Everyone is looking at India as a very exciting market: Irda member

It is not often that the regulator and chief executives of insurance companies come together to discuss issues facing the industry. But that is exactly what happened at the Business Standard Insurance Round Table, with Insurance Regulatory and Development Authority’s Member Finance R K Nair and four CEOs — Tata AIG General Insurance’s Gaurav Garg, IndiaFirst’s P Nandagopal, HDFC Standard Life’s Amitabh Chaudhry and ICICI Lombard’s Bhargav Dasgupta — discussing ‘Insurance Industry’s Next Challenges’. The discussion was moderated by Sanjaya Baru. Excerpts:

Sanjaya Baru: There are many issues before us this year, one of them being that economic growth is back to 8.5 per cent. How has that impacted both life and non-life insurance companies? Has the sector been able to benefit from the recovery? There are many policy issues: mergers and acquisitions in the insurance sector, policy on initial public offers, on foreign investments etc. We would like to hear the panel’s views on all of these.
R K Nair: I have been looking at some of the numbers and am really amazed to see the tremendous progress made by the insurance industry. From a growth rate of about 19.8 per cent between 1996 and 2001, the compounded growth of the insurance industry has been about 25.6 per cent. So even if you take the inflation of seven or eight per cent, clearly, the insurance industry has been outgrowing the normal growth rate of the economy by more than 10 per cent over the last 10 years. That’s a fantastic performance, because you are competing with the asset management industry and the banking system.

This year, the average growth in first-year premium in life insurance has been 36 per cent, which is actually a representation of real growth, because if you go by international standards, they look at first-year premium growth. This, despite the general crib about the changes in the regulatory framework. I can only say the changes were required to be done.

The measure which we took last year involved two things: one was to actually make this product distinctive from an asset management product and two, bring in greater transparency and disclosures from the point of view of the insured. Basically, the job of the regulator is to ensure that that there is greater protection for the investor.

We understand that there have been some deductions in commissions; there have been some issues on surrender policy charges, etc. But then, you would appreciate that as a regulator, our job is to bring in more disclosures and to ensure that the customer is protected from mis-selling. So, the idea was to improve the market conduct of companies. Ultimately, if a customer feels after a few years that he has been ripped off, he will never come back and buy that product again.

There will be some pain in adjusting in the medium or short term. But I am sure you agree that no other sector had the kind of commission structure that the insurance industry had. I don’t see any reason why the insurance sector cannot adjust to the rationalised commission structure and build its business in a more sustainable manner.

We understand that an insurance product is a difficult product to sell because, unlike banking products or investment management products, insurance is more of a ‘push’ product. We are trying to improve the levels of selling while improving the education content of agents, so that they are better informed.

We are looking at ways and means of cutting costs for insurance companies and have been talking to other regulators to see whether we can dematerialise some of the insurance policies. This will reduce the paper work and cost of holding.

In non-life again, the general insurance business has shown tremendous growth. This year, the total premium underwritten by non-life insurance companies has crossed the entire sales of last year by December itself. This has happened after de-tariffing. Several of these companies are expected to come into profit.

With guidelines being framed on mergers and acquisitions and IPOs, these are going to be exciting times. Mergers of course will be driven through a court procedure because the regulator has not been given the power to finalise the issue of the merger. But there is a provision in the Companies Act which says that they could if they want. We are working on a proposal on this and have had debates on how to go about mergers and acquisitions.

I can tell you there is tremendous interest locally, regionally and internationally in the growth of the insurance sector. Everyone is looking at India as a very exciting market for insurance. I feel insurance will contribute in two areas fundamentally — one is the debt market and the other is infrastructure finance. India needs long-term money and hence everyone has a stake in the growth of the insurance sector. Long-term money is required in infrastructure, in long-term government securities and long-term corporate bonds.

Gaurav Garg: The regulator has done a great job, even if you compare its performance with international benchmarks. There are a lot of other markets where certain tariffs are still in place, even though the markets have been deregulated long back.

But having said that, the one point I would like to make is that while we say tariffs got de-regulated in 2000, what is not appreciated is that it was the year when private insurance players came into the market, but the tariffs and terms and conditions were the same. The real de-regulation of the market happened in phases in 2007, but fully in January 2008. So my submission to the regulators has always been that please view the general insurance companies as being deregulated from 2008. That’s the time when you start, because the playing field changed in 2008 when de-pricing happened.

