A new dawn for insurance industry: Irdai looks to make sector attractive

Irdai is charting out a long-term road map to markedly increase India's insurance penetration through a supportive regulatory architecture

Ever since the new chairman of the Insurance Regulatory and Development Authority of India (Irdai) took over nine-odd months ago, the insurance sector has seen a slew of changes in regulations. The aim is to improve the ease of doing business for existing players, as well as attract fresh capital into the sector, to facilitate a significant increase in insurance penetration in the country from the current low levels.

After the former chairman — S C Khuntia — demitted office in May 2021, the insurance regulator functioned without a chief for close to 10 months. Part of this period coincided with the devastating second wave of the Covid pandemic, which resulted in a flurry of claims for both life and non-life insurers.

However, the insurance industry emerged from the pandemic with few scars, with no major insurer crumbling under the pressure of unprecedented claims during the two-year Covid period.

As Debasish Panda took over the post of Chairman of Irdai in March 2022, experts pointed out that his priority would be to chart out a long-term road map for substantially stepping up insurance penetration.

Twenty years after India’s insurance sector was opened up, unshackling the control of state-owned companies, as many as 50 private players have set up shop. But insurance penetration has moved little.

Overall insurance penetration increased from 2.71 per cent in 2001-02 to just 4.20 per cent in 2021-22. Life insurance penetration went up from 2.15 per cent to 3.20 per cent during this period, while non-life insurance penetration moved up by 44 basis points to just 1 per cent. Insurance penetration is measured as the proportion of insurance premium to a country’s GDP, while insurance density is the ratio of per capita premium to population. India compares poorly with the penetration of 11.4 per cent for developed countries (such as the United States and Canada), and even 8 per cent for Europe, Middle East, and Africa. The world average for insurance penetration is 7 per cent.

Panda has taken the bull by the horns. Irdai has committed to enable “Insurance for All” by 2047, whereby every citizen would have appropriate life, health and property insurance cover, and every enterprise would be supported by appropriate insurance solutions. The regulator is also looking to make India’s insurance sector attractive. And, to achieve that objective, it is bidding to create a “progressive, supportive, facilitative and forward-looking regulatory architecture to foster a conducive and competitive environment, leading to wider choice, accessibility and affordability to policyholders”.

To that effect, the regulator extended the “use and file” procedure to all health insurance products and almost all general insurance products under fire, motor, marine, and engineering. This was done to empower insurers to respond to emerging market needs in terms of products. Typically, insurers needed to take the regulator’s prior approval to launch products. The “use and file” procedure was then extended to life insurance products in select segments, such as protection, unit linked plans, and pension. However, many non-life savings products will continue to need the regulator’s approval.

Furthermore, in a first-of-its-kind advisory, the regulator has proposed premium growth targets over a five-year period for life insurance companies, in a bid to double insurance penetration.

Irdai proposed a target of 30 per cent compound annual growth rate (CAGR) in gross written premiums (GWP) over five years for top-tier insurers because of their large base, and suggested a CAGR of 50 per cent for smaller companies. (GWP is the sum of new business premium and renewal premium.) Later, it prescribed similar targets for non-life insurance companies, to increase penetration to 2.52 per cent by FY27 from 1 per cent in FY22.

Large traditional non-life insurance companies — such as ICICI Lombard, HDFC Ergo, and Bajaj Allianz General — have been given premium growth targets of 40 per cent, 38 per cent, and 38 per cent, respectively, for the FY22-FY27 period. Some companies have got growth targets of over 100 per cent. While public-sector insurers have been asked to grow their premiums by 25 per cent a year, private-sector general insurers have been set a premium growth target of over 40 per cent a year. Targets for standalone health insurers exceed 48 per cent a year.

Industry insiders suggest that though these are aspirational targets, the regulator is essentially cajoling and prodding insurance players to be more aggressive. Having said that, companies cannot be irresponsible when it comes to mis-selling. “We need to balance the growth targets and must be mindful of the risk on the balance sheet, because it could very well come to bite a company, especially small companies,” says an industry expert.

Meanwhile, the regulator has also taken a series of steps to simplify the process of setting up an insurance company in India. For example, investment through a special purpose vehicle has been made optional for private equity funds, enabling them to directly invest in insurance companies, providing more flexibility. Secondly, subsidiary companies are also allowed to be promoters of insurance companies. Moreover, the regulator has said investment up to 25 per cent of the paid-up capital by a single investor will be treated as an “investor” and, above that, as “promoter”. Earlier, the threshold was 10 per cent for individual investors and 25 per cent for all investors collectively.

