Budget 2025 can unlock new opportunities for insurance sector. What about 100% FDI?

India Budget: The Indian insurance sector is at the cusp of a new growth trajectory that needs policy intervention by the government. The Union budget will provide an excellent opportunity to pump up the insurance sector, which is expecting a reduction in GST rates - to make health and term insurance more affordable, an increase of tax exemption to encourage people for buying insurance policies that would ultimately provide security, long-term capital and ease the inflationary effects on individual tax payers.

It may also help, if the Union budget provides incentives for insurance in rural India which will significantly impact expanding and promoting insurance in those areas where penetration is very low.

Also Read: How about a vision for modernising taxes and business growth

Budget's Vision: India as a Global Insurance Leader

India, which is ranked as the 10th largest insurance market globally, is projected to become the sixth largest by 2032. To reach that kind of growth, there is a need for more players, more technological advancements, and the use of digital to get into deeper pockets.

Budget to Drive FDI in Insurance

The government’s proposed move to permit 100% Foreign Direct Investment (FDI) in the sector will help facilitate entry of more players into the Indian market, thereby ushering in a new wave of competition, innovation and growth.

In a capital-intensive market like insurance, the proposal will help inject substantial capital into the sector, enabling insurers to expand their operations, enhance their product offerings, and strengthen financial reserves.

Moody’s recent ratings have highlighted significant foreign direct inflows into the insurance industry, if the government goes ahead with a proposal to increase the FDI from 74% to 100%. It can also impact improved margins for Indian insurers, listing of insurance companies and newer tax rules.

It will help in strengthening and modernizing the insurance industry and attract significant interest from global insurance players. Many international insurers can enter the Indian market which will drive Indian insurers to adopt global best practices in product and processes, innovation as well as cutting-edge technologies.

Insurance players globally have been undertaking significant strides on the technology front by betting big on advanced technologies such as AI, ML and big data analytics. These could help India’s insurance sector by bringing in fresh perspectives on underwriting, claims management and customer service.

Along with this, the Bill also proposes allowing a single composite license for life, health, and general insurance, which will work as a one-stop shop for addressing consumers’ needs, making it more convenient for them to access products for all their insurance and protection requirements.

Budget to Enable Composite Licenses and Reduce Entry Barriers

The proposal of differential capital and reduction in solvency norms will also help reduce entry barriers for new entrants into the market. All these measures put together, will help deepen the insurance market in India, leading to more innovation on the product front. For a country like India, which has a significant share of population living in the rural and semi urban markets, innovation on products to suit the varied needs of customers and proper pricing will play a crucial role in higher uptake of insurance products.

Budget to Revolutionise the Insurance Agent Model

The proposed regulations have also highlighted about allowing insurance agents to offer policies from multiple insurers, in place of the tied agency model. For decades, the insurance industry has been driven by the tied agent model, where agents promoted insurance products of the company they have been associated with. In most cases, consumers bought products which were encouraged by the agents and often ended up buying insurance, which did not suit to the best of their needs.

The proposal will help consumers receive multiple options for insurance products and they can choose the most suitable insurance, as per their requirements. The tied-agent model has not been able to reach more than 100 million consumers, residing in the top 50-60 cities. Over the years, the model has not succeeded in the smaller cities. Allowing insurance agents to offer multiple insurance policies, will help the sector reach out to those 700 million consumers, who need financial protection, but have not been reached out to.

With proposals to increase FDI limit, composite license, insurance agents being allowed to offer multiple insurance policies, expectations for reduction in GST; the insurance industry is filled with optimism for budget 2024-25. Most importantly, consumers should benefit from the budget and the industry should collectively look at increasing the insurance penetration beyond the current 3.7%.

(The author Balachander Sekhar is the Co-founder & CEO at RenewBuy)