The insurance industry is undergoing a makeover. While the commission structure for unit-linked insurance plans (Ulips) has been revamped, an expert committee has suggested that agency commission be done away with in three years. Similarly, the general insurance industry is coming to terms with the post-tariff era. Insurance Regulatory and Development Authority (Irda) Chairman J Hari Narayan, who is overseeing the new architecture, talks to Shilpy Sinha about the issues that the insurers are facing. Excerpts:
What are your views on the consultation paper floated by the Swarup Committee?
It is just a consultation paper. The committee’s concern is mis-selling which takes place because agents recommend products that offer more commission, though they may not be the best for customers. The logic is derived mainly from the experience with mutual fund companies. In case of mutual funds, the churn is very high as an agent will suggest one product now and another after two months as he earns a commission each time (there is a switchover). But Ulips that insurance companies sell have a lock-in period and so there is not much churn. Also, in mutual funds, 80 per cent of the investment comes from institutions whereas Ulips are bought by retail customers.
This particular model (suggested by the committee headed by pension regulator D Swarup) is largely influenced by the experience in England. But you cannot compare the two societies. There is no reason to believe that it might work here. I don’t think the consultation paper makes much practical sense.
Should commission be embedded in the product?
Fundamentally, the idea that the commission cannot be embedded in the premium is not a very well considered one and it will kill this (insurance) industry.
Non-life insurance companies are reporting underwriting losses. Is it only because of detariffication or is it also due to improper pricing?
In a competitive environment, companies have sold policies at lower prices. They may have done it deliberately or their initial assumption in terms of the number of claims must have gone wrong. Or, it may be a mix of both. We have not got enough depth and width in our statistical base to make more predictable assumptions.
By when should we expect a shift to a risk-based capital approach?
In principal, the risk-based method of calculating the capital requirement and solvency of any company is a more accurate and scientific way of doing things. It will lead to better management and better appreciation of risk. But it is important to see whether we have the necessary back-up for a risk-based approach. There are various types of risks. In India, those databases are not profound and so the ability to assess risks of various kinds is limited. Before we move to a risk-based capital approach, the regulator will have to be equipped, the insurance companies have to prepare themselves and we have to do this in stages.
Are you seeking more disclosures from insurance companies?
At present, insurers only disclose new business premium. We would like them to also disclose the renewal premium, the persistence ratio, the number of policies dying out, claims, the claims ratio, the percentage of claims rejected, the management expense ratio and the solvency margin. Some of these disclosures would be half-yearly, some quarterly, some annual and some monthly. Unless all these are available on a regular basis, it will be difficult to figure out how a company is doing. Companies will have to put internal audits in place to be sure that the figures are correct.
It has been nine months since you allowed companies to decide on policy wording but you have not approved any add-on. Why is that so?
Over the past years, we have been approving 160-220 products a year. But now, with de-tariffing coming into effect, 300-320 products are coming up for approval. So, there is a mismatch between internal capacity and new proposals. We have less than 100 people at the moment. We are looking to increase it to 200 over the next two-three years.
There is a cap on management expenses. How many companies have violated the norms?
We implement it only when a company completes five years of operation. Out of the 20 companies that have completed five years, six are not compliant with this norm. We have asked them to explain the steps they are taking to bring down such expenses.
Global reinsurance companies are allowed to set up a company in India but none has shown interest so far. The insurance Bill talks of allowing reinsurance companies to set up branches here. Will the reforms result in reinsurers opening branches in India?
Reinsurers are allowed to set up a company but the business requires huge capital as they underwrite mega risks. No one is willing to put in so much capital. At present, reinsurance companies are not allowed to operate through branches. The difference between a branch and a company is that the former can operate using the strength of its parent’s balance sheet while the latter will have to have its own balance sheet. We will have to come up with guidelines when we allow them to open branches. These would include norms on reporting, the reinsurance premium they collect in India and the investment guidelines. We will be concerned whether this money is going to the parent and whether the company is adequately capitalised. We are going to set up a committee to look at the norms.
Life insurance companies are not profitable even after eight-nine years of operation. Is that a concern?
No, the losses are not a concern. Life insurance companies make losses for the first eight-nine years. The break-even has been pushed back by two-three years, may be because the companies sold more than they planned in order to record a higher rate of growth.
Will you allow insurance companies to invest in derivatives?
We have not allowed insurance companies to invest in derivatives so far. There are arguments that insurance companies should be allowed to invest in certain simple derivatives such as interest rate futures and index futures. We are still examining it but have not made up our mind.
Is there a discussion going on with the government on relaxing the listing tenure?
There is one insurance company which has had discussions with Irda on whether we will permit it to disinvest now. We had said that it was only the government that could reduce the tenure. Then, they approached the government. The government is thinking of reducing it (the lock-in) to five years. Therefore, they have sought our suggestions. We have no particular issue. We are only concerned with disclosures and the measures that will have to be in place to ensure that the initial public offering, when it comes, is fair to the investing public in terms of disclosures.
