After 20 years of liberalisation, stage is set for larger reforms to leapfrog the Indian industry to the next level
By
C.L. Baradhwaj
The Indian Insurance industry has crossed 20 years after privatisation.
As per IRDAI’s Annual Report, insurance penetration for the financial year 2020-21 was 3.20% of gross domestic product(GDP) for life and 1% for non-life.
While non-life saw a gradual increase in the penetration over the last 2 decades, for life insurance, the penetration peaked at 4.60% in 2009-10, mainly due to focus on Unit Linked insurance policies and started sliding thereafter due to product rationalisation.
IRDAI has taken many steps to develop the life insurance industry.
New Product Regulations in 2013 and again in 2019, introduction of new distribution channels including Web Aggregators, Insurance Marketing Firms, Common Public Service Centers, Point of Sales Persons, e-commerce guidelines, amendments to the Investment regulations in 2016, recognition of branch offices of foreign reinsurers amendments to Section 45 placing 3 year time restriction for disputing policy benefits under a life insurance policy- to quote a few, with the latest being the increase in foreign investments in insurance companies to 74%.
The sector is now set for the next generation of reforms to leapfrog the industry to the next level:
- Concessions in IRDAI registration fees & renewal fees for business done in under- penetrated areas
Currently the fees for IRDAI registration and renewal fees paid for the premiums generated by Insurance companies are uniform across the country, No discrimination made between the business generated from under-penetrated areas and otherwise. Incentives in fees to be provided by lowering the fees for the business done in such under-penetrated areas.
Recommendation:
For insurance companies, per centage of fees payable for premiums generated in under-penetrated areas shall be half the fees paid for penetrated areas. This will incentivise all the players, be it Insurers or the Intermediaries to do more business in such areas.
For intermediaries, the fixed fees payable upon renewal may be halved in case not less than 50% of the total policies sold come from under penetrated areas
- Recognition of enhanced role of Insurance Brokers
As per the current regulatory framework, there is a very little difference between corporate agents and Insurance Brokers. Direct insurance brokers will have to invest a capital of Rs.75 lakhs, while exclusive Corporate agents need to have a capital of Rs.50 lakhs. While corporate agents work for up to a maximum of 3 insurance companies in each Life, Non-life and Health insurance, Insurance Brokers can work for any number of insurance companies.
Insurance Brokers are allowed to provide consultancy services to policyholders which is more relevant for the non-life business. Otherwise the differentiation is very less
Insurance Brokers carry higher responsibilities vis-à-vis Policyholders and Regulations must recognise the enhanced role of Insurance Brokers. Some additional responsibilities which may be allowed to be given to Insurance Brokers such as:
- Issuance of confirmation of insurance cover/Policies for simple non-medical cases in life and retail motor insurance cases in non-life. Ultimate underwriting decision will be taken by the insurers.
- Allowing data entry of proposal forms and limited policy servicing activities of Insurer can be allowed to be undertaken by Insurance Brokers and Insurance companies paying a suitable compensation to Insurance Brokers for undertaking such activities (like in the case of Web Aggregators)
- Allowing Insurance Brokers to undertake Insurance awareness activities on behalf of the Insurance companies by adopting a under-penetrated district or a rural area, provided a minimum number of lives are covered in the under-penetrated district by the Broker
- Appointment of Sub-brokers – only by certain Insurance brokers with a clean regulatory track record after a minimum period of 3 years, including lower customer complaints, minimum benchmark persistency etc. may be allowed to appoint Sub-brokers
- Section 45(1) – Incontestability period to be increased from 3 years to 5 years, subject to death of life assured happening after 5 years
Existing provision of Section 45(1) of Insurance Act, 1938
No policy of life insurance shall be called in question on any ground whatsoever after the expiry of three years from the date of the policy, i.e., from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later.
Recommendation
Section 45(1) be amended as follows:
No policy of life insurance shall be called in question on any ground whatsoever after the expiry of five years from the date of the policy, i.e., from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later.
Provided that the death of the Life assured happens after 5 years from the date of the policy
Rationale
Life insurance industry has seen an unprecedented increase in experience of fraudulent claims during the last seven years.
While insurance companies have joined hands to combat fraudulent claims, the incidence of such claims in certain pockets continue. Underwriting guidelines have been tightened by prohibiting /conducting heightened due diligence for new business emanating from high-risk areas.
Trends of such fraudulent claims getting reported late is also seen – high probability of fraudulent claims getting reported beyond the 3-year period to avoid repudiation of claims.
Probability of fraudulent claims arising after 5 years remote. In order to prevent fraudulent tendencies to delay reporting of claims after 5 years, it is also suggested that the incontestability provision be mandated only if the death happens after 5 years.
- Amendments to Section 41 of Insurance Act, 1938 on prohibition of rebates
41. (1) No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebateof the premium shown on the policy, nor shall any person taking out or renewing or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer
Suggested change
Following Proviso may be added as Second Proviso to Section 41
No Insurer, Agent or Intermediaryshall allow or offer to allow, either directly or indirectly, as an inducement to any person to take or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebateof the premium shown on the policy, nor shall any person taking out or renewing or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer.
“Provided that customer promotions and discounts for different profiles of customers based on parameters such as mortality, persistency, health etc. are not deemed to be rebating provided such promotions and discounts are based on cost-benefit analysis and are periodically reviewed by the Insurer.”
Provided further that the IRDAI by way of Regulations shall specify the nature of customer promotions and discounts which may be allowed under the First proviso
Rationale
Keeping in mind the customer’s interest, insurers may want to allow such discounts only to a specified customer segment, based on factors such as the behavioural pattern of customers. Such a discount would be in the interest of the customer and shall be instrumental in creation of value for them.
Similar practices being adopted in the banking sector for higher participation. Banks give rewards or offers to customers on activating mobile banking or internet banking or on conducting the first online transaction.
Therefore there should be an allowance for incentivising customers for based on right customer behaviours and positive outcomes for the insurance companies.
The author is an Executive Vice President, Future Generali India Life Insurance Company Limited