Reforms in life insurance next on govt agenda

After a slew of foreign direct investment reforms and measures to revive market sentiments in the last two weeks, the government will now come up with a booster dose for the life insurance sector. Finance ministry officials had intense deliberations with the Insurance Regulatory Development Authority (Irda) in the last two weeks. Finance Minister P Chidambaram is likely to meet the insurance regulator on September 26 to reach some finality.

The proposals on the table vary from small procedural issues to raising foreign direct investment (FDI) in the insurance sector to 49%. Relaxing investment norms for insurance companies is top on the agenda to release more funds for infrastructure sector.  Taxation of life insurance policies, revival of unit linked insurance products (Ulips), faster regulatory approval for new products, tax on pension products, open architecture on bancassurance and relaxed licensing norms are some of the other issues being considered by the finance ministry.

 

“There are issues related to product approval, policy, procedures. All that will be looked into. We are talking to Irda. The finance minister will also meet the regulator,” said a finance ministry official.

Today life insurance sector is second only to banks for mobilising savings. It has an investment corpus of roughly Rs 13 lakh crore, but less than one-sixth of it goes to the infrastructure sector.

The government wants to direct some of the insurance funds for development of infrastructure, which needs about $1 trillion in the next five years. Irda guidelines, however, allow insurance companies to invest up to 50% in government securities, 15% in infrastructure bonds, and 35% in corporate bonds and equities. Moreover, they can invest only in highest rated 'AAA' or 'AA' bonds. There is also a cap of 20% for investing in equity and debt instruments of one company in the infrastructure sector. An additional 5% can be invested with board approval.

The insurance companies want Irda to improve commissions for Ulips, which accounted for about 70% sales in 2008-09, but their share in new business premium fell to 15% in 2011-12 due to regulatory changes and volatile stock markets. Revival of Ulips may form part of the finance minister’s broader strategy to boost stock markets and prepare ground for disinvestment of PSUs.

The finance minister has already cleared a proposal to increase the foreign direct investment limit in the sector from 26% to 49%. Though a proposal on allowing higher FDI in insurance is not likely to be put up before the Cabinet in its upcoming meeting, the finance ministry has sought approval of the law ministry on amendment to the Insurance Bill and may make take it to the Cabinet soon.

Human resource development minister Kapil Sibal had conceded that the government does not have majority in the Rajya Sabha and hence it would have to take help of others to get legislative bills passed. He said the government will persuade the opposition to support reform bills.

Insurance companies are also asking for providing flexibility in minimum assured returns with regard to certain policies. They have also proposed that pension products sold by insurance companies should also be given the same treatment as the New Pension System. Another issue raised by the companies is that the insurance regulator takes more than six months to approve a product thus delaying its launch.

On September 4, Chidambaram had met top executives of life insurance companies to discuss issues and the sector and ways to improve insurance penetration in the country. The meeting came within a month after he announced that the government would take steps to attract more people to invest in mutual funds, insurance policies and other well-designed instruments.

Life insurance penetration in the country is just about five%. In the last two years, the industry saw a severe slowdown, with policy issuances falling eight% in 2011-12. First-year premium collections fell nine% to Rs 1,14,233 crore. In the April-July period this year, the sector recorded 16% jump in new business collection at Rs 31,180 crore but the growth was mainly driven by 23% rise in sale of new policies by state-run LIC, while private insurers grew at 0.1%.