And if one were track this across the world where de-pricing has happened, the normal cycle it takes for the industry to come back to some kind of stability is four to five years. We track various markets, where we have seen that in the first three years, it drops. In the fourth year, it starts levelling off and then it starts stabilising.

However, it might take longer here because in 1972, when nationalisation happened, there were 106 private companies and right now on the general insurance side there are 22-odd. If you take the four public sector companies and the specialised health insurance companies out of this, there are 15 or 16-odd general insurance companies.

I think this is a market to view from a long-term perspective rather than short-term. Credit must be given to the regulator for bringing in transparency, which is a very healthy sign. If you go to the regulator’s website, you can get a lot of information which really was not available for a very long time. When companies like ours or other private companies started out in 2000, there was no data. Then how do you price a product, how do you know which segments are good, which are bad? So in that sense, keeping the tariff on for the first eight years was a very mature thing to do. In those eight years, companies could build their data to really know what they need to do on pricing.

So I think the journey has been pretty good. The transparency that Irda has brought in is excellent: every regulation is on the website, they publish all drafts; everyone is free to comment. They also publish all the action that is being taken on various things.

Sanjaya Baru: So do you have any concerns?
Gaurav Garg: Talking about the concerns, the penetration level of the general insurance side was 0.6 per cent of the GDP and it still is 0.6 per cent. It has been so for the last 30 years, even before privatisation. So that’s one major area of concern.

I think it’s very important for us that the Insurance Bill goes through, to make the industry grow and to empower the regulator. The other two things that are going to affect the insurance sector is the introduction of the IFRS, which will change the dynamics of accounting. The other thing which will affect the entire financial system is the Direct Tax Code. One current issue of course is the amount of pool for third party motor insurance.

P Nandagopal: We need to ask why the traditional plans are now being pushed. If the objective is to give customers a fair deal, we don’t understand the logic. The second important debate is guaranteed versus non-guaranteed pensions. This country is going to require a pension plan product very soon, because the government doesn’t have any kind of safety net. And I suppose pensions are products we need to push fairly. The benefits of guaranteed products are not to be disputed, but in the same way, the benefits of non-guaranteed products also cannot be disputed. I believe that guarantees will always offer a choice and customers will decide.

Sometimes it’s an implicit cost and sometimes it’s an explicit cost. If you are buying a guaranteed product, there is a certain kind of implicit choice. The implicit cost is that you are really losing out on market development. The explicit cost is that there are hidden terms and may be the cost of guarantees would be high. So customers should be given opportunities to buy both, and I believe some sort of a reform has to be there. The third reform is distribution reform. Ultimately, the life insurance business is a long-term retail business, and thankfully, Irda has brought in the kind of discipline needed to shift the definition of ‘long-term’ from three years to five years. That’s definitely going to help.

There can’t be a dispute over the fact that the whole purpose is customer protection. But should we not have a level playing field between the public sector and private sector, between traditional and unit-linked plans, between the different distribution plans, and banking and agency? These are some issues we should consider.

Amitabh Chaudhry: I agree with the Mr Nair that the authorities did a great job as far as growth is concerned, after opening up the insurance sector. The premium income has gone up by about six times from 2000 onwards, the number of agents has gone up by about five times, the number of offices has gone up by about five times. About Rs 30,000 crore of capital has been put in, but accumulated losses are around Rs 18,000-19,000 crore.

One important change that has happened in the life insurance industry is that we have gone from macro regulation to micro regulation, and that has a huge impact. I think the authority has somewhere come to believe that because we were not behaving well as a group, we need to be regulated on a micro basis. This has got reflected in products as well as in disclosure. We are the only country with guaranteed products and a cap on charges, which has a level of disclosure and transparency.

I completely agree that the insurance industry is moving towards traditional products, but the level of transparency which is there in traditional products, the level of return being provided, and the charges which a customer incurs in traditional products, do not necessarily make them the best products for a policyholder. The industry is very proudly claiming today that we are selling more traditional products. Is that the direction that the industry wants to move in? And obviously, because LIC is a traditional seller of traditional products, they have gained. Also, what has happened because of this rapid change is that it has not given us time to react. Here we were given 30 days to change to a different regime.

Because of the rapid change, informal rules were being imposed, which has obviously led to a scene where the industry is still struggling. On the pension side, we have finished off the pension industry. Because of the way we have defined the product, no one wants to buy it.

