I. Introduction
In the last two years, Government has taken a number of new initiatives, like increase in FDI limit, accidental insurance benefits to Jan Dhan Accounts, insurance at a cheaper price under Jan Suraksha Scheme, health insurance to BPL families and travel insurance to railway passengers etc, to increase the insurance penetration (ratio of insurance premium to GDP) and density (ratio insurance premium to total population) in the country, which has been staggering at a very low level compared to global peers.
India’s insurance penetration is at 3.4% in 2015 (Life 2.7% & Non-life 0.7%), compared to the world average of 6.23% (Life: 3.47% & Non-life: 2.77). It also lags behind other developed countries like the US (7.29%), UK (9.97%) and Asian countries like Japan (10.82%), South Korea (11.42%) and Singapore (7.25%). Further, India’s insurance density is also at a very low level of $54.7 in 2015 (Life: $43.2 & Non-life: $11.5), compared to World average of $621.2 (life: $345.7 & non-life: $275.6).
In the post reform period (after 2000), the Indian insurance sector grew at a CAGR growth rate of 16%, despite having several issues like, regulatory changes in 2006 and 2010 on ULIP products, lower GDP growth, etc. In last year’s budget 2016-17, the introduction of social security schemes has been a great move in deepening the penetration and density of insurance in India.
These schemes have helped in spreading awareness about insurance, especially in the rural landscape. With increased awareness coupled with the GDP growth, the Indian insurance sector has also continued to grow at a higher rate, compared to other financial sectors in the economy.
The business figures of the insurers indicate that till October 2016, the life insurance premium underwritten in new business premium has increased by 30.37% to Rs 87,343 crore, while non-life insurers’ gross direct premium collections grew by 32.03% to Rs 72,608 crore.
Despite the strong growth, the Indian insurance industry faces a number of difficulties like capital raising, tight regulations, and regulatory forbiddances in merger & acquisitions etc. In the current year so far, ICICI Prudential Life Insurance Company is the only insurance company which is listed in the stock exchanges.
The listed stock price is below the issue price and continues to fall, which raises a number of questions for the other insurers who have planned to be listed. Though, SBI life has planned to go to the market by divesting 5% of its stock but till now there is no announcement. The budget proposal to list the 4-PSU general insurance companies has not been cleared yet.
To make the administrative process efficient, transparent and accountable in the economy, the Government has ushered in a number of reforms across the sectors. Some of the major reforms are: roadmap for GST, direct benefit transfer (DBT) payment, discontinuation of Interview in recruitment of Junior Level Posts, Jeevan Pramaan, e-Sign and demonetization of high denominated notes to curb the black money in the country.
With the recent demonetization, huge amounts of money have flown into the banking system, which pushed the system liquidity into surplus mode and interest rates downward. Research suggests that the downward interest rate scenario led to insurance premium collections but the return on investment would decline due to the fall in G-sec yields (Parida & Acharya, 2014).
II. Expectation from Union Budget 2017-18
Given the progressive mind-set of the Government, it is quite natural to keep high expectations in the forthcoming Union Budget 2017-18, which will lay out a clear roadmap to set the right vision for the Indian economy. In the following, let me briefly highlight the expectations from the budget for the Insurance sector.
a) Ensure Appropriate Taxation Policies
In the Union Budget 2013-14, Government has widened the service tax net to the insurance policy premiums paid. Though, the tax rate differs from product to product; traditional products that are not investment-oriented are taxed at lower rates compared to investment-focused policies. In my view, insurance should not be taxed in India, as it is an instrument that provides financial protection against risk.
Further, in India the insurance penetration is low; the introduction of tax in the realm of insurance may not represent the best step forward. However, the Government may continue to tax at the claim settlement stage as TDS. Some recommendations relating to insurance sector regarding taxation is as follows:
- Increase in the limit for Income Tax (IT) exemption in health insurance premium for self and family: In the last year’s budget, Government has increased the limit for income tax exemption in health insurance, which was a welcome move wherein the industry saw a considerable increase in the number of people / families opting for policies with up to Rs 10 lakh cover. However, there is an impending need for further tax exemption as health insurance is still not adopted as a necessity for one’s self and family. Further exemption will encourage people to get a health insurance policy with extended covers which is a necessity in today’s time given the current medical inflation in the country.
