After the first few years of the decade when the business contracted, India’s insurance sector continues to grow well and the premium-to-GDP ratio was 3.5% in 2016, down from 5.2% in 2009 but up from 2.7% in 2001. When looked at number of persons covered—instead of just the premium paid—with 5.3 crore persons covered by the Pradhan Mantri Jeevan Jyoti Bima Yojana and 13.47 crore by Pradhan Mantri Suraksha Bima Yojana, the coverage looks better. During FY18, the first-year life-insurance premiums rose 16.3% on top of 20.9% in FY17 and 12.3% in FY16. Interestingly, for the first time since the sector was opened to private players in 2000, the share of LIC went to below half at 49.1%.
What has driven life insurance growth over the last few years has been the surge in sales of Unit-Linked Insurance Plans (ULIPs), especially for the new players. In the case of SBI Life, these rose from 44% in 2012 to 69% in Q3FY18, from 12% to 65% for Bajaj Life, 56% to 86% for ICICI Prudential and 12% to 41% in the case of Max Life. For the industry as a whole, the share of ULIPs in total insurance has risen from 8% in FY14 to 12% in FY17.
The other part of the increasing financialisation of India’s savings, of course, is the growth in the mutual fund industry, where equity inflows have risen from Rs 79,000 crore in FY15 to as much as Rs 233,900 crore in FY18. As a result of this, the share of India’s household savings being held in financial form rose from 7.4% of GDP in FY12 to 8.2% in FY16, before falling to 6.8% in FY17. Since India’s overall savings of the household sector also fell in this period, from 23.6% of GDP in FY12 to 16.3% in FY17, what is more relevant is the composition of the savings. From 31.3% in FY12, the share of household savings held in financial form rose from 31.3% to 46% in FY16 and then fell to 41.7% in FY17. An issue that the government would probably need to examine, in the light of the latest budget, though, is the distortion caused by the new proposal to tax shares and equity mutual funds at a 10% rate for long-term capital gains. While this makes sense given bank interest rates are taxed at the marginal rate of tax for every group, there is no tax on ULIPs which, in addition, also get benefits under Section 80C. Also, while Sebi has put a cap of 2.5% of AUM as fund expenses, expenses for ULIPs are capped at 4%, making it more attractive for banks to sell insurance products than mutual funds.