Fintotal News Analysis | Life Insurance Industry to Get a Revamp
Life Insurance Industry to Get a Revamp
Ruby Jacob, 03 Oct 2012

The Finance Minister held discussions with insurance sector regulator IRDA on steps to rejuvenate the life insurance industry. Among important points agreed upon are those attempting to make life insurance products more tax friendly for buyers, widening the reach of products through bancassurance, redefining groups for group insurance products, process of introduction of new products and loosening investment norms in rated debt securities.

Tax bosses at CBDT and CBEC are expected to announce their decision soon on reducing service tax on first year premiums of policies, including single premium ones. The FM has also proposed to them for treatment of Annuity policies on par with National Pension Scheme for service tax exemption. Certain insurance pension products may also get income tax deduction over and above the Rs 1 lakh deduction allowed under section 80 C. This is certainly good news.

Banks that are presently acting as agents would have the flexibility to act as brokers. This is a welcome change in the bancassurance scene since an agent can sell just one insurer's products and so acts in the insurer's interest. A broker however can sell products of several insurers so he can actually advise customers as to what suits their needs. All banking correspondents will be permitted to sell micro insurance products meant for rural areas.

India's population is grossly uninsured. Only 5 in 1000 persons are insured. Even of these many are not sufficiently insured. The government is on the effort to bring more masses under financial inclusion. Despite the huge untapped market the insurance industry has lacked steam.

Among still other things discussed were to widen the scope of group insurance products. Currently group insurance works among employer-employee groups. It may be extended to homogenous groups with common interest. Examples could be a group of nurses or a union of cabbies or a self help group. The main policy holder would be compensated for taking responsibilities.

Introduction of new products takes very long under the present 'file and use' system. This is set to change by introduction of 'use and file' system. A new product that is introduced will be considered approved by IRDA within 15 days of intimating it to IRDA unless it is found to be non-compliant with standard products. Standard products will be identified or designed by IRDA and the list will be revised periodically. Guidelines for design of new products will be issued by IRDA by end of November 2012.

Insurers can somewhat reduce their client acquisition costs by accepting KYC of banks. They can avoid additional KYC and collect just the additional information for insurance purpose from the client. Similarly for lack of adequate AAA rated debt securities insurers the 75% minimum requirement of holding AAA rated securities will include Government securities and Other approved securities. This is good news for insurance providers but not necessarily for customers. The primary role of insurance is to provide protection. Increasing the space of investment in instruments rated less than AAA to 12.5% increases risk exposure of customers to lesser quality debt papers.

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