The spat between the insurance and the capital market regulators is now at a critical stage of a game theory experiment. While the regulators are debating the location of the court where the dispute will be heard (the insurance regulator does not want Mumbai where the judge may actually understand finance), insurers are debating whether to carry on with the launch of new investment-linked products.
From what I understand, the debate in the insurance industry is to figure out how far the Securities and Exchange Board of India (Sebi) will go in carrying out its threat of banning new unit-linked insurance plans (Ulips). And what form that ban will take. If the Insurance Regulatory and Development Authority (Irda) were to approve new Ulips, as it has said in repeated press statements that it will, it would be a violation of Sebi’s quasi-judicial order. An ex-regulator tells me that if there are two laws, one that says you can do something and another that says you can’t do that particular thing, the one that says you can’t will prevail.
This would mean that Sebi will be within its rights to ban the new product issuing insurance company from trading on the stock market. The insurance company would not be able to buy and sell shares held by its managed funds (which make up 98% of Ulip products), effectively freezing the product. Not just the new investors in the yet-to-be launched policy would suffer, but the existing investments in older Ulips, which currently are alive, would freeze. They would remain frozen till the courts sort out this issue. At the minimum, the damage would be of missing out on a possible stock market rally; the more serious impact would be on investors who may want to redeem. Possibly claims on death would carry on, but it will be up in the air.
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Would Sebi risk being perceived to harm investors, is what the insurance industry (maybe even the regulator) is calculating before the new policies are approved. The game is now of perception, and facts such as costs, transparency and fraud are getting buried under the giant noise-generating information push that we see today. Apart from a tiny band of financial planners, a professional community that serves the consumer and not the product manufacturers (disclosure: I am a non-practising certified financial planner—I did a two-year course to understand retail financial products), the spin is largely from the point of view of the industry, the distribution houses and the agent population. What do I mean by spin? Take this mobile phone text message that I got as a forward: “With no-load and tightening Sebi regulations every month, someone will launch a campaign soon: To hell with the tigers, Save AMCs. Only 32 left.” The tears are for asset management companies (AMCs) that are having to, oh my God, actually serve the investor as the market regulator systematically blocks all elbow room for misusing investor funds. Or consider the arguments that the Life Insurance Council, the industry association of life insurers, regularly brings out to sabotage investor-friendly moves such as zero loads or more transparency. It weeps for the insurance agents who work so hard. It cries for the nation that will lose long-term money (and disregards the fact that lapsation rates are so high that more than half the Ulips of private sector companies are not renewed after one year).
The other spin you need to look out for is one that comes though your newspaper. A recent news report in a leading business daily spoke about the insurance regulator asking the department of posts (DoP) to hand over its insurance portfolio to it for regulation and the ministry of finance being rattled and having to intervene. I called the DoP’s relevant department and spoke to the officer there. No such notice has come from Irda. The officer said that of the 27 conditions specified by Irda, DoP is already compliant with all but two, one of which was that DoP is not a company and the second that it outsources its actuary function. And that the directive will have to come from the government and not Irda. And no. No notice was received. This is just more spin getting into your newspapers. Beware.
What should you focus on? Who is doing what to benefit you? Just you? Forget about the nation or the poor insurance agent whose petrol bill (as he pushed yet another dud policy at you) needs to be paid or the need for long-term infrastructure funding that only insurance products can give. Look at each piece of news and regulatory action and decide if it works for you. Does it make the products cheaper? More transparent? Comparable? Portable? Is the exit clean? Check answers to those and ignore the spin doctors.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is consulting editor with Mint and can be reached at email@example.com