I think the customer is not interested in the new pension product, and the insurance industry is not interested in offering the product which the regulator wants us to. As a result, the share of pension products has come down dramatically. And ‘dramatically’ is an understatement. I think the regulator should be looking at that.

I think this industry would do very well if we could have some road map from the regulator as to what to expect in the next three to five years. I think we have been making that demand for quite some time, but while we have moved from macro to micro, please tell us what we can expect in the next couple of years, so that we can change our opinion of the market and respond accordingly.

I think the biggest challenge we have today, apart from the regular traditional products, is that we need to offer a more exciting environment. The margins have vanished overnight and it is very important that we re-fix our new normal. But we can do that only if we have a clear visibility in the regulatory environment for the next three to four years. Every time we do something, something else comes up and we have to start all over again. The second issue is that we have to diversify our distributive channels. I think relying on one channel has its risks. I think it will force us to look at some other distributive channels.

Bhargav Dasgupta: Let me talk about some of the areas of regulation that we have seen specifically coming from the regulator this year and how we see that shaping the industry, going ahead. There have been many regulations this year. Firstly, the ones regarding improved disclosures are more than welcome.

The second set of regulations was the policyholder protection-type — both in terms of disclosure and grievances. Irda has allowed consumers to write directly. This may create difficulty in the short term but is an excellent move for the long term. The third key area has been in market conduct even for us, through tightening of distribution rights, in terms of referral guidelines and the requirement of the audit of population guideline. These are fine, but what I would also like to see from the regulator is probably a roadmap — if not for five years, at least for the next two to three years, so that we can plan our businesses forward.

It is probably time for the regulator to differentiate between companies who are behaving appropriately and those who are not. And what I mean by that is the performance of any company in our industry can be measured very easily by combined ratios. It’s probably time for the regulator to consider differential capital charge for different sets of performance. For if you are working with a combined ratio which is within a certain range and less than 100, your business is healthier and you don’t contribute risk to the industry. The solvency margin could be relaxed. If, however, you are operating at 125 and above, you could have ranges in between. You need to have capital if you are contributing risk to the system. Rather than micro regulation, this is the way to go, as it will drive behaviour.

The third area is that we have not had de-tariffing of wordings. If I look at a standard policy to retail customers, the wordings are archaic — probably from the British period, and they run into 35 pages of small print. How do you expect customers to read even if they want to? So there should be a solution for both retail and corporate. You need to customise the policy document as well. So there is clearly a need for simplification of wordings.

There is a common grouse across the industry that product approval takes a huge amount of time. While we understand the anxiety of the regulator in terms of not allowing a customer to be taken for a ride, this should not come in the way of innovation, and clearly, the lack of penetration is coming in the way of innovation. We need to do a lot more work in building awareness. The perception outside seems to be that there is a lot of underwriting during claims. It is not good for general insurance and I think that is what we have to focus on. I think innovation in terms of both distribution operation models and products and services is required.

Sanjaya Baru: I would now invite Mr Nair to respond to some of key issues raised by the panelists.
Nair: I will deal with non-life insurance first. We are seeing exciting improvement in non-life insurance. And we are seeing good growth in motor insurance — that is another area in which India is growing. As we have witnessed globally, when the economy improved, it is the insurance sector in the European market that invested. Clearly, these are areas of growth and the regulator is only trying to bring about some kind of orderliness in growth, because a lot of companies are coming in and customers are interested. We want growth in an orderly manner and are also not trying to stifle the industry.

We hope that over the next few years you should be able to reach a higher level and we would see more than 35 per cent growth in health insurance, as the country needs health insurance.

The issue of IFRS is in the public domain and we have said that we will converge with IFRS. There are some issues to be sorted out. I can only say that we will ensure that you don’t have this kind of volatility in profit, in income and asset value.

Having said that, I would urge all of you to look at yourself and answer a simple question: How is the market share of LIC growing? LIC is under the same regulation. In fact, we try to be a little tougher on them. The regulator is not soft on anybody and believes in a level playing field. If LIC is doing well, may be they are doing better business and may be they are reaping the benefits of better marketing and creation of insurance awareness.

The industry has seen periods of growth and de-growth. We found that during the financial crisis a lot of money moved into the public sector. I don’t know why it happened, but it happened. I don’t know why one player in the same industry is growing and another is not growing at all. Some introspection needs to be done by private sector players. I am genuinely not able to understand this. Even on Ulips, LIC is the only one that is growing.