Hyderabad: The current chairman of the Insurance Regulatory and Development Authority (Irda), C.S. Rao, finishes his term on 14 May. His five-year tenure at the helm of Irda saw a boom in the industry, advent of more private sector players with overseas partners and dismantling of the price control regime in the non-life insurance segment. Rao, a former Indian Administrative Service (IAS) officer from the Andhra Pradesh cadre, spoke to Mint about the regulatory challenges during the phase of high growth and structural changes, and also his take on where the industry is headed. Edited excerpts:
When you look ahead, what are the challenges—the pitfalls the industry as well as the regulator should be wary of?
Eventful stay: C.S. Rao, chairman, Insurance Regulatory and Development Authority
A second wave of registrations is coming up. I remember we had 12 life insurers when I came. Now it is almost 20. That again is a positive sign because multinational insurers see the growth story here and they don’t want to miss the opportunity.
Today, we have a compliance system. What has to be put in place now is the supervisory mechanism to see whatever regulations we have are fully complied with. Once we go and start inspecting the insurance companies we will satisfy ourselves. A supervisory mechanism has to be put in place which we are now trying to do. I have started a whole process of recruitment of people. Insurance supervision by the regulator should look at the solvency of insurance companies and also at the market conduct of insurance companies, particularly with sales.
Look at the grievance redressal mechanism, look at the lapsation rates, these are going to be the areas of study for the next five to six years.
I feel that in the present context there may not be any major consolidation efforts because there is scope for a large number of players still. Unless you find there is someone lagging behind who would like to merge with somebody. But I don’t see any possibility of that right now.
On the non-life side, the challenge is going to be adequate premium, proper underwriting—scientific underwriting is going to be a challenge. Solvency of companies will come under pressure in case claims are going to mount. By and large we find in the past few years there have not been many claims. Insurance companies have been doing fairly good business, not only in India. Even with a fall in premiums there is no shortage of reinsurance cover. So, things have been soft so far. If they harden, difficult decisions will have to be taken by insurance companies with regard to underwriting of risks.
Third of course will be health (insurance). It is bound to increase and it will bring with it, its own issues. The main issue being how do you control claims and how reasonable are charges. These are issues that are going to be debated from now on on the health side.
Health has shown the fastest growth recently, but claims have been high. What is the biggest challenge here if you were to highlight one point?
The challenge is to arrive at appropriate rates for various procedures and have protocols that govern treatments. How many tests are required? How do you justify the various tests you are prescribing? How do you justify the rates you are charging? This is going to be a major challenge and insurance companies will have to grapple with the problems along with the corporates which are in the health service business. Together, I am sure they are going to evolve something that is workable because both will have an interest in it.
Claims ratios are high (today) because of the segmentation of the market. If you see the number of people who have health insurance policies, a large proportion of them are over 50. If you have a large proportion of younger people coming into the market it will alter the claims ratio and people will be aware of risks they are having because of their occupations. The third is if they enter early, they can easily cover themselves against possible pre-exisitng diseases.
Recently life insurance companies have ventured into health insurance. There is so much confusion among consumers on whether to approach general insurance or life insurance companies
Our immediate interest is to see as many people in the market as possible. People should get access to health insurance. Specially if a life insurance company is providing access to health insurance in an area that is not covered by non-life companies, then that is all the more reason why they should be there.
For example, a product like a cancer product or a diabetic product automatically falls under a pre-existing disease and so a non-life company may not be able to cover it. So if somebody else is covering it, I think we should encourage them to cover it.
What non-life companies are saying is that they should have a level playing field. Where they can’t have a level playing field is with regard to the commission they can pay to the intermediary or agent. We are looking into that.
What we try to do is that when products come from life and non-life, we have now created a small health unit which looks into it from both sides and then ensures there is some kind of uniformity between the two, so, there is no advantage accruing to one or there is no arbitrage.
On the legislation side, has it been disappointing as it does not look like any amendments to existing Acts covering insurance are going to come through soon?
What we have tried to do in the legislation is to review the whole situation and see what changes have to be brought about. What should be the changes in the Insurance Act itself is one thing we have looked at from the regulatory and supervisory point of view. And also from the point of view of changes in the market itself. All the market changes should be captured ultimately in the Insurance Act. These two we have done.
But bringing about that kind of major amendment to the Act is going to be time-consuming because every major provision will have to be visited at different points of time.
Would you have liked to see a little more progress there because there was lot of effort put in to prepare the draft (for these changes)?
