What does the insurance sector expect from budget 2020-21?
The Union Budget of India for 2020-21 was adopted not that long ago – more precisely, on the 1st of February. It's believed that the budget will push...
The Union Budget of India for 2020-21 was adopted not that long ago – more precisely, on the 1st of February. It's believed that the budget will push new frontiers to growth and prosperity. There's no way of knowing if it will be enough to stimulate the economy. What is certain is that governmental policies will play an important role in driving economic recovery. At this precise moment in time, the wholesale market is crammed with Chinese products, not to mention the fact that consumption at home has significantly reduced.
These are the words that pretty much sum up the budget: Aspirational India, Economic development, A Caring Society. The insurance sector is expecting an upward movement and would like the government to take into consideration people in terms of life, health, and general insurance. This sector of activity plays an important role in the economic development of the country, helping direct the small savings of taxpayers into large funds of money, which can be later on invested in capital markets and the infrastructure.
The changing insurance sector in India
The insurance sector in India is made up of approximately 57 companies. 24 represent life insurance businesses, while the other 33 are non-life insurers. Over the years, this area of the Indian economy has undergone a great many transformations, largely driven by the needs of the population, which has led to competition with positive outcomes. Life Insurance Corporation, LIC for short, is the only public sector company. It has branch offices in Fiji, Mauritius, and the United Kingdom. When it comes down to the non-life insurers, there are about six companies.
The one thing that the insurance sector needs is capital. The total amount of funding required by an organization ranges between 1% and 2%. Given the fact that Indian insurance companies are forced to thrive in tough economic times, it shouldn't come as a surprise that their resources are fairly limited. The finance minister is the one who can bring much-needed capital to places where others might not even consider, giving companies the chance to do business in a market that is growing at an alarming rate.
The government wants to raise funds by selling a partial take in LIC
The Indian government plans to raise funds by selling a few shares of the Life Insurance Corporation via an initial public offering. This way, they can obtain some liquidity from ownership in the public sector company. However, to make the move worth anything, it's necessary to create a real win-win scenario. Needless to say, the employees are opposed to the current plans of the government. LIC's employees don't want the government to go through with it, as it would be against the national interest.
The fact is that the government has already started making preparations for the initial share sale. It will take approximately one year to complete the transaction and attention needs to be paid to the fact that this process will require making several changes. An inter-ministerial committee is going to be formed, with the aim of monitoring India's most significant insurer. The hope is that the stake sale will increase the value of the company and open an opportunity for wealth creation. A decision regarding the quantum at stake hasn't been made, but it's highly unlikely that it will be less than 10%.
There's a need for a focus on the non-life insurance sector
Non-life insurance is the type of insurance that applies to property and liability. The most important segments are health, motor, and home insurance. The question now is: Why do officials need to take into account this particular sector of the economy? Because people are currently underinsured. It has an impact on the economy by encouraging domestic savings. Home insurance guards the person's investment against loss or damage, which is the result of fire or vandalism. To put it simply, it's a bare necessity.
If we were to compare India and Florida, we would immediately see almost half of people in Florida have taken out a home insurance policy to protect themselves from the severity of weather-related events. Not only do they know their risks, but also the residents do everything possible to minimize the risks. Unfortunately, in India, people have the tendency to ignore such matters. We cannot blame the government or insurers for that matter. Nevertheless, there is something that officials can do to encourage citizens to become first-time insurance buyers.
One thing that the government can do to increase the numbers in the insurance sector is to offer tax benefits. Businesses could take advantage of many tax allowances and reliefs, which could reduce their tax bill. Increasing tax deduction might very well be the much-awaited solution. Equally important is to make home insurance mandatory. There needs to be a guarantee that people's property is protected in case it's damaged or destroyed. Right now, home insurance isn't required by law. But it should be.
Opportunity lies in the insurance space
As an industry, insurance is generally regarded as a slow-growing option for investors. The insurance industry in India takes on a dynamic role in the wellbeing of the economy. It can be argued that it's anything but slow. With time, consumers have started to grasp the value of non-life products, the adoption of cutting-edge technology contributing to the adoption of such products. The only problem is that the insurance sector needs capital to continue the transformation. Insurers need help to come up with groundbreaking and affordable solutions for the new generation of citizens.
Insurance companies should get more tax incentives to enable the penetration of general cover among the public. If no separate deductions are granted, the existing limit of Rs 1.5 lakh will have to be increased. The non-life players are in need of help. Most importantly, they are at a disadvantage as compared to other corporations. They have no capital to work, as banks and other financial institutions are reluctant to lend them money. No matter what the 2020-21 budget is, something needs to be done. And right away.