The insurance sector in India has witnessed rapid development since its liberalization in 2000. The key recommendations for reform in the insurance sector are:
In order to encourage market players to develop products that meet customers’ needs, all insurance products should be de-tariffed subject to appropriate regulatory oversight.
The higher capital requirement restricts growth and increases the cost of insurance for the policy holders after considering the minimum return on capital required by shareholders. It is therefore recommended that the capital requirement of insurance companies be set at 100 per cent of the solvency margin requirement. Given the high growth scenario, scarcity of equity capital and higher return expectations of equity investors, alternative forms of capital, such as preference shares, subordinated debt and hybrid instruments that have fixed cost as well as some risk/ loss absorption characteristics, may be evaluated and permitted as capital. Insurance in India is in a high growth phase with substantial investment requirements over a number of years before the new insurance companies achieve stable profitability. In this scenario, permitting foreign investors to own a larger share may be considered.
A separate exemption limit is recommended for long-term life insurance and pension/ annuity products. A similar provision may be considered for investment in dedicated close-ended infrastructure mutual funds and long-term bank deposits. Life insurance companies are required to pay service tax on the auxiliary services provided by insurance agents, even if the taxable service value is lower than the threshold limit. This may be rectified by giving the benefit of the threshold irrespective of the actual tax paying entity.
The investment regulations may be reviewed on an ongoing basis to enhance the ability of insurance companies to invest in emerging instruments and derivative products, to optimally manage their portfolios.
In order to ensure efficient utilization of capital on a system-wide basis, general insurance companies may be permitted to take on risks originated by other players. As recommended for other insurance companies, FDI restrictions on re-insurance companies should be removed.
The insurance sector is governed by several statutes and regulations issued thereunder. There is a need for a simple unified legislation that sets out the key principles and statutory provisions, with several aspects currently defined by statute being moved into regulations.
In keeping with greater liberalization, increased disclosure norms to report both gross and net level incomes, liabilities and reserves would be needed.
The insurance and asset management sectors have substantial overlap in terms of the products offered, such as in the area of unit linked insurance plans vis-à-vis mutual funds. It is recommended that the regulatory and other treatment of similar products offered by different segments of the financial sector may be reviewed to ensure appropriate alignment.
There is a need to develop disaster insurance by mandating it in certain zones prone to frequent losses, setting up insurance pools, and providing tax concessions for reserves set apart by corporates and insurance companies for meeting losses associated with natural disasters.
In order to increase penetration of health and other personal non-life insurance products, especially in rural areas, premia associated with these insurance products may be made eligible for tax exemptions.
Given the importance of risk mitigation in agriculture, and the need to promote private investment in this high risk and long gestation business, it is recommended that an appropriate policy framework, including consideration of fiscal incentives, be developed to promote commercially sustainable development of agricultural insurance.
