The Indian insurance sector is composed of 34 general insurance (often known as non-life insurance) companies and 24 life insurance companies. Among the life insurers, Life Insurance Corporation of India (LIC) is the only Public Sector Enterprise (PSE). There are six PSEs in the general insurance segment. In addition, there is a sole national re-insurer, known as General Insurance Corporation of India (GIC Re).
Underinsured India
However, India is a hugely underinsured country, compared to global peers. At only 4%, the insurance penetration (premium as a percentage of Gross Domestic Product-GDP) in India was significantly below the global average of 6.8%. Similarly, insurance density (per capita premium paid) was $92 in India, while the global average was $853.
The US remained the largest insurance market in the world, with total premia, non-life and life, of $3 trillion in 2022, followed by China and the UK. The three markets together accounted for over 55% of the global premia. India was in 10th position with a premium value of $131 billion with only 1.9% global market share. India is projected to become the sixth-largest insurance market by 2032 as it is one of the fastest-growing markets in the world.
Unexplored Marketing Opportunity
Most of the life insurance products sold in India are savings-linked, with just a small protection component. That means households remain exposed to a significant financing gap in the event of the premature death of the primary breadwinner. Moreover, 93% of exposures in respect of natural disasters were uninsured in India.
The NITI Aayog in its report in 2021 confessed that even among the non-poor, 40 crore individuals in India lacked any form of financial protection for health. Also, over 90% of the present-day workforce in India does not have any social security. This segment is termed as “missing middle” because they are not poor enough to be covered by Government subsidized insurance, and at the same time, they are not rich enough to buy insurance. A well-designed, appropriately priced, voluntary, and contributory insurance product catering to this segment will contribute to achieve the goal of “insurance for all” by 2047.
Proposed Reforms
Against this backdrop, the Standing Committee on Finance of the Parliament (hereafter, the Committee) headed by Jayant Sinha tabled its report entitled, “Performance Review and Regulation of Insurance Sector” in the recent Budget Session of the Parliament which created vibration to the insurance sector in the country.
Overall, the recommendations of the Committee are laudable from the insurance industry and the customer perspectives. The government should hold deliberations, maybe through a Working Group to be set by the Insurance Regulatory and Development Authority of India (IRDAI), with all concerned stakeholders to find solutions to the issues that need to be resolved in an effort to provide an appropriate policy framework. The following are some of such salient issues:
Composite licensing for all insurance segments: The Committee recommended that insurance companies should be allowed composite licensing which will enable an insurer to offer both life and non-life insurance products under one entity. So far the regulations of the IRDAI do not allow composite licensing for an insurer to undertake life and non-life insurance products under one entity.
A composite license can cut costs and compliance difficulties for insurance firms, and as expected by the Committee such a proactive reform “can offer customers more choice and value, such as a single policy that covers life, health, and savings.” If materialized, the customers can get all-in-one insurance from one provider, with lower premiums and easier claims.
Open architecture for insurance agents: The Committee recommended the introduction of an open architecture concept for insurance agents so as to facilitate a larger outreach of insurance products and a stronger distribution infrastructure in the country. Such a reform would pave the way for insurance agents to associate with multiple insurance companies so as to serve the specific needs of the customers.
At present, an insurance agent can associate with one life, one non-life, and one health insurance company for the distribution of insurance products.
High time to lessen GST rates: Insurance is not a mere commercial product; in fact, it is also a societal service! The insurance industry along with the experts have been arguing for a reduction in high rates of Goods and Services Tax (GST) for a long time.
Financial services, including premiums for health insurance, term insurance plans and unit-linked insurance plans attract 18% GST. The Committee observed that a high rate of GST results in a high premium burden, which acts as a deterrent to the penetration of insurance in India.
To make insurance an affordable product to the common man, the Committee recommended for the reduction of the GST rate to all insurance products, particularly health insurance retail policies for senior citizens and micro-insurance policies up to limits prescribed under Pradhan Mantri Jan Aarogya Yojana - PMJAY (presently Rs.5 lakh), and term policies.
Ensuring level-playing field: The Committee further noted that the PSEs in the insurance sector have to mandatorily participate in government-run insurance schemes which impact their profitability. The Committee, with a view to ensuring a level playing field, recommended that such provisions be uniformly applied to all players.
