1. Home
2. Blogs

Budget Bullish on Insurance!

• 
• 
• 
• 0
• 0

Published on January 5, 2021. EST READ TIME: 3 MIN

The Union Budget for Fiscal Year 2021-22 presented by our Finance Minister, Nirmala Sitharaman, on February 1, is likely to play a significant role in resurrecting the Indian economy from the throes of unprecedented lows and dwindling government finances and from the adverse impact of COVID-19. The expansionary budget looks to reinvigorate growth and fast-track economic recovery by way of higher spending and demand generation, by giving a pause to fiscal prudence temporarily. 

First things first

Despite the concerns of a wider fiscal deficit, the Budget proclaims higher government spending in many force multiplier sectors, such as Infrastructure, healthcare, banking and expansion of the insurance sector with liberal foreign capital. The budget, with its hands-off approach on the tax structure, also outlines the plan for resource mobilization via market borrowings. Also, aggressive divestments of large PSEs in non-core sectors indicate good news for the market.

Among the significant proposals is the creation of a Development Financial Institution (DFI) to fund capital expenditure and infrastructure with initial equity contribution of Rs. 200 billion and a mandate to provide big credit corpus to the tune of Rs. 5 trillion to infrastructure projects in the next 3 years.  

 Projects under the National Infrastructure Pipeline will also find support from the DFI. Similarly, the idea of Bad Bank for the banking sector to clean up the balance sheets of stressed banks by taking over the stressed debt is remarkable.

To create more jobs and boost domestic production capabilities, segments marked with Production Linked Incentives has found revision in custom duties in some sectors. 

 FDI Boost in Insurance

The insurance sector has come out as a big beneficiary of the new budget, thanks to the proposal enhancing FDI limit drastically from 49 to 74 per cent. Marking a stark departure from the status quo position that insisted on “Indian-owned and controlled” Indian insurance companies, the new step is a big milestone in the insurance sector.

The market movers expect far-reaching changes in the insurance sector when the new regime unfolds. The effects will include a big leap in insurance penetration. Also, it will actualize foreign ownership in the insurance sector, which the government has hinted at with adequate “safeguards.”

 With higher FDI, the power of Indian partner to appoint the bulk of the directors and control the management will come under pressure. The insurance sector liberalization is also in tandem with the big allocation made for the health sector. 

 The rationale of insurance liberalization is that it is a capital-intensive business requiring substantial capital injections. The present scenario after COVID 19 pandemic has created a special situation, wherein many Indian partners are looking for funds to bolster capital that can salvage solvency margins.  

 Higher insurance penetration also needs adequate capital infusion. The higher FDI window will be an opportunity for foreign insurance players and traction in mergers and acquisitions can be expected. 

 Car Scrapping Policy

The insurance sector has many underlying growth drivers within the budget proclamations. The voluntary vehicle scrapping policy in the budget speech is a crucial demand driver for the auto insurance sector.

The voluntary scrapping policy, announced by the Finance Minister includes fitness tests and scrapping of personal vehicles after 20 years and commercial vehicles 15 years post usage. According to Sitharaman, the vehicle scrapping policy will boost fuel-efficiency, bring down pollution, and cut down the country’s oil bill. 

This policy is set to trigger a huge demand for new vehicles and expand the size of the automobile industry to Rs 6 lakh crore from the current Rs 4.5 lakh crore, giving a side benefit to the motor insurance segment as well. A big impetus to the demand of third party insurance and comprehensive insurance is in the offing.

The segments within motor insurance set for a boost are liability coverage, collision coverage, comprehensive insurance, underinsured motor insurance, uninsured motor insurance, personal injury protection insurance and gap insurance covering both commercial and personal vehicles.

While previous market forecast suggested the motor insurance sector in India to grow in double digits with a compound annual growth rate of 11.1 percent until 2023, the new car scrapping policy will undoubtedly lift the growth pace further.

 Insurance Market Scenario in India

 As of 2020, the overall market size of the insurance sector in India is $280 billion. The insurance industry in India has 57 companies, of which 24 are in the life insurance business, while 33 operate in non-life insurance.

 In short, the Indian Budget 2021-22 is a golden page for the insurance sector that promises more foreign capital, knowhow, best practices and modifications in ownership control, with a likely ripple effect in many associated sectors.

Disclaimer

The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

This blog has been written by 

S. Gopalakrishnan | Motor Insurance Expert | 40+ years of experience in insurance industry

A veteran in insurance industry. S. Gopalakrishnan is a name to reckon with in the field of reinsurance, he has headed the Reinsurance department and has rich experience in other fields of motor insurance. He loves to share his opinion on latest topics in the insurance industry and how he can help people in safeguarding their assets using insurance products.

Mr. S.Gopalakrishnan recommends "HDFC ERGO for your vehicle insurance needs, it has always put customer’s interest at the forefront, with round the clock assistance to deal with emergency breakdown issues and hassle free claims process. You can be assured of complete and reliable guidance through the whole process."

---

• 
• 
• 
•