Life insurance sector has not achieved objectives of opening up

Chennai: While Finance Minister Arun Jaitley announced the government's plan to allow 49 percent foreign direct investment (FDI) in insurance, he obliquely reminded the players the objectives of opening up the sector in the first place.

"Benefits of insurance in India have not reached a large section of the people and insurance penetration and density are very low. The government would work towards addressing this situation in multi-pronged manner with the support of all stake-holders concerned," said the finance minister in his budget speech Thursday.

According to the Economic Survey for 2013-14, the insurance penetration has grown from 2.3 percent (life 1.8 percent and non-life 0.7 percent) in 2000 to 3.96 percent (life 3.17 percent and non-life 0.78 percent) in 2012.

Insurance penetration is defined as the ratio of premium underwritten in a given year to the gross domestic product (GDP).

Insurance density is defined as the ratio of premium underwritten in a given year to the total population.

The survey is silent on the insurance density which is the real measure of spread of insurance.

According to Life Insurance Council of India, a forum of the life insurers, there are around 36 crore life insurance policies that are in force currently in India that has a population of over 120 crore.

"The objectives behind opening up the insurance sector for private participation were to improve insurance penetration and grow premium income. Both has not been achieved in a major way," R.Ramakrishan, a member of Malhotra Committee on Insurance Reforms, told IANS.

According to Ramakrishnan, a former executive director of Life Insurance Corporation of India (LIC) and now a consulting actuary, the total premium for life insurance industry appears to be gradually drifting towards the negative zone in the recent years.

Ramakrishnan said the LIC logged an average annual growth rate of 19.5 percent during 1990-2000.

Assuming a similar rate of growth was maintained by the LIC, as its focus prior to the private entry was traditional products and not unit linked, the total premium earned by it would have been Rs.337, 256 crore in 2013-14.

"This will be similar to the total premium earned by LIC and the 23 private players," Ramakrishnan remarked.

The other reason for opening up the sector was to attract long term funds for infrastructure projects.

However, as bulk of the life insurance business transacted during the last decade is unit linked and investments were made in the stock market, Ramakrishnan said legally the minimum start up capital for a life insurer is only Rs.100 crore and for 23 players it should be Rs.2,300 crore.

According to Life Insurance Council of India, the players have pumped in around Rs.35,000 crore as capital as on December 2013.

Life insurers should develop individual agency force for a steady growth over a long term and for developing better insurance density, Ramakrishnan said.

Jaitley presenting the budget said the government would work towards addressing this situation in multi-pronged manner with the support of all stake holders concerned.

"This would include suitable incentives, using banking correspondents, strengthening micro-offices opened by public sector insurance," Jaitley said.

Ramakrishnan said the LIC should be brought under the direct control of the finance ministry as a measure of protection of policyholder's interests.