Reforms Wave in Insurance, Pension

Print Edition: November 2012

Reforms are the flavour of the season. The insurance sector is no exception. Its long pending demand for raising the foreign direct investment (FDI) limit may be fulfilled. The government has cleared a Bill that allows for 49% FDI as against 26% at present .

The FDI limit for pension funds under the New Pension System (NPS) is also sought to be aligned with that for the insurance sector. A minimum assured return is also proposed for NPS plans in line with insurance pension plans.

Withdrawals up to 25% of the contribution made in an NPS scheme by a subscriber can also be allowed. At present, only 20% of the contribution can be withdrawn before the subscriber turns 60, with the remaining being used to buy an insurance annuity scheme.

25% of the New Pension System corpus can be withdrawn before the investor turns 60

"The biggest hurdle for the NPS is lack of awareness. More capital in the sector would mean fund managers would be able to invest more in creating awareness and, thus, push the product among a larger number of people," says Vikas Raj, chief executive officer, IDFC Pension Fund Apart from the FDI limit, the insurance sector is also preparing for a bevy of reforms.

Draft guidelines on a number of issues have been issued by the Insurance Regulatory and Development Authority of India, which plans to implement them soon. Here are the main proposed changes.

Tax Sops
Some insurance pension policies have been recommended for being included along with the NPS for deduction in addition to the Rs 1 lakh limit under Section 80C of the Income Tax Act.

"A separate limit for insurance pension products will promote pension policies and allow customers to save more," says Sanjay Tripathy, head (marketing, product and direct channels), HDFC Life, a private insurer.

Service tax on the first-year premiums for regular and singlepremium policies may also go down while making the levy payable only on realisation of the money.

Third-party Claims
To help general insurers, who are bleeding money due to third-party motor claims , it has been proposed to cap the third-party liability at Rs 10 lakh. Currently, there is no cap on insurance claim for injury or death. For damage of property, the maximum claim amount is Rs 7.5 lakh. When damages exceed the cap, vehicle owners have to bear the additional cost.

The provision of immediate compensation under which victims can claim up to Rs 50,000 can also be omitted.

"As the risk (for insurers) is being capped, the insurers may slightly reduce the premium charged," says K N Murali, head, motor vertical, Bharti AXA General Insurance.

Wider Coverage
In order to widen the coverage of health cover, it has been proposed to include sickness benefit on foreign travels. Currently, health insurance plans only cover hospitalisation within India. Group insurance policies may also be extended to non-employee groups such as self-help groups and professional associations. Additionally, any insurance policy would not be challenged on grounds of false declarations after three years.

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