The relief across the financial sector is palpable. North Block is now under the control of a minister who has not delegated the work to a compromised cabal. And even better, he is a person who understands the markets and finance. After the mutual fund announcements last week, this week the ministerial gaze turns to life insurance. The aim is possibly to rework the broken parts of the insurance industry, with the worry being that the life insurance sector has seen falling business. Life insurance premiums have been the traditional way in India to plug small savings into big finance. Insurance companies, especially the public sector behemoth the Life Insurance Corp. of India (LIC) has been ready with large war chests to soak up public issues and prop up markets.
As the finance minister gets ready to deal with insurance, he may want to take notice of a few issues around the industry, some of which the regulator has flagged recently. There are a set of issues on which the insurance industry and the regulator are both on the same page—increasing the foreign direct investment limit, updating the Insurance Act, to name just two. But there are areas in which the regulator has taken a public stance that is in opposition to the industry. Lobbyists representing the insurance industry and the large sellers of insurance products, namely big banks, have taken a position that links regulatory tightening to the decline in insurance. They argue for higher commissions and laxer norms.
The insurance regulator took these lobbyists head on in a public meeting earlier this week as he read out the riot act to the industry in Mumbai. Insurance Regulatory and Development Authority (Irda) chairman J. Hari Nayaran said two things of importance. One, do not blame tighter regulations for falling business. Some parts of the industry have blamed the regulator for not clearing pension plans over the last two years. Pension plans made up a big chunk of the life insurance business before 2010. In 2010 the changed unit-linked insurance plan (Ulip) rules killed the pension market as it existed. And that was not a bad thing. Pension plans were actually thinly disguised mutual funds with no annuity tagged to the product. The new rules reduced costs, put a lock-in of five years, a guarantee on death benefit and maturity amounts and attached an annuity (a regular pension payment on surrender or maturity that should have been part of a pension plan but wasn’t) to the product. The regulator, say newspaper reports, has pushed back at the industry saying that Irda will not clear pension plans if they do not stick to the regulations in place.
Two, stop relying on surrendered or lapsed policies to pad up the profit. Pre-2010 policies that were discontinued after the first, second or third premium have almost nothing left in them for the policyholder. The game in the insurance industry was for the agent to hard sell a policy and disappear, collecting a 40% commission for his effort. If he did not show up again, chances were that the policyholder would not pay the second premium. The policy would then “lapse”. The money left in the policy would be kept by the insurance company—the rules allowed them to do this. Lapsed policy stats in India have been frighteningly high, going upto 80% in the case of specific companies. Money from such policies allowed some companies to turn profitable far sooner than estimated, another issue that the regulator has flagged. The stats of just four companies shows this. Over 2010-11, profits from lapsed policies totalled around Rs.1,504 crore for just four insurance companies. This product structure ugliness has got sorted out for the Ulips, but still exists for the traditional plans. Instead of laxer norms, the finance minister could ask for data on lapsation, persistency and profits from such policies to understand better the manner of operation of Indian insurance companies in the last few years.
End note: While sorting insurance out, the finance minister could also ask the banking regulator why banks should be allowed to go on cheating customers. To understand the issue, the minister should ask for Irda’s bancassurance report (http://goo.gl/4GDIj) and look at the annexures carefully. Ex-chiefs of both LIC and HDFC Standard Life have pointed out the issue of mis-selling by banks and linked the heavy upfront payments to sharp sales practices. The report flags the issue that banks are unwilling to take the “broker” road to selling multiple products since it means assuming responsibility for what they sell. Breaking the country up into telecom-like circles for bank tie-ups (the proposal is to have a geographical divide for bancassurance) will be a disaster. The finance minister may find answers to falling trust in banks and financial products and the increasing preference for gold if he enquires into the sales practices of banks around insurance products.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at email@example.com