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Editorial

ET EDIT -Large Not the Reform Insurance Needs The focus should be on improving reinsurance

June 15, 2019 05:50 AM

COURTESY ET JUNE 15

Large Not the Reform Insurance Needs
The focus should be on improving reinsurance
The government reportedly proposes to merge all state sector general insurance companies into one large entity. Curtailing competition in this space is a bad idea. The country does not need larger but many more players in the general insurance market. Greater competition will drive down costs, improve service and give consumers a wider choice. The notion that a single State-run insurer would prevent State-run firms undercutting one another’s business is flawed. The Competition Commission of India should examine if the government’s move would reduce the degree of competition in the insurance space and adversely affect consumer welfare. The unaddressed need is to beef up reinsurance, where size really matters.

Reinsurers offer insurance companies insurance against loss, especially losses related to catastrophic risks. The point is to distribute risk across society, to all those willing and capable of shouldering it. Catastrophe bonds issued by reinsurers are one means. Typically, catastrophe bonds offer a relatively high coupon with a short maturity, and will have their principal excused if a disaster happens during that period. These bonds are not associated with any economic cycle, but offer higher than normal yields to investors if the disaster they hedge against does not happen during the period. It makes sense for investors as part of a diversified portfolio. This, in turn, calls for deepening and having a fully mature bond market in India.


The freedom from price controls in 2007 notwithstanding, non-life insurance still plays less important a role than life insurance, given that a consumer who buys a non-life product views it as an expense. The need is for non-life companies to improve their underwriting discipline and base their pricing on the assessment of risks. The creation of more assets will help raise the sales of general insurance covers. One area where the country needs more insurance is natural disasters, whether earthquakes, floods or cyclones. Insurance must be mandated for settlements in disaster-prone areas, and the premium collected along with property tax. These are the kind of reforms needed.

 

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