The solution of the government’s Chief Economic Advisor is to increase the share of the insurance sector that foreign companies can own to 49 per cent. The government should be listening. The insurance sector is more amenable to large increases in FDI because it is free from problems of land acquisition, environmental clearances and other burdensome layers of regulation imposed by both federal and state governments.

In 1999 the federal government created the Insurance Regulatory Development Authority (IRDA) and changed the regulations that govern the insurance sector. Since then, many private insurance companies have entered the market, offering multiple insurance products catering to different members of society.

But although the increased participation of the private sector has allowed more people to access insurance there is still room for improvement. The ratio of premiums underwritten in a given year to GDP (‘insurance penetration’) remains relatively low, at 4.1 per cent. The reason the figure is so low is mainly because India is ranked 52 in the world for non-life-insurance penetration. The number of life-insurance premiums being issued is more satisfactory — at 3.4 per cent the ratio is only 0.4 percentage points below the world average. But, overall, that means India’s penetration rate is well behind the ratios of the United Kingdom (12.5 per cent) Japan (10.5 per cent) South Korea (10.3 per cent) and the United States (9.2 per cent).

One reason for this problem could be that insurance remains a ‘push’ rather than a ‘pull’ product in India. Due to low per capita income and poor education, not many Indians are aware of insurance products and their benefits, and there is a mismatch between expected returns and actual benefits. The problems in this sector are high customer acquisition costs, low customer-centric service excellence, low ability to detect frauds, focus on actuarial pricing, regulatory misunderstanding and settlement procedures.  The sector will grow naturally if it lowers the costs of acquiring new customers and improves customer service regulations and settlement procedures.

IRDA has set up a campaign to gauge how people view insurance products across states and union territories, which should encourage companies to offer insurance to people and businesses in small towns and less-developed districts. The campaign will improve insurance penetration and encourage companies to improve their distribution networks, manage risk more effectively and, most importantly, create insurance products that appeal to a more diverse range of clients.

IRDA estimates that if insurance companies are to perform all these functions while maintaining and increasing their customer base they will need to raise approximately 612 billion rupees. But Indian capital markets will not be able to provide this amount of money. An increased FDI cap would remove the problem because inflows would fulfill this much-needed long-term finance requirement. They would also help finance the current account deficit. Along with funds, large foreign firms would bring better insurance products and superior technological capabilities. Foreign know-how would also help the Indian insurance industry improve the way it underwrites and manages claims, and analyses actuarial data.

The insurance sector in developed countries is very sophisticated and competitive compared to India. For example, the insurance sector in India has barely 51 participating firms and US$50 billion in gross premiums, while in the United States there are 1000 insurers and gross premiums exceed US$700 billion. American insurers have both the experience and capital necessary to help expand the Indian market. Health insurance, which is the fastest-growing insurance sector in India, looks to have the most potential.

Finally, the way the global insurance industry relates to its customers is changing. Insurance agents are no longer mere intermediaries between customers and the company; they are advisors who provide significant financial assistance to their clients. A larger inflow of foreign capital and ideas would help train Indian agents to provide this service and enhance customer satisfaction as a result. A better relationship between agents and clients would eventually lead to a decrease in insurance premiums because of enhanced efficiency and innovation in the sector.

Cabinet’s approval of a bill to increase the foreign investment limit indicates that the government recognises the industry’s needs. But the bill must still pass Parliament. The insurance sector needs to grow to protect the vulnerabilities of millions against uncertainty and disaster, but growth depends on effective regulation and a competitive market. Increased foreign investment in the sector would bring in much-needed capital, competition and efficiency. It would also reduce regional disparities and enhance insurance penetration in hard-to-reach areas. But a proper regulatory system needs to be in place to make sure crises, like the situation in 2008, do not occur in India.

Pravakar Sahoo is Associate Professor at the Institute of Economic Growth, Delhi University.