Foreign Money Cold on India’s Insurance Gamble

The government is considering divesting its stake in the big four of the insurance sector — National Insurance Company, New India Insurance Company, United India Insurance and Oriental Insurance Company. It will free the government’s capital and get the much-needed funds from private investors, especially foreign investors, for the insurance companies now that the government has allowed 100% foreign investment in insurance. 

The policy signal is clear. The question is whether foreign investors will bite.

Recent history offers mixed signals.

Allianz decided a few months ago to move out of its long-standing partnership with Bajaj in its two insurance companies. Some other names which chose to leave India over the past decade are: New York Life Insurance Company, ING, AIG, and Old Mutual. Most of them cited ‘moving out of Asia’, and therefore India, as a part of their ‘global strategy’. 

But is that the real reason? 

There are multiple reasons for the exit. One key challenge is the unwillingness of local partnerships to share management control and to operate independently. This was the case with Allianz. Throughout the 25 years of partnership, no dividends were paid, though in 25 years the ₹20 billion investment grew to ₹240 plus bullion for both companies — life and general. Allianz has now entered into an agreement with Jio Financial Services to form a 50-50 domestic reinsurance joint venture. It will be interesting to see how this partnership evolves.

It is not as if all foreign investors want to leave the country. There are global players like Zurich Insurance, which recently acquired 70% in Zurich Kotak General Insurance. Surely, it would have found some attraction here. Nevertheless, simply easing FDI norms isn’t enough. To tap the high potential market and to achieve ‘insurance for all’ objective, the path is long and arduous. 

Many Hurdles
There are many other issues which act as hurdles for investments in this sector. Returns on investments and profit after tax are both low in insurance. This is mainly because the market is price sensitive and taxes are high. 

Of late, digital innovations have helped domestic insurers reduce costs by increasing operational efficiency and thereby profitability. The performance metrics for insurance companies need to change. 

Growth in premiums and the ratio of premiums to GDP are critical performance criteria. However, in India, it is also important to weigh in efficiency in claim processing, adoption of digital techniques to offer bespoke solutions and enhancing customer experience while measuring performance of insurance companies. 

This requires high-quality, high-frequency data. Insurance is a risk business, and without quality data, it can become riskier. Maybe, like in banking, insurance too needs an insurance score for pricing and risk management. 

But then there are also frauds that mar profitability of insurance companies. In general and life insurance, there are exaggerated claims for damages and even fake claims. 

According to a recent survey, an estimated 15% of claims in insurance are false. Health care industry annually loses approximately ₹6-8 billion to false claims. In spaces like agriculture, land records are often a missing link, leading to widespread fraud in crop and cattle insurance. In fact, insurance today is unaffordable not only because of high taxes—the GST of 18% is a significant deterrent—but also due to fraud. Money lost has to be compensated for.

Again, payment of commissions is an issue that leads to malpractices. Many policies lapse as the insured changes companies or just don’t renew the policy. This could reflect non-follow-up by the agent, poor quality of service given by the company, or inefficient claim settlement. Should the commission not be linked to the quality of business garnered?

Most importantly, to increase the insurance coverage, bancassurance is not a preferred option with regulators. The main reason for this is mis-selling at the bank branch level. However, rather than throwing the baby out with the bathwater, one should examine the reason behind misselling. Bank employees simply sell insurance to meet the given targets. 

The policies are often a co-product with a bank account about which the customers are never told. The fact that the policy premium needs to be paid every year to keep the policy alive is never told to the customer. The policy lapses because the amount of premium-plus-penalty for its revival is too high. 

Even if there is no intention to cheat the customer, misselling happens more because the employees, brokers and agents who sell the policies are themselves ignorant about what each policy offers, and so are unable to match them to customer needs. Potential clients also lack sufficient knowledge to ask the right questions and judge whether the policy offered meets their requirements. Lack of awareness results in a lack of trust. Apart from sternly addressing misselling and making the punishments exemplary, both groups need to be educated. 

While IRDAI has played a crucial role in monitoring and regulating insurance distribution channels, and has taken initiatives like Bima Sugam, Bima Vahak and Bima Vistaar to improve distribution and access, it is necessary to make inclusion measurable. This could be done by linking the commission to the quality of business. Just as the banking regulator has developed a financial inclusion index, can there be an insurance inclusion index? 

There is a need to speed up the process of bringing regulations at par with international best practices. IFRS and risk-based operations will make India’s insurance industry comparable to the international insurance business. 

Despite the regulator’s efforts at simplification, regulations still remain complex. The regulator can learn and adopt from global best practices, just as the banking regulator has. Similarly, the players too can learn and see how to up the game by focusing on distribution strategies, product designs and marketing techniques.

Insurance in India is today an insurer’s dream. According to a PWC report of August 2024, over 400 million individuals, 31% of India’s population, lacked health insurance. The gap in life insurance coverage is approximately 87% and the mortality protection gap exceeds 90% among those aged 26-35 years. On the physical assets side, more than 50% vehicles operate without third-party insurance and homes and other physical assets are seldom covered. 

The government’s two main schemes, Pradhan Mantri Jan Arogya Yojana and Pradhan Mantri Suraksha Bima Yojana, have, over the last decade, covered 64.3% of India’s population. While this is remarkable, it also speaks of more than 35% of people being out of coverage. The gap has remained despite the private sector’s entry into this sector, along with technology and innovative ideas for products, as well as distribution. With the demography expanding, the market size of the insurance sector in India is expected to grow to $280 billion this year, a CAGR of 12-15%.

In short, both pull (demand) and push (supply) factors have to work together to achieve the objective of ‘Insurance for all by 2047’. In a country where poverty is still a major challenge, insurance should be looked upon as social security. Both the policy and practice should work towards providing that.