Business
The competitiveness of India's insurance sector
By
Amit Kapoor The Rajya Sabha passed the Insurance Laws (Amendment) Bill, 2015 on
March 14 after the Lok Sabha had earlier passed it on March 4. The
enactment of this bill has the potential to be a historic game-changer
for India's insurance industry.
India has a long history of
the thought and practice of insurance. The thought of pooling resources
and re-distributing these finds mention in the writings of Manu,
Kautilya, and Yagnavalkya. It was the precursor to the modern day
insurance industry. The sector, during the British era, had quite a
number of life and general insurance companies. The life insurance
companies were nationalized in 1956 and the Life Insurance Corporation
of India (LIC) created. Similarly, the general insurance companies were
also nationalized in 1973 when 107 companies were amalgamated into four
entities. Post-1994, there was a move to set up an Insurance Regulatory
and Development Authority (IRDA) in 1999 to foster competition within
the sector. The sector, post-2000, has seen greater participation by
private and foreign companies.
The Indian insurance sector can
at present be broadly subdivided into three distinct segments – The life
insurance segment (24 companies), the general insurance/non-life
insurance (28 Companies) and the reinsurance segment (1 company). The
industry thus has post 2000 certainly seen the emergence of greater
competition. The penetration rates are still dismally low at less than
five percent for the life insurance segment and less than one percent
for the non-life segment. The industry has been somewhat privatized over
the years and at present, this sector has a 45 percent share in the
non-life insurance segment and an approximately 25 percent market share
in the life insurance segment.
The life insurance segment
continues to be dominated by government-owned LIC with a market share of
over 70 percent. The reinsurance segment has a government monopoly
with The General Insurance Corporation of India (GIC Re) being the sole
entity for over 40 years now.
The Insurance Laws (Amendment)
Bill, 2015 becomes important against the backdrop of this historic,
present and an evolving insurance industry landscape. The bill has
several provisions that can enable Indian consumers, as well as domestic
and foreign companies, to benefit from India’s vast and at present an
almost unpenetrated market.
First and foremost, the bill has
increased the Foreign Direct Investment (FDI) limit in the sector to 49
percent from 26 percent. The Department of Industrial Policy and
Promotion (DIPP), in a press note following the enactment, amended the
April 2014 Consolidated FDI Policy Circular. This move is expected to
push foreign companies who are at present in joint ventures in India to
increase their investments. These include companies like Nippon Life of
Japan, BUPA of Britain and Metlife of the US.
The capital
infusion is expected to be close to $2 billion in the near term and $10
billion over the medium to long term. The move will also help in
creating jobs that India requires for its ever-increasing workforce.
Some consultancies have estimated an additional 15-20 percent jobs in
the industry in the coming few years.
Second, the bill also
gives IRDA greater powers to frame laws for the sector. Some have
compared these powers to be akin to those of capital market regulator
Securities and Exchange Board of India (SEBI). The law also gives IRDA
powers decide the agency commission structure that is expected to curb
the high attrition rates (among agents) that were previously experienced
in the sector.
Third, the bill also enables foreign reinsurers
to set up branches in India. This segment is expected to deepen with
the coming in of global giants like Berkshire Hathaway, Munich Re,
Lloyds and Swiss Re. It is also likely to help India develop technical
expertise within the domain over the next couple of decades.
The
bill is thus all set to benefit the Indian consumers who may witness
an increase in choice with the entry of newer players as well as
increase in the competitiveness of the sector. It is because both the
existing and newer players will enable greater capital infusion into the
economy.
According to a recent McKinsey report for CII, the
market size of the total insurance sector is currently close to $60
billion. This is expected to quadruple over the next ten years till 2025
to $250 billion. If that happens, it not only means greater capital
infusion but also greater insurance penetration among the masses and
greater jobs within the sector.
(The article is co-authored
with Sankalp Sharma, Senior Researcher at the Institute for
Competitiveness, India. is Chair, Institute for Competitiveness &
Editor of Thinkers. The views expressed are personal. Amit can be
reached at [email protected] and tweets @kautiliya)