Hari Narayan: The insurance industry is coming of age and in terms of the regulatory framework, we are focussing on second generation issues as far as insurance regulation is concerned. Most of the building blocks of the second generation range are more or less in place, the entire architecture in terms of governance, the architecture in the guidelines, in terms of disclosures, the requirements we have kept in place in terms of calculation of economic capital — all these are important in the context of companies which wish to go public after finishing 10 years of existence. The first set of companies will be coming (with an IPO) in 2011. The IPO guidelines, which are being framed in consultation with Sebi, will be in place.
On the consumer side there have been significant developments. First, there were concerns about Ulips in terms of pricing and commission. In order to bring the insurance sector in line with the kind of spreads which we have in other sectors such banking and mutual funds, we have imposed a cap on charges between gross and net yields. It will not help the industry if we micro manage. It (the guidelines) enables companies to manage their costs, including sales cost, policy administration cost and fund management cost which best suits their marketing strategy. The spread of three per cent for products having a term of less than 10 years and 2.5 per cent for those with longer tenures, compares very favourably with the banking sector, where the spread is between 2.1 per cent and about 3.4 per cent. It is considerably less than the spreads available in the mutual fund industry.
Almost all insurance companies have put in place robust grievance redressal procedures and systems. We are trying to build an architecture, such that all these individual systems can be accessed from one system and from one place. It is on beta testing and is starting from July. Our grievances will be subject to scrutiny and the management and we can ensure that whatever is offered in terms of policyholder welfare is actually being delivered.
The other area of concern to us is management expenses, and we find that management expenses affect bottom lines more sharply. We do intend to bring in various systems to enable and cajole companies and ensure that they comply by looking at extra solvency requirements.
The insurance industry has made a remarkable beginning and has built a strong enough base. As we look to the future, one of the biggest contributors to the Indian stock markets will be investment from the insurance sector.
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Moderator: There was some media focus on what the media called turf war between you and Sebi. But I am sure it is more an issue of defining the scope of the two institutions. How do you look at that debate? Do you want to tell us what is happening as far as the jurisdiction of Sebi and Irda are concerned?
Hari Narayan: In the Indian regulatory architecture, what different regulators will manage is defined by the law. This might not be the best system and is not the only system in the world, but in India we have enacted for ourselves a system where each sector is separate. The scope of regulatory overlap in our view is limited, because the Act carefully specifies the limits and what exactly are the roles and functions of each of the regulators. There is a difference of opinion between our understanding of what the Sebi remit is and what Sebi believes its own remit is. We had two rounds of discussion but we can’t call it a turf war, because ultimately both are here to ensure customer satisfaction, investor protection and financial stability. We do believe that things of this nature need greater clarity. Having multiple regulators doing the same task won’t be healthy for the consumer or the industry. I am confident that this matter will be resolved entirely in accordance with the law.
Moderator: Do you have regulatory concerns in respect to investment in stock markets?
Hari Narayan: Broadly, investment by insurance companies is regulated by the provisions of the Insurance Act, with 50 per cent of investments going into government securities, 35 per cent into approved investments and 15 per cent being in other than approved investments. There are other issues such as concentration and sector risks. From the regulatory point of view what we are concerned about is that companies must have in place automated or efficient systems that can provide a full range of information. We have charted out what exactly should be the investment management architecture. Different companies are in different stages of compliance with these norms, but we require that these be periodically audited on a quarterly basis to help companies to get in shape. In six months this would be a robust system.
Moderator: Mr Rao, can you comment on the regulatory system that we have, what are your concerns, and also comment on the nature of competition? What are the constraints that we face in responding to the competition?
Rao: As we enter a stage where there is a fair amount of maturity developing in the insurance market, there would be a greater amount of disclosure. Disclosures and greater emphasis on risk management systems will be the focus areas. In the context of these risk management systems there will be a requirement of computing economic capital to adequately capitalise various insurance companies.
On competition, if you look at the figures till the end of February, the overall growth has been 16 per cent and is expected to be around the same level at the end of March. But on the private sector side the growth has been flat. Now that we have seen the worst of the economic crisis, we expect average economic growth to be over 8.5 per cent in the medium term. The sectors that are likely to have a fair amount of prosperity would be in relation to the rural population and the urban middle class. The second feature would be that the volume of business coming from bancassurance will be higher. There would be movement towards newer areas of distribution and in the internet banking sphere and a fair-sized market will exist in health and pensions. There would be also be a separate segment of micro insurance which would be developing. For this we need to tie up closely with the distribution network, whether banks or post offices.
