- Introduction
- Insurance: intro
- Insurance Penetration
- Insurance density
- FDI in insurance
- Insurance amendment bill 2008
- What is Bancassurance?
- Chindu’s revival package for insurance sector
- Chindu’s Budget speech: Insurance
- Reforms
- Government Schemes: Insurance
- Mock Questions
Introduction
- Fifth chapter of Economic Survey is about Financial intermediaries.
- You already know that financial intermediaries = banks, NBFC, pension-insurance-mutual funds etc. they acts middlemen between lenders (people) and borrowers (govt. and businessmen). for details given in earlier article, click me
- The fifth chapter, discusses various issues, reforms related to financial intermediaries in four sectors: 1) Banking, 2) Capital market, 3) Pension and 4) Insurance.
Pension sector | Already discussed in NPS article click me |
Insurance sector | Discussed in the present article. (part 1 of 3) |
Capital market: QFI, FII, SEBI reforms, ECB etc. | Will be published soon. (in part 2 of 3) |
Banking sector: NPA, NBFC, RRB | Will be published soon (in part 3 of 3) |
let’s start with Economic Survey >> Chapter 5> Financial intermediaries> insurance sector. The chapter itself, barely contains 4-5 paragraphs on Insurance, but this article also covers budget-speech and various insurance schemes given in India Yearbook.
Insurance: intro
- Insurance funds = important financial intermediaries for India. They help move peoples savings into Government and corporate securities.
- Insurance industry in India, can be classified into following
Insurer | Example |
Life | LIC, ICICI prudential, |
Non-life/General insurance (e.g. health, travel, business, marine, fire) | ICICI Lombard, Oriental, New India, United India. Among them, three are standalone Health insurance companies
|
Re-insurer | GIC |
Specialized |
|
- The basics of IRDA, Insurance ombudsman functions, various types of policies etc. already explained in earlier article click me
Insurance Penetration
- It is the ratio of premium underwritten in a given year vs. gross domestic product (GDP).
- It helps measuring growth in the insurance sector in a country.
Insurance density
- ratio of premium underwritten in a given year to total population (measured in US dollars for convenience of comparison).
Issue?
- In past, (before LPG reforms of 90s), India’s Insurance penetration and density were very low because insurance sector was monopolized by public sector companies.
- But Post liberalization, and with the entry of private sector companies, both insurance penetration and density have increased.
- However, India’s insurance penetration and density are still low as compared to other developing countries of the world.
FDI in insurance
- Before 1999, Insurance sector in India was monopolized by public sector companies: LIC + GIC (and GIC’s subsidiaries).
- 1999 was the reform year insurance sector
- Insurance Regulatory and Development Authority (IRDA) Bill passed
- Private sector companies can enter insurance business (they started doing so from 2000)
- 26% FDI allowed in Insurance sector.
- 2012:
- As of 2012, there are 52 insurers in India.
- Chindu gave 12 point revival package for insurance sector
- Cabinet approved 49% FDI in insurance sector.
- But insurance amendment bill is not yet passed in the parliament yet.
- FDI in insurance = will increase competition, = more efficiency, innovation, cheaper premiums for policy holders; Thus FDI ultimately benefit the customers, and help improving India’s insurance penetration and density.
- But some political parties oppose it saying, FDI in insurance = bad idea. Those unscrupulous private insurance companies will invest policy holders’ money into bad corporates and it will lead to something bad like sub-prime crisis.
- What they don’t see is: Even China allows 50% FDI in Insurance, Malaysia 70%, and Mexico has 100% FDI in insurance sector.
- And all these countries are doing fine. Hence, the fears regarding foreign investment in insurance= misplaced.
Insurance amendment bill 2008
Salient features are
(list is definitely not exhaustive)
- Increases FDI from 26% to 49%
- health insurance policies would cover sickness benefits on account of domestic as well as international travel.
- Reduced capital requirement for new company wanting to enter health insurance.
- Policy can be repudiated on any ground, including misstatement of facts etc.within first three years of purchase.
- Public Sector General Insurance Companies and GIC will be permitted to raise capital from the market, as long as Government’s shareholding doesn’t fall down below 51%.
- Appointment of agents is to be done by insurance companies subject to the agents meeting the qualifications, passing of examinations etc. as per IRDA’s guidelines.
- IRDA is empowered to take action against agents to protect the insurance customers.
What is Bancassurance?
- Bancassurance = Arrangement through which banks sells insurance products. (and earns Commission)
- “Bancassurance” system appeared in France in the 80s.
- According to Insurance law: one bank can work as Bankassurance agent for only one insurance company. (one for life insurance and one for non-life insurance)
- Meaning one bank cannot sell policies of multiple insurance companies (unlike a stationary shop owner- who can sell pens from multiple brands such as Raynolds, Parker, Luxor, Cello etc.)
- But this “one bank one insurance co.” system was changed after Chindu’s revival package.
Example of Bankcassurance
Type of insurance | Insurance co | +bank |
Life | ICICI prudential | ICICI Bank |
SBI-life | SBI | |
Non-life | ICICI Lombard | ICICI bank |
TATA-AIG | HSBC, IDBI etc. |
Bancassurance: pros and cons
Pros | Cons/Anti arguments |
|
|
Chindu’s revival package for insurance sector
He released this in late 2012. Total 12 points, important ones are
New products
- An insurance company has to seek approval from IRDA, before launching a new product. According to this plan, IRDA must give that clearance within 30 days.
- Life insurance companies can introduce a product even without getting formal approval from the IRDA. (in some specific conditions).
