Hyderabad: Regulators are sometimes not too keen on laying down the law because they may be too close to the industry that they are charged with making sure is complying with rules, said J. Hari Narayan, who stepped down on Wednesday as chairman of the Insurance Regulatory and Development Authority (Irda).
“There is a lot going on in the world of insurance products and regulators the world over are chary of regulating products, product design. They normally have two reasons to do that: it stifles innovation and it doesn’t allow free market play. But I think there is a philosophical problem. I think the regulators are probably closer to the industry than they ought to be,” Hari Narayan said in an interview.
“You need good regulations in products and one shouldn’t shy away from that because it is a financial product. It’s a question of hygiene really,” he said.
Hari Narayan’s tenure as Irda chairman, which began on 10 June 2008, has been a controversial one, enlivened by a turf war with capital market regulator Securities and Exchange Board of India (Sebi) over unit-linked insurance plans (Ulips) in 2010.
The row with Sebi eventually got settled in favour of Irda, but Hari Narayan acknowledges now that the fight with the capital market regulator, led by C.B. Bhave at the time, marked a shift in perception and led to a clean-up of insurance products. The regulator also began moving towards better customer protection.
To begin with, though, Hari Narayan had to contend with a steep learning curve. “I found the insurance sector very complex. The quality of personnel was very bright, but I took some time in understanding products. I was learning initially,” he said.
His understanding of the industry had improved by the time of the tussle with Sebi.
“It is right that our understanding of the product was quickened by Sebi’s intervention. But what also happened then was there were a whole lot of articles on what was wrong with insurance products in the media. In that sense, Sebi was the point of departure. Yes, that issue gave us insights into the practices being followed by the insurance companies, the design of the products,” he said.
Sebi’s contention had been that Ulips were investment products packaged as insurance plans. After winning the battle, Irda transformed Ulips by increasing the insurance cover, introducing cost caps and lowering surrender charges in order to make them customer-friendly.
The regulator is now ready with new product guidelines on traditional plans as well on those that are expected to be announced shortly. These increase the guaranteed surrender value of traditional plans and peg commissions to the term of the policy: the longer the term, the higher the commission.
Irda has been unwilling to relent in the face of resistance from the industry against the rules. But by increasing the surrender value or lowering surrender charges, it wants to encourage the industry to sell long-term products. This would check early lapsation of policies, which is a chronic problem in the industry.
“Insurance industry would not have a future if they don’t build trust with the customers. I don’t think these guidelines are unreasonable. I think it has got to do with the attitude and managers of life insurance. Some of them are bankers who may understand finance, but have no understanding of insurance,” he said.
Insurers agree that regulations in the recent past have been for the good of the industry.
“The regulations have nudged the industry in the right direction to ensure long-term sustainability. The regulations are only ensuring that better value is delivered to customers and hence improving the attractiveness of life insurance in the context of financial products,” said Sandeep Bakhshi, managing director (MD) and chief executive officer (CEO) of ICICI Prudential Life Insurance Co. Ltd.
But the pace at which regulations are announced troubles insurers. “The direction has been positive, but the industry did have a degree of discomfort in adjusting to the pace of change in the last two years. The time given in some cases to react to the change was also not sufficient. The other grouse the industry has had is the long time it has taken to close uncertainty around products,” said Amitabh Chaudhry, MD and CEO of HDFC Life Insurance Co. Ltd.
Some blame the slump in business on this. Fiscal year 2012 saw new business premiums dropping by 10%.
“Frequent changes and the limited transition time allowed, for instance, forced life insurers to redevelop and refile the existing product range multiple times. The impact could be seen in volume drop from 85% to 40% in Ulips, 10% to nil in variable insurance products and 30% to nil in case of the pension products,” said Rajesh Sud, MD and CEO of Max Life Insurance Co. Ltd.
Hari Narayan accepts that regulations may have had an impact on growth. “Yes, in the past two years, growth has been flat. It may be true that pace of regulations may have affected growth, but the question is not about growth. It is about whether those regulations were needed or not needed. Irda is there to protect both sides of the equation. So, do we want growth at any price or do we want healthy growth, sustainable growth?”
He also accepted there was premium churn, or the same policyholder buying newer policies and allowing the old ones to lapse, and blamed it on insurers who adopted practices from other segments.
“They had developed the practices of bankers and mutual fund people. And that’s not the way that insurance works. That’s a lesson they had to learn the hard way,” he said.
Hari Narayan also questioned the need for insurers to have a large bouquet of products. “This business that I file a product and it gets cleared immediately makes little sense. You need to ask why you are churning the products like that. The industry got it wrong. They wanted more products not because the products were different from one another, but to enable the premium churn.”
Insurers have also complained that Irda takes too long to clear products.
Hari Narayan said this was due to their complexity. “They would define products so poorly that we would go on exchanging notes. Sometimes it was so gross that the insurer himself did not have an idea of what he was filing. This is one of the reasons why we had to lay down the boundaries for product design. We wanted to tell them what we don’t want to see in products,” he said.
Hari Narayan stood his ground with the government, expressing his disapproval when the government sought to raise the Life Insurance Corporation of India’s (LIC’s) equity investment limit in companies from 10% to 30%
“If you look at section 43(2) of the LIC Act, 1956, it says that the government could control the funds in the short term,” he said. “But that short term has long ceased. Fifty years later is not short term. And Parliament has made it clear that LIC comes under the regulatory purview of Irda. I think the government has understood this because so far I haven’t seen any notification,” he said. However, on 8 February, Irda allowed all insurance companies, including LIC, to raise their exposure in equity in a given firm from the present 10% to 12% and 15%, depending on the size of the controlled fund.
Hari Narayan put some reforms in motion before stepping down. For instance, Irda is working on standardizing the definition of persistency ratios, one of the tools to assess basic hygiene standards at a life insurance firm by showing leakages in renewal premiums of life insurance policies.
But even this ratio, used as a measure of the percentage of policies remaining in force, is not watertight because the industry does not follow a clear definition of persistency. Even as the regulator mandates persistency ratio on an absolute basis, some insurers report it on a reducing balance basis.
“We will have to mandate a standard definition on persistency. The draft paper is ready. These companies are being very clever. Persistency is a significant metric and has been around for 100 years. Nowhere in the world is there a confusion on persistency, but here there is. Because these guys are clever, they will calculate persistency that will give a better picture. So when you have this kind of nonsense going on, you will have to be cleverer and bring out a regulation,” he said.
Insurers broadly agree that the direction of regulation in Hari Narayan’s tenure has been in favour of customers. Going forward, they want to be a part of the process.
“The regulatory process needs to have a road map with clear end objectives,” said Sud of Max Life. “There is a need to shift from rule-based to outcome-based regulatory regime. There is also a need for greater industry participation in the process of designing the regulatory framework. A consultative process, which has been witnessed in the recent times, should have been adopted right from the beginning. That would have led to better acceptance and smoother implementation of regulatory processes.”
Read Mint Money on Monday to understand how Irda transformed itself from a developer into a regulator. We also examine how Irda functioned under different chairmen and the role that Hari Narayan played in making customers the focus of all reforms. Plus, a look at what to expect from the regulator in the future.