Interestingly, at that time, the issue of Life Insurance Corporation of India's (LIC's) solvency was prominent. These days LIC is once again in focus because the government wants to support the state-owned entity not in terms of capitalisation, but by way of guarantees.
In an interview to Freny Patel and Barkha Shah, Rao, who is all for a level playing field in the insurance sector, said that discrimination between the players will not be tolerated.
Once again, Rao is up against the government in a confrontation between the regulator and the owner. Excerpts:
Insurance players are sceptical that if the foreign direct investment (FDI) limit is increased, Indian promoters would end up playing second fiddle to foreign partners. Since the Irda Act insists on Indian promoters diluting their stake through a public offering in the 10th year, will Irda reconsider this matter?
If FDI is allowed to be increased to 49 per cent, the section in the Irda Act will have to be amended, or both the partners will be asked to reduce their stakes to 26 per cent. Ideally, it should be left to the respective company whether or not it wants to go public.
It was earlier felt that companies could go public as business expands and there is greater need for capital. It was felt that by the 10th year companies would break even and could then attract public investment.
We support the need for an increase in the FDI limit for insurance companies, because it is difficult for some of the Indian players to raise capital.
Seeing how the industry has evolved since you took over as Irda chairman, what do you think is the key role of the regulator today?
The main role of a regulator is to see that all players have a level playing field and are solvent enough to discharge their obligations. Prior to the privatisation of the insurance sector, government companies alone were in the field.
There were no serious issues pertaining to a level playing field. And with the government being the owner, there was no problem on solvency of the public sector undertakings [PSUs]. Hence, there was no need for a regulator.
Today, with the emergence of private insurance companies, the regulator needs to balance between the two. There is also a need for vigilance to ensure that prudential norms are being followed with regard to investments, so as to retain customer confidence.
Do you actually think there is a level playing field today? Don't the PSUs have an edge?
Public sector insurance companies have an edge because they have been operating for a long time and have a sizeable market presence. They have huge assets built over a long period.
At the same time, new players have an edge too "" they have been able to bring in the latest technology. At the same time, they also have great flexibility; they do not carry any of the baggage from the past and are not accountable to the large number of agencies as in the case of public sector players.
You highlighted the need for insurance companies to meet the solvency requirement. Recently, the government talked of granting guarantee to LIC in meeting the solvency requirement. Would this be acceptable to the regulator?
We would not like to accept a government guarantee because this would come under the domain of a level playing field. However, we would be willing to give LIC more time to meet the 150 per cent required solvency margin.
It could be 2006 or 2007, because we do not see any serious threat. But we would not like to make any exceptions in the case of LIC. There should be no discrimination between state and private players.
Other private players have also said that the solvency requirement is very stringent. Would Irda look at relaxing these norms?
We have not heard any private players complaining. Nevertheless, we would like to be conservative because insurance is a long-term contract.
This explains why investments are calculated based on the book value and not the market value for the purpose of solvency margins. Moreover, the sector has only recently been opened up and we need to properly "know" the players before we liberalise the norms further.
We need to evaluate how strong their corporate governance is before we relax the existing rigid regulations.
How do you gauge the market growth in the insurance sector?
The market will grow because of the high level of awareness created since the privatisation of the sector. A large number of people are underinsured, and yet the penetration rate and coverage per capita have gone up.
Since 2000, the penetration level has risen from 2.3 per cent to 2.88 per cent in 2003. Similarly, in terms of density, the per capita coverage is as high as $ 16.4 today as opposed to $ 9.4 three years ago.
On the health side, the number of people covered has shot up from 4 to 5 million six years ago to the present 12 million. With further reforms, insurance penetration will increase further.
The Law Commission is understood to have submitted the final draft to the government. How far is this an improvement over the first draft?
The final draft will first have to be placed before Parliament. There could be some areas for relaxation of regulations. There is a need to look into the new realities of the capital market underlying changes. I feel that some regulations need to be built into the law for the safety of policyholders.
At the same time, some areas should be left to the regulator by providing some flexibility, like in the area of investment norms. For instance, the norms governing investment in initial public offerings are very strict.
Irda is working on this and will approach the government shortly.
Do you then think the revised draft will give Irda more teeth?
What the Commission has suggested is the integration of the various acts, and not the abridging or enhancing of powers. However, we may be able to take advantage of the revamping of the acts, since there could be modification of the LIC Act as well.
For instance, it is not possible to freeze the share capital of LIC at Rs 5 crore. Further, the penalty with regard to breach of tariffs needs to be reworked and indexed to inflation. This should be left to the regulator to enforce.
Many brokers feel short-changed since the age-old 5 per cent direct discount still prevails. Why does Irda wish to uphold this norm and what will trigger its removal?
There is no reason for brokers to feel so because they knew what they were getting into when they applied for their licences. Earlier corporations had built their own expertise in the field of insurance and had incurred expenditure in determining their insurance expenditure.
Having done so, the 5 per cent rebate corporations get when they approach insurance companies directly helps meet their expenditure. We are not saying that brokers should not be there, but until tariffs prevail, the 5 per cent discount will continue.
The competition is heating up in the non-life insurance industry and the practice today is to look at cross-subsidisation as a means of capturing business. Does Irda condone this practice?
Initially, in this industry, there is bound to be stiff competition for capturing existing market share. As insurance companies need to have access to the same set of clients every year, and to convince them each time to place their business with them, this element of cross-subsidisation happens the world over.
Companies will, however, realise in the next couple of years that this practice will not work to their advantage when placing their business with a reinsurance company. This is because they will end up bearing a higher expense on their net account.
Today, the idea is to grab existing business. When players realise that there is not much scope to play around, the market will then stabilise.
Most players expect cross-subsidisation to come to an end with detariffing of the insurance industry. Will Irda be able to meet the April 2005 target date?
Detariffing of motor own damage has been targeted for April 2005. However, insurance CEOs are saying that the entire sector ought to be detariffed because the problem really lies with third party motor. We will take a fresh view on what is to be done.
Irda has put a stop on insurance companies tying up with corporate agents, and plans to draft guidelines for such tie ups. How serious is the problem and what checks and balances would Irda ensure are in place?
Insurance companies today do not have much control over their corporate agents and this leads to mis-selling. There have been instances where corporate agents are even issuing personal line policies.
There may not necessarily be complete disclosure of terms and conditions as a result. The policyholder is getting confused between the insurance company and the intermediary and does not know whom to get in touch with.
The draft guidelines would try to ensure that insurance companies are fully accountable for whatever business corporate agents collect, and that there are adequate checks and balances.
The problem lies with the multi-level kind of marketing entities, the likes of Amway, where not all those who are selling risk products are licensed.
Further, insurance companies need to supervise their corporate agents, and ensure that all employees selling risk products are licensed.
