The press release (http://goo.gl/kLdMLC), dated 29 August 2013, issued by the Insurance Regulatory and Development Authority (Irda) on the detailed assessment report (http://goo.gl/NF4xx7) of World Bank and the International Monetary Fund (IMF) arouses further interest on the subject matter. Though the entire report cannot be analysed, some important facets can be taken up.
What does the IMF report say?
One significant observation is that “the current uncertainty regarding Irda’s control of its funding and budget, its incomplete oversight of LIC and the reserve powers of the central government to direct its activities all potentially detract from the supervisor’s powers and independence”. Other comments include lack of adequate enforcement powers with respect to monetary sanctions and lack of adequate reserves under the motor third-party insurance pool.
What does Irda’s press release say?
In short, Irda, in its press release, while welcoming the assessment by IMF and World Bank, has refuted the above mentioned findings of IMF. It has asserted that it has complete autonomy with regard to the supervision and regulation of the insurance sector and complete “oversight” of the Life Insurance Corp. of India (LIC).
What is the reality?
One common reaction to reports of institutions such as World Bank and IMF is to dismiss them with a sweeping observation that the reports represent the interests of the developed countries and not our national interest. Such an approach is rather unfair. More so in this case, as there are truths in what IMF says.
For example, let’s look at the issue of the funding of Irda. There have been several reports on the difference between Irda and the government on funding. The government wants Irda to turn over its funds to the Consolidated Fund of India and thus depend upon the government for funding its (Irda’s) functioning. This demand, if still true, seems to contradict the clear wording of the Irda Act that all fees and charges received by Irda shall be credited to the Irda Fund (section 16 of Irda Act, 1999). The section also clearly states that the fund shall be applied for meeting the salaries and other expenses of Irda.
The LIC Act, 1956 (section 21) gives powers to the government to issue policy directions to LIC. The section also emphatically states that the government has the last word on the directions. Section 43 of the LIC Act also gives powers to the government to apply or exempt LIC from some provisions of the Insurance Act, 1938. There is, thus, apparent truth in what IMF says about Irda’s incomplete “oversight” of LIC. The government has been reportedly issuing directions from time to time particularly on the investments of LIC. In this era of scams, it is useful to remember that one of the earliest investment scams in Indian history is the LIC-Mundhra scam of 1957 wherein business Haridas Mundhra sold fictitious shares to LIC. At that time, it was the largest single investment by LIC. Legal issues apart, there are moral issues in the government issuing directions that may be seen as undermining the authority of Irda.
Naming and shaming: It is true that the maximum quantum of penalty “per failure” of Rs.5 lakh under the Insurance Act is comparatively inadequate. But IMF’s comments, “given the limitations of the current tools available, Irda has adopted a name and shame approach whereby sanctions and enforcement actions are disclosed on its website”, are somewhat odd. Globally, there are regulators who name the entities penalized. It has little to do with the quantum of penalties. But yes, the joint venture partners of insurance companies in India are well-known global insurers. And yes, their naming and shaming in India could affect their global image. Could that be the reason for IMF’s comments? IMF alone can clarify on that.
Motor third-party insurance pool abolition: Irda’s press release states that the Indian third-party (TP) motor pool was dismantled in 2012. It is true that the pool for commercial vehicles set up by Irda in 2007 was dismantled in 2012. But Irda replaced this pool by a commercial vehicles TP declined risk pool in 2012. In any case, the TP premiums for all classes of motor vehicles continue to be fixed by Irda.
Insurers have been complaining that the premiums fixed by Irda are inadequate. But the irony is while premium rates for most classes of business of non-life insurers have been going down after pricing freedom, there have been regular increases in motor TP premiums, perhaps taking away the need for insurers to manage motor TP claims. In 2007, the need for pool arose out of supply constraints following abolition of tariffs fixed by TAC, the pricing body. But now with the reports of the transport associations themselves demanding de-tariffing of motor TP premiums, it is time that Irda frees pricing and fully abolishes the pool. That will take away the unwanted blame on Irda for inadequate reserves arising from inadequate pricing.
So far, there have been no reactions from the government.
K.K. Srinivasan is former member, Irda.