Widening insurance reach key challenge

In India, apart from central bank, the Reserve Bank of India, the focus has been on insurance regulator Insurance Regulatory and Development Authority or Irda. American International Group Inc, or AIG, the insurer that seems to have come back from the brink, is present in the country and questions have been raised about the fate of these ventures.

Answering these questions, and others on the insurance business in an interview with Mint is J Hari Narayan, the chairman of Irda, who took charge of the regulator in June. Narayan, a former chief secretary of Andhra Pradesh also spoke on his aim to widen the reach of insurance in India. Edited extracts:

Do you think you need to be more vigilant, in light of the financial crisis at AIG?

Too much should not be read in(to) the AIG issue. We should not forget that AIG is one of the largest insurance companies in the world. For instance, if we take LIC (Life Insurance Corp. of India) it has total assets of the order of $200-300 billion and AIG is 10 times its size.

It’s not an issue for the Indian market. Solvency of Tata AIG (the joint venture with the Tata group through which AIG is present here) is quite satisfactory. It has adequate resources to meet all its liabilities and has much more than the minimum solvency prescribed. So it’s a very sound company and (there is) no need for anxiety.

In a day or two they are expected to submit the report on these developments.

What’s your stance on insurance companies misusing the referral system of distribution (Mint recently featured an investigative report on this by Outlook Money that showed that some corporate agents of insurance firms were selling policies through so-called pyramid schemes or multi level marketing networks)?

IRDA chairman J. Hari Narayan. Bharath Sai / Mint

What’s the key challenge before Indian insurance firms today?

... to expand the availability of the products to (a) larger section of (the) Indian population and to enable development of appropriate products for meeting the needs of the poor people.

But isn’t there some skew in the kind of products being sold? Unit linked insurance plans (ULIPs) account for more than 80% of the premium earned by private sector insurers.

Over the last 3-4 years, it is very true. Otherwise, the bulk of the life insurance policies have always been term and endowment policies. But over the last three to four years, ULIPs have increased in popularity.

Lately, you (may) have noticed (that) there is slight dip in the popularity of this product because the stock market does not promise as much return as it used to and people are slightly nervous about their stock market investments. But having said that, there is a great difference in investment profile with what used to happen earlier. I would imagine a certain section of population that is looking for returns different from security is developing.... ULIP investments are very much like a long term investment and therefore they bring a great amount of stability into the Indian markets.

There is no one way in which policyholders are charged in ULIPs. Do you think there is a need of common fee structure for policyholders to understand their policies better?

Absolutely. And that’s what we are working towards. I think that very shortly we will come up with common pattern for charges. Though (the) actual charges will not be mandated, the patterncan be mandated by the regulator. Currently, different companies use different terms for signifying the same thing. In next three or four months I expect it (the common guidance) to come out.

General insurance is one area where Irda has made significant changes. And because some premiums have come down sharply after detariffing (slabs on tarriffs were removed, allowing insurers to fix their own) some general insurance firms have been badly hit. Do you think there’s anything Irda could have done to lessen the pain?

Competition is always good. They will find their ways.

Another change made by Irda, the creation of the motor pool (where vehicles refused insurance by several insurance firms are insured) hasn’t gone down well with general insurers too. Some insurers want this dismantled.

I don’t think motor pool should at all be dismantled.... It is an essential component of the transport industry of the country. However, certain operational aspects can certainly be made more efficient. We are working and will come out with some solution soon -- some operational changes that will give great satisfaction in the way the pool works.

One area where there is definitely some dissatisfaction among consumers is health insurance. Senior citizens, in particular, have a lot of complaints against insurers. Are you considering a separate grievance mechanism for them?

There is a robust grievance redressal mechanism already in place. And this mechanism has three legs. One leg is that companies are required to have their own grievance redressal forum. Second, for individual claims which are of value upto ₹ 20 lakh, the government has established an ombudsman system which is like court. And if the forum gives a decision the insurance companies cannot appeal; only the policyholder can appeal. So it’s a very pro policyholder kind of mechanism. The third leg is Irda itself.

Still, there have been complaints by senior citizens that their premium rates have been increased, despite the notification by the regulator that they should not be hiked more than 75%.

Some of the complaints have come to our notice and the companies have admitted that it was an error and they have rectified it. There may be some odd cases where rectification has not taken place.

What are the major challenges you see in the health insurance business?

