How insurance can improve the ease of doing business

Published in Mint on 16th November, 2017. Written by Kapil  Mehta

Last week, the papers were awash with the World Bank’s Ease of Doing Business report. Although India’s rankings have improved, they are still low at the 100th position. I’m sure we can do better in letter and spirit. In letter, because the competitive education system that we have all gone through, encourages an ability to understand testing patterns and score well. In spirit, because the difficulty of doing business is holding us all back in a very substantial manner. So, I went through the detailed methodology of these rankings to determine the role insurance could have in improving our standing.

The entire study is available on www.doingbusiness.org. The research is meticulous and must take enormous effort to compile across 190 countries. There are 10 criteria, given equal weight. In six of these, there is a role for insurance, either in terms of improving India’s rankings or in coping with the issue that is pointed out.

Our worst performance is in the criterion of ‘Dealing with Construction Permits’, where we are 181 out of 190 countries. Within the detailed criteria is an entire section on liability and insurance, where India scores a duck. The World Bank wants that architects, engineers, technical inspectors or construction companies involved in construction should be legally responsible and have insurance for design defects found after a building is occupied. This is reasonable because the issues related to design defects can take years to show up. Unfortunately, we have no such liability or insurance requirements. Insurances covering this risk are available but generally exclude design defects or set the defect cover at basic levels. The government ought to mandate this liability and the associated insurance for members of the construction eco-system. Apart from the obvious benefit of improving our ease of doing business score, this is something that home and business owners would benefit from.

‘Enforcing Contracts’ is our second worst performance, where we are 164 out of 190. One of the culprits of this poor ranking is high litigation cost relative to other countries. Our legal fees, at 31% of claim value, are much higher than Finland’s best of 9%. The largest chunk of this is attorney fees that are 22% of claim value for the specific case that the World Bank has taken. This validates my daughter’s decision to consider law as a profession. However, returning to matters of more national significance, it suggests the need to buy liability insurances. These insurances include products such as: directors’ and officers’ liability, professional indemnity and comprehensive general liability. These pay for the various litigations that a business may have to face and can help contain high legal costs.

‘Registering Property’ is our third worst performance, 154 out of 190 countries. One of the most significant components of this criteria is the land dispute resolution process. The World Bank wants that registration of immovable property should be subject to a state or private guarantee. Also, people who buy land and then suffer losses, because ownership papers were faulty, should be compensated. This is where ‘title insurance’ can step in. This product, not yet available in India, has generated significant interest. The insurance regulator set up a working group in June last year to look into this. The development should be fast tracked. A major constraint is that land records are poorly maintained. The government, which controls land registration, should consider a guarantee on the integrity of its own records.

We are ranked 146 in ‘Trading across Borders’. Thankfully, insurance is not a bottleneck here—there are other issues. Marine insurance is what transporters need to buy when goods move. The cost of this insurance is rock-bottom and policy issuance fast. There are product variants such as sales turnover marine insurance that completely eliminate the need for specific documentation for each transit, and these are catching on.

We are ranked 103 on the criterion of ‘Resolving Insolvency’. The issues are that recovery times and recovery rates of creditors are poor. It takes over 4 years in India to resolve insolvency proceedings and make recoveries, compared to under 2 years in the countries of Organisation for Economic Co-operation and Development (OECD). Also, in India, typically recovery rates for credit in cases of insolvency are less than 27%, compared to over 70% in OECD countries. That’s where ‘trade credit’ insurance should be actively promoted. This specific insurance pays the outstanding amount if a borrower defaults or delays beyond a certain period. The insurance can be designed to cover bankruptcy. There are many requests for trade credit insurance to cover delayed payments by government departments, ironically, an exclusion in these insurances.

There is a brighter side. India does very well in ‘Protecting Minority Shareholders’, where we stand fourth. Because the country is so focused on protecting minority shareholders, companies would do well to buy insurance that contains costs related to minority shareholders. The litigation against directors is set to increase. This makes the directors’ and officers’ liability insurance a must-have, if you want to attract talented directors. Also, existing liability insurances will need to be modified to cover law suits where minor shareholders litigate against the company. Today this specific risk is largely uninsured.

There are four other criteria where insurance works fine or has limited role. These are ‘Getting Electricity’, ‘Getting Credit’, ‘Paying Taxes’ and ‘Starting a Business’, where we stand 29th, 29th , 119th and 156th respectively.

From the mathematical model, it seems to me that, ceteris paribus (other things being equal), some of these changes could improve our ranking by an additional 5-10 places. And, the impact would be far more substantial if we combine this with real reform in land and judicial processes.

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