“Atmanirbhar Bharat” and insurance Government’s big leap towards making the insurance sector resilient June 2021 “Atmanirbhar Bharat” and insurance | Government’s big leap towards making the insurance sector resilient Introduction Contents 04 Role of insurance in achieving ‘Atmanirbhar Bharat’ 08 Impact of policy measures in recent years 10 3 Recent government measures aimed at complementing sector resilience and self-reliance 16 Global examples of how governments are plugging protection gaps and preparing the sector in meeting emerging challenges 18 Recommendations on how to increase uptake and way forward 20 “Atmanirbhar Bharat” and insurance | Government’s big leap towards making the insurance sector resilient ‘Atmanirbharta’ central to the long-term success of ‘the India story’ There is no doubt that the COVID-19 pandemic has affected At the same time, the insurance sector has also enabled Indian economic growth and consequently, the Indian growth across other sectors. Whether it be real estate, insurance sector’s growth. However, India’s growth story manufacturing, auto, or health – no sector could have taken over the last three decades remains impressive and its up any long-term growth bets confidently if these were not growth potential is favorable. Last year when the Indian backed by underlying insurance policies. Also had it not been government announced its policy framework around for the massive funds managed by both life and general Atmanirbhar Bharat, it was clear that while globalization insurers, a major chunk of investments into infrastructure and dependence on other economies is important, our own and capital markets would not have materialized. Hence, internal economic resilience is completely non-negotiable for ‘Atmanirbhar Bharat’ to meet its desired objectives, it is and we need concrete steps to strengthen it. important that insurance must play a cardinal role – both as a driver and also as an enabler. The narrative remains the same for the insurance sector which has seen superlative growth in the last two decades The sector continues to have tremendous potential in since privatization. While the sector saw short-term impacts improving self-reliance, as its penetration and density have from the ongoing pandemic, its long-term potential remains significant scope for improvement when compared to global unflinching. On one hand, ‘Atmanirbhar Bharat’ can sharply peers. India’s overall insurance penetration rate is just 3.8% raise the insurance sector’s long-term viability, on the other (against a global average of 7.0%) in 2019 (figure 1and 2), hand, a robust insurance sector is an absolute must-have which is almost half of the world average and lags most for the success of the country’s overall ‘Atmanirbharta’ or advanced economies, although it has improved significantly self-reliance. Overall, the insurance sector premiums grew over the last decade. ~11 times in real terms during the period 2000-20, with life premiums up ~10 times and non-life premiums up ~12 times1. This success can be attributed to a combination of multiple enabling factors including robust economic growth, favorable government support, a rapidly growing middle class, rising disposable incomes, and increased awareness about the need for insurance. All these factors signify how a strong domestic market has driven growth over the years. 1. https://www.sigma-explorer.com/ 5 Penetration and density increased steadily … Figure 1. India insurance density (left-axis) and penetration (right-axis) 100 4.0 3.5 80 3.0 60 2.5 2.0 40 1.5 1.0 20 0.5 0 0.0 2014 2015 2016 2017 2018 2019 Density (US$) Penetration (%) … but there is still significant scope for growth Figure 2. India vs. world, density (left-axis) and penetration (right-axis) for 2019 8000 16 7000 14 6000 12 5000 10 4000 8 3000 6 2000 4 1000 2 0 0 US and Advanced Advanced World South China Brazil Russia India Vietnam Indonesia Canada Asia EMEA Africa Density (US$) Penetration (%) Source: Swiss Re “Atmanirbhar Bharat” and insurance | Government’s big leap towards making the insurance sector resilient The sector has considerable coverage gaps across all product lines - nearly 57% of vehicles are uninsured for motor third party insurance and only ~36% of the population has health insurance, therefore reflecting a huge group of unserved customers and potential growth market2. In fact, India’s mortality protection gap (US$17tr) is the highest in Asia, with life insurance sum assured covering only ~1% of the same (figure 3)3. Figure 3. Components of household mortality protection coverage in India (US$tr) Mortality protection gap Source: Swiss Re Moreover, India has the highest number of households with a very high (more than 90% of their protection needs) or high mortality protection