THE STRATEGIC REVIEW OF THE FUNCTIONING OF INSURANCE REGULATOR OF INDIA

PREFACE

The reforms in the insurance industry since 2001 have been significant. The reform agenda has been driven by several stakeholders and across several dimensions: The IRDAI has issued scores of regulatory guidelines, notifications and orders; the Government has amended several laws and tax policies including the amended Insurance Act; other regulators such as SEBI and RBI have changed the regulations in related financial services sectors. The Insurance Regulatory and Development Authority (IRDAI) was constituted to regulate and develop insurance business in India. As a key part of its role, it is responsible to protect the rights of policyholders. Indian Insurance sector has witnessed a significant growth ever since its liberalization in the year 2000. Even while the Insurance penetration has increased to 3.9%, the number of policies has gone to over 50 crores in this period; the potential of Insurance sector in the country has not been fully realized. Today Insurance has a very close interface with other financial Services that are provided by Capital Markets, Banking and Pension Sectors.

The recent changes in the regulatory framework consequent upon promulgation of the Insurance Laws (Amendment) Ordinance 2014 to amend the Insurance Act, 1938, the General Insurance Business (Nationalisation) Act, 1972 and the Insurance Regulatory and Development Authority Act, 1999, can give a galvanising effect to the Insurance Industry. In order to appreciate the implications of these rapid reforms, it is necessary to make a strategical assessment for a long term view of the signals emerging from the noise. Understanding these signals is a prerequisite to looking ahead.

Indian law has certain expectations from the IRDAI to perform in the Indian insurance industry. IRDAI has to protect the interest of policyholders by ensuring fair treatment by the insurance companies. The growth of insurance companies in a speedy and orderly manner has to be taken care by the Insurance Regulator. It should monitor and implement quality competence and fair dealing of the insurance companies in the industry. IRDAI should make sure that the insurers are providing precise and correct information about the products offered by them for the insurance customers. The Regulatory body should also ensure speedy settlement of genuine claims of the policyholders and prevent malpractices in the process of claims settlement. Complaints on unfair business practices affect the image of the insurance sector. A foolproof grievance redressal mechanism can win the confidence of the customers.

1. INTRODUCTION:

The Insurance Regulatory and Development Authority (IRDA) is a national agency run by the Government of India. This is based in Hyderabad and was formed by an act of Indian Parliament called as IRDA Act of 1999. Considering some of the emerging requirements of the Indian insurance industry, IRDA was amended in 2002. As stated in the act mission of IRDA is “to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.” Indian insurance industry is regulated by the terms and conditions of the IRDA. According to the Section 14 of IRDA Act of 1999 there are certain duties, powers and functions laid down for the IRDA. Insurance Sector underwent a lot of sea-changes, when it was privatized in 1999 and the Insurance Regulatory & Development Authority of India- IRDA- came into being. Now one more revolutionary change is sweeping across the Sector once again with the passing of the Insurance Act 2015 by the Government of India. This change has raised the expectations of the customers manifold in the following portfolios:

• More innovative products, Cheaper & affordable plans
• More improved customer service standards
• An end to the mis-selling of policies by the intermediaries
• Insurers becoming more responsible for their acts of omission and commission
• More penetration into Rural & Social Sectors
• Penalty for the insurers for the non-compliance of the Investment Regulations
• Relief from the stringent provisions of the Sec. 45 of the Insurance Act 1938where the insurers were rejecting death claims of the policies without proper justification
• Customers becoming co-partners in the running of the insurance companies by their participation in the Boards of the insurers, etc.
• This significant initiative aimed at enhancing the level of insurance inclusion as measured by indicators such as insurance penetration and insurance density for the sake of orderly growth.

