By Saon Ray & Vasundhara Thakur
Indian Union Budget 2021-22: The FM, in her Budget speech, announced several measures for the insurance sector, which are likely to ease the problems the sector faces: dearth of capital, depressed insurance penetration and density rates, and dominance of public sector insurers.
The insurance sector has traversed through many phases, starting with nationalisation. Life insurance was nationalised in 1956 with the Life Insurance Corporation of India, followed by general insurance in 1972. In 2000, the sector was opened up as 26% ownership was allowed to foreign companies, and increased to 49% in 2015; this Budget raised FDI to 74%.
Insurance is a capital-intensive sector, and insufficient capital has been a challenge facing insurers in India. Raising FDI to 74% with adequate safeguards in place is expected to bring in requisite capital for stoking the growth of the sector, in line with the expectations of the industry.
Insurance penetration rate (the ratio of insurance premium to GDP) and density (the ratio of insurance premium to total population) characterise this sector. The penetration rate for 2018-19 for India is 3.7% as per the data by the Insurance Regulatory and Development Authority of India (IRDAI) Annual Report 2018-19. The same for 2018 for other BRICS are: Brazil (3.9%), Russia (1.53%), South Africa (12.89%), and China (4.22%). So, India lags behind other BRICS nations, except Russia. The data for total density rates (from IRDAI report) for 2018 also paint a similar picture: Brazil ($345), Russia ($164), India ($74) (2018-19 for India), China ($406), and South Africa ($840). Feeble uptake of insurance products in India is closely linked with the paucity of capital. Thus, the increase in FDI limit may help stimulate the tepid movement of insurance penetration and density rates besides alleviating capital concerns of Indian insurers.
The meagre penetration and density of the Indian insurance sector has meant that those most in need have been left out. Sections of the population with high susceptibility to financial shocks are the ones that are underserved. In this direction, the Budget proposed developing a portal that will collate information on migrant labour force in the unorganised sector. This data will serve as a foundation for devising insurance schemes targeting them. However, it remains to be seen how these insurance schemes are devised, their coverage, and their implementation effectiveness.
Another challenge the Indian insurance sector faces is public sector dominance. The Budget proposed privatisation of a general insurance company in 2021-22. Although the private sector’s share has been increasing steadily, such a step is likely to provide further impetus.
The insurance sector occupies an important position in the growth and development of an economy. The significance of this sector has been realised during the pandemic. Liberalisation of the sector, coupled with privatisation as proposed in the Union Budget, could change the face of insurance in India. The increase in the FDI limit, proposed reduction of public sector presence in the sector, and a future plan of formulation of insurance schemes for migrant labour force in the unorganised sector are all expected to equip the sector to tackle issues that have stymied its growth. The Budget measures are likely to attenuate some of the concerns facing the insurance industry, thus paving way for a better developed insurance sector in India.
Authors are with the ICRIER