The Insurance Regulatory and Development Authority (IRDA) of India has done well to address some of the long-pending demands of the industry that include opening up the channels for more capital to flow in. Insurers can now seek money from private equity funds directly, and a single investor can now hold 25% of the insurer’s paid-up capital without being tagged a promoter. It has also enhanced access to debt, widened the scope of marketing relationships, and lowered solvency requirements. The latter will benefit smaller insurance companies, which have the appetite and ingenuity to introduce niche and innovative products but little cash at their disposal. Insurers now can also raise subordinate debt or preference shares without prior approval of the authority, to enable them to respond to market conditions in a speedy manner. On the distribution front, the upper tie-up limit for intermediaries has been increased to ensure last mile connectivity—a corporate agent can tie up with nine insurers (from the earlier three) and insurance marketing firms can tie up with six insurers from previous two in each line of business—life, general and health.
So far, so good. The question, however, is will these measures cover the distance that needed bridging to move ahead with the regulator’s vision of “insurance for all” by 2047? The answer is quite hazy here, as the measures fail to address the elephant in the room, which is the very high direct cost (commission and opex) as well as indirect cost (low persistency) that result in poor value proposition for policyholders. Analysts say for products targeting the larger section of population, retail life insurance products have one of the highest costs of distribution. The regulator and the industry should try to enable an ecosystem that enable launching of products that have a lower cost of distribution and higher value proposition for customers. The latest measures of the insurer are silent on this aspect. Reportedly, the regulator is looking at bringing down the capital requirement for insurance companies from the current `100 crore. But, even at the existing level, such an amount is insufficient.
At the heart of the problem is the fact that the insurance industry in India has to progressively reduce the unit cost in line with other financial services industries such as mutual funds and banking. In a refreshing change from past practices, the new regulator has promised to improve dialogue with industry players so that their concerns are addressed fast. While this is a good practice, the regulator must also be able to convince the industry that no reforms will work if insurers themselves do not offer products with value proposition to customers that are comparable with products from competing industries. The other point is about health insurance, which brings in the biggest chunk of premiums in the general insurance business. Absence of a regulator for healthcare delivery fuels customers’ suspicion about overcharging by hospitals. At the other end of the spectrum is the government-funded health insurance. Private insurers avoid this segment as the low level of premium does not justify the claims. Total insurance penetration in the country has increased from 33% in 2014-15 to 42% in 2020-21 (life from 2.6% to 3.2% and non-life from 0.7% to 1%). This can be increased manifold if the insurance regulator thinks about a holistic regulation that takes care of the policyholders as well.