Insuring India

On the 11th of August, 2021, the Rajya Sabha passed The General Insurance Business Nationalisation (Amendment) Bill, 2021, after the Lok Sabha had passed it on the 2nd of August. This law, once it comes into effect, will allow the Central Government to dilute its stake in state-owned general insurers below 51 percent. The passage of the bill amends The General Insurance Business (Nationalisation) Act, which was first passed in 1972.

The state-owned general insurance companies include The New India Assurance, National Insurance Corporation, General Insurance Corporation of India (GIC Re), The Oriental Insurance Company, and United India Insurance. As per Business Standard, NITI Aayog is learnt to have recommended United India Insurance as one of the primary potential candidates for privatisation.

This entire practice is part of the government’s long term strategic disinvestment policy [Page 37, Budget 2021-22]. According to the policy, in strategic sectors such as banking, insurance and financial services, the Government would be reducing its stake.

A Brief History

To understand the amendment, we will have to revisit the original Act, i.e, the General Insurance Business (Nationalisation) Act [“Parent Act”]. In 1972, with the passing of the Parent Act, the general insurance business was nationalised with effect from 1st January, 1973. One hundred and seven insurers were amalgamated and grouped into four companies, namely National Insurance Company Limited, New India Assurance Company Limited, Oriental Insurance Company Limited, and the United India Insurance Company Limited. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. 

By early 2000, IRDA had realised that nationalisation of insurance was not working out. The IRDA opened up the market in August 2000, and additionally allowed foreign companies to have ownership of up to 26%. Fast forward to 2021, the sector has transitioned from being an exclusive State monopoly to a competitive market, with 100% FDI in insurance intermediaries (via Budget 2019-20). However, public-sector insurers hold a greater share of the insurance market, even though they are fewer in number.

The Insurance Sector Problem

Covid-19 once again exposed what experts in the insurance sector have been saying for some time – the penetration of insurance, and it’s density in India, while much better than pre-liberalisation, is still abysmal. 

Insurance penetration is defined as the ratio of total premium to GDP. In 2019, it stood at 3.76 percent in India, compared to 11.43 percent in the US, 4.03 percent in Brazil, and 13.4 percent in South Africa. Additionally, insurance density, which is measured as a ratio of total premium to population, in India stood at $78 in 2019. This is comparatively less than other emerging economies. 

As per Ray et al. 2020, insufficient capital makes it difficult for companies to increase their market penetration, as such growth of the insurance sector is contingent on continuous infusion of capital. While the Union Government has been pumping money into these companies, the performance of the entities have been less than desirable. United India Insurance had reported a net loss of Rs 1,485 crore in 2019-20 while the National Insurance Company reported a loss of Rs 4,100 crore in 2020. Additionally, the solvency ratio (size of an insurer’s capital in relation to the risk) of the public sector general insurance companies is lower than the regulatory minimum of 1.5. Low solvency ratio affects the ability of insurance firms to settle claims. The general insurance industry recorded a decrease in profits, with public-sector general insurers posting losses, while their private-sector counterparts recorded profits.

Additionally as per Ray et al. 2020, there is a significant positive relationship between insurance penetration rates (life, non-life, and total) and economic growth in India. The paper also goes ahead to show that liberalisation (increasing of the FDI cap to 49%) positively influenced life and total insurance penetration rates, while the effect on non-life insurance was negative and insignificant. The preliminary empirical assessment showed a positive and significant relationship between insurance penetration and insurers’ equity capital, in the case of life and non-life insurance in India for the period of analysis. 

To simplify, the more capital available to the insurance companies, the easier it is for it to increase its market penetration. Currently Public Sector Insurance companies are bleeding out capital. The solution to the same is to allow individuals to invest more money in the PSU, and rejuvenate it’s existing capital stock. The new Amendment to the Parent Act allows for the same. For a developing country like India, we need to ensure we get as many people insured as quickly as we can. Insurance provides a safety blanket during disasters for people and in turn allows for mobilisation of savings leading to the economic growth of the society as a whole. Covid-19 already pushed thousands without insurance into poverty. We cannot afford to wait for the next pandemic or crisis. 

Let us however, briefly take a look at two of the criticisms of the Amendment. The primary one being that because the Government will sell off a majority controlling stake, it shall open a “flood gate of unethical practices” by private insurance providers. To this we must note that the only profit making State Insurance company, United Insurance, mechanically rejects claims on technical issues, like small filing delays, despite instructions from IRDA to not do the same. Assuming that private companies will reject claims for profits, but Government companies don’t or won’t is a fallacy. We do need the IRDA to be doing a better job, irrespective of whether it’s a State-owned company or private, so that such mechanical rejections don’t happen. An additional criticism of the disinvestment is about the possible lack of trust in insurance companies, without the presence of the Government.  For one, the Government may still remain the largest shareholder for sometime, even if it doesn’t control the majority stake, for another the rapid growth of private insurance companies can be taken as proof that consumers have found such services reliable.

Conclusion:

It is important to understand that by merely disinvesting from State-controlled insurance companies, we will not overnight and automatically ensure everyone in India has insurance.  Increasing insurance penetration will have to be a joint endeavour by the State and the Market. Hopefully with new capital, the erstwhile government insurance will design products with the rural sector and the challenges of rural people in India. The focus of the insurance sector is steadily shifting towards increasing access to low-cost, simple insurance products, including those that can be sold through online channels. This can be incentivised by government policies and on ground activism by NGOs, which spread awareness, and improve financial literacy, particularly the concept of insurance, and its importance. In this context, government insurance schemes such as Pradhan Mantri Jan Arogya Yojana, Pradhan Mantri Fasal Bima Yojana, Pradhan Mantri Suraksha Bima Yojana, and Pradhan Mantri Jeevan Jyoti Bima Yojana are notable contributors in expanding insurance coverage among the population.

Lastly, we need to focus on the economic development and opportunities for people, especially the uninsured. Most of the time, poor people are not uninsured because they are financially illiterate, but because they are too poor to afford said insurance. Their economic development will have a net positive result on insurance penetration and provide a safer future for everyone, irrespective of what disaster strikes in the future.

Read more: The Dilemma of Online Free Speech