Regulatory goals for Irdai
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Every time I hear about the life insurance industry maturing, it strikes me that evolution of the industry and the regulator run in parallel. When there were only public sector insurers, while there was a controller of insurance with limited responsibilities, there was no insurance regulator. The Insurance Regulator and Developement Authority of India (Irdai) is one of the youngest regulators in India and has evolved with the industry.
During the 17 years since its inception, Irdai has issued 133 regulations (says its website) governing products, commission, expenses, intermediaries, health insurance and others. These regulations were necessitated based on new ideas brought in by foreign joint venture partners, changes in market behaviour and evolution of the industry; for example, unit-linked insurance plans (Ulips), guidelines or evolution of common service centres (CSCs), and introduction of points of sale. Many of the regulations were also necessitated to incorporate the provisions of the Insurance Laws (Amendment) Act, 2015.
However, these reactive regulations made in a piecemeal manner have resulted in redundancy, inconsistency and multiplicity. An example of this is the classification of distributors and the regulations governing licensing and certification of distributors, or the product regulations that require a similar product to get filed separately based on channels. We now need to consciously recognize that the post privatisation industry has matured and is close to completing two decades. The financial scenario and customer needs are different now. There has also been tremendous change in the socioeconomic fabric of the country and adoption of technology.
It is hoped that the large unorganized sector will move into the formal investment and banking channel with the changes in regulations, including the JAM initiative (Jan Dhan, Aadhaar, mobile), and the demonetization drive.
I believe this is the stage at which the regulators need to consolidate and streamline all regulations. Irdai’s website states the regulator’s mission statement: “To protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.”
If we had to start afresh, based on the current economic scenario, how would we state the objectives to accomplish the laudable mission statement of the regulator?
Identity: Irdai has to define a niche for the insurance industry based on customer requirements and the unique value addition that insurance brings. Comparisons with banking and mutual funds industry are not holistic and can be misleading. Insurance, in its simplest form, is a risk-management technique. There are three types of risks that the life insurance industry helps manage:
1. risk of mortality and morbidity (dying earlier than expected and falling gravely ill);
2. risk of market volatility (returns guarantee and long-term investing); and
3. risk of longevity (living longer than the average life expectancy).
These risks are addressed through protection, long-term investment (guaranteed or market-linked) and pension or annuity products. The regulator needs to establish this niche position that no other industry serves.
Enforcement: There have been many discussions around governing the principle and not the rule. It is ironic when regulations are rolled out based on a principle, insurance companies seek clarification from regulator. CEOs who make risk evaluation-based decisions regularly, hesitate to interpret the regulations even in customer interest. This could be due to past experience and concerns that implementation is made on the letter and not spirit of the law. The starting point of every regulation should be the statement of objectives. This provides clarity in interpretation. It also absolves the regulator from having to consider every possible scenario to draw out rules for those scenarios. It places responsibility on the insurer to ensure objectives are realized. This could be facilitated by encouraging insurance companies to form a self-regulated body to create consensus on interpretation and make tactical decisions, ensuring that the spirit of regulations is achieved.
Customer outcome: Insurance industry is the only financial institution that continues to provide financial security through long-term guarantees and fund management with a long-term horizon. The four sets of regulations brought out by the regulator in the recent past—on expenses of management, commission guidelines, with profit committee guidelines and investment guidelines—read together (and not in isolation) have created a strong platform to build products that are equitable and ensure customer fairness. For instance, the reduction in yield in a 15-year traditional participating plan is 2.50% with capital guarantees and return guarantees. The issue of fairness in returns can be addressed by stating an external comparable benchmark, adjusting for cost of security (capital) and cost of guarantees. Another major concern in insurance policies is discontinuance. Regulations need to enable features around minimum premium payment, flexibility of premium waivers and premium holidays, adjustment of premium payment schedules to adapt to the changing customer profile and requirements.
As we look forward to the fourth chairperson of Irdai, we cannot overemphasise the need to spring-clean, without a “not invented by me” syndrome. One would look for retaining relevant regulatory changes, consolidation of fragmented pieces, guidelines with objectives and a strong enforcement framework.
R.M. Vishakha is managing director and CEO, IndiaFirst Life Insurance Co. Ltd