In addition, the Committee took note of an anomaly of the Tax Deducted at Source (TDS) on GST that is applicable only to public sector insurance companies. As these PSEs are included in Section 51 of the Central Goods and Services (CGST) Act, TDS at the rate of 2% is required to be deducted from the payment made or credited to the supplier of taxable goods or services or both, where the total value of such supply exceeds Rs.2.50 lakh.
Catastrophe insurance for disaster-prone areas: Natural catastrophes in India led to uninsured economic losses of $32.94 billion (Rs.2,73,500 crore) during the five-year period of 2018-22, indicating the low insurance penetration in the country, Swiss Re noted. India has been ranked third after the US and China in recording the highest number of natural disasters since 1900. India witnessed natural disasters almost every day in the first nine months of 2022, from heat and cold waves, cyclones and lightning to heavy rains, floods, and landslides.
These calamities claimed over 2,700 lives, damaged 1.8 million hectares of crop area, destroyed over 4.16 lakh houses, and killed almost 70,000 livestock, according to a report of the Centre for Science and Environment (CSE) and Down to Earth journal. Therefore, it is high time to explore how to make catastrophe insurance possible to insure homes and properties, especially those of economically vulnerable groups such as farming communities and those working in the Micro, Small and Medium Enterprises (MSMEs) in areas susceptible to catastrophic damages with the aid of Public-Private Partnerships (PPP).
The successful global examples of risk management pools such as the California Earthquake Authority, Australia’s Household Resilience Program, and the Turkish Catastrophe Insurance Pool provide required inputs regarding how to run non-profit establishments that collect funds from insured firms with funding from government and private insurers, helping in managing risk up to a pre-decided limit.
India should start working on the creation of such risk management pools to address the risks faced across the country. To start with, a specialized insurance business may be set up by one of the PSE general insurance companies with a subsidised premium for disaster-prone areas.
Addressing the road accidents: The Ministry of Roads Transport and Highways (MoRTH), Government of India intended to introduce cashless medical treatment to all injured road accident victims across the nation in a couple of months. India has a dubious record of the highest number of road accident deaths in the world.
Road accidents claim 19 lives every hour in India, according to a government report. In 2022, there were 4.61 lakh road accidents across the country, out of which 1.68 lakh people were killed. It is in this context the Committee found that a large number of vehicles, particularly commercial vehicles are plying on the Indian roads without any insurance cover, which poses a risk to the owners and third parties in case of road accidents and damages.
As per the Motor Annual Report of the Insurance Information Bureau of India (IIB), of the over 25.33 crore vehicles on Indian roads as of March 2020, the proportion of uninsured vehicles was almost 56%. Many innocent victims suffer due to accidents caused by commercial vehicles. There is no proper insurance coverage that can be identified after the accident. Accordingly, the Committee recommended the implementation of eChallan enforcement across States by leveraging data integration by IIB, mParivahan, and National Informatics Centre (NIC) data.
Need to Strengthen Four General Insurance-PSEs: The Committee advocated that the Reserve Bank of India (RBI), on behalf of the government, can issue “on-tap” bonds of various maturities to meet the capital requirements of the insurance industry to the tune of Rs.40,000-50,000 crore. An appropriate strategic roadmap is needed of the hour to improve the competitiveness and the culture of efficiency, effectiveness and innovation in the management of these PSEs, and enable them to attract sufficient capital and talent.
Indians Spend Higher Out-Of-Pocket Expenditure (OOPE) on Health
A study conducted by the World Health Organization (WHO) in 2022 found that high OOPE on health deprives 55 million Indians, annually. The government estimates further exposed a sorry-state-of-affairs, and according to it, over 63 million Indians are faced with poverty every year due to health costs alone.
OOPE includes expenses borne directly by a patient when insurance does not cover the full cost of the health good or service. In India, OOPE on health (48.2%) was more than the government’s expenditure on health (40.6%), as confessed by the government in its Economic Survey 2022. While OOPE is generally high in India, it is more so in economically weaker States.
For example, in UP, the patients’ OOPE was 71%, followed by Bengal and Kerala (68% each) implying the prevalence of wide inequalities across the States in people’s access to affordable healthcare services. While five States of Maharashtra, Karnataka, Tamil Nadu, Gujarat and Delhi contributed almost two-thirds of total health insurance premiums in 2022-23, the rest of the States contributed just one-third. India cannot achieve its laudable goal of universal health coverage and delivery of quality health services for every Indian at affordable cost as envisioned by the National Health Policy 2017, without addressing this pertinent issue.
(Disclaimer: The opinions expressed here are those of the author)
