Economy

Budget 2020: Govt needs to tweak these rules to increase insurance penetration

Updated : January 30, 2020 06:22 AM IST

The government should take a re-look at the imposition of GST on pure protection insurance products.

The FM must consider easing restrictions on remuneration earned from non-mandatory risk products

While there is no denying that the government has worked hard with the stakeholders to map out a robust policy framework for the insurance ecosystem to overcome legacy problems, I feel that policy changes without pragmatic action on the ground have a limited impact in triggering growth.

Now that a set policy has been adopted and the industry has accustomed itself to them, the government should focus on introducing the next set of reforms in Budget 2020 that enable increasing customer onboarding. After all, the key to building a sustainable insurance industry is to expand the consumer base that shall not only increase the overall insurance penetration in the country but also expand the number of households having a financial safety net.

Background

As the countdown to Union Budget 2020 begins, speculations are running high regarding what Finance Minister Nirmala Sithraman’s ‘Bahi Khata’ has in store for India once it is unveiled on February 1 in the parliament. The industry, as well as the common taxpayer, are hoping for a budget which spurs demand in the economy.

Keeping in mind the critical role insurance can play in reducing health-related spending of the government, I feel that the government should consider revising some regulations, which can further incentivise insurance as a priority purchase for Indians.

GST on pure life, health insurance must be removed

Let’s consider some alarming facts before moving forward. The healthcare inflation in India has witnessed a steep rise from 4.39 percent in 2017-18 to 7.14 percent in 2018-19. In fact, an analysis of the data compiled by the National Sample Survey Office (NSSO) reveals that the annual health expenditure of 1 in 5 Indian households or 36 million households exceeds their annual per capita consumption expenditure, putting them in the category of households facing catastrophic health expenses. On the life insurance front according to the Reserve Bank of India data, the sum insured to GDP ratio stands at paltry 58 percent (RBI Data) in comparison to advanced economies like the US, Germany, South Korea and Japan which hover around 105-321 percent and the grim reality is the lowly 3.69 percent insurance penetration of our country, which is among the lowest in the world.

Going by pure facts, it is prudent to question the rationale behind the imposition of service tax in 2014 and now 18 percent GST on the insurance premium. In India, most of the social security programmes are aimed at the bottom strata and fiscal restrictions make it impossible for expanding the scope any further, it is the middle class that takes the hit as they are left fending for themselves. Not only do they pay taxes honestly, but they also fuel demand in the economy. Therefore, the government should take a re-look at the imposition of GST on pure protection insurance products. The GST is unnecessary leading to higher costs on a purchase being made out of pure necessity and not for luxury. Removal of GST on these protection products will enable 230 million + households to create a safety net for themselves.

Restrictions on remuneration for sale of insurance

Consumers are slowly moving to online platforms because the business model offers transparency, empowerment, and freedom of choice with the cherry on the cake being the high-level of customer-centric services that are offered to them. This has been made possible due to the investments that businesses such as ours are making in the adoption of technologies such as Artificial Intelligence, Machine Learning, Text-to-Speech, Progressive Learning, etc. However, all this has a cost attached to it and eventually takes a toll on our bottom line. Thus, for an industry already operating on wafer-thin margins, the government must consider easing restrictions on remuneration earned from non-mandatory risk products (i.e. – pure life and health insurance). These restrictions make it difficult for the industry to build long term sustainable businesses. Furthermore, these limitations are impinging upon product innovation in the insurance industry. We must appreciate that apart from motor and two-wheeler insurance, all other General or Life Insurance offerings are push products and not pull products. Thus, for the sake of innovation and transparency, there is an inherent need for easing the strictures placed on the remuneration that an aggregator can earn.

This will help with the penetration of insurance in its right earnest, ensuring social security for the households through insurance, being an incentivized priority for distributors in the country.

Incentivising digital transactions

There has been a constant focus on encouraging people to use the digital medium for carrying out transactions. While the efforts have borne fruit among the relatively younger segment of the population the same cannot be said for those who are in the age group of 45 years and above. Those belonging to that age group have inertia to move away from cash and mind you, according to the projections for 2020, this segment will constitute nearly 30 percent of India’s population. Their reluctance can be attributed to a lot of factors like not trusting the online medium. But if we create policies, which become the differentiators, then rapid progress can be made. For instance, the government may consider coming up with a policy wherein train tickets can only be purchased online for a specific hour during the day to encourage adoption. For businesses, the government could consider reducing compliances which are generating a certain percentage of the revenue online. What I am saying is that now is the time to move from vanilla incentives like cashback which is being done by businesses. However, to bring about a change, pragmatic policy changes are required. To sum up, the focus should shift from policy to adoption of technology and for that incentives need to be doled out. What these incentives could be is for the government to decide.

Removal of duplication of KYC

Convenience, Choice and Ease of Buying are the three differentiators that an online platform offers consumers. However, the duplicate process of KYC verification being followed currently negates these differentiators. In any case, online transactions paid through KYC verified bank accounts can be used for insurance purposes as well. Meaning, when the insurance premium is paid through digital means i.e. through a KYC verified bank account, there is no need for the insurer to conduct KYC of the customer again. The government should consider doing away with duplication of KYC process in Budget 2020. Furthermore, digital capability between banks and insurance companies/insurance intermediaries should be built to simplify the process. This will ensure that there is no loss of time in KYC verification of the customer, lowers costs for all parties involved and additionally, it will fast-track the entire process involved in insurance purchase for the customer.

Alok Bansal is CFO at Policybazaar.com. The views are personal.