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Insurance firms will have to watch their costs: regulator

Insurance firms will have to watch their costs: regulator
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First Published: Fri, Sep 18 2009. 11 25 PM IST

 Weighing options: Insurance Regulatory and Development Authority chairman J. Hari Narayan. Bharath Sai / Mint
Weighing options: Insurance Regulatory and Development Authority chairman J. Hari Narayan. Bharath Sai / Mint
Updated: Fri, Sep 18 2009. 11 25 PM IST
Mumbai: J. Hari Narayan, chairman of the Insurance Regulatory and Development Authority (Irda), is not too worried about the losses the life insurance industry is facing as the sector has grown faster than expected. But insurance companies would have to watch their costs, he says. Edited excerpts:
Weighing options: Insurance Regulatory and Development Authority chairman J. Hari Narayan. Bharath Sai / Mint
Are you concerned about the mounting losses of the life insurance industry?
What concerns me is not the fact that they are making loss per se. That the insurance company, particularly in the life sector, will be making losses for at least 8-10 years was well known even before they started. Most of them assumed that their business will show some bottom-line blackening by about the eighth or ninth year. Now, what we find is that’s not happening. What seems to have happened is they are actually selling more than they had planned to. So that rate of growth is actually too fast. And the effects of that are now being seen. So it is getting pushed by 2 or 3 years.
Do you think their cost strategy has also failed little in that sense?
What is increasing in the cost of the insurance companies is non-commission related cost—other types of cost whose rate of growth has been rather high and they should watch it.
Have you conveyed to them that they need to watch their costs?
The Insurance Act sets a limit on the total management cost and insurance companies are expected to abide by it. We allow a leeway initially by not being very rigorous in the implementation of that regulation for the first five years of the genesis of the company because we expect that there will be far more administrative costs initially. After that, we expect them to comply.
Have you found any of them violating?
Three of them are not compliant.
What actions have you taken?
We have written to the management of these companies asking them to spell out the steps that they propose to take to bring it in line.
A lot of the companies are closer to going public. Do you see a composite road map being evolved for the entire industry or is this going to be a case-by-case thing?
No, it won’t be. It will be a structure and within this structure these companies will have to operate, whichever company applies. It won’t be a case-by-case basis.
You said you haven’t heard from the government, but we have information that the law ministry has not found anything wrong with the law in relaxing it? Where does the matter stand?
The government has called for our comments on their draft notification. And that’s where the matter is.
Are you in principle fine with that? Do you think insurance companies are ready to go public?
We have no issues with that. That is a call the insurance companies will have to take. What we are really concerned with is the kind of steps, the disclosures, the kind of measures that will have to be in place to ensure that when an IPO (initial public offering) is issued it is fair to the investing public in terms of the disclosure and available knowledge.
On FDI (foreign direct investment), the Indian partner has to dilute its stake; there is no clarity with regard to FII (foreign institutional investment). What are your thoughts on that?
Yes, I think that is indeed a blind spot in the proposed bill and in the comments that have been called for, this has been pointed out. We have pointed out that there is indeed such a requirement and I am sure that before the bill becomes an enactment, it will be addressed.
Principally, do you believe that as equity dilution happens, this 49% cap should be able to take the FII bit as well?
There are various ways in which a company can go from 26% to 49%. And yes, at the moment, the Bill is unclear as to which way is it going to be. That will have to be clarified.
Are you in principle opposed to the thought that commissions should be between a distributor/agent and consumer/investor, or should they be embedded in the financial products?
I think that it is a very premature step given the width and the depth and the different types of the Indian market and the need to nurture much closer relationship between the policyholder and the agent. Therefore, I think it will have to be embedded in the premium for times to come.
Have you conveyed your reservation?
Yes, we have conveyed the reservation.
cnbctv18@livemint.com
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First Published: Fri, Sep 18 2009. 11 25 PM IST