In the past year, the Insurance Regulatory and Development Authority (Irda) has introduced several guidelines to ensure that unit-linked insurance plans (Ulips) become cheaper and are recognised as insurance, not investment products. J Hari Narayan, chairman of Irda, tells Business Standard that despite the strain, the industry has coped well with the changes.
The insurance industry is under pressure because of the stringent Ulip guidelines the regulator introduced last year. Sales growth of life insurance policies has fallen, margins have shrunk and companies have extended their break-even plans. Does that bother you?
The life insurance industry has raised a first-year premium of Rs 103,000 crore up to February 2011. This is an increase of 23.82 per cent over the corresponding April-February period last year. I, therefore, do not see any fall in the sale of insurance policies. On the contrary, I see a fairly healthy growth.
Are you happy with the way insurance companies have changed business models to comply with the new norms?
Irda had to bring in appropriate guidelines for Ulips to ensure that the policies offered to the investing public are sound products and are designed to maximise consumer benefit. I am very happy with the way insurance companies have responded to the regulatory changes.
Given the circumstances prevailing at that time, the regulatory authority took a conscious decision that required the industry to make quick changes. I am conscious of the strain imposed on insurance companies by the quick tempo of changes which we have brought in and I appreciate the constructive manner in which they have reworked their product designs and business models to successfully operate in the changed business environment. This speaks very highly of the managerial capability of the insurance companies and their commitment to serve the Indian insurance consumer better.
Commissions paid to agents have come down significantly. Are you comfortable with the present levels or would you like them to move towards a no-load structure?
In any business, distribution costs are a very significant aspect of overall costs. This is true when considering traditional businesses like consumer durables, foods or software, as well as financial products. Efficient intermediation is a must and it would be a poor business model which does not take into account the reality of distribution costs. The commission structure has been found to be particularly effective in the insurance space, not just in India, but in most countries around the world.
If the Insurance Amendment Bill which Parliament is considering now is approved, there will be scope to re-examine the existing commission structure, to underpin the expansion of insurance penetration as well as foster growth of full-time insurance agents to provide customers with better advice and choice in a most cost-effective manner.
Ulip pension plans have failed to attract policyholders because of the mandatory 4.5 per cent guarantee on them. Are you going to review the guidelines?
There has been an apparent reduction in sale of pension policies, as compared to the period before issuance of the recent guidelines. However, it is incorrect to attribute this apparent decrease in sales solely to the mandatory 4.5 per cent guarantee. The apparent decrease in sales could also be because the earlier products which were marketed as pension products were not true pension products.
The Irda is of the view that any insurance product, including pension products, must carry some form of assurance. This is why they are insurance products. In the view of the authority, products (including pension products) which do not carry an implicit guarantee are not insurance products. Subject to this caveat, innovations and product designs will always be encouraged by the Authority.
Two non-life insurance companies — Reliance General and Royal Sundaram — are awaiting guidelines from Irda to merge. When can we expect the norms to be finalised?
The Irda is in the process of finalising the framework for amalgamation and merger of general insurance companies. The two companies would have to file their request in line with the stipulations laid down in the guidelines to be issued by the Authority.
Even the initial public offering (IPO) guidelines are awaited.
IPO norms will be finalised well before insurance companies become eligible to float them.
Many joint-venture partners have gone into shareholding agreements that differ from one company to another. Also, there is no clarity on who will reduce their stake and who will have the majority shareholding after the FDI limit is hiked. What are your views on this?
The shareholding patterns of joint venture partners are a matter of their prerogative, as long as they are within the permissible limits of regulation. As far as the foreign direct investment guidelines are concerned, it is for the government to take a decision on whether to continue with the present limits or hike them.
Are you considering allowing insurance companies to raise tier II capital after the Bill is passed?
The Amendment Bill does have an enabling proviso permitting companies to raise capital in forms other than equity capital. A committee constituted by the Irda to examine changes in the regulatory framework after the amendment to the Act is examining various options as to the capital structure of insurance companies. We will await the recommendations of the committee.
The dispute between hospitals and insurance companies has not been resolved completely. What steps are you likely to take in this regard?
The recent differences between health service providers and insurance companies were principally on costs and charges. Whereas the insurance companies had sought lowering and uniformity in rates because of the volume of benefits offered, service providers sought a differential rate, based upon the quality of healthcare. The differences on this crucial matter between service providers and insurance companies have substantially narrowed and constructive dialogue has commenced. To further this process, the Irda will constitute a Health Insurance Council with all stakeholders as members.
These developments will lead to a more constructive and healthy relationship between insurance companies and service providers. In addition, greater innovation will come in health insurance policies, such as market segmentation, differential pricing, etc. Such developments, in turn, are to be welcomed as positive steps in the evolution of a sustainable, affordable, equitable health insurance system in the country.
After last year’s major regulatory changes, can we expect more this year?
Regulations in the financial sector constantly evolve, as per changes in the national and global economic situation. To further strengthen the Indian insurance industry, greater attention needs to be paid to strengthening technical processes internally, both in the various insurance companies and, indeed, in the Irda.
