Page 109 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes 8.2.3 The Road Ahead

The insurance industry has successfully completed the first phase of reforms by having a smooth
transition from a state-controlled monopolistic structure to a free market competitive industry
and the stage is set for consolidating the gains made in the first phase of reforms. Despite the
suggestions by many an analyst, IRDA does not do any "mystery shopping" to uncover rebating
and payment of commission in excess of levels stipulated in the Insurance Act, 1938.
In future, IRDA expects further segmentation in the market with some companies becoming
financial conglomerates, others transforming themselves into niche players.

The country is in the midst of demographic changes and an increasing older population will
demand annuities and pensions related products. Though the life insurers have added value to
the market by introducing a number of new products, there have been some reports of market
misconduct such as rebating and mis-selling of keyman insurance covers, which has not been
good for the image of the industry. IRDA has to ensure that the insurers curb such practices. The
life insurance industry has witnessed frequent churning of agents and relatively high rate of
policy lapses, which is again not a good indicator for the industry.
IRDA has to ensure that the life insurance segment attracts more participants. Needless to say,
the unit-linked policy will continue to attract more policyholders because of the rise in stock
markets and with the announcement of new guidelines by the IRDA. There are a number of
issues, which need to be addressed on the ULIP policies. The IRDA has been working on them.
The objective is to protect the interest of the policyholders, particularly in the areas of design of
products, transparency with regard to the definition of charges, amount of charges, partial
withdrawal, top-up premiums, advocacy issues and sales illustrations, advertisement material
and others.

In future, the bancassurance channel is very likely to witness an increasing importance given the
reach and the strong relationship between the customer and the banker. In addition, some of the
areas that require greater attention are rural, social and health sectors. The penetration in these
sectors is still low given the huge potential and IRDA should encourage the players to exploit it.

8.2.4 Foreign Direct Investment in Insurance Sector

Over the past years, Indian insurance industry has shown a remarkable trend of growth. The
annual sales of all life insurance companies and general insurance is to the tune of 2.25 lakhs
crores a year. But like every other industry, the insurance industry also needs capital to grow
and for this IRDA had proposed to the government that the FDI limit should be enhanced to 49%
from the present level of 26% and that foreign reinsurance companies need to be allowed to
open branch offices in India. Both the proposals were considered by the Parliament and will take
sometime to be cleared. Amendments have to be made to the bill to bring in the change.

On Dec 22, 2008, Indian govt., decided to press ahead with liberalization of the insurance sector.
At the fag end of its term and in a truncated parliament session the government of India tabled
two bills to amend the laws applicable to the insurance sector. The two bills-The Insurance Laws
(Amendments) Bill and the Life Insurance Corporation (Amendment) Bill-were introduced in
the Rajya Sabha and Lok Sabha respectively.
The aim is obviously to keep the focus on privatization with dilution of public control and
provision of a greater role for foreign firms in the insurance sector. This emphasis comes
through from the four principal elements of the current legislative effort. The first is to permit
public insurance companies to mobilize additional money from the markets. The second is to
relax the cap on foreign direct investment or ownership by foreign players in the insurance
sector as a whole. The third is to reduce the capital requirements for private players in certain

104 LOVELY PROFESSIONAL UNIVERSITY