Effects of Liberalisation on Indian Insurance Market-An Overview
I consider it a privilege to address the conference organized by the Federation of Afro-Asian Insurers and Reinsurers. I am grateful to the organizers for giving me the opportunity to interact with the leading insurers and reinsruers of Asia and Africa. I am extremely happy that the leading reinsurers across the globe are also present here in this conference. Let me, on behalf of the Insurance Regulatory and Development Authority of India join the hosts, the General Insurance Corporation of India in extending a warm welcome to all of you and wish you a very productive exchange of views and a pleasant stay.
It is not surprising that this conference is so well represented by the countries in the region. The insurers of the region address issues of poor insurance penetration, low insurance density with hardly any insurance protection against natural calamities like droughts, floods, hurricanes and earthquakes. The insurance market is developing in the region only now and it has to be nurtured carefully. Conferences of this nature help exchange experiences and facilitate a better understanding of the problems and suggest possible solutions.
It is heartening to note that the year 2004 witnessed a continuing growth in the insurance premium in the emerging markets of Asia and Africa. South and East Asia, the largest cluster of emerging markets achieved a sound 9% real growth rate. The life business witnessed at 7.4% regional growth rate after achieving a robust 10.5% real growth rate in 2003. In the medium term, life premiums in the emerging markets, as a whole, are expected to keep on growing at around 8% per year. So far as non-life business is concerned, it recorded a 7.7% real average growth in 2004.
Insurance penetration in these markets has hovered around 3.9%, life premium being accountable for 2.4% and non-life for the remaining 1.5%.
The insurance scene in India is changing rapidly. Those of you who have been watching the Indian economic scene would have noticed the rapid changes taking place in the financial sector. It is worth recalling that life insurance industry was nationalized in 1956 followed by nationalization of general insurance industry in 1970s.
The nationalised companies did contribute to the spread of insurance beyond the metropolitan areas and succeeded in popularising the concept in rural and semi-urban areas. They also succeeded in mobilising resources which were largely invested in government bonds or bonds floated by Public Sector Companies, which in turn were utilised for supporting various government sponsored programmes at the State and Central levels. There was, however, a huge gap between the potential available and its exploitation. The public sector companies had numerous problems such as over-staffing, inadequate infrastructure, and antiquated procedures. In the absence of competition the consumer didn’t benefit in terms of wider choice, lower price for insurance cover and adequate level of service. In the early nineties of the last century, the government reviewed its policy and initiated a process of economic reforms that encouraged private participation in various sectors. As a part of that exercise major reforms were undertaken in the insurance sector. With the adoption of the Insurance Regulatory And Development Authority (IRDA) Act in April, 2000, the insurance market was opened up to the private sector with limited exposure to foreign equity.
The government’s resolve to encourage private sector participation in insurance is fully reflected in the IRDA Act which provided for the creation of a regulatory authority independent of the government. This independence of the regulator from Government control is meant to send a clear signal to private sector entities that they are assured of free and fair treatment and that they can operate on a level playing field. The Authority’s role is that of a neutral umpire regulating both the public and private sector insurers in a transparent manner through a uniform set of regulations. The Authority is vested with the powers to grant licences to insurers and intermediaries and overseeing their activities for safeguarding the interests of the policyholders. The IRDA has, since its creation, tried to carefully guide the reopening of the insurance sector to market competition. It has always believed in openness and transparency and has followed the practice of prior consultations with various stakeholders before notifying the regulations. The regulations have been drawn up keeping in view the Insurance core principles, guidance papers and standards set out by the IAIS. This has resulted in broad acceptance of the regulations by the various constituents of the market both within and outside the country. The intention is to regulate the market on globally accepted standards.
The response to the opening up of the sector has been encouraging. We have, today, 13 life insurance companies and 8 general insurance companies under private ownership. Some of the leading industrial houses and well-established Banks of India have collaborated with leading international insurers to establish joint venture companies. We have witnessed impressive growth in life and non-life premium since the advent of private insurance companies in the Indian market. In a short period of 3 to 4 years these new companies have managed to establish a respectable market share. In the year ending 31st March, 2005, the private life insurance companies commanded a market share of 22 percent of new premium written, while the private general insurance companies had a market share of 20 percent. Life insurance premium registered a growth of 35 percent over the previous year, with the general insurance premium registering a growth of 13 percent.
