Financial Services
The roadmap and the push for reforms by IRDAI
07 Sep 2022
The pandemic has increased awareness about Insurance – especially Life and Health. This did provide significant tailwinds to the business growth in these segments. However, the Insurance Penetration at around 4%, and the Insurance Density of US$ 78 in India remains low. Worryingly, the Protection Gap stands at 83% - with longer life spans, this will be a big challenge in the coming years. The upside for Insurance growth is thus, significant. Digital transformation fueled by the pandemic has also brought opportunities for Insurers and Consumers to the fore. Meanwhile, the Government and the Insurance Regulator, IRDAI, have taken a series of enabling steps last year to increase Insurance Penetration, ensure policyholder protection, and improve the Ease of Business and Innovation. 
In the last Financial Year, the FDI Investment window for Insurers increased to 74% to attract foreign capital and expertise. There have been a couple of transactions where foreign shareholders have cemented their commitment to the Indian market by increasing their shareholding while others are evaluating their options. IRDAI has been nudging companies to list on the bourses, improving transparency and governance. While executed in a challenging market environment, the LIC IPO was a step in this direction. With PE investments in Insurance companies, the listing can be a lucrative exit option in supportive market conditions. The General Insurance Business (Nationalization) Amendment Act, 2021, passed by the parliament in August 2021, now allows the central government to dilute its stake in state-owned general insurers below 51 percent. This effectively means that these insurers can be privatized.
Digital has now become an imperative for Insurers to enable seamless customer experience, last mile distribution, product innovation, and claims processes. With Digital being embraced by the consumers, there is a tremendous opportunity for innovative solutions across the customer/ product lifecycle.  Furthering the FinTech penetration in the insurance sector, the IRDAI had created a ‘Regulatory Sandbox’ to use creative ideas to increase the pace of innovation. Insurers are experimenting with innovative solutions in the Sandbox across various functions. Seeing the traction, IRDAI has extended the validity of ‘Regulatory Sandbox’ regulations for two years.
In the past few weeks, we have seen more enabling regulations to increase ‘Ease of Doing Business’ and spurring faster innovation, ultimately seeking to increase Insurance protection and benefitting policyholders.
IRDAI first allowed Insurers to offer Health and most General Insurance products to customers without the regulator’s approval, thus radically moving from a “File and Use” approach to “Use and File.” This was extended to Life Insurance products (except individual savings, pensions, and annuity). While this intervention enables Insurers to be more responsive, flexible, and agile, it also places great responsibility on responsible product design and transparency. The time for taking a new product earlier was a couple of months. Insurers are expected to take advantage of the new provisions to respond faster to customer requirements and aim for drastically reduced timelines for ‘Go To Market.
The solvency margin requirement for Insurers doing crop business has also been relaxed, potentially freeing up capital to underwrite more business.
A stated approach of IRDAI is to have principle-based regulations instead of a rules-based regime. It has formed Working Groups from the industry to advise on further reforms in law, products, distribution, finance, health, finance, taxation, ease of doing business, etc. Among the proposed reforms in life insurance are the standardization of products and simplifying regulations, specifically on calculations of management expenses for these companies.
An interesting proposal is whether to allow Life Insurance companies to sell Health Insurance. Six years ago, the regulator had disallowed this, but now again, the same has come up for consideration. The driving force is the need for faster and enhanced Health Insurance coverage - with an apparent Affinity between Life and Health products and the wider distribution reach of Life Insurers, they may be able to ensure far higher coverage. However, this has potential ramifications on the General Insurance and Standalone Health Insurance companies. They have introduced innovation and focused on Health Insurance in the past few years. Also, it would mean that the Life Insurers would have to create structures and Claims/ Service processes for Health, especially Indemnity products.
Going ahead, change will be faster than ever before. Business transformation will be driven by digital transformation across the entire value chain – distribution, sales, claims, operations, service, etc. Integration of InsurTechs in each of these domains will accelerate. While the methods and speed adopted by Insurers will vary, it is undisputed that the approach will have customer-centricity at its core.
Thus, the enabling approach of IRDAI assumes great importance in shaping the change. With the distinct reforms-oriented approach and maturing of the industry, it seems that IRDAI is now moving from “R” to “D” - emphasizing more on the ‘Development’ part of its role. It is now up to the industry to seize the opportunity while at the same time living up to the faith reposed in it by institutionalizing a more mature and responsible approach.

Author: Vishal Bhave; Practice Leader, Insurance, Praxis Global Alliance

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