This week, fresh guidelines from the Insurance Regulatory and Development Authority (Irda) attempted to deal with some of the issues that the Securities and Exchange Board of India (Sebi) has raised in its notice to 14 insurance companies earlier this year ordering them to stop selling mutual funds that masquerade as insurance policies. The guidelines give the controversial unit-linked insurance plans (Ulips) a five-year lock-in instead of the current three-year lock-in. They also tweak the pension plans manufactured by life insurance companies. From 1 July, pension plans will have to carry a crust of life cover and at the time of vesting, will have to annuitize a part of the corpus, making it similar in structure to the investor-friendly New Pension System (NPS) product.
A glance back over the last few months shows a sort of haphazard rush by Irda to plug regulatory gaps. Though the issues were raised earlier, it took a Swarup committee report, (disclosure: I was associated with the report) that spoke about the high commissions and recommended a no-load retail financial product landscape, to prod the insurance regulator into announcing the 3% cost caps on Ulips. This was accompanied by notices that aimed to plug the agent churn problem by making it mandatory for the agent to remain with the insurance company for three years. More recently, Irda has made commission disclosure mandatory, but again, this seems to be a result of the noise generated by the Sebi on Ulips, rather than any coherent strategy.
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All are good moves, except that they are half-baked and seem to look as if the regulator is running around trying to plug the holes in a terribly leaky regulatory ship. They are half-baked because they don’t solve the problem of mis-selling and terrible product structuring. Take, for example, the regulation of capping costs at 3% in Ulips. This is great in theory, but it does nothing to compensate a consumer for high front-end costs if she exits the product after three years, nor does it stop an agent or banker from churning the Ulip after three, or now, five years. Or, take the regulation that gives a consumer a 15-day free-look period. Again, this sounds good in theory, but does the regulator know that if a consumer wants to return the policy, the first person she calls is the bank or the agent who sold her the policy? What happens next is almost surreal. The agents and banks suddenly stop taking calls and don’t respond to emails. They even give the wrong address so that the policy will not reach the customer before the free-look period ends.
Regulation is the key piece in the transformation of a controlled market to a free market. And regulation, as it exists in its current form in retail financial products and their sale, is clearly failing. Here’s a story that tells us why. A friend talks of her husband who works in a life insurance firm. To complete the mandatory hours of online education as specified by the regulator, the firm, one of the larger players in the business, has outsourced the online course to an outside agency, where people sit and click on user names bearing the names of the insurance firm’s employees. Such instances of “check-box” regulation abound. This doesn’t bode well for the rule of the insurance regulator that makes it mandatory for all sellers of insurance policies to have some basic hours of study.
Regulation that hopes that leaving it to the “good sense” of the companies they regulate will solve problems also does not work. Six years ago when I worked at The Indian Express and we broke the “churning scam” (where mutual funds were launching new funds largely to collect the 6% of investor money raised to push at the distributor and banking chain), a conversation with the then chairman of Sebi M. Damodaran was around leaving it to the “good sense” of the asset management companies. He was hoping that they would self-regulate themselves or through the industry association. But as he and Sebi discovered, regulatory loopholes are gateways to a race to the bottom. The companies need a stick and not a carrot. The final no-load decision was taken after all attempts to rein in the industry were exhausted.
So, what will help Irda out of this mess that is making a mockery of regulation? Two pieces of advice to the regulator. Short term: find some other points of data and information collection than just from those that stand to gain from keeping the industry at status quo. The very people who pump up the regulator in Hyderabad, bad mouth it offline, admitting that the regulatory system in India allows daylight robbery. Long term: find out what works for the customer and remove all noise such as turf and corporate sweet talk. Focus sharply on the consumer. Don’t look at the white noise created by executives in insurance firms. They are focused on their bonuses and crore-plus salaries.
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 firstname.lastname@example.org