Bank brokers
- Banks can work as brokers of Insurance products. (earlier they could work only as “agents”: meaning as an “agent”, one bank could tie up with only one insurance co.)
- But now as a “broker” One Bank can sell insurance products of multiple insurance companies.
- Banking Correspondence agents can sell micro-insurance products.
KYC
- IRDA will accept Know Your Customer (KYC) check done by banks.
Taxation
- Service tax to be cut on single premium policies and 1st year premium
- Government is thinking about offering some more income tax exemption, for investing in insurance products.
Investment
- Investment norms for Insurance companies=relaxed.
- Life insurers can invest in infrastructure SPV (special purpose vehicles) of any firm (earlier they could only invest in public sector undertaking’s SPV only).
Chindu’s Budget speech: Insurance
Reforms
- We need to increase insurance penetration in India. I’ve a number of proposals that have been finalized in consultation with the regulator, IRDA.
New branches
- Insurance companies will be empowered to open branches in Tier II cities and below without prior approval of IRDA.
- All towns of India with a population of 10,000 or more will have an office of LIC and an office of at least one public sector general insurance company. I propose to achieve this goal by 31.3.2014.
Banks as insurance brokers
- KYC of banks will be sufficient to acquire insurance policies.
- Banks will be permitted to act as insurance brokers so that the entire network of bank branches will be utilized to increase penetration.
- Banking correspondents will be allowed to sell micro-insurance products.
- Group insurance products will now be offered to homogenous groups such as SHGs, domestic workers associations, anganwadi workers, teachers in schools, nurses in hospitals etc.
Claims
- There are about 10,00,000 motor third party claims that are pending before Tribunals/Courts.
- Public sector general insurance companies will organise adalats to settle the claims and give relief to the affected persons/families.
RSBY extended
- The Rashtriya Swasthiya Bima Yojana already covers BPL families.
- Now, It’ll cover rickshaw, auto-rickshaw and taxi drivers, sanitation workers, rag pickers and mine workers as well.
Integrated social security package
- We need a comprehensive and integrated social security package for the unorganised sector
- The package should include life-cum-disability cover, health cover, maternity assistance and pension benefits.
- At present schemes like AABY, JSBY, RSBY, JSY and IGMSY are run by different ministries and departments.
- I propose a convergence among these schemes so we can evolve a comprehensive social security package. It’ll benefit the poorest and most vulnerable sections of society.
Government Schemes: Insurance
From, INDIA Yearboook
Mock Questions
- For the given year, Insurance penetration is measured as:
- Ratio of Premium underwritten to No. of People in the 18-60 age group
- Ratio of Premium underwritten to GDP
- Ratio of Premium underwritten to Total population
- None of above
- For the given year, Insurance Density is measured as
- Ratio of Premium underwritten to No. of People in the 18-60 age group
- Ratio of Premium underwritten to GDP
- Ratio of Premium underwritten to Total population
- None of above
- Bancassurance means
- Arrangement in which Insurance company provides banking services
- A bank giving security for Indian corporate to raise capital from abroad.
- A Non banking Finance company providing assured returns on its deposits.
- Arrangement in which Bank sells insurance products.
- Bancassurance leads to
- Increase in Bank’s NPA
- Decrease in Bank’s NPA
- Increase in insurance penetration
- Decrease in insurance penetration
- Bancassurance involves ________ and ________.
- Bank, NBFC
- Bank, MNC
- Bank, insurance company
- None of above
- The Insurance amendment bill aims to increase FDI limit in Insurance sector to
- 26%
- 49%
- 51%
- None of above
- Correct Chronology (older to newer)
- IRDA, SEBI, PFRDA
- PFRDA, IRDA, SEBI
- SEBI, IRDA, PFRDA
- None of Above
- An urban BPL family is not eligible for
- Janshree Bima Yojana
- Rashtriya Swasthya Bima Yojana
- Aam Admi Bima Yojana
- None of Above
- Incorrect Statement about Rashtriya Swasthya Bima Yojana
- It is a smart card based cashless health insurance scheme for rural households.
- Premium sharing between Centre :State is 50:50.
- Both A and B
- Neither A or B
- Incorrect match
- Aam Admi Bima Yojana: urban and rural BPL
- Janshree Bima Yojana: Rural landless
- Both A and B
- Neither A or B
- What are the similarities between Aam Admi Bima Yojana and Janashree Bima Yojana?
- Both provide life insurance
- Both are implemented via LIC
- Both A and B
- Neither A or B
- Who among the following, is/are eligible for Rashtriya Swasthya Bima Yojana (RSBY)?
- Rickshaw and taxi drivers
- Rag pickers
- Mine workers
- All of Above
Mains
- Pravasi Bharatiya Bima Yojana (5m)
- Rashtriya Swasthya Bima Yojana (RSBY) (5m)
- Janashree Bima Yojana? (5m)
- Meaning and advantages of Bancassurance (5m)
- Write a note on the salient features of Insurance (Amendment) bill. (10m)
- Examine the need for a comprehensive social security scheme in India. (12m)
- Write a note on Finance Minister’s 12-point plan for revival of Insurance sector. (12m)
Interview
- Are you in favor of increasing the FDI in insurance sector?
- Suggests the measures required to increase insurance penetration in India.
great work as always …thanks
Hi Mrunal,
How do I get ur basics notes on economy?
thank you…..sir…
AAP KI BAAR” MRUNAL” SARKAR
thank u
under interest subvention scheme 3% interest subvention is given not 4%
(it is given in monthly policy review dec 2013)