New Delhi: The UPA Government’s promise to liberalise the insurance sector for foreign players remained just that in the year 2007, but it did not stop more overseas companies to foray in the country in tie-ups with local firms.
The year also saw regulator IRDA giving more freedom to non-life insurers to price their products, the country’s biggest life insurance firm LIC getting approval for a health policy and banning of actuarial-funded unit linked products.
Left parties’ vehement opposition to financial sector reforms prevented the government from increasing foreign direct investment cap from 26% at present to 49%. The UPA regime had proposed raising the FDI cap in its first budget in 2004-05. The Cabinet had in 2006-end referred it to a Group of Ministers headed by External Affairs Minister Pranab Mukherjee. The Group held only a couple of meetings in which the government presented its case to the Left allies.
Finance Minister P Chidambaram recently expressed optimism that financial sector reforms would make some headway in the remaining 16 months of the UPA Government, but he did not specify whether it would include the insurance sector.
The Finance Ministry put up a brave front, saying 26% FDI cap is not an entry barrier. Entry of foreign partners enabled the sector attract $543 million FDI, Minister of State for Finance P K Bansal said recently.
Moreover, a number of new players ventured into different segments. For instance, Kishore Bayani-promoted Future Group entered life and non-life business with Assicurazioni Generali of Italy.
Similarly, Canara Bank tied up with the Netherlands-based Robeco, Bank of Baroda joined hands with UK-based Legal and General, and Bank of India with Japanese firm Dai-Chi Insurance. Apollo Hospitals Group also formed a joint venture with Germany’s DKV AG to start health insurance business.
While the government’s reforms process remained stuck for lack of political consensus, Insurance Regulatory Authority of India went ahead with its measures to give general insurers more freedom to fix premium in various product categories.
Toward the close of this year, IRDA announced removal of all pricing controls from general insurance products beginning 2008. This second round of detariffication is expected to boost competition and bring down premium charged by insurers.
However, detariffing in early 2007 triggered a rise in motor insurance premiums for cars, two wheelers and commercial vehicles by 33-257%, while pulling down premium in case of fire and engineering policies. But insurers did not get full freedom on tariffing as IRDA increased the rates that they can charge for motor policies related to third-party liability, denying them a free hand to fix prices.
Following the decision, the premium for third party insurance in heavy vehicles increased by 126-150% to Rs8,000-9,000 from the existing Rs2,940-3,980. This was opposed by transport associations. After hectic parleys among government officials, insurers and regulator, hike in tariff was cut down from 150% to 70%.
If things go well, insurers would even get flexibility to quote their own terms and conditions beginning next fiscal. General Insurance Council has already floated draft guidelines to invite comments from the public and other stakeholders.
To give a boost to health insurance, the government increased the tax exemption limit to Rs15,000. Meanwhile, a section of health insurers demanded that the initial paid-up capital requirement be reduced from Rs100 crore to 50 crore.
As far as life insurance was concerned, the year marked banning of actuarial-funded unit-linked insurance products. In these products, various charges incurred by the company are spread throughout the scheme, and IRDA felt such products were too complicated for the common consumer to understand. The move affected Bajaj Allianz and Aviva’s 8-10 such products.
The year also saw setting in motion a proposal to have health insurance portability that would allow a policy holder to switch over to a new company without losing bonus and other benefits. General Insurance Council is framing proposals in this regard, which are expected to be put in place from the beginning of the next fiscal after regulator IRDA’s nod.
Although India is far behind the world averages and ranks 78th in terms of insurance density and 54th in terms of penetration, the future holds immense potential.
According to global consultancy firm McKinsey, life insurance industry could more than double to $100 billion in the next five years. The market could grow even more if FDI limit is hiked to 49%, but only time will tell whether the Left-backed coalition government is able to take such a decision next year.