Published in Mint on, Oct 18 2011. Written by Kapil Mehta
Over the past 10 years, there have been scores of regulatory guidelines, notifications and orders issued by the Insurance Regulatory and Development Authority (Irda). Each change is widely reported in the media and discussed and debated within the industry. The discussions typically tend to be tactical and specific to the change introduced. However, a clear direction emerges if one pauses and looks at long-term regulatory trends.
Focus on customers
The first trend is that insurers are being forced to focus on the customer. The use of the word “forced” is deliberate. Given that financial literacy in the country is extremely poor, financial products such as insurance have been frequently mis-sold. Regulations are now forcing insurers and distributors to respect the rights of customers. There have been over 10 fundamental regulatory interventions that significantly improve the value proposition of insurance for the customers. These include insurance advertisements and disclosure regulations in 2000, the protection of policyholder’s interest regulation in 2002 and, most recently, the revised product requirement for unit-linked insurance plans (Ulips).
Today one can purchase any Ulip and be confident that it will have reasonable product charges and a threshold amount of life insurance. Illustrated returns while selling insurance are restricted to 6% and 10%, or lower. As a result, customer expectations are set at realistic levels. Now, all charges and guarantees have to be specifically described in the illustration.
Similarly, basic grievance redressal mechanisms have been set up. An aggrieved customer can write directly to the company, Irda or an ombudsman. In my experience, involving Irda normally ensures the fastest turnaround time by the company. The grievance redressal process still has a long way to go but we are far ahead from where the industry started off. As per Irda’s statistics in life insurance, 43% of grievances in 2007-08 were outstanding at the end of the year. This has reduced to just 14% in 2009-10. The trends in general insurance are similar.
Quality of distribution
The second trend has been to ensure better quality of distribution. There have been at least 15 regulatory notifications on the topic of licensing and training of agents. The combined impact of these notifications has been to raise the standard of insurance intermediaries and agents. In the early days almost anyone who walked into an insurer’s branch could become an agent or intermediary. Now, becoming an intermediary and then retaining one’s license has become more difficult. So distribution channels have begun to shrink. But customers do benefit because better qualified, trained and long-term operators sell insurance to them.
The third trend of the regulations has been to establish strong financial practices that ensure solvency of the insurers. Many surveys indicate that customers do not trust private sector companies as much as government-owned insurance companies. A report by Invest India Economic Foundation, in 2005 indicated that only 13% of the paid workforce actively trusted private sector life insurers. The corresponding number for government-owned Life Insurance Corp. of India was a huge 71%. Establishing strong financial practices has helped address the trust issue. There are guidelines on where insurers can invest their money (always done in a very conservative manner), detailed description of how solvency needs to be measured and reported, creation of a motor pool so that the insurance load for mandatory insurance is shared fairly by the sector, and strictures that ensure that the policyholder’s liabilities are met even if shareholders change.
This does not mean that there have not been misses in regulations. The most notable has been the delay in raising foreign direct investment (FDI) from 26% to 49%. Attracting FDI into the country can significantly improve the quality of products and customer experience. Consider the telecom industry, where FDI up to 74% is allowed. Intense competition coupled with the financial stability of companies has resulted in tariffs that are among the lowest in the world. Proponents of not increasing FDI argue that increased foreign ownership will result in a higher degree of control by foreigners and potential solvency issues if profits are expatriated. These are false arguments because there is no difference in the control rights that a shareholder has at 26% and 49%. Further, Irda has put in place fairly conservative solvency requirements to ensure that policyholder liabilities are always met even if a company issues dividends. Attracting long-term capital will only help develop the industry.
It typically takes at least 10 years before the impact of significant regulatory changes can be fully evaluated and understood. However, if we listen carefully to the signals rather than the noise, it does seem that the insurance industry is headed in the right direction.