Published in Mint on 29 February, 2016, Written by Kapil Mehta
The government has had a strong insurance track record over the past year. And the insurance industry has grown well. Life insurance, which has been in doldrums for long, is looking up again. The year-to-date growth at 16% is the highest in the past five years. General insurance has managed to retain double digit growth of 14% despite the economic slowdown.
The government’s insurance schemes have also performed well. There are three schemes: Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana, and the Atal Pension Yojana. And all put together, about 125 million people are now covered through these plans. These are large numbers and the benefit is being delivered to people who would not have had access to insurance otherwise. It is remarkable that state machinery can work so single-mindedly to achieve insurance objectives. It also appears that these insurances are not subsidised and sustainable.
Foreign interest in insurance has been revived. Several overseas insurers want to increase their ownership in Indian insurers to 49%. According to some estimates, foreign direct investment (FDI) proposals in insurance last year are more than the previous four years put together.
Given this background, the government was off to a good start even before presenting the budget. The budget proposals build on this momentum and highlight three insurance-related priorities.
First, government prefers to use its own distribution to deliver insurance to the poor. It uses insurers as back-end suppliers to implement its plans. This model has worked well in the schemes that have already been implemented. That’s why the government has now introduced two more plans, where the health insurance plan will cover Rs.1 lakh for a family, topped up to Rs.1.3 lakh for senior citizens.
Second, the importance of retirement planning has been acknowledged. Awareness of the issue is the first step to developing solutions. The National Pension System (NPS) is the biggest beneficiary as its services have been made tax exempt, and up to 40% of accumulated value has been allowed as tax-free withdrawal. A one-time exemption has been provided to users of provident fund schemes to transfer to the NPS. Single premium pension plans have also benefited from a reduction in service tax from 3.5% to 1.4%. The government will now fund employer contributions to the provident fund for those earning less than Rs.15,000 a month. The tax exemption on provident funds appears to have been limited to 40%, which makes it comparable to the NPS.
Third, the industry is being prepared for future growth. The four public sector general insurers, which account for over 50% market share, will be listed. Apart from the benefit of realising value, this will make these insurers more market responsive and accountable for performance and underwriting quality.
However, there are a few areas where progress should be hastened. The Financial Redress Agency should get established faster. For pensions to really take off, the annuity payments need to be made income-tax free. Property insurance needs to be made mandatory, particularly in disaster-prone areas.
Overall, from an insurance perspective, it is a good budget that challenges the industry to keep pace with the government’s delivery of insurance.