India is growing, but the insurance sector is still lagging behind. Initially, FDI was allowed up to 26% but now attempts have been made to increase it to 49% through ordinance. Find out the merits as well as the demerits of the content of the ordinance.
It is the major failure of insurance sector in the country that they are unable to reach the general mass. Even though there has been enormous development in the field of insurance, the majority of population is still out of its reach. One of the major reasons for such backwardness in this sector can be attributed to non competitive attitude. The sector needs to expand its capital and secure better services, especially in the rural areas where the awareness regarding the same is very less. The sector is dominated by traditional players with minimum private party intervention. It is easy to increase the ambit of providing benefit to mass by including private agencies in this sector. There are various ancillary business attached to this major protective sector like the health insurance, employee insurance, etc. But the need of the hour before is to increase the competition in the home insurance market so that they provide better services.
In 2008, the government tried to pass a bill incorporating required changes. The present regime, which was one of the most vocalist opposition of the erstwhile bill, tried passing the bill with some amendments in 2014. Finally, the new regime has taken a less democratic way of increasing the foreign holdings in an Indian insurance company from 26% to 49%, by way of introducing the ordinance in the Parliament. There are other reforms which are also pushed through this ordinance, which will be discussed in detail later in the article.
The legislative history of passing of this ordinance can be traced from the year 1991. The liberalization process was started by the then government with the goal of making the economy more market-oriented and expanding the role of private and foreign investment. The Malhotra Committee was set up in 1993-94 whose main job was to suggest the government regarding the reforms relating to then nationalized insurance sector. The committee advocated allowing private competition and permitting foreign investment in Indian insurance sector in order to improve the service provided by them.
There was no well-settled regulatory body for the regulation of issue related to this sector. So in the year 1999-2000, there was formation of an Insurance Regulatory & Development Authority (IRDA). The main aim of this regulatory body is to protect the interest of and secure fair treatment to policyholders. This was also for providing speedy and orderly growth of the insurance industry for the benefit of common man.
Major developments were seen in the year 2004 when the Central government came up with the plan to increase the foreign investment cap from 26% to 49%. But the government had to face a lot of opposition. In 2008, the Insurance Laws Amendment Bill 2008 contained large number of reforms including raising the foreign investment cap up to 49%. In the month of July and August 2014, there was a complete review of the Insurance Bill. The Bill was unable to pass in the winter session of Parliament which ended on 23rd December 2014 and the Bill was brought in the form of ordinance, indicating the anxiety of the government.
The main objective of the Insurance Amendment Bill is to allow insurance companies to raise the capital through new and innovative instrument so that they will be able to increase their business. This amendment which is aimed at increasing the foreign investment cap from 26% to 49% will allow competition in the Indian market and hence will improve the reach of this sector among general masses.
The major concern should be that the Indian Insurer must be “controlled” by Indians so that the interest of Indian market should not be affected as a whole. The word “control” as defined under Section 2(27) of the Companies Act, 2013 means that the right to appoint a majority of the directors, to control the management and also to control policy decisions. It is important that while expanding the scope of insurance sector and attempting to improve the services provided by them, Indian ownership must be safeguarded.
The scope of power of Securities Appellate Tribunal is increased as they will be able to hear appeals against the orders and decision by IRDA. At the same time IRDA is given power to regulate basic operation of Insurance Company like solvency, investments, expenses etc. Providing such powers to regulatory body is important for creating faith in public. Some regulatory measures are introduced to secure the investors from any kind of fraud like imposing huge fine to those companies which run without registration. But, still the ordinance nowhere talks about appointing person in the SAT from the group having knowledge of Insurance law. This step would have strengthened the redressal mechanism in an efficient manner.
Consumer interest in the major concern as it is clear from the ordinance. The government has talked about taking steps like increasing the fine rate substantially so that the concerned companies should comply with the present insurance law in the country so that the interest of the consumer remain in the investment. It has been seen that the legislatures are making amendments in laws in order to make it more public- friendly. Recent amendments in the Companies Act, 2013 have separate sections for increasing the investor’s education and protection of investor’s interest. Moving on the same way, in the case of this ordinance, the consumer interest is given paramount importance.
There are various benefits of this ordinance as far as consumer interest is concerned. The main benefit which is provided by this ordinance is that no claims will be rejected after three years. In order to protect the interest of the policyholders better, the period of repudiation of claim of any policy after three years are rejected. This clause has been made to protect the interest and faith of the policyholder. The new Section introduced in the amendments says that the insurers will be responsible for all acts and omissions of the agents and heavy penalty up to ` 1 crore was fixed. In case any agent kickbacks to the buyer by any agent the penalty of ` 5 lakhs will be charged. There has been additional qualification added for the agents. Presently, the licensing of agents is done by IRDA. But going forward, appointment of agent is proposed to be done by insurance companies subject to the agents meeting the qualifications, passing of examinations etc. as specified by the authority. Further, the ordinance hit hard at the practice of multi company agents being the same person. It mandates that no person can be agent for more than one life insurer and one general and health insurer. These attempts were taken to increase the insurance penetration as well as being probity to the insurance sector in the country.
The insurance industry in India is a big market having only handful of players. The present rate of insurance penetration in the country is only around 3% of the gross domestic product. This will create more opportunity for jobs as there will be urgent need for more manpower. Further, this will hopefully give a much needed boost to the health insurance sector. As a matter of fact 79% of medical expense is still borne by individuals. The government is trying hard to revamp health insurance situation in India. It is evident from the fact that the government has increased the limit of deduction of health insurance premium from ` 15,000 to ` 25,000. For senior citizens, limit will be ` 30,000. Very senior citizens – ` 30,000 deduction on expenses incurred in the Union budget passed at the time when I am writing this. The ordinance coupled with the policy decision taken by the government with regard to health insurance premium on the eve of the Union budget will probably transpire the public health in India.
The other advantages of the ordinance are as follows:-
The ordinance route taken by the government in order to set the wheel of insurance sector in motion is a welcome step with only rider that the ordinance is only a temporary measure which has no finality until and unless passed by parliament within the specified period of 6 weeks from the start of new session. As the banking sector enjoins FDI up to 74%, therefore, there is no point depriving the insurance sector from the same. The ordinance aims at achieving more security for the citizens especially in the field of health, education, etc., so that when the time arises the common people will benefit from their small investment which will secure a better future for them. But, since the non-approval of the ordinance through the parliament can further delay the transformation of insurance sector. Seeing the ground of opposition of this bill, it is sincerely believed that the Parliamentarian will put the national interest above their party interest and the democratic sense of parliament will prevail over any other thing when the ordinance will put before the Upper House where the government is still in minority.
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