By Ashvin Parekh
The long-awaited Insurance Laws (Amendment) Bill was issued in 2022 and then revised after consultation with the Insurance Regulatory and Development Authority of India and other stakeholders and following public comments. As we are told, it will be tabled in Parliament during the monsoon session. The draft Bill of 2024 proposes some significant changes to the Insurance Act, 1938, the Insurance Regulatory and Development Authority Act, 1999, and the Life Insurance Corporation Act, 1956. The stated objective of the amendment is to make insurance cover available to all by 2047. One of the major ingredients for the objective is to open the sector to 100% foreign direct investment (FDI). The other key aspect is to expand the existing scope of business undertaken by insurers by registering the class(es) of insurance business. The multiple classes of business are a deviation from the mono-line businesses such as life, general, and stand-alone health insurance, as it is today. Then there are a few major reforms, including empowering the regulator to form regulations for differentiated registration with smaller mandatory capital.
This article attempts to examine each of these major reforms and evaluate the possible impact on the sector. The efficacy of the reforms needs to measure up to the stated objective. Before any evaluation, we need to understand some fundamental characteristics of the insurance business. The prevailing truism that insurance covers have to be sold and not necessarily bought is very valid. We can see that even with motor third-party insurance, a mandatory requirement, only around 40% of vehicles in the country have an insurance cover.
The second key characteristic of the sector is that insurance penetration does not depend on the supply of covers, but more significantly on their demand. This leads us to the aspect of affordability and awareness (financial literacy). In case of affordability, the fact is that when a large part of the population strata has inadequate or surplus income, the spend on insurance covers to face a future risk is not a priority. Government intervention becomes more essential in such a situation. Pension reforms is a case in point. At the time of pension reforms in 2004, the general belief among policymakers was that if the pension funds are managed with small costs in the voluntary pension segment, people will queue up to buy schemes. However, only a small fraction of voluntary participation has taken place till date and that too with the government-supported Atal Pension Yojana. Believing that augmenting the supply of insurance capacity will impact penetration may be ill-founded. FDI of 100% may not have the desired impact on penetration either.
The foreign investors who could be interested in 100% FDI may either be strategic (foreign insurance companies) or financial (like private equity or pension funds). The past experience of raising the FDI limit from 49% to 74% has not brought foreign equity to any significant extent. In case of existing joint ventures — where overseas companies have Indian counterparts — there is a dependence on the domestic partners for their distribution abilities and reach. There are perhaps very few partnerships where the overseas partner will buy out a domestic one and kill the distribution arrangement. In fact, there are several instances where the domestic players have larger roles and equity ownership, and in some cases they buy out equity from their foreign partners too.
Likewise, there has been very little traction on new strategic partners looking to form new ventures in India or acquiring controlling interest in existing ones. The amount of effort and resource utilisation on the part of the regulator in conducting roadshows overseas in the past three years is commendable, but it has not yielded any noticeable success. There is also a school of experts who believe that there is no need for further capital in the cases of many existing life, general, or health companies, and if required, they have the financial strength to introduce more capital. The reform will therefore lead to few investments from overseas, particularly because of the availability of domestic partners with adequate distribution ability.
Let us now turn to the second major aspect of the amendment, which is the registration of composite insurance companies, i.e. companies with multiple classes (not products). The reform will enable existing mono-line companies such as life, general, or health to register for the other classes. In case of the existing private sector companies, over a period of time, some permutations and combinations such as life and health or life and general insurance business may happen. The benefits and reasons for such combinations will largely depend on the regulations framed, and it is generally believed that the regulations will be very conducive as they will consider the possible combination in public sector entities. Such public sector entity mergers for conducting multiple classes of business will transfer the present responsibility of providing the necessary solvency capital from the government to merged entities; however, it may weaken the financial position of the latter.
The differentiated capital requirements will perhaps lead to small regional or specialised entities providing covers to hitherto underserved segments. Their financial viability would be a major question. The extent of the policyholders’ preparation to entrust their cash flows will also be a question mark. Also, they will require the regulator to be vigilant about systemic risks.
The last major aspect is the regulator’s empowerment resulting in substantial autonomy. This will be a good development, provided the regulator refrains from micromanaging the sector. In the absence of performing councils in the life and general insurance sectors, there could be a need for a redress mechanism.
The amendments could fulfil the desired objective of insurance for all by 2047, if the market realties are well examined and the impact of the reforms is reviewed. Otherwise, it will be a pipe dream.
The writer is managing partner, Ashvin Parekh Advisory Services LLP.
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