In the works at IRDAI: Making Indian insurance firms less risk-averse

The regulator hints at relaxing the FDI cap still further but it is unclear yet whether doing so would spread insurance to the bottom of the pyramid

In a span of three months since taking over, Debasish Panda, the new chairman of the Insurance Regulatory and Development Authority of India (Irdai) has issued a flurry of orders, significantly relaxing rules for all types of insurance companies to operate in India. At an average of one order per week, he has reduced the number of returns these companies have to file every month to four from the existing 40-odd, done away with prior approvals to launch new products and eased capital requirements, especially for entering government-run insurance products that offer vast opportunities to grow. Most importantly, he has held out the carrot of a possible 100 per cent foreign direct investment in the underwriting business, against the present 74 per cent.

How far these were necessary will be known if he can move the needle on one metric that tells how badly the sector has performed in the 16 years since it was opened up to foreign investment. Insurance penetration in the country has risen by only one percentage point in 16 years. It was 2.7 per cent in 2001 and 3.7 per cent in 2017. The global average is 7.33. This is the state of affairs despite the presence of 24 life insurance companies and 33 non-life companies (including five standalone health insurers) in India. As of now, the insurance companies are upbeat.

Prasun Sikdar, MD and CEO at ManipalCigna Health Insurance Company, said there was now room for optimism that the regulatory moves will foster innovation in product development. “That Irdai has allowed companies to introduce products without prior approval is a major announcement,” he added.

Essentially, the insurance companies have mostly grown by nibbling away at the share of the government-run companies in the sector. In life, in two decades the share of LIC has come down to 65 per cent from 100. Within non-life, while New India Assurance has held on to its lead, its market share has also slipped to 18 per cent. The other three state-run companies have eaten through their net worth. Though there is good reason why the faster private sector competitors such as ICICI Lombard, Bajaj Allianz and HDFC Ergo have taken advantage, the insurance penetration data shows their growth has only displaced the public sector lead. The new entrants have not reached out to new markets.

Because of the reluctance of the insurance companies to reach people at the bottom of the income pyramid, the government has launched its own insurance schemes, one in life, the Pradhan Mantri Jeevan Jyoti Bima Yojana, and two non-life policies, Pradhan Mantri Suraksha Bima Yojana and Pradhan Mantri Fasal Bima Yojana. They have vastly expanded the reach of insurance in the country but owe nothing to the efforts of the insurance companies. Neither were these conceived by them and nor do they market the policies, acting only as backroom support. These schemes are run by the central and the state governments where the banks and other agencies collect the premium and transfer to one or the other insurance companies. The pay-out for claims is also through the banks.

Panda’s mettle will be tested in how far he is able to push the insurance companies to expand into the uninsured Indian population, with products that are innovative and address their needs. Sanjay Dutta, chief, underwriting and claims, ICICI Lombard, said, “The Irdai’s announcement will bring around a conceptual change that has been long pending…However, we will now have a greater responsibility and opportunity to ensure consistent innovation to develop products based on constant evaluation of customer need and improved pricing of products for our policy holders.”

To expand insurance coverage, unlike banks, the companies need to deploy extra capital. For every rupee of premium earned, the companies need to provide their own capital to cover the costs, which is known as their solvency margins. Indian promoters including the banks have been reluctant to put in more money as capital in their insurance ventures. While latest figures are not available, but data up to March 2019 shows that against the 49 per cent foreign investment cap (it was made 74 per cent in Budget FY21) the utilisation rate was only 35.49 per cent in the life sector. FDI utilisation rate is worse for non-life business, reinsurance, and standalone health insurance companies. The aggregate space for foreign investment has rather gone down from the level of March 2018, when it was 25.42 per cent, to 23.66 per cent in March 2019. Because Indian promoters have not paid up their share of 26 per cent, foreign counterparts have not bothered to top up their holdings up to the limit available for them. Short of capital, the management of the companies have been most reluctant to expand their coverage to the non-salaried workforce.

Instead, some companies have resorted to opaque structuring of their equity. A telling case, in this context, is that of erstwhile promoters of Magma HDI General Insurance Company who had to pay a Rs 80-crore penalty imposed by the Enforcement Directorate. “Through a complex web of transaction, the company has tried to facilitate the overseas investor to show subdued holding in the insurance company, thereby circumventing the FDI guidelines and contravened the provisions of Foreign Exchange Management Regulation Act, 2000, to the extent of Rs 209.96 crore,” the order read.

Panda, as the former secretary, department of financial services, has been privy to some of this reluctance among the insurers. He has said at an insurance outreach event in Mumbai, within weeks of his joining Irdai, that he plans to work on the “creation of a framework to enable new entities to enter the insurance market in India with special outreach to global investors for enhancing FDI into the country”.

The regulator will not only need to hear the insurance companies more frequently but also goad them to move on. Panda seems ready to wield the stick as evidenced by an interesting order issued by the Irdai to non-life insurers, who were offering add-ons to their coverage of motor insurance. The circular telling them not to do so made clear what the regulator wanted. “This is not to be done”, it said about the offending lines of business. Within the same week, one noticed the insurance companies had modified the wording of their advertisements in different media channels.