The proposed consolidated rules could stir things up in the insurance industry, especially for general insurers
The proposed amendments to the insurance laws that are likely to be introduced in the Budget session of the parliament could bring about widespread changes in the insurance sector. This is because it is rethinking the way the insurance industry works. And while this opens up several opportunities for new and existing players, it can also disrupt the style of many established players.
Let’s look at the changes.
RULES FOR SWITCHING INSURANCE
Of the several proposed changes, the most important is the one regarding the types of insurance businesses can carry out and the amount of capital required to enter these. Until now, there were mainly three types of insurance: life insurances, general insurers and private health insurers. With the proposed amendments, these lines become blurred. Any insurer can obtain a license for any line of business be it life, general or life, and/or among them any particular part of those lines of business. The insurer may also choose to limit coverage to a specific area only.
So, effectively, HeroMoto or Bajaj Auto can decide to go in for two-wheeler insurance only. Or a local bank in Assam can start providing insurance to tea gardens or a bank in Kerala can provide insurance to local fishermen. Similarly, life insurance can fit into health insurance, which is a long-term industry requirement, while health insurance can fit into other lines of general insurance or even life insurance.
This opportunity and lower capital requirements, linked to the nature and scope of the business to be run, could lead to the entry of fewer new players, while allowing existing players to hone or expand their roles. Since life insurance is not an easy business to get into and requires a certain scale of operation, there is a threat of major disruption in the general insurance sector. This may distort pricing and put pressure on the profitability of some general and health insurance companies in the short term.
The proposed rules while opening up the entire insurance space to players also have a clause that allows the insurance regulator to allow insurers to distribute other financial products. Whether this will be limited to other insurance products or even mutual funds and bonds is unclear. Again, whether this will require buy-in from other regulators is unclear. However, in both cases, this can be a win-win.
Health insurance companies that do not want to enter health insurance, for example, can now sell health insurance products made by other health insurers. Also, if allowed, insurance companies with large agency-driven businesses like LIC and Star Health Insurance can use their network to sell mutual funds and bonds. Although it is possible that several agents are already doing so under different organizations, I suspect that there will still be a significant portion of such agents and that would mean business expansion.
For those looking to invest in insurance stocks, one can expect the dice to be loaded in favor of life insurance brokers with these proposed policies and general insurance representatives. Therefore, if you want to bet on this sector, trying to see the opportunities that are not important in life insurance can be fruitful.
First published: IST