Insurance in need of reform, 20 years on

India’s experience two decades after the opening up of the insurance industry to private players has been reassuring, but more reforms are needed to create a vibrant market that can attract long-term funds and help the economy grow. Greater competition has helped drive down costs, improved services and given consumers a wider choice. But life insurance towers over non-life insurance.

And, the Life Insurance Corporation (LIC) continues to be a dominant player with assets under management of about Rs 31lakh crore. For its corpus to be deployed optimally, the government must act on this year’s budget promise to divest a part of its holding in LIC through an IPO.

Investors and the insured will benefit, considering that LIC still accounts for nearly two-thirds of the new business premium. Listing will bring in transparency and accountability, boosting corporate governance. Premium payments lie on the books of insurers, and prudential norms require insurance companies to provide for more capital as premium collections rise.

The government should raise foreign direct investment from 49% to 74% in insurance to allow foreign partners majority control. More investment will flow into underinsured India (with insurance penetration at 3.69% of the GDP).

Despite the freedom from price controls in 2007, general insurance lags life insurance as a consumer who buys a non-life product perceives it as an expense. Non-life companies must improve their underwriting discipline and base their pricing on the assessment of risks. A market for catastrophe bonds must be created, to insure against natural calamities. Crop insurance must become market-oriented. Such reforms are essential to grow the non-life business and mitigate risk.

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