Financial Intermediaries: Insurance Sector: Issues, Reforms, Bancassurance, FDI

8/11/2019 Financial Intermediaries: Insurance Sector: Issues, Reforms, Bancassurance, FDI

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- Mrunal - http://mrunal.org -

[Economic Survey Ch5] Financial Intermediaries:

Insurance Sector: issues, reforms, Bancassurance, FDI(part 1 of 3)

Introduction1.Insurance: intro2.Insurance Penetration3.Insurance density4.FDI in insurance5.

Insurance amendment bill 20086. What is Bancassurance?Example of BankcassuranceBancassurance: pros and cons

7.

Chindus revival package for insurance sector8.Chindus Budget speech: Insurance9.Reforms

New branchesBanks as insurance brokersClaims

New schemesIntegrated social security package

10.

Government Schemes: Insurance Aam Admi Bima Yojana(AABY) Janshree Bima Yojana (JBY)Universal Health Insurance Scheme (UHIS)Rashtriya Swasthya Bima Yojana (RSBY)Pravasi Bharatiya Bima Yojana

Agro InsuranceRajiv Gandhi Shilpi Swasthya

11.

Mock Questions12.

Introduction

Fifth chapter of Economic Survey is about Financialintermediaries.

You already know that nancial intermediaries = banks,NBFC, pension-insurance-mutual funds etc. they actsmiddlemen between lenders (people) and borrowers (govt.and businessmen). for details given in earlier article, click me


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The fth chapter, discusses various issues, reforms relatedto nancial intermediaries in four sectors: 1) Banking, 2)Capital market, 3) Pension and 4) Insurance.

Pension sector Already discussed in NPSarticle click me

Insurance sector Discussed in the presentarticle. (part 1 of 3)Capital market: QFI, FII, SEBIreforms, ECB etc.

Will be published soon. (inpart 2 of 3)

Banking sector: NPA, NBFC,RRB

Will be published soon (inpart 3 of 3)

lets start with Economic Survey >> Chapter 5> Financialintermediaries> insurance sector. The chapter itself, barely

contains 4-5 paragraphs on Insurance, but this article alsocovers budget-speech and various insurance schemes given inIndia Yearbook.

Insurance: intro

Insurance funds = important nancial intermediaries forIndia. They help move peoples savings into Governmentand corporate securities.Insurance industry in India, can be classied intofollowing

Insurer ExampleLife LIC, ICICI prudential,

Non-life/Generalinsurance (e.g. health,travel, business, marine,

re)

ICICI Lombard, Oriental, NewIndia, United India. Among them,three are standalone Healthinsurance companies

Star health1. Apollo Munich2.Max BUPA 3.

Re-insurer GIC

Specialized

Export credit guaranteecorp.

1.

Agriculture insuranceCompany of India ltd. (AICIL)

2.


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The basics of IRDA, Insurance ombudsman functions, various types of policies etc. already explained in earlierarticle click me

Insurance Penetration

It is the ratio of premium underwritten in a given year vs.gross domestic product (GDP).It helps measuring growth in the insurance sector in acountry.

Insurance density

ratio of premium underwritten in a given year to total

population (measured in US dollars for convenience of comparison).

Issue?

In past, (before LPG reforms of 90s), Indias Insurancepenetration and density were very low because insurancesector was monopolized by public sector companies.But Post liberalization, and with the entry of private sectorcompanies, both insurance penetration and density have

increased.However, Indias insurance penetration and density arestill low as compared to other developing countries of theworld.

FDI in insurance

Before 1999, Insurance sector in India was monopolizedby public sector companies: LIC + GIC (and GICssubsidiaries).

1999 was the reform year insurance sectorInsurance Regulatory and Development Authority(IRDA) Bill passedPrivate sector companies can enter insurancebusiness (they started doing so from 2000)26% FDI allowed in Insurance sector.

2012: As of 2012, there are 52 insurers in India.Chindu gave 12 point revival package for insurancesectorCabinet approved 49% FDI in insurance sector.


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But insurance amendment bill is not yet passed in theparliament yet.

FDI in insurance = will increase competition, = moreefficiency, innovation, cheaper premiums for policyholders; Thus FDI ultimately benet the customers, andhelp improving Indias insurance penetration and density.But some political parties oppose it saying, FDI ininsurance = bad idea. Those unscrupulous privateinsurance companies will invest policy holders money intobad corporates and it will lead to something bad likesub-prime crisis.What they dont see is: Even China allows 50% FDI inInsurance, Malaysia 70%, and Mexico has 100% FDI ininsurance sector.

And all these countries are doing ne. Hence, the fearsregarding foreign investment in insurance= misplaced.

Insurance amendment bill 2008

Salient features are

(list is denitely not exhaustive)

Increases FDI from 26% to 49%health insurance policies would cover sickness benets onaccount of domestic as well as international travel.Reduced capital requirement for new company wanting toenter health insurance.Policy can be repudiated on any ground, includingmisstatement of facts etc.within rst three years of purchase.Public Sector General Insurance Companies and GIC willbe permitted to raise capital from the market, as long asGovernments shareholding doesnt fall down below 51%.

