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A peek at the future of insurance in India

Neena Haridas in New Delhi

Cooperatives and listed Indian companies with majority foreign stake would be allowed to float fully-owned insurance ventures. This was stated by N Rangachari, chairman, Insurance Regulatory and Development Authority, at a seminar organised by the Federation of Indian Chambers of Commerce and Industry in New Delhi today.

An amendment to the IRDA Bill will have to be officially moved by Finance Minister Yashwant Sinha to make it possible for cooperatives to enter life and general insurance businesses along with private companies. Rangachari said, "The government is considering allowing cooperatives into insurance business."

A recommendation on this issue has already been made by the parliamentary standing committee on finance which considered the entire issue of insurance reforms.

IFFCO likely to enter insurance

If the government finally opens up insurance to cooperatives, like Japan, the fertilizer giant IFFCO (the Indian Federation of Farmers' Cooperatives) is expected to jump into the fray. IFFCO has already made a representation to both the IRDA chairman and the finance minister seeking amendment to the insurance bill.

IFFCO has already got a techno-economic feasibility study done by a former GIC official. With its vast network of over 10,000 farmers' cooperatives, the penetration of insurance business in rural, semi-urban and urban centers is bound to increase.

'Listed Indian arms of foreign firms can enter insurance'

On whether a company like Hindustan Lever would be eligible as an Indian company to hold more than 26 per cent in insurance ventures, Rangachari said HLL is a registered and listed company in India and would qualify as an Indian corporate. However, even the domestic companies have to reduce their stake to 26 per cent in ten years from the date of forming the company.

London-based Unilever holds 51 per cent stake in HLL while the IRDA bill, which is awaiting Parliament approval, provides a maximum of 26 per cent foreign holding in insurance ventures. Even a 100 per cent subsidiary of a foreign company can not hold more than 26 per cent in an insurance company in India.

Rangachari said two separate bills would be shortly moved by the government in Parliament seeking to regulate the activities of actuaries and surveyors.

Regulations for insurance intermediaries

The IRDA would also shortly formulate regulations for insurance intermediaries. This will be done only after the insurance bill is adopted by Parliament in its winter session commencing later this month.

Rangachari said the government is yet to take a decision on allowing multi-lateral agencies like the World Bank and Asian Development Bank to pick up stake in insurance joint ventures.

Curbs on deployment of premium

He said foreign insurance companies would not be allowed to take premium out of the country. These companies would have to reinvest the premium in India.

"The bill provides that the foreign companies are not allowed to take out the premium income and are supposed to invest within the country," he added.

Rangachari said the authority was only concerned with limiting foreign equity stake. However, he maintained that a foreign partner could have management control with 26 per cent. It is upto the Indian partner how he wants to run the business, he said.

Rangachari said IRDA would not allow insurance licence holders to sell their licences as in the telecom sector. Moreover, any transfer of share by an insurance company over one per cent would need permission from the IRDA. He said companies will have to take two separate licences and form two separate companies to enter into both life and non-life insurance segments.

Rangachari said that there would not be much change in the tariff regime after the new players join the existing insurance companies. "Certain classes are outside the tariff control and they would continue to be so," he said. The IRDA would ensure sufficient number of players in the industry. "We are in the process of making guidelines to deal with brokers and agents to assist insurers," he said.

Once the insurance bill becomes operational, Rangachari said, both the LIC and GIC will have to scale down their investment in government bonds, paper and approved securities. The LIC will have to scale down from 75 per cent to 50 per cent of the total premia fund collected in a year. The GIC will have to scale down investments in government paper from 55 per cent to 50 per cent. On the remaining 50 per cent fund, investment guidelines would be provided by the IRDA.

These guidelines are yet to be finalised. He indicated there would be a cap on investments in stocks by both state-owned and private insurance firms.

Rangachari said solvency margins have been proposed to keep the insurance companies solvent during initial years of their operation with huge capital investments. "In later years, we may shift over to alternative mechanisms," said the IRDA chairman.