Further, Irdai has introduced a new provision that will allow promoters to dilute their stake up to 26 per cent, subject to the condition that the insurer has a satisfactory solvency record for the preceding five years, and is a listed entity.

Separately, restrictions related to distribution channels have been eased, whereby corporate agents can tie up with as many as nine insurers each in the life, health, and general insurance segments. This is expected to enable smaller insurers, which might not have a tie-up with a major bank, to better distribute their products and intensify competition, and thereby provide consumers with a wide variety of choices.

Ashvin Parekh, managing director, Ashvin Parekh Advisory Services, notes that there is now an effort by the regulator to focus on the development part of its role. To that extent, it is a big exception, because after 22 years, for the first time, there is a new leadership at Irdai that is looking at both regulation and development of the sector.

“Having said that, they have to now maintain a fine balance between regulating the sector and developing it. One of the reasons why previous leaderships at Irdai focused more on regulation was that they wanted a more stable industry, whereby insurance companies do not fail. Consequently, very little experimentation was fostered. Now, a lot of relaxations have been given because the industry has matured,” he added.

Parekh also touched upon the fact that the regulator is trying to get capital into the sector, especially foreign capital.

However, unfortunately, among all the new applications that have come to the regulator, perhaps only one or two are from strategic investors. So, the agenda to attract more foreign capital has not fructified to any great extent. That said, there is definitely a lot of potential. Perhaps, strategic investors are waiting for more reforms, he said.

According to the regulator, 19 applications to set up shop are in the pipeline at various stages. Recently, the Irdai chairman made a pitch to conglomerates and individual investors present in the country to inject money into the sector, as the industry would need a capital infusion of some Rs 50,000 crore every year to double its penetration over the next five to seven years. Panda plans to meet chiefs of insurers after March, “to drive home the point that they have to factor this in and start planning to infuse more capital”.

Irdai also aims to provide flexibility and autonomy to the boards of insurers in operational and financial decisions. For expenses of management, various segmental caps are proposed to be replaced with a single overall limit in general and health insurance. Similarly, for life insurance, expense limits for certain segments are proposed to be enhanced, with overall regulatory monitoring at the company level.

In the case of commissions, the maximum limits specified in the current regulations are proposed to be removed, with commissions being linked to the overall limit of expenses of management. Experts suggest that this will enable insurers to devise commission structures that incentivise intermediaries in line with their solicitation efforts, and also make insurance more affordable.

“The regulator stepping in and taking a more developmental approach is a welcome change, and in the right direction,” Tarun Chugh, MD and CEO, Bajaj Allianz Life Insurance, had said at the Business Standard BFSI Insight Summit in late December.

Speaking on the same lines, Bhargav Dasgupta, MD and CEO, ICICI Lombard General Insurance, said, “For the first time after 20 years, we are seeing a lot of initiatives from the Centre and from the regulator in addressing the need gap. That, we believe, is a huge positive from the longer-term perspective.”

NS Kannan, MD and CEO, ICICI Prudential Life Insurance, said, “I think, we are in a policy sweet spot.”

“This is a financial services industry and it will remain regulated forever. But on the government side, there have been a lot of initiatives. On Irdai’s part, they have done mission- mode activities. So, while we have to do our job in terms of creating awareness, we have a huge tailwind in the form of a policy sweet spot. I think this is a golden period for the industry, going forward,” he said at the Insight Summit.

Among other major initiatives, the regulator is building an online marketplace, Bima Sugam, that will allow insurers to sell their products on the platform, settle claims, and service customers. It is expected to be a one-stop destination for all the insurance needs of a consumer as well. They can buy insurance policies, port their insurer and agent, and settle claims.

All these facilities will be provided to policyholders with e-insurance accounts. A social safety net product called Bima Vistaar, which will target untapped geographies, is in the works and is soon going to be launched on the Bima Sugam platform. This product will use a new distribution force on the lines of banking correspondents called Bima Vahak.

“The efforts of the present chairman will bear fruit in terms of increased business and penetration only after assessing how the insurance companies position themselves in view of the changes that have been brought about,” said Nilesh Sathe, former Member (Life), Irdai.

“Whatever problems the industry was facing, the Chairman of Irdai has tried to resolve those and has kept a massive target of insuring every citizen by 2047. The number of circulars issued by him in the first 10 months is more than the number of circulars issued in the last three years,” he said.

However, Sathe believes that the Budget announcements are a setback for the insurance industry: If insurance is sold only as term insurance, penetration will hardly improve, because penetration is a ratio of premium to GDP. “Insurance was and will continue to be an important instrument of saving and investment, and if the government wants it to be an instrument only to cover risk on life, increasing penetration of insurance in India will be a myth,” Sathe said.