Insurance Bill: A reform that will benefit consumers
The Insurance Laws (Amendment) Bill, 2015 is the NDA government’s first significant piece of economic legislation. It is as a reformist legislation that will positively impact insurance consumers of our country in particular and the economy in general.
At the heart of this legislation and the increase of FDI in insurance is one very person – the Indian citizen and insurance consumer. India remains an underinsured country, under-pensioned and underfunded on issues of social security. While averages and statistics that are trotted out usually may paint one picture, the reality is this – that at the bottom of our economic pyramid, large numbers of citizens are underinsured.
Investment
Insurance penetration in India is at 3.9% is below the world average of 6.3%, as per the figures in 2013 and is a very low 17th out of 62 nations. Compare this with, South Africa (15.4%) followed by South Korea (11.9%); the UK (11.5%); Japan (11.1%) and remember these are penetration adjusted for GDP!
Over 800 million Indians have no life insurance. Many more in health, livelihoods and assets remain uncovered by insurance. This low insurance density needs to be addressed and this can only be done by introducing more insurance companies and more investment in this sector. More players means more investment and more competition. More competition means lower prices for consumers and increased affordability. Competition and more competition through many companies is the only sustainable way for Indian consumers to get easy access to and affordable insurance.
Why FDI and why not domestic sources is one of the questions posed by opponents to this bill? The question can be posed to all sectors that attract FDI today – telecom, infrastructure, services, airlines, and homes etc – Why FDI at all?
It is that while our economy is a growth economy. Just like any other economy we have finite resources and these need to be prioritised. We need our domestic resources for areas where private capital will not go. Social sector, poverty programs of the government, rural infrastructure etc. If we can raise additional resources from external sources, it is good economics and politics to do so. Even in a country like China, the economic playbook has FDI at its core.
On the issue of opposition to FDI, it must be pointed out that foreign equity is in insurance and every other sector through the FII route anyway. FDI is better for the country’s economy, since it is more long term and creates tangible assets as opposed to FII, which are speculative and short term in nature. It’s a flawed and contradictory position, inconsistent with demands of today's’ consumers that want choice and competition as their right.
Transformational
The dynamics of a well insured society are transformational. High insurance densities have huge impacts on societal well-being, health, family standards of living at one end of the spectrum of benefits. It also creates an economy of high savings rates, improved long term capital availability to the financial sector, which in turn makes long term infrastructure financing easier etc. So, catalysing the insurance sector and regulating it well is good for both the consumer and the economy.
Budget 2015 has introduced into our economic architecture some new structural propositions that directly impact the poor and needy citizens of India. The accident insurance, pensions and insurance are first steps at creating a social security framework. Every developed democracy has a social security net that ensures a targeted and sustainably funded model that backstops the poor and needy or temporarily out of work. This legislation also further powers this architecture because it makes insurance more affordable by creating competition.
Opportunity
There are some elements in the Bill that could have been avoided and/or improved – the Bill talks about Indian control. It could be misunderstood to imply that it creates two classes of investors – giving a certain group of Indian investors rights disproportionate to their holdings and perpetuates the 80s bhumiputra type differentiation. This is not contemporary thinking. For a nation that needs to attract billions of dollars of investment into Make in India, digital India, defence, infrastructure and services – creating economic differentiation between foreign and Indian investors perpetuates a culture of rent seeking amongst some Indian businessmen and corporate groups that have done it for several years.
Also, the Bill misses a big opportunity to create a reinsurance hub and thousands of jobs associated with it in India. With Dubai and Singapore fast emerging as reinsurance hubs that are moving markets away from traditional Europe and North America, it seems we have not thought this through. For the reinsurance hub in India, the FDI limits will have to be higher.
The government and finance minister must commit that they will work to making Insurance PSUs even more competitive and strong. By re-architecting how they are managed and run. PSUs must be investment assets for the government, not by preserving their monopolies but by transforming them to market share leaders and world beaters, even as the insurance market grows. Countries like Singapore have shown how government linked companies can perform well and that vision must be unveiled here as well.
The Insurance Laws (Amendment) Bill is pro-competition and pro-consumer. It is pro-investment and pro-economy, is a reformist legislation that will catalyse the insurance sector and the economy.