2. MARKET FAILURES THE “ IRDAI” IS TRYING TO CORRECT:

The IRDAI is the link between the insurance companies, their intermediaries and the insurance customers. The government set up the commission last year to rewrite and synchronize the financial sector legislation, rules and regulations so as to address the contemporary requirements of the sector, including insurance. In the matter of the intermediaries, particularly the agents, the role of the Regulator has been disappointing. Following are the areas needs improvisation:

1. Insurers must go back to the basics of insurance and focus on the most fundamental insurance needs of protection and risk management. The lack of customer focus is evident when sophisticated unit link products are sold to rural customers. Their requirement is pure term insurance and not investment oriented products.
2. Insurer’s must improve and invest in their people. The recent downturn phase has exposed the inadequacy of talent available. This has been felt most in the agency system which is the primary distribution channel of the industry.
3. Insurers must develop more targeted affinity-based channels. Affinities can provide a cost-effective way for insurers to tap large groups of people. Overseas affinity based marketing is highly developed. For example, the Association of Retired People (AARP) in the US is a large insurance distributor. In South Africa, fans of soccer and rugby clubs are leveraged as affinities for insurance. India too has several large and strong affinities that have tied closely together and not been adequately tapped. For example, schools, doctors, CAs, and RWAs.
4. The industry has to create more effective dispute resolution. The published grievance redressal statistics does not give an insightful view of how grievances are handled. Creating time-bound grievance redressal processes and empowering the service team to take decisions that are commonsensical will go a long way in reducing the conflict.
5. Intermediaries in India have historically been product and insurer led. Customer’s interests have often been a lower priority. This is not good strategy because intermediaries lose their reputation. Intermediaries must now begin to demonstrably put customer’s interests first. This will help create a long-term franchise for them.
6. Intermediaries must invest in technology. Thus so far intermediaries have not had sophisticated technology. Such companies must now take a longer term view of the opportunity and invest. The right technology is imperative for scale up and also creates competitive barriers. CRM systems and insurance tracking systems should be the highest priorities.
7. The Government needs to create a level playing field across industries and across companies. Structurally, the government is both a maker and checker in the industry. It is the largest player in life and general insurance and also has a deep role in appointment and supervision of the regulator. This is an anomaly and the government must evaluate mechanisms to reduce this dichotomy. Overseas exposures will allow a wider range of assets for investment diversification and access to potentially higher returns. it will hold out prospects of better returns for policyholders
8. The number of agents has drastically come down during last three years. There was a time when LIC itself had nearly 30 lacs of the agents- now the number for the entire industry has come down just to 20 lacs and LIC has only 12 lacs of agents.
9. Mis-selling of insurance products is again an area where the Regulator could not achieve much- this is rampant in the field. This will continue as long as the intermediaries are paid by the insurance companies, because the loyalty of the intermediaries will be with the insurers and not with the customers. Because selling and distribution are different. Seller sells anything that is tangible whereas the distributor sells the financial services which are intangible. Insurance is the only exception where sellers are accepted as distributors.
10. Conservation of policies or Retention of the policies is another area, where the Regulator is found wanting. In the words of Horstmann ( 1998 ), “ there is a strong and positive relationship between customer satisfaction and loyalty. A Satisfied customer is six times more likely to repurchase a product and share his/her experience with five or six other people”.
11. LIC versus private sector insurers is an issue. The commission feels that exemptions are heavily loaded in LIC’s favour, which needs to be changed. The government’s financial reforms panel should consider a complete makeover of the country’s insurance laws that would end the monopoly of state-owned Life Insurance Corp. of India (LIC), shift control of the government to the insurance regulator, and create a legal system to deal with any failure of insurers.
12. The actuaries institute recommended that capital and solvency requirements of LIC should be aligned with that of private life insurers and LIC should be restrained from using its policyholders’ money as solvency margin. For private insurers, solvency margin is met from shareholders’ money.
13. IS “IRDAI” THE MOST APPROPRIATE ‘STATE INTERVENTION’?

Historical trends when interpreted carefully can reveal the future. The market continues to remain hugely underpenetrated. A strong control mindset was necessary in the early days and IRDA has done well to ensure that there are no failures on its watch. However, companies have now matured and need more flexibility.

• Customers are Stakeholders. Stakeholders have a quest for value. Their policies have to ‘Stay Sold’- the policyholders need to feel that their premiums are well-cared for and they can always connect with their insurers, if need be. But at the same time, while the Customer is the King, the Distributor is the Enabler since he is the bridge between the insured and the insurer. As a matter of fact, every insurer should depute a few officers and staff to the IRDAI to help in their task.
• FSLRC is also likely to revisit the current investment laws and suggest amendments to enable IRDAI to frame rules for agents’ commission, solvency norms, capital requirement norms, loans and advances by insurers, among other things. At present, these norms are largely governed by the Insurance Act.

