Boost for insurers, mutual funds: Reforms that IRDA and SEBI really need to focus on

Insurance, mutual fund reforms: Insurers and mutual funds are gaining traction among the Indian millennials but still its penetration is very low. In fact, current insurance penetration in India is a mere 3.42 per cent while mutual funds have a penetration of paltry 1.2 per cent, which speaks volumes about the potential of reforms required at IRDA and SEBI level. So, going with Nobel laureate Amartya Sen ('knowing the problem is half the job done'), we first need to identify why insurers and mutual funds have still not penetrated into the mass audience in India and what could be the possible solution required to increase the penetration of insurance and mutual funds.

Speaking on the current status of the insurance and mutual funds in India Seema Prem, CEO and Founder of FIA Technology Services said, "The insurance and mutual funds industry in India is still in its nascent stage. With the current insurance penetration at 3.42% and mutual funds at 1.2%, India is far below the global average. One of the reasons: the existing regulatory framework of both these industries are insufficient to promote penetration and acceptance of these products amongst low-income customers."

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Elaborating upon the challenges that the insurance and mutual fund sector is facing in Indian markets Seema said that both insurance and mutual funds industries are fraught with challenges that have led to the high levels of exclusion in these industries. She pointed out the following challenge that insurance and mutual fund is facing:

1] Lack of cost-effective distribution channels; 

2] Lack of products suitable for low-income and emerging consumers; 

3] Manual and cumbersome documentation process; and

4] Poor level of awareness and financial literacy.

Prem stressed upon the following 5 major steps that can bring a boom in insurance and mutual funds proliferation and penetration in India:

1] Government and Bank Mitra contribution: Govt has been using the Banking Correspondent channel and its network of Bank Mitras to facilitate the reach of these products to the excluded customers. However, the current operational structure of a Bank Mitra is not useful enough for the sale of complex financial products. There is a need to train Bank Mitras so that they can handle the sale of complex products like insurance and micro-mutual funds.

2] Taking regulators help: If regulators like IRDA and SEBI make significant changes at the policy level to enable rapid penetration of their products to the last mile, it could help accelerate inclusion. Let’s dive into exploring the possibilities.

3] IRDA, SEBI role: IRDA and SEBI will need to design products that are not only scalable for themselves but also are of significant value to their customers. For e.g., the low-income segment is characterized by high volatility in their incomes, which makes regular savings a challenge. Low-income customers also need a lot of liquidity and therefore will be hesitant to commit to long-term investment programs.

4] Focus on the complete product life cycle: A focus on the complete life cycle of the product, from enrolment to transaction processing to processing redemption requests will keep the process clear and systematic for the low-income and first-time customers who lack understanding of these products. A technology-led complete end-to-end outsourcing can help in controlling the costs in this low margin scenario.

5] Explore multiple distribution channels: The regulators should explore multiple distribution channels. Setting up a separate insurance cum mutual funds correspondence channel for the distribution of these products will give it the focused attention that is necessary for its rapid penetration.

Hence, in short, if we need to accelerate its objective of deeper penetration of other financial products, they will need to get IRDA and SEBI to innovate and disrupt the way these products are being sold traditionally.