Citing the urgency of implementing insurance reforms, the ordinance route has been used to disregard the Parliamentary logjam and advance the much-awaited Insurance Laws (Amendment) Bill, 2014 (Bill). The Ordinance has been promulgated by the President of India and hence, carries the same force and effect as prevalent law. The fate of the Ordinance depends on what happens when it is presented before both houses of the Parliament in the next Parliament session.
While the fate of the Ordinance may be uncertain, the Indian insurance industry and foreign investors are very keen on the ”green signal” for many of the changes it proposes. The Government appears to have taken a considered look at the interests of various stakeholders and referred to the Select Committee’s recommendations while drafting the Ordinance.
It is worthwhile to look at some of the pronouncements in the Ordinance; however, the most talked about is the increase in Foreign Direct Investment (FDI) cap from 26% to 49%. In addition to this welcome change, the Ordinance has also enabled Foreign Portfolio Investment (FPI) in the insurance sector by introducing a composite cap of FDI and FPI investments of 49%, bifurcation of which will subsequently be notified. The Ordinance clearly stipulates domestic ownership and control of Indian insurers.
The above reforms have far-reaching effects on the capital-starved insurance sector. On one hand, the Indian insurers will benefit from availability of capital and foreign expertise and on the other, the foreign players will have access to the developing Indian insurance market. Insurance penetration is an important yardstick in considering the economic development of a country. The reforms introduced are expected to help on this front and it is envisioned that the customers will enjoy a better experience.
Several Indian conglomerates are in advanced stages of discussion with foreign investors and large insurance groups to access the increased FDI limit. However, there is lack of clarity on the fate of the Ordinance in the Parliament. Hence, the industry and investors are adopting a ”wait and watch” approach.
Other than changes in the sectorial FDI limit, the Ordinance proposes several reforms for both the insurer and the policyholder. The insurers have been accorded more flexibility in terms of being permitted to appoint agents. However, the insurer will be liable for mis selling of policies and for all acts and omissions and violation of code of conduct by its agents. To increase transparency in operations, the insurers will be required to maintain electronic records of policies it has issued and display the same on its website.
Another noteworthy reform introduced in the Ordinance is the classification and indeed recognition of health insurance as a separate category of insurance. This will bring to attention, the gaping need for health insurance as a separate offering to the Indian population, which was hitherto being provided as an allied service by life and general insurers.
Lastly, the proposal to allow foreign re insurance companies to set up branches in India to carry out re insurance business, which was initially introduced in the Insurance Laws (Amendment) Bill, 2008 seems to have been modified in the Ordinance. As a result, foreign re insurance companies cannot set up a branch office in India to undertake re insurance business, unless such it is located in a Special Economic Zone.
The Ordinance has proposed several other amendments to the Insurance Act, 1938, which are not subject of this article.
The wheels of machinery move slowly indeed and particularly as far as insurance is concerned, they almost grind. The intent of the current Government to bring in reforms needs to be appreciated and recognised. Experts may however, choose to frown upon the Ordinance route to usher in reform whereas the pragmatists may opine that to stop reform is not correct and roadblocks have to be overlooked by whatever means if the country is to progress. One thing is sure though, this move will be debated by many and will be remembered for its boldness and unquestioning intent to usher in financial sector reforms.