Appointment of agents is to be done by insurance

companies subject to the agents meeting thequalications, passing of examinations etc. as per IRDAsguidelines.IRDA is empowered to take action against agents toprotect the insurance customers.

What is Bancassurance?

Bancassurance = Arrangement through which banks sellsinsurance products. (and earns Commission)

Bancassurance system appeared in France in the 80s. According to Insurance law: one bank can work as


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Bankassurance agent for only one insurance company.(one for life insurance and one for non-life insurance)Meaning one bank cannot sell policies of multipleinsurance companies (unlike a stationary shop owner- whocan sell pens from multiple brands such as Raynolds,Parker, Luxor, Cello etc.)But this one bank one insurance co. system was changedafter Chindus revival package.

Example of BankcassuranceType of insurance Insurance co +bank Life ICICI prudential ICICI Bank

SBI-life SBINon-life ICICI Lombard ICICI bank

TATA-AIG HSBC, IDBI etc.

Bancassurance: pros and consPros Cons/Anti arguments

LIC has a big network of agents and offices butprivate Insurancecompanies dont. HenceBancassurance systemhelps the privateinsurance companies toutilize the big network and manpower of a bank without much investment.It helps the reach of insurance products to themasses.Bancassurance increases

Insurance density andinsurance penetration.Increases the competitionbetween public andprivate sector insurancecompanies = betterprices, products andservices for customers.

Account holder doesntneed to visit multiple

offices one for bankingand one for insurance.

Banks have hugedatabase of customertelephone numbers.They annoy customerswith stupidtelemarketing calls forselling insurancepolicies.Bank employees donothave in-depth knowledgeof insurance products.They only care aboutmeeting the sales-targets. They

sometimes misinformthe customers aboutfuture benets / returnsto sell a particularinsurance policy.(^although samecriticism applies forinsurance agents also,they push for productsthat give more

Commission.) soultimately youve to do


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Now bank is a big mallwhere he can doshopping for both.

bit of a research andcomparison of variousinsurance policies beforeinvesting into one.

Chindus revival package for insurance sector

He released this in late 2012. Total 12 points, important onesare

New products

An insurance company has to seek approval from IRDA,before launching a new product. According to this plan,IRDA must give that clearance within 30 days.Life insurance companies can introduce a product evenwithout getting formal approval from the IRDA. (in somespecic conditions).

Bank brokers

Banks can work as brokers of Insurance products. (earlierthey could work only as agents: meaning as an agent,one bank could tie up with only one insurance co.)

But now as a broker One Bank can sell insuranceproducts of multiple insurance companies.Banking Correspondence agents can sell micro-insuranceproducts.

KYC

IRDA will accept Know Your Customer (KYC) check doneby banks.

Taxation

Service tax to be cut on single premium policies and 1st year premiumGovernment is thinking about offering some more incometax exemption, for investing in insurance products.

Investment

Investment norms for Insurance companies=relaxed.

Life insurers can invest in infrastructure SPV (specialpurpose vehicles) of any rm (earlier they could only


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invest in public sector undertakings SPV only).

Chindus Budget speech: Insurance

Reforms

We need to increase insurance penetration in India. Ive anumber of proposals that have been nalized inconsultation with the regulator, IRDA.

New branches

Insurance companies will be empowered to open branchesin Tier II cities and below without prior approval of IRDA.

All towns of India with a population of 10,000 or more willhave an office of LIC and an office of at least one publicsector general insurance company. I propose to achievethis goal by 31.3.2014.

Banks as insurance brokers

KYC of banks will be sufficient to acquire insurancepolicies.Banks will be permitted to act as insurance brokers sothat the entire network of bank branches will be utilizedto increase penetration.Banking correspondents will be allowed to sell micro-insurance products.Group insurance products will now be offered tohomogenous groups such as SHGs, domestic workersassociations, anganwadi workers, teachers in schools,nurses in hospitals etc.

Claims

There are about 10,00,000 motor third party claims thatare pending before Tribunals/Courts.Public sector general insurance companies will organiseadalats to settle the claims and give relief to the affectedpersons/families.

RSBY extended

The Rashtriya Swasthiya Bima Yojana already coversBPL families.

Now, Itll cover rickshaw, auto-rickshaw and taxi drivers,sanitation workers, rag pickers and mine workers as well.


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Integrated social security package

We need a comprehensive and integrated social securitypackage for the unorganised sectorThe package should include life-cum-disability cover,health cover, maternity assistance and pension benets.

At present schemes like AABY, JSBY, RSBY, JSY and IGMSY are run by different ministries and departments.I propose a convergence among these schemes so we canevolve a comprehensive social security package. Itllbenet the poorest and most vulnerable sections of society.

