By Smitha Hari 

Executive Summary: The insurance sector has evolved considerably over the past decade with an increase in the number of players as well as product categories. There have been many developments in the sector in the recent past in the year 2014 – proposal of increasing the Foreign Direct Investment (FDI)  limit to 49%, introduction of the insurance repository, changes in ULIP regulations and availability of policies online. In 2015, the sector is expected to witness consolidation in addition to introduction of new distribution channels, innovations in products and a more stringent regulatory regime. The sector is expected to grow at a fast pace in the coming years, with increasing awareness and penetration levels. Forward looking policies and innovations by insurance players will help in taking the sector to the next level of growth.

The Insurance Sector is one of the most competitive sectors in India today. With 28 players in the non life insurance business and 24 life insurance players, the industry has come a long way since the time when there was only one player in the market – Life Insurance Corporation. In 2000, the sector was liberalised by the Government. Over the past 14 years, the sector has not only witnessed increased competitiveness due to the presence of multiple players, but has also seen several product and operational innovations. The Insurance Regulatory and Development Authority (IRDA) being the regulatory authority of the insurance sector in India is the sole authority which frames regulations for the sector, ranging from registration of insurance players to protection of policy holders’ interest, thus aiming to regulate and promote the growth of the insurance sector.

The insurance sector is continuously evolving and requires continuous changes by the government and the regulator to be competitive. The year 2014 witnessed some landmark changes in the insurance sector.  One of the most recent changes is the proposal to increase the foreign investment cap to 49% from 26% for the sector. This has been a long pending reform which the newly elected government had taken up on a priority basis. In July 2014, the Union Budget presented by the new government stated the intention of hiking the FDI limits. On Dec 10th 2014, the parliamentary committee recommended raising of the limit to 49%. This bill is waiting for the consent of the Parliament. While the NDA enjoys a majority in the Lok Sabha, this is not the case in the Rajya Sabha. As a result, it is expected that there could be some friction in this respect to pass the Bill. Nevertheless, the government intends to pass this resolution in this session of the Parliament. Increase in FDI limit will not only give the insurance sector the much needed access to foreign funds, but will also make the sector more competitive and open for growth. Access to international best practices and entry of mature players in the industry will help in the strategic development of the sector.

On the regulatory front, IRDA has recently brought about several changes. In September 2013, the insurance repository was introduced which is a facility to maintain insurance policies online in the demat form. At present applicable only to life insurance policies, the system is expected to be available for other insurance types in the coming years. The insurance repository system helps in easier maintenance of policies and the risk of losing physical policy documents is also minimized. Another development in the sector is the introduction of new guidelines by IRDA with respect to Unit Linked Insurance Policies (ULIPs). During the latter part of last decade, ULIPs were very popular as agents and insurance players promised high returns and attractive features. However, these plans were notorious for the exorbitant charges and fee structure. As a result, policy holders lost a considerable part of their premium towards such charges. IRDA had brought down these charges in 2010. Recently, IRDA has made the product attractive for investors by reducing the charges further. Regulating a unit linked product was the need of the hour to protect policy holders’ interest. Another innovation in the sector is the advent and popularity of online term plans. A term plan bought online from the insurer’s website works out to be much cheaper than that bought offline or from the agent. Portability of health insurance policies is another development brought about by IRDA in the recent past in year 2014. The regulator has constantly worked on improving transparency and protecting policy holders, while at the same time bringing about forward looking policies to promote the growth of the sector.

Going forward in 2015, the insurance sector is expected to see changes in the operational as well as ownership levels. First, the sector is expected to witness consolidation, especially on the back of the proposed hike in the FDI limit. New players could enter the market, while existing smaller players can be taken over by the larger players. Next, the distribution infrastructure could also witness some changes. New channels could come into play in order to widen the reach of insurance products. Despite growing penetration levels over the past decade, India remains a largely under penetrated market as far as insurance is concerned. Many people continue to view insurance as a tax saving instrument rather than a necessary financial instrument to protect risks. However, it is expected that with growing awareness and financial penetration, this view will change and people will begin to appreciate the importance of buying an insurance cover. Adopting distribution channels such as bancassurance has already gained momentum, and is expected to increase in the coming year.

The range of product offerings is also expected to increase in 2015. Innovation in product offerings, which calls for differentiated products, could become popular, as new companies and international practices come into vogue in the sector. On the regulatory front, IRDA could get more stringent in terms of the due diligence to be undertaken by the players, and also on aspects such as mis-selling.

According to IBEF, the insurance sector is expected to grow at a CAGR of 12%-15% over the next five years. With India having high savings rate in comparison to many other countries, this should not be a very difficult target to achieve. This shows the enormous potential of the sector. Proactive policies by the regulator and the government, increasing customer awareness, making operations efficient, innovative products and bringing about customer centric products and services will help in taking the sector to the next level of growth.

The author writes on the issues related to the personal finance. She has co-authored two books on Personal Finance and currently associated with GettingYouRich (www.gettingyourich.com), a Mumbai based Financial Planning firm.