Insurance amendment bill: necessary but not sufficient

Published in Mint on Mar 11 2015, Written by Kapil Mehta

If all goes as planned, the Insurance Laws (Amendment) Bill, 2015, which has been approved by the Lok Sabha, will become law over the next few weeks. The first version of this bill was introduced in the Rajya Sabha seven long years ago. The most contentious proposal has been to increase foreign ownership limits from 26% to 49%.

I vividly recall an event in 2007 when insurers tried to convince, unsuccessfully, the coalition party of the time to press forward on the new insurance and pension bills. Every suggestion was shot down because “foreign ownership would result in capital being surreptitiously taken out” and “privatization was bad”. Insurers’ arguments that, from a legal and operating standpoint, there was little difference between 26% and 49% ownership fell on deaf ears. The beneficiaries of low foreign direct investment (FDI) caps have been Indian companies, which will earn high returns from foreign partners. This could hardly have been the desired outcome that Left parties, which resisted the change, would have wanted.

The industry has not exactly prospered over the past seven years that the bill was delayed. The table shows some performance metrics during this time.

I am not making the case that this poor performance is caused entirely by the delay in passing the bill. Regulations and markets have had a big role but the FDI restriction has not helped. In any case this issue should get resolved soon when the new bill is approved by the Rajya Sabha or a joint sitting of Parliament. We now need to peer into the future and consider the consequences of this new legislation.

Foreign investment will increase substantially. This will take place over 3-5 years. Many Indian insurers are now valuable and foreign partners will be happy to increase ownership. Several overseas insurers have maintained representative offices in India for over a decade. Perhaps they will consider running full-fledged operations.

The relationship between the regulator, Insurance Regulatory and Development Authority of India (Irdai), and insurers will be more confrontational. Irdai will have considerably more power to penalize—up to Rs.1 crore per incident in many cases. But insurers will be able to appeal to the Securities Appellate Tribunal (SAT) if they disagree with the regulator.

This is only fair and creates a good system of checks and balances. But it will take time for insurers to gain enough confidence to challenge Irdai. There is little precedence and it may take a few years to arrive at a good working balance.

The decisions that Irdai will be allowed to take are many more. Several matters that were previously in the Insurance Act will now be regulated. This means Irdai can pass regulations without seeking approval in Parliament or changes in law. Consequently, future political logjams or a parliamentary de-prioritization of insurance will not hold up regulatory decisions. Irdai will be able to take decisions on type of share issuance, financing instruments and setting management expense levels for insurers.

Distribution will face some heat. Insurers will be stricter because the liability for misconduct of agents or selling through unauthorized entities is squarely on insurers. The fine could be up to Rs.1 crore. Rebates, which are common, will be liable for fines up to Rs.10 lakh, up from Rs.500. I would be delighted to see rebating disappear. It eats into the already meagre agent earnings. Given the extent of mis-selling and rebating prevalent, these fines could be substantial.

Multi-level marketing (MLM) distribution has been prohibited. That’s easier said than done. It’s difficult to differentiate an MLM from a legitimate distribution channel. An MLM is one where the earning of an intermediary through recruiting people is more than by actually selling a product. It requires deep analysis of the distribution channel’s incentive structure to make a classification. The product being sold also matters. Selling palm trees in Hawaii is wrong but an approved health supplement may be fine. The regulator will need to define MLM clearly.

Trading in insurance has been banned. If you are wondering what this is there are situations where an insured person will assign her life insurance to an unrelated person or stranger in return for money. On assignment, the responsibility for paying future premiums as well as receiving benefits is transferred to the new policy owner. This creates an unpleasant situation where the new owner benefits most if you die early. I, for one, would not like to be caught alone with a stranger who owns my life insurance. Banning such trading was required.

It’s good that in the new bill an insurance policy cannot be challenged on any ground after three years. Buyers will be reassured that claims will be paid when they die. That should reduce the workload on the overworked ombudsmen. Today, it takes over a year for the ombudsmen to review grievances. That will come down. Perhaps when the Financial Redress Agency is created, the ombudsmen will no longer be required.

Health insurers can now be established with a capital of Rs.50 crore compared with the previous Rs.100 crore. This will not encourage more health insurers to set up shop because it takes over Rs.100 crore to build a health insurance business in the first place.

When the bill is finally approved, the government can take a well deserved break. But Irdai and the insurance industry have a full agenda for the coming months.

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