Government Schemes: Insurance

From, INDIA Yearboook

Aam Admi Bima Yojana(AABY)

Rural landless householdsFor the death / disability of Headof family / one earning memberof the family.+scholarship for kidsimplemented via LIC

Janshree Bima Yojana (JBY)

Started in 2000 and merged with Aam Admi Bima Yojana in 2012,for better convergence.Provided Life insuranceprotection to the rural and urbanpoor persons below poverty lineand marginally above the povertyline.Insurance cover 30k (naturaldeath)Rs.75k (accidentaldeath/disability)implemented via LIC

Universal HealthInsuranceScheme (UHIS)

Started in 2003Healthcare for BPLMedical expenses upto Rs.25k Maternity benet givenPre-existing diseases also


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covered.

RashtriyaSwasthya Bima Yojana (RSBY)

Started in 2007Smart card based cashless healthinsurance.BPL family (upto 5 members) inunorganized sector.In Budget 2013, Chinduextended this scheme torickshaw, auto-rickshaw and taxidrivers, sanitation workers, ragpickers and mine workers.For medical expenses uptoRs.30k per year.Premium sharing: centre vsState=75:25, incase of Northeast, 90:10

Pravasi BharatiyaBima Yojana

For emigrant workersMinimum Rs.10 lakh insurancecover

Applicable during employmentcontract period abroad.For sickness, accidental death,disability while being abroad.

Also cover expenses fortransporting dead

Also for legal expenses related toemployment contract disputeabroad.body/sick/disabled person back home.

Agro Insurance

Two schemes:1) NAIS (National agricultureinsurance scheme): available toall farmers, irrespective of theirfarm size. Protects them againstcrop losses due to naturalcalamity.2) Weather based crop insuranceschemeBoth are run by Agriculturalinsurance company (AIC)


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Mock Questions

For the given year, Insurance penetration is measured as:Ratio of Premium underwritten to No. of People in the18-60 age group

a.

Ratio of Premium underwritten to GDPb.Ratio of Premium underwritten to Total populationc.None of aboved.

1.

For the given year, Insurance Density is measured asRatio of Premium underwritten to No. of People in the18-60 age group

a.

Ratio of Premium underwritten to GDPb.Ratio of Premium underwritten to Total populationc.None of aboved.

2.

Bancassurance means Arrangement in which Insurance company providesbanking services

a.

A bank giving security for Indian corporate to raisecapital from abroad.

b.

A Non banking Finance company providing assuredreturns on its deposits.

c.

Arrangement in which Bank sells insurance products.d.

3.

Bancassurance leads toIncrease in Banks NPA a.

Decrease in Banks NPA b. Increase in insurance penetrationc.Decrease in insurance penetrationd.

4.

Bancassurance involves ________ and ________.Bank, NBFCa.Bank, MNCb.Bank, insurance companyc.None of aboved.

5.

The Insurance amendment bill aims to increase FDI limitin Insurance sector to

26%a. 49%b.51%c.None of aboved.

6.

Correct Chronology (older to newer)IRDA, SEBI, PFRDA a.PFRDA, IRDA, SEBIb.SEBI, IRDA, PFRDA c.None of Aboved.

7.

An urban BPL family is not eligible for

Janshree Bima Yojanaa. Rashtriya Swasthya Bima Yojanab.

8.


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Aam Admi Bima Yojanac.None of Aboved.

Incorrect Statement about Rashtriya Swasthya Bima Yojana

It is a smart card based cashless health insurancescheme for rural households.

a.

Premium sharing between Centre :State is 50:50.b.Both A and Bc.Neither A or Bd.

9.

Incorrect match Aam Admi Bima Yojana: urban and rural BPLa. Janshree Bima Yojana: Rural landlessb.Both A and Bc.Neither A or Bd.

10.

What are the similarities between Aam Admi Bima Yojanaand Janashree Bima Yojana?

Both provide life insurancea.Both are implemented via LICb.Both A and Bc.Neither A or Bd.

11.

Who among the following, is/are eligible for RashtriyaSwasthya Bima Yojana (RSBY)?

Rickshaw and taxi driversa.Rag pickersb.Mine workersc.

All of Aboved.

12.

Mains

Pravasi Bharatiya Bima Yojana (5m)1.Rashtriya Swasthya Bima Yojana (RSBY) (5m)2.

Janashree Bima Yojana? (5m)3.Meaning and advantages of Bancassurance (5m)4.Write a note on the salient features of Insurance(Amendment) bill. (10m)

5.

Examine the need for a comprehensive social securityscheme in India. (12m)6.Write a note on Finance Ministers 12-point plan forrevival of Insurance sector. (12m)

7.

Interview

Are you in favor of increasing the FDI in insurance sector?1.Suggests the measures required to increase insurancepenetration in India.

2.


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Published on 15/04/2013 @ 12:01 am under Category: Economy

URL to article: http://mrunal.org/2013/04/economic-survey-ch5-nancial-intermediaries-insurance-sector-issues-reforms-bancassurance-fdi-part-1-of-3.html

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Financial Intermediaries: Insurance Sector: Issues, Reforms, Bancassurance, FDI