The insurance industry went through a challenging period after regulatory changes in September 2010, coupled with a volatile macroeconomic scenario. The proposed reforms could spur growth while also encouraging innovation to make insurance attractive to consumers.

Increase in foreign direct investment will bring in the capital required to increase distribution beyond the cities and strengthen the insurance risk framework. Foreign institutional investors and private equities too can invest in insurance companies that are looking for capital for expansion.

The new ‘Use and File’ guideline will allow life insurers to introduce certain standard products even without a formal approval from the regulator, thereby reducing time to market. Standard products will also reduce complexity, enabling a shorter sales cycle and greater distribution.

Leveraging the vast network of bank branches could hold the key to addressing low insurance penetration in semi-urban and rural areas. Currently, banks operate as corporate agents, and can sell products of only one life insurer, one general insurer, and one specialised health insurer. If they are allowed to become brokers, banks could tie up with several insurers, subject to the final framework. This would enable even new entrants to access a network of over 90,000 bank branches with the advantages of a captive customer base and low cost of customer acquisition. The customers too can benefit from the increased choice of products. This may accelerate product innovation to address specific needs of customers.

In addition to insurance, pension reforms could be vital, as India lacks a formal old-age social infrastructure. There is low pension penetration, with only 12 per cent of the working population covered by retirement benefit. To address this gap, the New Pension System (NPS) was launched, but met with limited success; a majority of the funds were contributed by Government employees due to mandatory enrolment.

Pension fund assets constitute about 5 per cent of the GDP — much lower than in OECD (Organisation for Economic Co-operation and Development) countries, where it is nearly 67 per cent of the GDP on average. Increase in FDI would attract global pension fund companies to India, and this is expected to significantly improve the size of pension assets.

Increase in FDI ties in well with the Government’s agenda to strengthen the pension framework while filling the funding gap for infrastructure. India needs to invest about one trillion dollars in the infra space during the 12th Five Year Plan (2012-17). Foreign players are expected to bring in global expertise, and enable funding for long-term infrastructure projects. The increase in players would increase competition, facilitate product innovation, and enhance customer awareness about the need to invest in pension.

Another significant proposal that could potentially drive both insurance and pension segments would be additional tax exemption for some pension products, as Indian household savings are heavily influenced by tax incentives. This could result in greater demand for pension products and life insurance.

With these proposed reforms, the Government has paved the way for growth in the insurance and pension sector. While many insurers are yet to strike a balance between growth and profitability, they may still be required to review their operating model to benefit from the proposed changes.

(Shashwat Sharma is Partner, KPMG in India)

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