As a provider of risk-mitigating services, and a supplier of capital for long-gestation investments, a mature insurance sector is critical for a well-functioning economy. Two decades of insurance reforms, which progressively enhanced the policy and regulatory environment and ushered in independent regulation, private participation and foreign capital, have created a sound insurance sector in India. With only six state-owned companies in 2000, we today have 57, mostly private, insurers. Premiums rose 20-fold from ₹46,000 crore in 2000-01 to ₹9 lakh crore today.
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The transformation was led by a regulator empowered by removal of limiting hardwired statutory provisions that enabled a focus on ease of entry with undiluted stress on fit and proper qualification and capital adequacy. Regulations which progressively promoted outcomes over prescriptiveness, enabled innovative business practises and products within a framework stressing financial prudence and consumer protection. Steps like use-and-file and the recent expense of management regulations are key milestones in this quest for arm’s length regulation, along with measures like an open distribution architecture, de-tariffing, regulatory sandboxes, and a technological emphasis through regulations for digital distribution, e-insurance, cyber-security and tele-medicine. The digital emphasis was invaluable during Covid and led to enduring changes in business practises.
Additional measures like policy dematerialisation, access enhancement through Bima Sugam, Bima Vahak, and Bima Vistar are on the anvil. Envisaged legislation promises enhanced ease of entry, regulatory empowerment for permitting new intermediaries with potentially innovative business models, composite licences for life and health business, and provision of services incidental to insurance and other financial products by insurance entities.
However, notwithstanding significant achievements, gaps remain. These include low insurance penetration, with limited spread to rural areas and smaller cities. Certain risks are un-insurable or insurable partially at prohibitive premiums. Cyber-attack and data breach risks, important in the digital age, are inadequately addressed. While steps like coverage of medical tele-consultation and pre-existing conditions like diabetes, hypertension etc., and standard demystified health and travel policies have been initiated, gaps remain in covering chronic conditions, specialised care, and mental disorders. While schemes like PMSBY and PMJJBY have drawn in weaker sections, further awareness about essential covers, customer rights, and uninsurable risks is needed. Investment regulation could consider globally prevalent approaches like portfolio risk-based capital provisioning for freer investment choices, to better achieve goals like long-term capital availability. Promoting reinsurance must also be a priority.
Recent initiatives and those on the anvil, reveal the regulator’s intent to address these gaps. The pandemic-induced boost to consumer awareness and demand, especially in the life and health space, and the digital thrust, are also key conducive factors. However, going forward, certain key qualitative dimensions associated with past initiatives, merit renewed emphasis.
As the most efficient regulatory tool available, promoting competition by upholding the right to do business through flexible entry norms, must remain a priority. This would facilitate entry of innovative and disruptive service providers, and encourage further digitisation, to attain the potential afforded by technology. Regulations must remain outcomes focused. Core regulatory concerns like solvency and propriety at the corporate and product level, consumer protection, product and business innovation, fair competition etc. must be upheld through frameworks that achieve these desired goals through minimalist, least onerous and non-prescriptive approaches that allow managerial discretion. Regulations must be audited for a clear nexus with these objectives and be suitably eased on failing the test.
The fundamental insurance principle of the viability of large, diverse insurance pools at reasonable premiums must be promoted for universal inclusion and affordability. The incentive for leaving out those at higher risk, must be moderated by encouraging insurers to distinguish between self-acquired controllable and natural uncontrollable risks in individuals, and penalise the former rather than the latter. This could go hand in hand with more refined actuarial pricing practices, and mechanisms like iterative re-calibration based on observed performance of insurance pools and post facto sharing of surpluses with consumers.
A level playing field across service providers is the key to fair competition. Barring exceptions like incentivising rural services or higher costs in certain lines or regions or special circumstances of small new insurers, regulations must not favour particular business models or products, and should enable competition based on attributes and efficiencies inherent in them. This would allow superior USPs to succeed, disrupt, and elevate the insurance eco-system. For a level playing field, the State and the regulator must remain facilitators at arm’s length from service provision. Examples like UPI, a digital public infrastructure that exploded opportunity for private service providers, merit emulation. In this context, an initiative like Bima Sugam should be a neutral platform with uniform access for all, without exclusivity over other channels.
Given the distribution-centric nature of insurance and the limited success of direct to customer services, overcoming distribution deficiencies is essential for translating the huge available underwriting capacity into sector growth. Towards this end, distribution intermediaries must be given their rightful voice.
Over time, with corporate agents being allowed multi-company work, followed by individual agents being allowed work as point-of-sale persons for intermediaries or as agents for stand-alone health insurers and motor insurers, the distinction between brokers with extensive service obligations towards customers and agents with such obligations borne on the company, has been greatly diluted, notwithstanding concerns regarding free-riding and obscuring of the boundaries without passing on the wide-ranging duties of brokers onto agents. While this was presumably done to address distribution bottlenecks, it adversely impacted life and general insurers, and pushed them towards brokerage-based distribution. Bottlenecks in qualifying new agents have compounded the problem. New mode distributors like aggregators have their own misgivings regarding lack of a level playing-field and non-recognition of legitimate distribution costs.
Thus, the interest of innovative and effective distribution merits ease of entry and a level playing field in terms of rights, obligations, and commercial terms across channels, including on customer on-boarding issues like access to centralized e-KYC, Insurance Information Bureau, Vaahan database and repositories. This would allow undistorted choices to insurers, taking cost-effectiveness, efficacy, and service quality across distribution channels into account. The expense of management initiative would support this objective. Concerns, especially on the life side, regarding expenses still being irrationally segmented and contingent on the product mix, could be addressed. The sub-broking model, successfully used in stock broking, could be encouraged, including in tandem with aggregator platforms. Distributor understanding of customer needs and risks must be used in underwriting, claims settlement, product development, and value-added services, to better serve customers. Managing General Agents, prevalent overseas, could be considered.
Mis-selling by distributors arising from inadequate accountability and conflicted situations like selling to vulnerable bank customers, could also be addressed through better disclosures, display of commissions on policies, etc. and third-party checks. Addressing misaligned distribution incentives could improve persistence of life policies. Suitable redressal mechanisms could address concerns regarding delayed claim settlement and wrongful denials.
Clearly, with the right policies the insurance sector in India can overcome shortcomings and build significantly on its substantial achievements.
This article is authored by Anup Wadhawan, former Union commerce secretary.
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