When he retires next month, J. Hari Narayan will, unfortunately, go down as the regulator who may have taken the life out of the life insurance industry. This industry has enjoyed double-digit growth in the good times, exclude Life Insurance Corp. of India and the growth was near triple digits, and managed to sustain growth even during the not-so-good-times. So when it reported a negative business growth in FY12, seemingly due to harsh regulatory interventions, it evoked sympathy.
Insurers see this downfall as a direct fallout of reforms overdrive that the regulator has been on since 2009. Unfair as these allegations are, they are not completely devoid of reason. Ever since the capital markets regulator, Securities and Exchange Board of India (Sebi), lay claim to the market-linked insurance product and threatened the turf of the Insurance Regulatory and Development Authority (Irda), the insurance regulator has been on a hyperactive mode. In the last four years, Irda ushered in a spate of consumer-friendly reforms, but the initiatives went a little off track as the industry, bombarded with too many reforms that went through frequent changes, found it difficult to cope with the narrow deadlines and was left flummoxed. In fact, the latest industry joke is to hire a CIO, or chief interpretation officer, having the sole mandate of tracking reforms and keeping pace with the alterations to these reforms.
Sure these reforms came at a breakneck speed and yes there is a better way of cleaning up the mess, but to let the process overshadow the outcome would be a huge error. It is indisputable that the reforms have placed the focus on consumers and have transformed Irda from being just a developer for the sector to also being its regulator.
It is also unfair to attribute negative growth squarely on reforms when the genesis of these reforms lies in large-scale mis-selling—that got insurers their double-digit growth in the first place—and knotty products that not only made investments very expensive but also licked the investor dry in case of an exit. This negative growth then is the price that the industry has had to pay for being driven by greed and showing complete callousness to investors.
The regulator has attacked the very foundation on which the edifice of life insurance industry was built in India. It targeted mis-selling and product design, among other things. To that effect, these reforms should serve as a beacon for the years ahead. Haphazard ways notwithstanding, here is how the last four years have pushed the life insurance industry several notches closer to being consumer friendly.
Costs: Costs in the most popular product, unit-linked insurance plan (Ulip), have been capped. So despite a law that allows commissions to distributors up to 40% of the premiums in the first year, commissions have dropped significantly. According to Irda’s annual report for FY12, commissions have come down to almost 10% of the premiums. Seven years back, this would have been unthinkable since a 40% commission was usually the norm. This stark drop in commissions has led to an exodus of agents. In the long run, this is good for the industry which has largely got rid of “hit-and-run” agents, who like the insurers focused on fresh sales.
Sales practices of agents: What is left is a pool of serious agents who like the insurer, that has begun to shift its focus on renewal premiums, will work hard to make the consumers stay in the policy for the long term and by doing that get a steady stream of income through renewal commissions.
Also by clipping the exit costs to the bare minimum, the regulator has forced insurers to focus on renewal premiums or persistency of insurance policies.
Until 2010, the insurer could lay claim to all your investments as exit cost. But, this did not discourage you from exiting early because you either were sold a 15-year policy as a three-year product, the maximum lock-in until then, or realizing you were mis-sold a plan, chose to cut your losses. For the insurer, exorbitant exit costs only added to its profits.
Not anymore. Though insurers still have a chunk of profits coming from lapsed policies, they will have to now look for other ways to sustain these profits since the pool of profits from lapsed policies will fade away gradually. In the long term, they will need to focus on persistency, a key indicator of an insurer’s health, which has got into focus only recently.
What’s in the offing? These changes have largely been in Ulips, but seeing the obvious shift of the insurance industry to traditional plans, the regulator is writing new rules for that category of products as well. These guidelines should be out anytime.
Endnote: To wrap up, not only did the regulator enforce consumer-friendly guidelines, it also penalized defaulting companies dearly. For an industry which so far has enjoyed a soft regulator and penalties seldom going beyond Rs.5 lakh, it was a shock and a first when a private insurer got slapped a penalty of Rs.1.47 crore last year for deficiency in claim settlement and for overpaying their intermediaries. Not only has Irda made the fine bite, it has gone after faulting insurers with a vengeance. In 2012 alone, as many as 13 insurers were penalized, mostly for overpaying their distributors.
Irda has transitioned from being a developmental authority to being a regulatory authority. The regulator has already got the momentum going for the year ahead. Let’s wait for the new regulator to keep this momentum going, hopefully in a more organized manner.