Covering more bases

But can the insurance sector get around the logjam over the insurance bill?

But can the insurance sector get around the logjam over the insurance bill?

The clear message sent out by Finance Minister P. Chidambarams initiative to sort out the problems in the life insurance sector on Monday is that the sector regulator has been behind the curve. The twelve points flagged by the minister,for the Insurance Regulatory and Development Authority Irda to act upon,were not new. Cumulatively,they could obviate the capital scarcity created by the impasse over the insurance bill by making what is available work better. On each of them,however,the regulator has long engaged the companies without reaching a decision. By stepping into the conversation,the minister has made it clear he wants these to be resolved within a clear timeframe. While the unusually detailed press release issued by his office has quite correctly refrained from asking the regulator to act upon them,the expectation is clear. Irda has responded positively,noting that the concerns raised by industry could be addressed in a consultative and constructive manner entirely within the framework of the insurance law and regulations as they stand.

Insurance penetration in India has been a story of missed opportunities,with just about 4.4 per cent of the GDP in terms of total premiums underwritten each year. It has consistently trailed the percentage in major developing countries. While the regulator can point to the lack of capital that has stymied the rate of expansion of business,the overprotective regulations for solvency meant that few insurance companies,including the public sector LIC,have felt the need to step out of their comfort zone. For instance,asking the insurance companies to file their proposed policies with the regulator for approval,but setting no time limit for doing so,meant that in the past two years,no company has launched any new plan in the markets. As the insurance companies stumbled,the middle classes lost interest in the sector. According to RBI data,life insurance cover accounted for almost 26 per cent of total financial savings in 2009-10. In the two years since,the percentage has slipped to 23. The cumulative impact on the savings behaviour of the household sector has been disastrous.

The finance minister is now banking on a mix of tax proposals with measures to ease investment norms,and the reduction of arbitrage between ULIPs and traditional plans,to bring about a recovery. Instead of encouraging the push factors,like hiking commissions of insurance agents,the minister is depending on pull factors like reduction in service tax on single premium products,treating annuity products at par with the National Pension System and creating a separate tax deduction limit. But along with these measures,the ministry may have to make some regulatory changes too.