Raising the FDI cap in insurance will help infuse capital in an industry that needs it in plenty to grow to the next level.
Adecade or more provides sufficient learning experience for a relook at the regulatory architecture of any sector that has undergone fundamental changes in its market structure. This certainly holds true for the domestic insurance industry, which, ever since being opened up to private players in August 2000, has 24 companies now operating in the life space alone. Their combined new business or first-year premium collections amounted to some Rs 115,000 crore in 2011-12, of which 30 per cent accrued to those other than the erstwhile state-owned monopoly, Life Insurance Corporation of India. But the fact that even today only a fifth of India’s population has life insurance cover – even while the industry actually registered de-growth for the first time last year – points to the need for fresh policy direction to drive its future growth.
It is in this context that the Finance Ministry and the Insurance Regulatory and Development Authority’s (IRDA) recent initiatives aimed at expanding the spread and penetration of life insurance in the country assume significance. It is now proposed to allow banks to sell the products of more than one insurance company. The current ‘one bank-one insurance company’ norm prevents any new player from tying-up with a bank already having an exclusive agency arrangement with an existing insurer. But with the same bank becoming a broker offering a bouquet of products from different companies, everyone benefits – the consumer, from greater choice of intermediaries, and insurance companies and banks, from increased business and market penetration. Equally pro-competition is the move to enforce a maximum deadline of 30 days for the IRDA to approve (or reject) any product that an insurer seeks to launch. Besides, the Finance Ministry seems open to a reduction in the service tax on first-year regular as well as single premium policies, and also granting additional income tax deduction benefits – over and above the existing Rs one lakh savings limit – on premium paid towards certain pension products offered by insurance companies.
All these measures would eventually generate more business for the industry, while also spurring competition and product innovation necessary to make insurance attractive to consumers. Consumers apart, what makes this sector important is its role as a source of long-term funds critical for infrastructure investments. Insurance companies can currently invest only in public sector-promoted infrastructure ventures – a norm that has little relevance when power, highways, ports or urban transport projects are increasingly being implemented through private participation. Viewed from this perspective, the plan to enable insurers invest in private infrastructure ventures – set up as wholly-owned subsidiaries of companies that would also guarantee the debt instruments being issued – is well thought out and timely. What the Government must do is to top up these initiatives with raising the foreign direct investment cap in insurance beyond 26 per cent. This will help infuse capital, which, too, the industry needs in plenty to grow to the next level.