• There has been a steady improvement in understanding of insurance economics. Companies have seen four distinct phases over the past ten years – a start-up phase of establishing the company (2000-03), a rapid growth phase often marked by the emergence of multi-channel distribution (2003-09), consolidation and expense reduction (2009-2014) and, finally, a return to growth (2014 to date). Whilst such rapid change is difficult to manage, the learning is immense. The rate of penetration of insurance in India is still low and has since last two years has a downward trend.
• Regulations have established strong financial practices that ensure solvency of the insurers. Many surveys indicate that customers do not trust private sector companies as much as public sector insurers. Establishing strong financial practices has helped address the trust issue.
• The competition has intensified. Tariffs have been dismantled (except Motor TP) and prices have fallen dramatically. Auto prices also show considerable variation linked to specific company strategies. Private sector insurers have steadily increased shares and PSU behemoths are fighting back. Increased competition is good because it benefits customers and ensures efficiency in organizations.
• The life premium growth is expected to accelerate slightly in the advanced economics. In the emerging markets the life sector is forecast to decelerate. The out-look for the non-life industry in advanced markets is more muted than for life, given expectations of moderate economic recovery and pricing weakness.
• The emergence of corporate restructuring and M&A in the sector. Both the general and life segments have seen outsight acquisitions, ownership changes and entry of new investors. The regulatory regime in M&A has also evolved and the framework for transparent transactions is more or less in place. Following years of consideration, the Insurance Laws (Amendment) Act 2015 (Amendment Act) was enacted in 2016 and it introduced certain key changes to the Insurance Act 1938,
• All insurers, reinsurers and insurance intermediaries are regulated by the IRDAI. The Insurance Act and the IRDAI Act lay down certain general principles. The specific regulations issued by the IRDAI from time to time govern insurers and intermediaries, depending on the nature of business undertaken by these entities. There are separate sets of regulations governing reinsurance arrangements of general insurers and life reinsurers, including the manner by which cross-border reinsurers can reinsure risks written by Indian insurance/reinsurance companies. Cross-border reinsurers must file certain specified information with the IRDAI by the end of each financial year, to accept any reinsurance/ retrocession from India.

4. THE DESIGN/STRUCTURE OF THE REGULATORY BODY.

The Indian insurance sector is highly regulated. Before the role of the Regulator in the changed atmosphere, first let us discuss their present functions:

1. Protecting the interests of the policyholders
2. Establishing the guidelines for the operation of the insurers as well as the Brokers
3. Specifying the Code of Conduct, qualifications and training for the insurance intermediaries
4. Promoting efficiency in the conduct of the insurance business
5. Regulating the investment of funds by the insurance companies
6. Specifying the business to be done by insurers in the Rural & Social Sectors
7. Handling disputes between insurers and intermediaries
8. Taking care of the customers’ grievances, both directly and indirectly
9. Insisting on the Required Solvency Margins- RSM-for the insurers so that the interests of the customers are well protected from the dangers of any financial insolvency by any insurer
10. Protecting the interests of the policyholders in case of any takeover of an insurer and seeing to it that the outgoing existing customers are taken care of well by adequate servicing arrangements and
11. Ensuring that the leadership of each insurance company is in safe hands by helping in the selection of a suitable and fit candidate as its CEO.

One approach could be to step back from its current involvement in appointing regulators. Additionally, the government provides security to its companies by way of captive business and, in the case of LIC, a sovereign guarantee. This does not mean that we can do away with the IRDAI. It has a definite role to play in safeguarding the interest of the insurance customers, being a watch dog for the insurance companies, looking after the solvency of the insurers and in exploring ways and means to increase the insurance penetration in India

In order to check mis-selling, the Authority has made many regulations etc such as IRDA (Protection of Policyholders’ Interests) Regulations, 2002, The IRDA (Insurance Advertisements and Disclosure) Regulations, 2000, IRDAI (Appointment of Insurance Agents) Guidelines, 2015,IRDA (Licensing of Corporate Agents) Regulations, 2002, IRDA (Insurance Brokers) Regulations, 2013, which are aimed at protecting rights of prospects and ensuring fair market conduct. The recent amendments to the Insurance Act, 1938 will enable the interests of policyholders to be better served through provisions like penalties.  The Insurance Laws (Amendment) Act 2015 (Amendment Act) was enacted in 2016 and it introduced certain key changes to the Insurance Act 1938, for example:

