Cabinet proposes far-reaching insurance reforms
Increase in FDI - allowing foreign reinsurers to open branches in India, reducing the minimum capital for health insurer and allowing Lloyd's of Britain to operate are some of the major decisions taken by the union cabinet Thursday to deepen the reform process in the sector.
The cabinet also cleared proposals for enacting a separate law governing the obligatory third party insurance on motor vehicles and allowing public sector general insurers to go public.
The meeting of the cabinet, presided over by Prime Minister Manmohan Singh also gave its nod to enable insurer or insurance intermediary aggrieved by an order of the Insurance Regulatory Development Authority (IRDA) to prefer an appeal to the Securities Appellate Tribunal.
The cabinet approved necessary official amendments to the Insurance Laws (Amendment) Bill 2008, pending in the Rajya Sabha, to remove archaic and redundant provisions in the existing laws and also to provide IRDA flexibility to discharge its functions.
Welcoming, the cabinet decision to retain the 49 percent foreign equity cap provided in the bill, P. Nandagopal, managing director and chief executive officer, IndiaFirst Life Insurance Company, told IANS: "More than rationality, it is sentiments that play a major part in the market. The cabinet decision will turn the market sentiments positive and rekindle animal spirits."
"The sector will get more money which is currently needed and improve market sentiments," Nandagopal said.
Life insurance companies' officials were of the view that foreign partners of the bottom 10 players in the 24-company industry will actually bring in fresh funds.
For the top industry players, it will be more of stake sale -- Indian partner diluting his stakes in favour of foreign partner -- or a mere book adjustment.
"The bottom 10 companies will need additional capital to scale up their business. Further, the move may make Indian market more attractive for other foreign insurance companies. Recently, the Japanese are showing interest in the Indian life insurance market," Vibha Padalkar, executive director and chief financial officer, HDFC Standard Life Insurance Company, told IANS over the phone from Mumbai.
She agreed with the view that in larger companies, it will be more of transfer of shares between promoters.
"Initial public offerings (IPO) by life insurers will depend on whether government allows foreign institutional investors (FII) to invest," Padalkar said.
Speaking on the increase in FDI and its impact on the non-life insurance industry, S.S. Gopalarathnam, managing director, Cholamandalam M.S. General Insurance Company, told IANS: "The sector is not in need of huge capital like the life insurance industry. Here, reinsurance plays a major role in minimising capital needs."
He said the government's move would only result in changes in the equity holding structure.
According to him, the hike in FDI limits may attract newer players.
The cabinet in order to encourage health insurance in India and to reduce the entry barrier for new players - the minimum capital requirement for a health insurance company has been reduced to Rs.50 crore from Rs.100 crore.
The government also decided to allow foreign re-insurers to open branches only for reinsurance business and also allow Lloyd's to operate in India by amending the definition of foreign company for the purpose of insurance and re-insurance would mean: a company or body established under a law of any country outside India and includes Lloyd's established under the Lloyd's Act, 1871 (United Kingdom).
"It is a welcome move as it would increase the reinsurance retention within India and also result in development of resinsurance skill in the country," Gopalarathnam said.
In a policyholder friendly measure the cabinet decided that an insurer cannot reject a claim on the grounds of misstatement of facts three years after of taking the policy.
The cabinet also decided to allow government owned non-life insurers and also the General Insurance Corporation of India (GIC)-the national reinsurer- to tap the public for future capital requirements. However the government would retain 51 percent holding in these companies.
"Instead of having four different companies operating in the same space it is high time the government merge them into one entity," K.K.Srinivasan, former member of IRDA told IANS.
The other decisions taken by cabinet relating to insurance industry are allowing the insurers to appoint agents and taking away the powers of agent licensing from IRDA, specify the penalties on insurers and intermediaries and deterring multilevel marketing of policies.
The cabinet also decided that the agents commission structure and their code of conduct to be specified by regulations by the IRDA.
The ceilings on commission in the has been removed and insurers along with the agents are made liable for any violation of the regulations and stiff penalties would be provided for mis-selling, rebating and marketing of products through multi level marketing schemes.