It seems that one way or another, sooner or later, the The Insurance Laws (Amendment) Bill, 2008 will become law. This bill is often described as critical whose passage is necessary for the whole economic reforms process to move forward. In fact, for many years now, this bill has been referred to as a sort of a litmus test of whether the government of the day was serious about economic reforms. On the opposite side, among those who wear opposition to economic reforms on their sleeve, resisting the insurance bill has been a given.
Reasons for opposition to the bill haven't been coherently put forward very often but tend either to be a general anti-FDI stand or that it is against the interests of lakhs of LIC agents. The interests of crores of policyholders is also sometimes mentioned, although the exact mechanism by which FDI will damage their interests is not mentioned.
On the other side of the debate, the logic of these insurance reforms is generally articulated quite clearly. The stated logic is that after more than a decade of the insurance business being opened up, Indians remain underinsured. The numbers that are generally quoted in support of this logic are that one, India's insurance density, which is the per capita premium underwritten as well premium underwritten as the ratio of GDP are both far below the global average. This is true not only of the industry's own statements but also of media coverage and IRDA's reports. IRDA takes these two metrics--insurance penetration and insurance density as indicators of the 'potential and performance' of the industry.
Basically, this means that the industry and the regulator measures success by how much money insurers have taken from customers, rather than how much insurance they have delivered and to how many people. Premium payments is what the customer gives, not what he gets. These numbers are not indicative of the security--the cover that is delivered. The reason that this industry exists is to deliver insurance--in the plain English sense of the word. Which is, when a customer dies, how much money does his family get? How many customers have what amount of this cover? The premium data don't tell you that because they lump together everything that a customer pays, including what are basically his investments as well as commissions and other charges.
My guess is that the need for this information--how much actual life cover is actually provided to how many people will never even be acknowledged by the insurance industry and its rather tame regulator. The nature of commissions and compensation in this industry is such that there is a huge incentive for insurance companies and agents to divert more of the premia towards investment and away from cover.
Even though the insurance amendment bill is being sold as a 'reform', there's very little of the sort from the customer's perspective. The measure to prevent repudiation of a policy after three years is good, as are the fines for misselling even though the efficacy of the latter depends on IRDA's hitherto weak regulation.
In reality, more money will come in and finance a high-pressure sales process which will extract more premia for investment products that are disguised as insurance. To measure the success or failure of the opening up of India's insurance sector, we need to know how many Indians have actual, meaningful amounts of life cover, rather than how much premium has been collected by an ever-growing army of agents.
Of course, there is no reason to object to raising the foreign ownership limit. In fact, I would say that it should be raised to 100 per cent immediately so that as much foreign investment can come in as needed. The only condition should be that in some way the attention of the industry should be turned to providing real insurance to as large a number of people as possible.
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