Making insurance a development tool

Published in Mint on Feb 28 2015., Written by Kapil Mehta

For insurance, the past few years have been gloomy. Between 2011 and 2014, life insurance funds reduced from Rs.2,10,100 crore to Rs.1,99,600 crore. Life funds as a proportion of household financial savings reduced from 20% to 17%. Penetration fell from 4.6% of gross domestic product (GDP) in 2009 to 3.1% in 2013 . Reduction in distribution commissions due to regulation is one major reason for this slowdown. The fact that markets have been in the doldrums for much of the past five years has not helped.

The general insurance sector has its own unique problems, primarily profitability. The entire industry had an underwriting loss of over 10% of premiums in 2014 . That is over Rs.7,000 crore. Underwriting loss is premiums less reinsurance costs, claims and expenses, and is an indicator of the industry’s health.

General insurers managed to deliver profits because investment income is high. Investment income is earned on reserves and the fact that premium is collected upfront but claims paid out later. Over the next few years, as interest rates reduce, the general insurance sector’s vulnerability will show. That’s why improving profitability is such a priority.

Even the promising health insurance industry stumbled. The number of people covered by health insurance reduced from 253 million in 2011 to 216 million in 2014 . Premium growth at 13% was the lowest in the past three years. Intense competition causing low prices has been the sector’s shortcoming.

The past six months, however, have been a bright spot. First, the insurance ordinance was issued and then backed up by the Foreign Investment rules to increase foreign direct investment (FDI). This made foreign insurers sit up and look at India as a market again. Second, the insurance regulator announced measures that would make general insurance pricing rational. Finally, the economy is building momentum, which has a direct impact on insurance.

From an industry and customer perspective, this budget is thoughtful and positive. The assertion that the insurance ordinance will be brought to Parliament in this session reassures potential investors. For the first time, insurance has been viewed as a policy tool for development rather than just one of the many personal tax exemptions. There are four heartening insurance-related announcements in the budget.

 A move towards universal social security

This is how civilized nations treat their citizens. What is commendable is that the first step proposed is commercially transparent and mostly non-subsidized. The underlying approach is to use the 125 million Jan Dhan Yojana accounts as a distribution platform for financial inclusion rather than for providing subsidy. Both the Pradhan Mantri Suraksha Bima Yojna, which proposes accidental death cover of Rs.2 lakh for Rs.12 per year and the Pradhan Mantri Jeevan Jyoti Bima Yojna, which provides term insurance of Rs.2 lakh for Rs.330 per year are commercially viable. The source of funds for subsidy to vulnerable groups is clearly identified as the large unclaimed amounts in many Public Provident Fund (PPF) and Employees’ Provident Fund (EPF) accounts. There are two anomalies in this social security plan that the government should correct.

One, Atal Pension Yojana, the pension plan appears to be of guaranteed benefits. We should not walk this path. Most countries have moved to defined contribution plans where benefits are properly funded by money collected.

Two, there is a risk-coverage overlap because term insurance encompasses death by accident. This makes the accidental death insurance redundant.

Emphasis has been paid to health insurance

The government has used every tool in its arsenal here. Buyers of Employees’ State Insurance will now be able to buy health insurance approved by Insurance Regulatory and Development Authority of India (Irdai) instead. This has many benefits because the Irdai approved health insurance products provide access to a much larger set of hospitals with fewer restrictions.

Apart from this, tax deduction for health insurance has been increased from Rs.15,000 to Rs.25,000. For senior citizens, this has gone up from Rs.20,000 to Rs.30,000. People who are older than 80 years can now claim deduction on actual expenses. For good measure, even the Upanishad mantra that the finance minister recited asked for freedom from illness.

Recognition of pension as an emerging need

The National Pension System (NPS) is now an alternative to the EPF. The tax deduction limit for pension schemes under section 80CCC has been increased from Rs.1 lakh to Rs.1.5 lakh. The limit under section 80CCD has been effectively increased from Rs.1 lakh to Rs.2 lakh for contribution to the NPS. Service tax exemption has been given for the Varishtha Pension Bima Yojna. The Atal Pension Yojna has been proposed for Jan Dhan account holders.

An intention to set up a financial redressal agency

This organization should be modelled along the lines of the UK Financial Conduct Authority. As financial sectors, including insurance, grow, it is essential to build such capacity. Consumers will materially benefit when this agency is set up. The disappointments, admittedly minor, were that categories such as home insurance were not encouraged and service tax was increased to 14%. The budget is a purposeful step forward by a government that knows its mind and is confident of execution. That’s what we need most today.

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