gap (50-90% of their protection needs), with 44% of households having a gap in excess of 90% of their protection needs (figure 4). Figure 4. Distribution of gap by severity (India vs. Asian peers) 100% 7% 23% 32% 32% 34% 80% 44% 26% 60% 15% 45% 35% 41% 39% 40% 35% 17% 16% 53% 20% 14% 13% 11% 15% 11% 13% 17% 14% 0% China India Malaysia Thailand Indonesia Hong Kong No gap Medium gap (up to 50%) High gap (50-90%) Very high gap (more than 90%) Source: Swiss Re 2. https://indianexpress.com/article/india/over-50-vehicles-on-road-uninsured-report-7103787/ 3. https://mortalityprotectiongap.swissre.com/#/overviews/India 7 “Atmanirbhar Bharat” and insurance | Government’s big leap towards making the insurance sector resilient 1 Role of insurance in achieving ‘Atmanirbhar Bharat’ Atmanirbhar Bharat, or 'self-reliant India' incorporates the Currently, infrastructure financing is dominated by banks policies announced since the outbreak of the COVID-19 (with infrastructure accounting for 11% of all non-farm credit pandemic – which were aimed at enabling India to become in FY21) and infrastructure NBFCs (such as Power Finance more efficient, resilient, and self-sustaining. Insurance, Corporation, Rural Electrification Corporation, Indian as a means to achieving financial and social self-reliance, Railway Finance Corporation, etc.)5. However, looking ahead, and as a mobilizer of long-term funds to meet India’s insurance companies and pension fund managers should be infrastructural needs, is key in enabling the country to key participants in such funding. achieve ‘Atmanirbharta’. • Insurers and pension funds are most suited for infrastructure financing and funding of long-term bonds, Insurance as a long-term investor since the long-term profile of their liabilities matches in self-sufficiency with the long-term nature of infrastructure funding requirements (long gestation typically varying from 15 to Since infrastructure is the cornerstone of India’s economic 20 years) growth, it requires huge investments across sectors such as power, ports, roads, railways, telecommunication, etc. To implement such a massive exercise, the Government of India launched the National Infrastructure Pipeline in 2019, wherein it planned to invest ~INR111,000 crore in infrastructure projects by 20254. 4.3 lakh crores Cumulative infrastructure investments by the Indian life insurance industry (till FY20) 4. https://www.deccanherald.com/national/centre-plans-invest-rs-111-lakh-crore-in-infrastructure-projects-under-nip-gadkari-928461.html 5. https://rbi.org.in/Scripts/Data_Sectoral_Deployment.aspx 9 Current contribution by the life insurance sector to India’s Insurance as a means to achieve infrastructure funding remains suboptimal, with cumulative investments contributing to less than 5% of India’s future financial and social self-reliance infrastructure funding requirements. However, certain enabling policy measures can help ensure insurers apportion Insurance remains a key tool to achieve financial and social a greater share of investments towards this space. self-reliance, as it is a product of farsightedness and present sacrifice for future anticipated gains or indemnification of • IRDAI can potentially reconsider the prescribed cap losses. of 5% for insurance companies’ investment in a single infrastructure investment trust or InvIT (preferred route to Insurance acts as a protection against unforeseen events raise infrastructure funds currently)6 such as death or incapacitation of the breadwinner of the family, ensuring that a family continues to enjoy the • ►PFRDA currently prescribes a minimum credit rating of same financial and social status as before. It also enables AA for the sponsor of an InvIT. As InvITs are independent policyholders to account for contingencies and delay of of their sponsors, the rating threshold can be made income, by building a corpus to take care of events such as applicable only to InvITs and not the sponsors7 loss of job, retirement and family needs, etc. In India, Article 41 of our Constitution requires the State (within limits of its economic capacity and development) to make effective provision for securing the right to work, to education, and to provide public assistance in case of unemployment, old age, sickness, and disablement. Part of these obligations is met through the mechanisms of life, health, and accidental insurance. Some of the legislations passed by the Government of India as part of its efforts to provide social and financial security to its people include the Workman Compensation Act of 1923, 6. https://dea.gov.in/sites/default/files/Report%20of%20the%20 Employee State Insurance Act of 1948, Motor Vehicle Act Task%20Force%20National%20Infrastructure%20Pipeline%20 of 1988 (amended in 2019), Public