Only 6% (or 75 million) out of 1.25 billion Indians have insurance cover. Of this, only 4.4% (or 55 million) have life insurance. Just 0.71% (less than 9 million) have other coverage. Most of the 90,000 or so people killed in road accidents every year have no life insurance. Only 5% have health cover. About 20 million Indians have government-provided access to public hospitals with varying shades of service. The rest (ie 98%) are obliged to spend on poorly regulated private healthcare outlets on account of lack of health insurance.
These figures show how poorly the Indian consumer of insurance services is served. It also shows how, under public sector monopoly (till 2000), a potentially large market grew in a stunted way. After insurance was opened to private investors, the situation improved somewhat. Since 2000, 23 life, 17 general, and four health, private insurance joint ventures have been established. Until 2010, the 23 ‘life’ joint ventures employed nearly 3,00,000 persons as sales agents and provided a large number of jobs across the country. However, by March 2011, approximately 40,000 jobs were eliminated as the economy and industry faced significant challenges and capital investment was constrained. This trend has continued in 2012.
In the above joint ventures, global foreign insurers provided the product development, risk management and overall management experience necessary to make the Indian insurance industry more professional, while domestic partners brought knowledge of local markets and distribution support to the table. But equity participation by overseas partners continues to be restricted to 26% and domestic partners are required to provide the lion’s share.
Typically, life insurance companies are required to make significant upfront marketing investments and, through operations, build large reserves to pay policyholder benefits and claims. These efforts require large capital investments coupled with patience on the part of the shareholders till the business stabilises and becomes self-sustaining. It is usual for life insurers to take seven to 10 years to break even. The seven early entrants (ie pre-2003) in the Indian industry reached break even after seven-eight years of losses and are only now generating positive cash flows.
Seventeen later entrants are not faring as well on account of regulatory swings and the fact that their entry was coterminous with the economic downturn post-2008. As a result, the break even of these late entrants is likely to be stretched from seven-eight to 10-12 years. Further, they are likely to require much more capital as margins tend to shrink and inflation increases costs.
In the past, foreign partners in Indian life insurance companies have not been found wanting when it comes to committing their capital as and when required. In fact, in certain instances, it was the domestic partners who hesitated to provide the requisite capital infusion. As a consequence, the late entrants in the industry find themselves short of the capital required to meet solvency obligations and to grow. Needless to add that without additional capital, they will be placed at a permanent disadvantage vis-a-vis early-entrants and public insurers.
These negative consequences are not unavoidable. Foreign partners in Indian JVs have the capital required and are ready to invest in these companies over the long haul. The 26% cap, however, prevents them from doing so and, therefore, the hike in the FDI limit to 49% proposed by the Cabinet (pending parliamentary approval) is a welcome step. In addition to ‘cover’, insurance companies provide strong capital flows into ‘markets’. Such flows are perceived to be beneficial for the country as they correct structural imbalances and exercise a stabilising effect on equity and debt markets. From another perspective, insurance is a social security instrument and infusion of capital in the sector will help improve penetration across target groups and introduced ‘best’ practices and better product innovation. Broadly, there appears to be a consensus on this issue. Earlier, the NDA government had recognised the need for increasing the FDI limit in insurance. The proposal is now supported by the present government. The time is, therefore, opportune to increase the FDI limit in insurance and to bring it in line with similar limits in other financial services.
Finally, from a policy perspective, the welfare triad comprising equity, efficiency, and sustainability need to be continually ‘balanced’. Raising the FDI limit in insurance is likely to facilitate this reconciliation and send a signal that the country is indeed ready to compete on a global platform.
Yashwant Thorat is CEO, Rajiv Gandhi Charitable Trust, New Delhi
The views expressed by the author are personal