Insurances are partially similar to banks and capital markets as they serve the needs of business units and private households in financial intermediation. The availability of insurance services is important for the stability of the economy. It makes business participants accept aggravated risks. That is, by accepting claims, insurance companies also have to pool premiums and create reserve funds. Insurance companies are playing an important role by enhancing internal cash flow and by creating a large amount of funds in the capital market.
A study on the insurance sector titled ‘The Relationship of Insurance and Economic Growth – A Theoretical and Empirical Analysis’ by Peter Haiss and Kjell Sümegion published in 2006 is still relevant. The study observed that the banking sector was mainly a buyer of protection while the insurance sector was mainly a protection seller for investment or portfolio management purposes. The same report states that at the end of 2003, the insurance sector particularly considered as financial guarantors, had reported a net position of $460 billion. Close to 65% of the net sold credit positions were derived from the corporate sector, 17% from financial institutions and the remainder from sovereigns. In this way, the credit risk had been transferred on a massive scale from banks onto insurance companies, providing them with a more pivotal role vis-à-vis the banks and the economy at large.
By 1955, there were 255 insurance companies operating in India, doing business of around `200 crore. Life insurance WW was nationalised in 1956.
When general insurance was nationalised in 1972, there were 55 Indian companies and 52 non-Indian companies operating in India in that segment. The total premium written by these companies was `170 crore on 1971. There were many reasons for the nationalisation. Important reasons included no full guarantee to the policyholders, the lack in the concept of trusteeship, widespread distress in the sector, rampant malpractices, limited penetration of the life insurance segment, very limited coverage in rural areas and absence of group insurance and social security.
The main purpose of nationalisation was to increase the penetration (insurance premium as a percentage of GDP) and depth (per capita premium of insurance) of the insurance sector. After nationalisation, the penetration of the life insurance segment increased by more than 60% in the very next fiscal.
After the liberalisation of the Indian economy in 1991, the Indian insurance sector started taking a turn towards privatisation. Its depth and penetration had not improved substantially and this led to the discourse in favour of privatisation of the insurance sector.
There are 24 life insurance and 33 non-life insurance companies operating in the Indian insurance market. The share of the private sector has been rising. The market share of private sector companies in the non-life insurance market rose from 13.12% in FY03 to 55.7% in FY20 (up to April 2019). In the life insurance segment, private players had a market share of 25.29% in new business in FY19.
However, the privatisation drive in the insurance sector is yet to yield desired results. The depth and penetration of the sector has not taken a significantly upward turn. A few months back Tajinder Mukherjee, CMD, National Insurance Company Limited (NICL), spoke to BE on several aspects of the insurance sector. Mukherjee stated that indicators like depth and penetration have historically been comparatively low in India. She added that it has been predicted that the insurance sector is going to reach $280 billion by 2020 driven by increasing awareness, novel products and innovative distribution channels. Health insurance is going to play a major role in this expected growth especially with the government supported plans like Ayushman Bharat. It is the same for crop insurance. Ever increasing income levels of the middle class in the country, increasing life expectancy and many more parameters are going to drive the insurance industry to higher echelons.
Second, she said promotional activities are being done by Indian insurance companies. This has surely contributed to the higher level of awareness of insurance products among the public. Now more people are approaching the companies for their property and health insurance needs voluntarily. The situation is changing. The companies like NICL have been simplifying the policy wordings, packaging many covers to suit the specific requirements of customers, streamlining and expediting the claim procedure to popularise insurance.
Third, she mentioned that in India, the success of the insurance sector is to be judged differently. The general insurance penetration is typically measured as the ratio of the total non-life insurance premium to the GDP in terms of US dollars. That relates to the amount of premium that is being generated in the country as a percentage of the GDP. So when government comes in with very simple and economical products, it does not really bring up the amount in terms of US dollars.
Fourth, she had informed that the Indian government has proposed to merge PSU insurance companies in order to reduce competition between the public sector undertakings and to create one or two big public sector insurance companies in India. However, she had also mentioned that there were 25 other companies in the fray so the move may not reduce competition significantly.
Fifth, she stressed on the need to expedite the claim settlement process and address the trust deficit issue that is present in the market. However, she mentioned that this trust deficit factor is not limited to the Indian market. She sounded positive about the sector, with increasing digital penetration and new product offerings coming into the market.
Awareness building is the need of the hour
Generally, in most economies, economic development is linked with the increase in depth and penetration of the insurance sector. However, this hasn’t been entirely true in the case of India. It is because there are numerous segments in the insurance sector where the government still plays an important role through various welfaristic activities. Under such a situation, the growth of the insurance sector cannot be solely judged by the two above mentioned parameters. However, it has been repeatedly noticed that awareness regarding the insurance sector in dismally lacking in India. The government must work on this aspect.