Moderator: In what way has bancassurance helped you in dealing with the problem of management expenses?
Rao: We have the lowest expenses. The advantage of the bancassurance model and the type of model we have brought about brings total synergy between what the State Bank branches have to do and what SBI Life has to do. It is the need of the banking sector also, because sooner or later, the sector will reach a stage where any bank that is not in a position to convert itself into a financial super market would be left behind in its competitive edge.
Moderator: One of the issues in your business is the discussion on the the D Swarup Committee recommendation on commission versus profitability. In what way do you look at this debate?
Narayanan: The Swarup Committee recommendation looks at a framework where there will be less and less intermediation. From the customer’s viewpoint there is a lot of merit in this. Ultimately, the cost has to be borne by the customer. But to achieve that we have to wait for a long time as the customer would be able to make his own choices. Right now the concern of the industry is more on penetration. The non-life industry hasn’t grown in terms of penetration in the last 10 years. The penetration is just 0.6 per cent of GDP. It has been static. How many actual new insurance policies have we added, except for the mandated insurance of automobiles? I don’t think we have taken the message of insurance to the people. First-time issues have not been growing. Where there is growth it is through regions. As Mr Rao said, if banks can step into it, it will be a very welcome thing. You need someone to cajole the prospective insured to take an insurance policy. A little bit of remuneration is needed for whichever medium you use to sell the product. Remuneration to intermediaries cannot be wished away. Our industry is dependent on individual agents, as bancassurance has just started and brokers’ institutions are confined to large corporates. We have to wait for a long time to reach the level of no intermediatory commission.
Moderator: Mr Nandagopal, while selling products, how does a business deal with public sector players? In what way is the competition between the private and the public sector going to evolve and how would you deal with challenges faced in a market in which people seem to prefer the public sector when it comes to life insurance?
Nandagopal: The first point is selling versus buying. Awareness of insurance products is at a low level and people don’t believe that investments have to be an integral part of the financial plan. They do confuse insurance products with various other devices. So, there is a huge effort required to make sure that the customer gets the right product. There is a specific effort that needs to be put into position in this plan as a long-term financial production project. The journey doesn’t happen overnight and may not happen through publicity and media coverage. It will happen through a very systematic sales force doing personal and financial counselling. That is the most important part of a life insurance company’s job. It depends on how banks will facilitate the process.
There are two advantages that public sector companies have. One advantage is that they do have a large customer base which is loyal to banks. The second advantage is that this is a long-term business and an association with the government is there. They are better off, but that doesn’t take away any challenge.
Moderator: Mr Garg, one of the major concerns is the limit on foreign investment that remains in place. To what extent is growth curtailed and how important is it to change the framework?
Garg: For growth, capital requirements are higher on the life side. From Tata AIG General’s standpoint, I don’t see any hindrance, as both the joint venture partners are willing to put in capital. We have wiped away all accumulated losses from inception, so capital requirements are not as extensive at this stage. Having said that, whether 26 per cent versus 49 per cent from a general insurance side, will it hold back growth of companies? I don’t think it will, because in India, the groups that have entered the insurance sector are fairly strong groups.
General insurance growth will depend on how much penetration can take place. Penetration levels have been very low. The growth really is coming from the same customer base. There have been some regulations, especially on the micro insurance and micro health side, which are enabling and can help us penetrate these markets.
Moderator: One of the complaints that go to Irda is that everybody is chasing the same customers — the high income, young people who are likely to have less demands on the system. You are all ignoring senior citizens and low-income customers. Is that a fair charge and how do you deal with that?
Garg: The regulator has dealt with that. On the health side there are lots of efforts that have come into play to safeguard the interests of senior citizens. The General Insurance Council has been active. We are trying to find out ways and means to ensure that there is continuity of cover for senior citizens and companies do not arbitrarily pick and choose as far as the risks are concerned. Significant progress has been made and we are also looking at something which we call uniform policy. So, when one insurer changes to another insurer then the cover is not interrupted for senior citizens.
Moderator: Mr Ramchandran, am I right in assuming that in the last 10 years, everyone has chased the best part of the market and the challenge in the next 10 years is to get the rest of the market?