• The foreign investment cap was increased to 49%.
• Overseas reinsurers are permitted to open branch offices to carry out reinsurance business in India.
• Facilitating the entry of Lloyd’s of London. In February 2015, the Ministry of Finance notified the Indian Insurance Companies (Foreign Investment) Rules 2015
• The Rules envisaged that approval from the Foreign Investment Promotion Board (FIPB) will be required for any foreign investment beyond 26% up to the new limit of 49%. However, the Ministry of Commerce and Industry issued a press note bringing foreign investments in the insurance sector up to 49%, under the “automatic route”, subject to verification by the IRDAI and therefore FIPB permission is no longer required.
• The Rules clarified that the increased FDI limit of 49% will also apply to insurance intermediaries.
• The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, notified the Consolidated Foreign Direct Investment Policy, effective from 7 June 2016, to ensure uniformity with the Rules.

2016 also saw continued regulatory investigations and orders against insurers and intermediaries. The IRDAI issued:

• Regulations regarding the licensing process for third party administrators.
• Regulations to standardise the payment of commission/remuneration for insurance intermediaries.
• Regulations to standardise the issuance of insurance policies.
• New regulations governing investments by Indian insurers.
• New regulations regarding the product filing procedures to be followed by general insurers and health insurers.
• New regulations regarding reinsurance arrangements of general insurers.
• New regulations regarding permissible expenses of management.
• New guidelines regarding corporate governance.

5. AN EVALUATION OF THE “IRDAI” IN TERMS OF OUTCOMES ACHIEVED.

IRDAI has celebrated 19th April, 2015 as Insurance Awareness Day at Hyderabad (came into existence in 2000). Even before the passing of the Insurance Act 2015, IRDAI has done a commendable job by bringing out the IRDAI (Protection of Policyholders Interest) Regulations, 2002 & 2015 by incorporating the following benchmarks:

• 10 days’ time for complying to the majority of the requests of the customers.
• 15 days’ time for the settlement of any maturity claim of a policy.
• 30 days’ time for the settlement of a non-early death claim.
• 60 days’ time if it is an early death claim
• Six months’ time if any investigation is caused into the early death claim.
• Free-look period of 15 days allowed for a customer to return the policy document and claim refund of the premium, if the policyholder is not satisfied with the conditions of the policy is a great revolutionary step taken by the IRDAI.

• IRDAI has given up its role in the training of the intermediaries by ceding the function of recruitment and training of agents to the insurance companies from April 1 2015. Thus the whole licensing system has gone.
• It has mandated that 25% of the ULIP Funds should be invested in the Government Securities.
• The Holdings of Equity in an Indian Promoter company held by the FIIs, other than the foreign Promoters of the company, will not be a part of the FDI.
• IRDAI has mandated certain conditions for the advertisements being floated by the insurance companies- The caveat Conditions Apply should have at least 50% font size of the copy of the advertisement- because normally this caveat needs a lens to read it!
• Foreign Partners will not have any final say in the appointment of the CEO & Directors of the company, decisions on Strategy and Products.
• IRDAI can impose stiff penalty on the erring insurance companies- recent example is SBI Life insurance company, a heavy fine for mis- selling House Mortgage policies.
• The penalty for Rebating by the agents has been hiked to Rs 10 lacs and fine for any other misdemeanour by the intermediaries also increased manifold in order to act as a deterrent. IRDAI has imposed a fine of Rs.20 lakh on Appolo Munich Health Insurance Company for selling its policies through non-authorised insurance selling website makemytrip.com.

