Mumbai: The secretary general of the Life Insurance Council, an industry body comprising India’s life insurance firms, is busy fighting what he calls a “systematic campaign” by vested interests to malign the insurance industry and its flagship product—unit-linked insurance plans (Ulips). In an interview, S.B. Mathur says the insurance firms and the Insurance Regulatory and Development Authority (Irda) are not the bad guys in the story. Edited excerpts:
Many life insurers feel they are comfortable in registering Ulips with Sebi (Securities and Exchange Board of India). Why are you resisting it?
We are not resisting. Unless the road map is made clear, it’s a hypothetical question, but we will go by the decision taken by the two regulators. If in a single product, the liabilities side is managed by the insurance regulator and the asset side is managed by Sebi, there will be huge confusion for all. In insurance, the liability-side risk is much higher than the asset-side risk, which is manageable. We do not see much logic in it and that way there will be no end to this. Take New Pension System, which has a very strong capital market component. Why not they be regulated by Sebi?
Staunch defence: Life Insurance Council secretary general S.B. Mathur says that when it comes to financial products and their distribution, there is bound to be some overlap.Ashesh Shah/Mint
What is your position on the issue?
When it comes to convergence in financial products and more than that financial distribution, there’s bound to be some overlap. Since we are in a relatively newly opened-up economy, there is bound to be some confusion. So one need not look at it as a conflict between two regulators, but as a road map to handle any future confusion as the economy evolves further.
Earlier, there was criticism that since life insurance companies were investing too much in government securities, the policyholders were deprived of long-term benefits of equity markets. Now, when the industry has started investing in equities, people are saying that the capital markets regulator should step in, which is totally wrong.
But there are many areas and products that are jointly regulated by Sebi and the Reserve Bank of India (RBI).
But you look at the magnitude (of Ulips). If you impose a no-load regime to insurance, it is not justified. The insurance business is built over trust and it involves cost to build trust.
Do you think the whole controversy has its genesis in the Swarup committee recommendations on a “no entry load” structure and Irda’s opposition to that?
Whether you like it or not, it is an offshoot of that, it is a systematic campaign. Tell me, why should not the mutual funds go and do business in rural areas? You are talking about an industry (mutual funds) that neither has the capital nor any inclusive growth obligation.
How does this justify insurance agents being allowed to charge such high commissions?
There are two ways of meeting social objectives. One is government directly incurs expenditure, and the other is the corporate sector doing it with the cost being borne by the corporates, including customers. That part of loading-on costs is being totally ignored. Thirdly, permissive investment norms. Irda is very particular about how Ulip funds are invested. My point is, the working environment is very different.
Mutual fund investments have been made load-free, and most of the other financial products are available at very low rates. Then why do Ulips charge 35-40% commission? Don’t you think that such commissions should be lowered and the products should be made more investor friendly?
An insurance agent’s role is different from a normal distributor. He gives a primary report of financial and physical health of a person in such cases. So he is a primary underwriter.
Secondly, in case of death, who helps the family? It’s the agent. In case of death before completion of three years, the agent has an active role in the mandatory investigation.
Despite these, commissions have been gradually coming down. The law has capped commission payments. Our provisional data shows that last year, 47% of the total new premiums of Rs1.09 trillion came at commissions of less than 2%. During the four years ending fiscal 2009, 42% of the new premiums came at commissions of less than 2%.
During those years, mutual funds were charging higher commissions as entry load. If commission was the driving factor then why didn’t this money go to mutual funds?
How do you see the growth of the industry this year? Do you think sales will be hampered due to the ongoing tussle? Some private life insurers have recorded a decline in growth last month.
We will get to know now. There will be some impact. There won’t be very significant impact until the situation worsens.
A number of promoters of life insurance companies also own asset management companies (AMCs), so there is a view that when Sebi tightened norms for the asset management industry, they conveniently shifted to selling Ulips. Is this correct?
