.
Current regulations prohibit insurers from selling general and life insurance policies to customers through a single entity. So, to enable composite licensing, the government will have to bring amendments to the existing Insurance Act, 1938 and Insurance Regulatory and Development Authority Act, 1999. The composite licence will help increase the overall insurance penetration in the country, which currently stands at a mere 4%.
l Advantages for insurance companies
A composite licence will reduce costs of insurance companies and reduce their compliance hassles as they can run different insurance lines under one roof. Insurance companies can innovate their product line, especially in life and health insurance, as they will be able to integrate and analyse data of people’s life and health records.
With a composite licence in hand, life insurance companies will be able to sell indemnity-based health insurance products. At present, life insurance companies can sell only fixed benefit health plans and pay a fixed amount, which is the sum insured, following a claim. An integration will significantly benefit the underwriting process and insurers will be able to minimise risks and rationalise costs. Insurers can put in place an unified risk management and IT system in place for better compliance.
A composite licence will also give insurance agents and the intermediaries the flexibility to sell both life and
non-life products and be able to understand better the financial needs of their customers.
l How it can help consumers
A composite licence can enable insurers to offer customers comprehensive insurance options. It can offer more choice and value and even a single policy that covers life, health and savings. It can help lower the premiums and make claims hassle-free. Customers can pay the renewal premium for various lines of policies at once instead of paying the premium at different points of time for various policies. Moreover, a simplified intermediary registration will increase the efficiency of insurance distribution and benefit both intermediaries and consumers. Experts say a composite licence will help to improve policyholders’ financial security, increase returns from traditional life insurance policies and even reduce mis-selling.
l Regulatory changes required
There are some issues that need to be addressed for a smooth rollover to a composite licence regime. The solvency margin and capital requirement for insurance companies will have to change as they will have to deal with different risks and returns from different types of insurance. For instance, under current rules a paid-up capital of `100 crore is required to set up a life, general, or health insurance company. Experts suggest that if the composite licence comes into place, the minimum capital requirements should be based on the solvency margin of the business in all the insurance segments. It should also depend on the scale and size of operations of the insurer.
The accounting and reporting standards will also have to be changed as insurance companies will have to keep separate funds and records for different types of insurers.
The Insurance Act, 1938 specifies a minimum solvency ratio of 150%. A high solvency ratio instills confidence in the ability of the insurer to pay claims, meet future contingencies and business growth plans. As of March 2023, all life and non-life insurers have complied with the stipulated solvency ratio. To reduce the compliance burden, the insurance regulator has discontinued the filing of monthly solvency returns. However, the insurers whose solvency margin is less than 1.55 as at the end of any quarter, have to continue to report their monthly solvency position until the solvency position is restored to1.55.