Budget fails to bring cheer to micro-insurers

Will require financial incentives for intermediaries, say life insurers

The Union Budget has proposed service tax exemption for all micro-insurance policies in life insurance with a sum assured of less than Rs 50,000. However, industry players are not immediately rejoicing since the measure is not expected to boost the segment in a big way.

"People with small-ticket policies will be benefitted since there is a service tax exemption. But the larger issue in this industry is the lack of distributors who do not want to sell due to the low commissions," said the chief executive of a large private life insurer.

To boost insurance penetration and density, the finance minister talked of providing incentives, using banking correspondents and strengthening micro offices opened by public sector insurance companies.  

Global reinsurer Swiss Re’s sigma study on world insurance in 2013 said insurance penetration in India fell to 3.9 per cent in 2013 compared to four per cent in 2012. Insurance density stood at $52 (Rs 3,120) compared to $53 (Rs 3,180) in 2012.  Insurance penetration refers to premiums as a percentage of GDP, whereas insurance density (measured in $) refers to per capita premium or premium per person.

Though the minister has talked about suitable incentives to boost penetration, insurers explained that financial incentives would be required to have a larger number of distributors for small-ticket micro-insurance policies.

"The Insurance Regulatory and Development Authority (Irda)’s micro-insurance regulations cap commission for these agents at 15 per cent of the premium in non-life segment. Where is the incentive to the distributor? He may not derive any benefit from service tax exemptions," said the chief distribution officer of a mid-size bank-owned life insurance company.

To distribute these products, micro-agents are employed by insurers. Further, Irda has said district cooperative banks, non-governmental organisations, micro-finance institutions (MFIs), regional rural and urban cooperative banks, primary agricultural cooperative societies, companies appointed as banking correspondents and individual owners of kirana shops, medical shops, petrol pumps, ration shops and public call offices (PCOs) in rural areas can become micro-insurance agents.

Another issue is the concerns on lower renewals. "Non-insurance entities do sell micro-insurance. Though service tax exemption proposal may make it easier for these entities to pitch to prospective customers, incentives for renewals are necessary,” said a public sector insurance executive.

Further, executives said service tax exemptions might boost penetration on an immediate basis by attracting more customers into the insurance sphere. But the key, they said, was to enable them to stay invested by enabling easier renewals.

Life insurance companies sold 25.7 per cent of new policies in 2012-13 in the rural sector. The life insurers had underwritten 11.3 million policies in the rural sector, out of 44.1 million new policies underwritten by them in 2012-13.

The non-life insurers had underwritten a gross direct premium of Rs 8,196 crore in the rural sector, which is 12.69 per cent of the gross direct premium underwritten (Rs 64,583 crore) by them in 2012-13.

NOT A BIG ENOUGH UMBRELLA?

• Union Budget proposes service tax exemption for all micro-insurance policies in life insurance with a sum assured less than Rs 50,000
• Industry players not very upbeat about development as measure is “not expected” to boost the segment in a big way
• Micro-insurance products, offering coverage to low-income households, is a mechanism to penetrate rural areas
• Distributors are unwilling to sell products because of the low commissions offered