AMCs are allowed to start their businesses with a mere Rs10 crore capital and collect any amount of money they like. For the Rs7 trillion-odd AMC industry, merely Rs3,000-4,000 crore must have been brought by the promoters, and even this information is not in the public domain. On the other hand, there are hundreds of ways an investor can find out what the capital structure of an insurance firm is.
But for every rupee an AMC collects, it now has to pay out of pocket. It would rather get the money through Ulips, where the cost of acquisition is virtually nil as the consumer bears the cost.
Who said there are no costs? The cost has to be borne by someone. After pumping in Rs28,000 crore of promoters’ capital, I have not seen any profit in 10 years. Losses have not been wiped out. Four or five firms have now begun making profits. On the other hand, mutual funds with Rs10 crore capital commitment, see how much profit they have already made.
So, if I (as a company) have to collect money, I would rather collect from AMCs, rather than insurance companies. That is why there are 40 AMCs, 20 more are lined up. There 23 insurers, couple of them were planning to come and even they are quiet now. If this is such a profitable business, why shouldn’t the rule be reversed to 60 insurance companies and 20 AMCs?
There is a difference. I am an asset manager. I have not taken upon these statutory liabilities which are peculiar to your business (insurance). So it is not fair to compare those costs. But you are coming into my area of business, which is selling investments. Should you not play by the rules of this game?
Why can’t I compare? You will say I will only compare this part of the obligatory cost and this part I will leave? What is this funny business?
Capital requirements are peculiar statutory liabilities due to the nature of the insurance business. We are looking at the cost incurred for acquisition of these funds for investments.
You are stubborn…and not prepared to listen. This is not a level playing field. Capital has a cost. What happened in 2008, when the financial crisis took place? Why did government bend over backwards to (extend) liquidity support to mutual funds?
But since then the mutual fund industry and regulator have taken stock and made a lot of changes and focus is slowly returning to retail assets. Don’t you agree that these changes are being rendered ineffective by the insurance commission structure and Irda’s position?
You are taking a very prejudiced view. Thirty lakh agents—they cost money. Why didn’t they say this 10 years ago?
Why are you not trying to see this from the investor’s point of view?
Are you trying to say that for the 32 crore (320 million) policies sold, investors have come with their eyes closed? Are you willing to see that 5.32 lakh crore (trillion) policies have been sold during the year in spite of the Swarup committee report, and totally biased view is being floated around?
But like you said, most people trust their agents and do not look into the details. And often, even many agents do not know that their commission comes from investors’ money. How do you expect the investor to understand?
Can you change the society overnight by the click of a button?
But how else do you change? You should start somewhere, shouldn’t you?
This same Mr Bhave (C.B. Bhave, chairman of Sebi) in an earlier speech said if the insurance industry is able to attract funds at higher cost and mutual funds are not able to do so at lower costs, there is something wrong with them. Now they have changed their view. Obviously, there is pressure from somewhere else.
Do you think the whole thing is a government agenda?
I have no comment on this.
You mentioned earlier that it is a campaign.
It looks like that. In the consultation paper of the Swarup committee, not a single view of the insurance industry has been registered. Is it fair? I myself made a presentation. We made a detailed presentation, but not one item was included in the final report. And you release the consultation paper and sound CNBC and one paper at 9pm.
Next day was Ganpati festival. The idea is to focus data to media and create a negative public opinion.
There is this other campaign about load-free structure. Their load is on the gross capital amount. Our load is on only annualized premium.
What do you think is the intention of Sebi in asking insurers to register?
Nothing is clear. Basically, the matter is between two regulators. All I can say is the steps taken and media drive are totally prejudiced and unfair. I am not prepared to endorse or contribute to the theory that the edifice of Rs11 lakh crore of assets and 32 crore policies is built on mis-selling and high commission.
What is your last word on this?
I would like to reiterate that we have created an infrastructure which will pay in the long term. We are not bathed in milk. But we are also not the villains we are made out to be.
What will happen on 8 July, the day of the Supreme Court hearing?
Nothing will happen. Legally, Irda’s position is very clear.