Upcoming Reforms in Life Insurance

After working hard on FDI and then on equities market, Finance Minister P Chidambaram is working on reforming Life Insurance Sector.

Some of the proposed reforms in this sector are as follows:

1. Reduce service tax on at least first insurance premium

With this reform, the first premium for an insurance product will become cheaper. The same reduction of service tax will apply on single premium products.

2. Insurance premium counted above limit of Rs 1,00,000 in Section 80C for income tax deduction

This may be a welcome move for taxpayers but not for non-taxpayers. With farming still primary profession of India and farming income being already non-taxable so this reform may not be an attraction.

3. Banks may sell insurance from more than one insurance companies

Banks will act as brokers for insurance companies and they may be required to open separate firm as insurance brokers. With a bouquet of insurance products in hand, a bank’s representatives will be in a better position to offer product that suit the most to a consumer’s individual needs. Plus, there will be a competition among insurance products giving better benefit to end customers.

4. Introduce “Use and File” instead of “File and Use” System

At present, if an insurance company needs to introduce a new insurance product then the company needs to file that product with IRDA (Insurance Regulatory and Development Authority). Only upon approval, the company may sell that product to customers. The reform is that the company need to file for approval with IRDA provided the product complies with conditions attached to the standard product and may consider deemed approval after 15 days of filing for approval.

However, there is a criticism that insurance companies will introduce products that are harmful (or at least not beneficial) to customers. Read comments from article on ET.

5. Insurance companies may invest more in not-the-highest grade investment products

At present, insurance companies must invest at least 75% in AAA instruments. With the reform, about 12.5% more capital will be available for investment in non-AAA products. With this investment the return on investment will be higher.

The flip side is that investment in lower grade investment product carries more risk.

6. More money made available for Infrastructure development

IRDA will allow investments in an infrastructure SPV (Refer wiki or investopedia) floated by any company where the SPV is a wholly-owned subsidiary (WOS) of the parent company.

In sum, Finance Ministry is making efforts to invite people to invest in insurance products. The money spent now will act as safety net for people and drive financial turbine to generate growth even if it carries some (may be substantial) risk.

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