The Authority is of the firm belief that it is possible to sustain a high level of growth in the insurance market in view of the large untapped potential. India is a nation of a billion people and is one of the fastest growing economies with real GDP registering an average annual growth rate of 6.1 percent over the last decade. It has a large middle class with high household savings rates and disposable incomes. The size of the family is shrinking and this section of the population is looking at opportunities for obtaining appropriate risk cover coupled with maximisation of returns on their investments. Insurance penetration which had remained stable at a relatively low level of 1.5 percent for a long time and stood at 1.9 percent at the beginning of the privatisation process has now reached a level of 3.3 percent in 2003. Similarly, insurance density has risen from US Dollars 10 to US Dollars 16 per capita in 2003. While the gains may not appear to be dramatic the trends so far indicate the advent of a vibrant insurance market.
The country’s relatively low level of insurance penetration and density needs to be viewed in the context of its current stage of economic development. The per capita income of India is currently at around US Dollars 600 but is expected to increase rapidly. The country’s economic fundamentals are robust to support faster growth in per capita income in the coming years which has the potential of translating itself into a higher demand for insurance products and services. According to some studies the average annual growth in life insurance is expected to be 18 percent and 15 percent in general insurance for the next decade.
While we recognise that the macroeconomic backdrop remains favourable to growth, there still remain a few hurdles that we have to cross. The need for a higher level of foreign equity participation is recognised and the government has announced its intention to raise the FDI cap to 49 percent from the present level of 26 percent. There has to be a greater flexibility given to the insurers in taking investment decisions and this issue is proposed to be addressed when comprehensive amendments are taken up to revamp the antiquated Insurance Act of 1938. This exercise of amending the legal framework is already on the anvil. The general insurance business is predominantly a tariff controlled market. There is a demand for abolition of tariffs on the ground that such a step would promote efficiency and better service to the public at a lower cost. While the Authority is in broad agreement with this proposition it would like to exercise caution to ensure that there is no large scale destabilisation of the market in its transition from a tariff to a non-tariff regime. The Authority has prepared a schedule for moving to a de-tariffed regime. The schedule envisages distinct actions to be taken by the insurers with specific cut off dates for each action so that Authority could review the action taken by insurers before moving from tariff to a de-tariffed scenario. In the area of reinsurance, the Authority is conscious of developing local market capacity to withstand the adverse impact of catastrophic perils and would welcome the idea of having more than one reinsurer. At the present time, none of the insurance companies are publicly listed and this calls for further strengthening of corporate governance in terms of reporting and disclosure practices in a consistent and transparent manner.
In the area of supervision of insurers, we realize that supervisory philosophies vary from country to country. We have adopted a prescriptive model rather than an indicative model primarily for two reasons. Insurance activity is regulated based on an Act passed way back in 1938 and some of the rigidities arise out of the provisions contained in the Act. When the sector was opened up in 2000, adequate time was not available to overhaul the provisions of this Act to bring them on line with the developments that have taken place over the years. The second and perhaps, a more compelling reason is the none too happy experience of failure of companies that resulted in the demand for nationalisation of insurance activity in the early 1950s.
We are aware that, however well intentioned, too much of regulation has the potential to compromise competition and to condone and even endorse unwanted entry barriers, restrictive practices and other anti-competitive measures. To achieve an optimum market structure some trade off between security and competition is essential.
As the years go by and the Authority and insurers acquire a deeper understanding of the market and the manner in which it operates it should be possible to allocate greater responsibility to the insurers in the area of market conduct and protect consumers’ interests by concentrating on solvency of the insurer.
I have placed before you how the reforms process in the insurance sector has transformed the Indian insurance scene. I have no doubt in these three days we will have the opportunity to learn from the experiences of other nations. I do hope that this interaction would result in a more determined effort at bringing the benefits of insurance to a large section of population in these two continents that have not so far benefited from the protection that insurance confers on them.