Higher foreign investment in insurance sector will increase competition , bringing down premiums, and offer many new products to Indian consumers.
The government has relaxed FDI norms for insurance sector by permitting overseas companies to buy 49 per cent stake in domestic insurers without prior approval from Foreign Investment Promotion Board. Since then insurance industry has seen foreign insurance companies either increasing their stake or announcing their intent to do so. This positive move by the government will impact the life of individuals from all sections of the society. Here is how FDI can help common man and his financial life.
Basic financial security: Firstly, with expected rise in the number of players in the industry, there will be increase in the awareness programmes for consumers. Many people, through lack of exposure or even lack of interest, don’t know what life insurance is or how it works. However, increased competition among insurers will help in increasing insurance penetration. If we look at the data, in spite of opening of the insurance sector for private participation, the levels of insurance penetration and density are very low. During the first decade of insurance sector liberalisation, the sector had reported a consistent increase in insurance penetration from 2.71 per cent in 2001 to 5.20 per cent in 2009. However, since then, the level of penetration has declined to 3.3 per cent in 2014. A similar trend was observed in the level of insurance density which reached the maximum of $64.4 in the year 2010 from the level of $11.5 in 2001. During the year under review 2014, the insurance density was $55.
The insurance density of life insurance business had gone up from $9.1 in 2001 to reach the peak at $55.7 in 2010. During 2014, the level of life insurance density was $44. The life insurance penetration surged from 2.15 per cent in 2001 to 4.60 per cent in 2009. Since then, it has exhibited a declining trend reaching 2.6 per cent in 2014. One of the main reasons for this trend is the lack of awareness about the insurance products and its benefits.
More products With exposure to foreign players and their policies, industry is expecting to witness new marquee products including innovative product range and services. The government’s move to increase FDI limit is more beneficial to Indian consumers’ financial life because now they are more open to non-life insurance products as well. Over the last 10 years, the penetration of non-life insurance sector in the country remained steady in the range of 0.5-0.8 per cent. However, its density has gone up from $2.4 in 2001 to $11 in 2014. Some of these new products help the policyholders meet the dual need of protection and long term wealth creation.
More players with more products are also expected to bring down premium with better claim settlement ratio. Just to compare, during 2014, the life insurance premium in India increased by one per cent (inflation adjusted) when global life insurance premium increased by 4.3 per cent. The Indian non-life insurance sector witnessed a growth of 4.8 per cent (inflation adjusted) in 2014. During the same period, the growth in global non-life premium was 2.9 per cent.
Online and Paperless Process New FDI limit also signals that Indian insurance industry is open to positive changes including acceptance to technology. Consumers are looking for convenience in buying financial products (like shopping online for mobile, clothes etc.) and technology is making it possible. At present, only a part of the insurance purchase is digital but future belongs to end to end online paperless process. There are huge customer benefits to it.
Most life insurance policies are much cheaper when customer purchase them online. When customers buy term life insurance online, there is no need to fill in the forms with pen and paper. It is all electronic including document upload and scheduling medical appointment. The online process makes it easy to compare and select otherwise life insurance can get confusing at times, especially when consumers are comparing plans from different insurers offline. With technological support and better policies for international players entering the market, we can also expect customer care and support to improve further.
Improvement in saving rate In 2013-14, the gross domestic saving rate declined for the second consecutive year to 30 per cent of gross national disposable income (GNDI). This largely reflected the reduction in the saving rate of households. By this FDI move, the government is trying to encourage domestic financial savings through fiscal incentives giving additional scope to taxpayers to save more while saving tax. Apart from tax, the insurance sector is very similar to the banking sector in that both are vehicles and instruments for encouraging savings amongst the people in India. These pension plans and insurance premiums in turn invest in the financial sector giving an impetus to domestic saving and investment. Consumers will see some benefits soon and some gradual. Going forward, increasing life expectancy, favourable savings and greater employment in the private sector are expected to fuel demand for insurance plans and FDI will support it with better products, services and online paperless process.
(The writer is CEO of BankBazaar.com)