• It has correctly defined the role of Banks in the sale of insurance plans in the sense that Banks are answerable to the complaints of the policyholders as Brokers and not show the hand towards the insurance companies as being done hitherto.
• The Regulator has done significant work in the fast growing health insurance area by bringing portability policy, standardisation of terms and insurance for senior citizens. Insurance intermediaries need to give more importance to this need based cover:
• Insurers and reinsurers carry on the specific business for which they are licensed. The definition of Indian insurance company as prescribed in the Insurance Act states that the sole purpose of an Indian insurance company is to conduct life insurance business, general insurance business, health insurance business, or reinsurance business. Therefore, insurers are only permitted to undertake activities that are incidental to or supplement its sole purpose of carrying on insurance business.
• The overarching regulatory framework for the reinsurance of general insurance risks was recently amended by the IRDAI (General Insurance-Reinsurance) Regulations 2016 (Reinsurance Regulations). The guiding principle is maximising retention within India, so each insurer must maintain the maximum possible retention commensurate with its financial strength and volume of business. The IRDAI can require an insurer to justify its retention policy, and can give such directions as may be required to ensure that the Indian insurer is not merely fronting for a foreign insurer.
• The IRDAI has issued regulations setting out the licensing requirements and procedures for all recognised intermediaries, including insurance agents, corporate agents, brokers, surveyors, third party administrators, web aggregators, insurance repositories and insurance marketing firms.

6. WAY FORWARD: AN OUTLINE OF THE PROPOSED REFORMS:

There are many initiatives to be taken for the well-being of the insurance companies, intermediaries and even recommendations to be made to the Government of India.

1. Regulator must create more space for companies to innovate. A strong control mindset was necessary in the early days and IRDA has done well to ensure that there are no failures on its watch. However, companies have now matured and need more flexibility. As on date this is the status of the insurers but number of reinsurers branches has increased to seven including one private reinsurance company.
2. There are several areas where such flexibility is required. Top of the mind are training, product development and outsourcing. The industry has now evolved to a stage where monitoring just the output i.e. performance on a standardized examination should be sufficient.
3. In product development the regulator closely examines and approves a product before it can be launched. The most products are fairly routine and only a few require regulatory action. Such change will enhance the insurer’s flexibility in product innovation and also considerably reduce the regulator’s workload.
4. IRDA could stipulate broad guidelines on insurer’s profitability, customer’s returns and intermediaries’ commissions. It need not get into approving specific product features prior to product launch. Similarly, outsourcing of activities invites considerable regulatory scrutiny. Some of this is required – particularly in core areas such as underwriting, claims management and product development. However, in areas such as IT and operations, there need not be such tight control.
5. Regulatory capacity needs to be significantly enhanced. Consider the regulator’s workload today – there are close to 53 insurance companies and 7 reinsurers, each insurers with tens of products and hundreds of intermediaries requiring approval. Additionally, the regulator has to look at the investments of insurers, address customer grievances and create overall policy.
6. There is also a need to audit and inspect insurers and intermediaries for compliance. To address this load the IRDA should encourage to deputize people, enhance compensation and market itself as an excellent platform for insurance experience.
7. Articulate a long term regulatory timetable for the sector. There have been so many regulatory changes in recent years which normally require considerable technology and process modifications. The regulator should articulate a comprehensive table and calendar of likely changes. One does understand that unplanned regulatory interventions may be needed but much of the work could be structured.
8. The number of lives covered under Health Insurance policies during 2015-16 was 36 crore which is approximately 30 per cent of India’s total population. The number has seen an increase every subsequent year as 28.80 crore people had the policy in the previous fiscal. Looking to the enhanced treatment cost and medical expenses, this percentage should increase.
9. There is a need to publish more refined claims and grievance information by insurer. Currently the claims information that is published is aggregated. For example, health insurance claims are for group and individual combined. Individual product claims are not available. This is an issue because there are wide variations in claim approvals by product and type of business. Similarly, the reasons for claims rejection are not publicly available.
10. Micro Insurance needs more attention. All Micro Insurance policies are eligible for social sector obligations and if the same are issued in rural area then they are eligible for both rural and social sector obligations. Insurers should put in place effective operational procedures for accurate classification of the business obligations into Rural and Social sectors as per these Regulations.
11. The Regulator need to enter into MoU’s with other Insurance Authorities with an objective to promote mutual interests and cooperation in the field of insurance supervision through exchange of information and experiences on insurance supervision. The IRDAI should recognize importance of adopting international best practices while introducing and implementing regulatory measures domestically.