Rangachari said the regulatory body has been given ample authority and the government would leave the administrative and technical issues to the regulator and be concerned only with the policy matters. Even for policy matters, the IRDA would be consulted.

New players will deepen and expand the market

The IRDA chief said the entry of new players would not damage the existing companies but deepen and broaden the market. "Statistics have shown that the new players have not been able to get more than 10 to 12 per cent of the market." On the other hand, customer care has improved with the opening of the sector, he added.

He said the state-owned companies have done enough service to extend reach of the insurance. However, he clarified that the LIC and GIC do not forgo premium income in the welfare related schemes like crop insurance. Instead, these schemes are funded by the specially created government funds.

'Private insurance companies will take part in rural development'

Minister of State for Finance B Vikhe Patil said that the IRDA will ensure that private companies will take part in rural development on the lines of the nationalised insurance companies.

''The provisions in this regard will not be harsh but will be reasonably balanced,'' Patil said.

The minister did not give details of how the IRDA would make the private parties to do social service in the rural areas as ''the bill is still being processed''.

About 40 per cent of premia collected by the LIC and GIC is from the rural areas. They also discharge social obligations through various schemes in the rural areas with marginal budgetary support.

''A minimum amount of business for the private players will have to come from the rural areas,'' he said.

Patil assured that the IRDA bill will be passed in Parliament ''at the earliest as the government is rushing the process''.

Reiterating the assurance by Finance Minister Yashwant Sinha that the nationalised insurance companies will not be privatised, Patil said LIC and GIC have stabilised the insurance market, created awareness among the people and discharged social obligations.

''We have given considerable autonomy, relaxed investment reforms, professionalised the boards of LIC and GIC to give them a competitive edge in the impending liberalised sector,'' Patil said.

The efficiency of LIC and GIC, who will continue to play an important role in the insurance sector, will be improved in the new scenario, he added.

Patil regretted that though the nationalised companies have been performing well, the insurance coverage is low while products are limited.

Internet as a distribution channel for insurance products

Meanwhile, Lalita D Gupte, ICICI joint managing director, said that the Internet is slated to become a mainline distribution channel for various insurance products over the next two years to help companies get a base in the rural segment. The Internet would be used to advertise, help customers select appropriate products, disseminate information to customers and sell policies.

Earlier this week, the UK-based consulting firm KPMG released an in-depth report on ''Insurance -- Trends and Issues''. The KPMG report contends that entry of private companies would not have adverse impact on the state-owned LIC and GIC. The report cites the examples of Taiwan and Korea where the foreign companies took only three per cent and one per cent of the market-share respectively.

'Short-term specialists, please stay away'

Only credible players with a long term record should enter the proposed liberalised insurance sector, Insurance Special Secretary B K Chaturvedi said today.

Chaturvedi said in the case of life business, a minimum investment of Rs 2 billion to 3 billion will be required in the first years and Rs 4 billion to 5 billion in the long term.

It will be the exclusive decision of the IRDA to grant registration to foreign companies. There will be strict and rigorous scrutiny of norms in this regard.

Indian partners will have to keep in mind that Rs 1 billion minimum capital will be required if they wish to enter the insurance business. Financial returns in the insurance sector take a long time, so companies that cannot survive without profits in the short term should opt out of this business, he said.

On clubbing health insurance and pension funds, a number of questions have been posed. Pensions are normally clubbed with life business and health is clubbed with GIC. This is because of the very nature of the funds.

Chaturvedi said the possibility is that the insurance bill will be taken up for discussion during the current session. The bill has gone to the standing committee of Parliament and it is hoped that it will be incorporated.

However, if due to certain exigencies, the bill is not presented during the current session, then it will be taken up during the Budget Session.

The process of regulation will start only after the insurance bill is passed by both the houses of Parliament. The IRDA has most of the regulations ready. It will be discussed by the standing committee and then the IRDA will start its work. There is also a proposal to publish the regulations on the Internet.

Additional reportage: UNI

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