- Income Tax (IT) exemption for premium paid for home insurance and introduction of compulsory home insurance for a minimum basic sum insured: The data on the frequency of natural calamities hitting the country has revealed a very high number of losses to property, assets and lives. While one protects a family with life insurance and health insurance, people tend to overlook the need for home insurance. A natural calamity or any other misfortunate incident is not something one foresees. Since a house is one’s biggest financial asset, introducing IT exemption on premium paid will push more people to opt for home insurance. In the wave of natural calamities over the past year, the worst hit was property / home. We strongly believe making home insurance compulsory for a minimum basic sum insured will lessen the burden on individuals / families, especially for those staying in calamity prone areas.
- Separate limit for life and health insurance premiums: There is a need to set a separate limit of at least Rs 1 lakh under 80C for life and health insurance premiums. This would help improve insurance density, which continues to be low amongst emerging markets.
- Service tax exemption on term and health insurance products: In the virtual absence of a government backed social security and rising health care costs, there is a need to provide incentive to build a safety net. Exemption of service tax on term products for life and health insurance premiums up to Rs 10,000 can help achieve the same.
- Service tax exemption on preventive checkups: Preventive health checkups should be exempted from service tax. Rise in lifestyle diseases are posing a fresh challenge and preventive checks can provide timely intervention.
b) Conducive Regulatory Environment
Despite the Government’s efforts to attract foreign investors in the sector, not a single one has come forward till now. Significant initiatives are needed for realising financial inclusion and delivering financial services to the poorest section of the society. Though, there are over 10-12 prominent global reinsurers who want to invest and run their businesses in India, but due to some policy hurdles on licence norms, are not able to fully start operations in the country.
Foreign reinsurers such as Munich Re, Swiss Re, Scor, Hannover Re, XL Catlin and RGA among others have already approached IRDAI for the required licence to operate in India. Some of them have already got R1 licence and now are awaiting for R2 and R3, as a foreign reinsurer generally needs three stages of licenses – R1, R2 and R3 from the regulator to start operations in the country. R1 is the entry level licence while R2 and R3 levels help facilitate their business in a smoother way. The state-owned GIC Re is the only reinsurer who is fully operational in the country now.
c) Low cost Travel Insurance for Air Passengers
Last year, IRCTC implemented Re 1/- premium for Rs 10 lakh accidental insurance coverage for train passengers, which is a welcome move. At present, the insurance companies are pricing around Rs 300 to Rs 500 per passengers for the travel insurance. In line with IRCTC, the Government may insist the insurers to implement travel insurance for the air passengers with a premium of Rs 20 to Rs 50 for insurance coverage of Rs 20 lakh in the event of an accident.
d) Use of Technology
At present the use of technology in the insurance industry in India is lagging behind, as compared to other financial sectors like banking, asset management etc. So, the usage of the technology shouldn’t be confined only to the sales but it needs to be automated starting from ‘sales’ to ‘after sales’ to ‘customer servicing’ to ‘accounting’ to ‘investment management’ to ‘MIS reporting’ to ‘claims’. By using technology, it will help to reduce the cost and also lower the human intervention and thereby will increase transparency, improve the quality of the business and the level of customer satisfaction.
e) Simplify KYC
In the 16th Annual Insurance conference at Mumbai, IRDAI Chairman commented that IRDA is working on a centralized KYC (know your client) registration process for customers for simplifying and reducing the burden of multiple registrations needed every time, a person intends to buy a policy. This move will definitely help both the customer and insurers in buying/selling insurance contracts. However, there is a need for simplifying the KYC norms and also recommend to have a single demat account for all the financial products, which will benefit the insurance inclusion in the country (Parida T K; 2015).
III. Way forward
Overall, the bar was already set high in last year’s Budget. In this Budget, we expect the Government to take strong steps that will be the driving force to create and sustain high growth. As the Government is ready to launch the GST from 01 April 2017, in my view, there should not be GST for the insurance premium, at least for life and health insurance.
Further, a number of insurance companies are incurring huge amounts of loss, so there is a need to consolidate the industry voluntarily. So, the Government should look into the policy regarding the same, which will speed up the process of M & As.
As India’s insurance penetration is at a very low level and there is a huge potential market in the rural areas. So, the insurers should not confine themselves to the metro, urban or semi-urban areas. They also need to explore the business opportunities at every corner of the country. In doing so, the insurance companies should not look at this just as a regulatory requirement to be fulfilled.
Instead, it should be looked at as an investment into creation of future business opportunities. The Government should push the insurers to take steps like ‘adopting’ villages and giving basic facilities like drinking water, arranging free medical check-ups etc, which will help to develop goodwill and a market for the insurance industry in these areas.