Ramachandran: Penetration rates have gone up in the last 10 years. But now it is not only a social imperative but also somewhat of a competitive advantage for someone to find a business that can cater to those segments. There are two primary segments. The first is the rural market. Whether it is telecom companies or the FMCG sector, they have found a way to profitably address that sort of population. It is a combination of finding the right expense model, because you can’t shrink an urban model. The model per se has to be creative. There is some kind of regulatory assistance which has already begun. One of the things is about segmentation and differentiation.
Moderator: I would like to have a peep into how insurers deal with the regulators. Since I have all of you on the panel, I am going to use this opportunity to get some transparency and I am going to ask each one of you to raise some issues that bothers you as far as the regulator is concerned and get Mr Hari Narayan to use the opportunity so that all of us see what happens in those meetings where none of us is allowed to come in. Can I start with that end?
Ramachandran: The D-part of IRDA is a critical thing. In our discussions, there is a congruence of interests, though there will not always be congruence of thought process. A big set of tactical reforms is in the distribution space. Unlike other countries, open architecture in banks is not allowed and there is a committee appointed to go into it. On the agency side, we use the phrase, ‘tied agency’. It is time to untie the agency.
Nandagopal: At the end of 10 years, the glass is half full and as you go forward, a few challenges still remain in the industry. From the customer’s side three challenges still remain. There is the customer’s ability to decode the product, demystify it and do so in a language which he understands and a terminology that he or she can relate to. Second, whatever be the offer, it has to be comparable with the cost structure vis-a-vis other financial products. The delivery mechanism should be truthful, honest and transparent. These are still challenges. The third important thing is that if there has to be some kind of an opportunity available for us to penetrate deeply, then your overall cost will come down and the price will come down. The developmental initiatives are at three different levels, one is at the government level, where tax can be used as an instrument of state to bring the products closer to the market. The second is regulatory and the third aspect is self-governance. The industry itself has to do these things. So, all these have to be done simultaneously for better experience.
Rao: Whatever requirements we have are based on the fact that Irda and the industry are of recent origin. The natural inclination on the part of the industry is to go out there in the market, develop new areas, new segments, try to get something which may not be available in regulatory prescriptions. The regulator has to take a broad view on the entire issue and has to come out with prescriptions. It should be fair, just and equitable to all the players and it should maintain the primacy of the policy holder.
Narayanan: Every new regulation or every circular is like a pair of new shoes or a set of new clothes. Initially, it pinches and in due course of time you get used to it. After a few weeks, you start liking it. When new regulations are brought out there is a process of consultation which Irda has been meticulously following. So I do not think there is anything to complain about. What is happening behind closed doors is that if we want a new shirt today, it may be available day after tomorrow.
Garg: Indian regulations are far more mature for their age than many other regulations across the world. If you look at the US, every state has different regulations, some of them are highly complex and some are highly limiting.
There is total lack of penetration. India desperately needs a distribution revamp both on the life insurance and the general insurance side. Rules on distribution, some of which were created in 1938 under the Insurance Act, are still the same. There was nothing called a broker at that time. It was called a principal agent at that time and there are commission structures which have been in play for several years. So, that part of regulation needs to catch up with the rest of our advancement. Distribution needs to be the focus area if we need to penetrate the market fast. Open architecture by banks will be a welcome move.
The other point is basically consumer awareness and consumer education, which the regulator has taken up. If you look at the Indian mindset, the mindset is that the government will secure my savings. When you talk of consumer awareness, the regulator should come out and say, “You need insurance, you need protection and I am ensuring that whichever company is licensed by me is there to last.” That will send a big message to the market. That will ensure that people will buy more insurance because the regulator is assuring them of the longevity of the company. It is very important, especially on the life side of the business.
Moderator: Is the regulator in a position to say that? Are industry practices at a level at which you are comfortable with?
Hari Narayan: I am comfortable with that. I thought the education campaign was product- neutral. Let me say that I can assure you at the end of all this you still don’t know what happens behind closed doors. The issues that were raised, like language or demystification of the product, reminds me of a joke. In a contract, every type of writing is to block some other type of argument or to prevent one particular type of contingency. Having said that, there is a lot of scope for improving the language.
A new business model has to develop to increase penetration of insurance and to make it more reachable, more attractive and more useful. I am sure that the industry will come up with products that are easy to understand and easy to buy. We have improved and there are technologies available today where the inward flow of remittances is through a handheld device. In principle, one can think in terms of a recharge like you have in cell phones; you can have a recharge voucher for the insurance premium, but all that is on the inflow. I am waiting to see how technology