GOVERNMENT INITIATIVES:

Government’s policy of insuring the uninsured has gradually pushed insurance penetration in the country and proliferation of insurance schemes are expected to catapult this key ratio beyond 4 per cent mark by the end of this year. The Union Budget of 2017-18 has made the following provisions for the Insurance Sector:

• The Budget has made provisions for paying huge subsidies in the premiums of Pradhan Mantri Fasal Bima Yojana (PMFBY) and the number of beneficiaries will increase to 50 per cent in the next two years from the present level of 20 per cent. As part of PMFBY, Rs 9,000 crore (US$ 1.35 billion) has been allocated for crop insurance in 2017-18.
• By providing tax relief to citizens earning up to Rs 5 lakh (US$ 7500), the government would be able to increase the number of taxpayers. Life insurers will be able to sell them insurance products, to further reduce their tax burden in future. As many of these people were understating their incomes, they were not able to get adequate insurance cover.
• Demand for insurance products may rise as people’s preference shifts from formal investment products post demonetisation.
• The Budget has attempted to hasten the implementation of the Digital India initiative. As people in rural areas become more tech savvy, they will use digital channels of insurers to buy policies.

The Government of India has taken a number of initiatives to boost the insurance industry. Some of them are as follows:

• The Union Cabinet has approved the public listing of five Government-owned general insurance companies and reducing the Government’s stake to 75 per cent from 100 per cent, which is expected to bring higher levels of transparency and accountability, and enable the companies to raise resources from the capital market to meet their fund requirements. ICICI Pru has already divested equity through the IPO route.
• IRDAI has formed two committees to explore and suggest ways to promote e-commerce in the sector in order to increase insurance penetration and bring financial inclusion.
• IRDAI has formulated a draft regulation, IRDAI (Obligations of Insures to Rural and Social Sectors) Regulations, 2015, in pursuance of the amendments brought about under section 32 B of the Insurance Laws (Amendment) Act, 2015. These regulations impose obligations on insurers towards providing insurance cover to the rural and economically weaker sections of the population.
• The Uttar Pradesh government has launched a first of its kind banking and insurance services helpline for farmers where individuals can lodge their complaints on a toll free number.
• The select committee of the Rajya Sabha gave its approval to increase stake of foreign investors to 49 per cent equity investment in insurance companies.
• Government of India has launched an insurance pool to the tune of Rs 1,500 crore (US$ 220.08 million) which is mandatory under the Civil Liability for Nuclear Damage Act (CLND) in a bid to offset financial burden of foreign nuclear suppliers.
• Foreign Investment Promotion Board (FIPB) has cleared 15 Foreign Direct Investment (FDI) proposals including large investments in the insurance sector by Nippon Life Insurance, AIA International, Sun Life and Aviva Life leading to a cumulative investment of Rs 7,262 crore (US$ 1.09 billion).
• IRDAI has given initial approval to  six reinsurers to open branches in India.

India’s life insurance sector is the biggest in the world with about 360 million policies which are expected to increase at a Compound Annual Growth Rate (CAGR) of 12-15 per cent over the next five years. The insurance industry plans to hike penetration levels to five per cent by 2020. India’s insurable population is anticipated to touch 750 million in 2020, with life expectancy reaching 74 years. The future looks promising for the insurance industry with several changes in regulatory framework which will lead to further change in the way the industry conducts its business and engages with its customers. The Indian insurance market is a huge business opportunity waiting to be harnessed. India currently accounts for less than 1.5 per cent of the world’s total insurance premiums and about 2 per cent of the world’s life insurance premiums despite being the second most populous nation. The country is the fifteenth largest insurance market in the world in terms of premium volume, and has the potential to grow exponentially in the coming years. Since its inception the IRDA has led the insurance industry on the right path and monitoring the insurance business remarkably. The primary insurance regulator is the IRDAI. Only IRDAI approval is now required for foreign investments in the insurance sector, making the IRDAI the sole decision maker. In addition, appeals from orders issued by the IRDAI can now be preferred before the Securities Appellate Tribunal.

About the Author

JAGENDRA KUMAR
Ex. CEO,
Pearl Insurance Brokers
71/143, “Ramashram” Paramhans Marg,
Mansarovar, JAIPUR-302020