First, it is necessary that the health sector should be regulated better. At present, there is no regulation of the health sector. I mean, certain protocols of treatment and certain methods of treatment (must be laid down).... In other countries, for example, for any kind of a health condition, there are prescribed standard protocols, which are accessible to the public. Standard protocols do not seem to have been developed (here). Or even if they have been developed, they are not been regulated yet.

Second, is the quality and accreditation of hospitals. There is a system which in place but, by and large, it has not really taken off. And the third thing is (the need for a ) certain amount of transparency (in) operations, particularly financial operations, of hospitals. We would like to develop a system where hospitals, like other companies, are required to bring out various cost sheets that will enable over time to build up a data base on what things cost in (the) health sector.

On the insurance side, what needs to be done is that better drafted and more sensitively designed products must be made available in the market with better advertisement. We must recognize that there is a lot of moral hazard in the entire industry, which will then require individual citizens and policyholders also (to) play their part. If we want a healthy health insurance sector, all three parties must play a healthy role – insurance companies, hospitals and policyholders. If each one tries to game the other, then we not have health insurance.

Let’s talk about wordings. Several insurers say they are constrained in launching new products because there are only few words they are alllowed to describe products (this is called wordings). Irda has been talking about relaxing these.

This is something which we can’t do in haste but slowly because words have established meanings. Not just in the Indian market but in the international market too, for instance, (in the) reinsurance market (where insurers insure their risks). So it is unwise to change the meaning of the words rapidly. I think certain amount of wordings should be permitted, so that new type of products can come up. Having said that, let’s not forget that there are several general insurance products which are not bound by the wordings of the Tariff Advisory Committee or TAC. But we have not seen any amount of creativity in those products. For example entire health products and personal liability sector are not bound by the wordings of TAC but we have not seen so much creativity over there.

So, if insurance companies say they are not creative because of lack of flexibility they should ask themselves why they have not exhibited flexibility in these two fields. Is it that they lack the imagination or is it perhaps they lack the managerial drive? They have not demonstrated that they are serious about it.

Thirdly, .... (in) the US and Australia they have moved away from the ancient type of writing (insurance policies). There documents are far clearer. So, why has this not taken place in India?. And it has nothing to do with the wordings. I would like to see forward movements in those dimensions. Otherwise, it looks (to me like) insurance companies are using TAC wordings as (a) smokescreen and prevent any serious work in improving their products.

Your guidelines on investment guidelines have become very confusing where LIC is concerned. And this is despite this being applicable to new investments. Why?

The guidelines are prospective. But LIC, which is one of most the significant investors in the Indian market, has pointed out that certain of the requirements will constrain their ability to invest. LIC will be investing somewhere in the region of ₹ 100,000-150,000 crore every year in the market. You must have appropriate instruments and mechanisms, which will enable them to make such investments. So, they were pointing out certain difficulties in that matter and we are listening to them and further discussions will go on.

Does this mean LIC wants to invest only in a few blue chip stocks to be on the safer side and keep their investment portfolio safe?

What every insurance company needs to do is follow prudential norms, which also relate to prudential exposure norms. It is not wise to invest ...a lot of money in any given company. We have prescribed 10% limit and if you take big companies, 10% is ...a lot. LIC was giving a scenario where under certain circumstances, and given the rate of growth which they anticipate, the volume of investment which they may have to make over the next three-four years, will be of such a size that it may not be possible for them to stick only to 10% for AAA (companies with very high credit and fundamental rating) companies or AA (companies with high credit and fundamental ratings). That is one scenario. As you know, in a scenario painting, if you change certain assumptions, you will get some other results.

But does LIC need to worry about the existing investments?

Our guidelines do not apply to LIC’s existing investments. Though, even for the existing investments, purely as a regulator, I will very strongly say, Follow prudential guidelines’. We are in dialogue with LIC on the existing investments and we heard what they have to say. They said they would come back to us on existing investments

Have you recommended any changes in the Insurance Bill?

Yes, we have suggested certain amendments. And group of ministers (looking at the bill) have considered them and with certain modifications .... (put it up for) consideration of Cabinet.

One thing which we have proposed to the ministry is that when the Insurance Act came in 1930 , the economic scene and the industry were very different. We are talking of something which happened 70 years ago. So what we have required, given the nature of the financial market, is that we need to be fairly flexible and quick in relation to the developments in the market. We have asked for the empowerment of the regulatory authority to issue regulations.

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