A lot of work has already been done. Now it is a question of taking it to its logical conclusion. The issue is whether lack of amendments has in any way hindered the growth of the insurance industry. It has not. So, it is not a major stumbling block for the development of the industry or entry of new players. To that extent I am prepared to live with delay in amendments. We knew all along it will take time. It will be good ultimately in the long run to give more powers to the regulator.
With the benefit of hindsight, do feel you might have taken a different step when dismantling tariffs? If you had a chance to revisit that would you have taken a different step?
It is only one year (since this has been done). Perhaps after some time you will have the benefit of hindsight, but it is only one year. As of now, I am not able to immediately say if we should have taken a different stand. In fact, what we have tried to do is to have a road map and to the extent possible, adhere to the road map. The road map gave insurance companies an opportunity to adjust over a long period of time. That has helped. If you see, nothing seriously has gone wrong after detariffing...there are instances where there was a rollback within one month or two months after detariffing in some countries. There are instances where reinsurers have withdrawn from the market because of a steep fall in the premium. These things have not happened in this country. We have had a fairly smooth transition from tariff to non-tariff but that has to be maintained.
The second thing is the consumer will have to learn to live with an appropriate premium. He should look at a cover not in terms of the premium that he pays but in terms of the service he is receiving. The consumers will start discriminating between the insurers on the level of service he is getting and not the premium he is paying.
In the Budget, a service tax on unit linked insurance products was announced, which will increase the cost of a policy. How are you going to take this forward?
I think the life council has made a representation which is under the consideration of the ministry. Let us see what happens.
They are also trying to find out what are the services that are being provided by insurance companies, whether they come under the gamut of service tax or not. If they are all taxable, to that extent insurers will have to start looking at fixation of premium at the appropriate level. But the representation is before the ministry (finance) and the ministry will consider it before notifying it.
Ulips (unit-linked insurance plans) are the biggest selling product and contribute to more than 80% of private sector’s premium. Ulip sales are probably closely related to stock market sentiment. Are you worried about the lopsidedness of products sold?
It has been proved all over the world that if you are a long-term player you get better return in the equity market. Insurance is a long-term business. As a product, the individual is getting a better return than a conventional policy. In a conventional policy, the investment is so conservative that you are going to get only a small return. But if you are going to have a coverage, it is more a life cover than a return on investment.
From the product profile point of view I don’t have any serious reservations about it. But how long-term are they in remaining as investors is the issue. And depending on the kind of selling that is done, if they remain for 15 years or so, I think it will work.
I would like to see more of term policies also being sold as that is pure life cover. I was looking at it as what are the incentives we should provide the insurer to enable him to sell more term policies. We found that our requirements with regard to solvency are very high, we have reduced it substantially. But we should also have a system of incentivizing the agent. Here we have a constraint, the (Insurance) Act says what we can pay in first year...whether we can do something about it in public interest is an issue we are examining.
Are you planning to increase the number of distribution channels?
We have plenty of channels. I am concerned about some of the channels, for example, the corporate agents. Corporate agents we thought of as an agency to distribute with only marginal additional cost. But that is not the way it is happening. I think corporate agents are trying to extract more money from the insurance companies than even perhaps what the agents are getting. This is a trend we have to reverse. We have some concerns about referral model also. A committee appointed by us has submitted its report. We are studying the report.
What about using outlets such as petrol pumps to sell policies?
I don’t know about this recommendation. I know there are two types of agents they have suggested. In a personal accident policy, there is no major disclosure involved, it doesn’t require major skill set (to be sold). If it is selling a unit-linked policy, it requires a considerable amount of training. I think they are trying to draw a distinction between simple policy and a complicated policy and have a hierarchy of agents. We are studying the recommendations.
The Sixth Pay Commission’s report said the government should consider lateral recruitment. In this context, what is the manpower policy at Irda, especially as you need skilled people?
What we require is people with insurance background. That we don’t have today. There are very few institutions that are imparting that specialization, but that will come. What I am trying to do in my organization is to follow the pattern of banks and public sector insurance companies where you recruit from the open market.
So, we have introduced direct recruitment at the level of assistant director, that will be lateral entry for him. Then he will be sent for training. Come here, learn on the job and grow. With regard to lateral entry, we already had a lateral entry when Irda was established in 2000.
We require a large number of people with actuarial background, we recruited at the level of deputy director. We have a flexible policy where up to 50% of the posts you can recruit laterally in any part of the hierarchy. That way we have a principle to bring in experts from outside.
When you have lateral entry, how do you manage the salary expectations of people coming from the private sector?
It is very difficult to compete with the private sector. Across the world, regulators can never compete with the industry. But I think going by the present Indian conditions, if you look at our salary structure, they are on a par with Sebi (the capital market regulator). It is an attractive proposition for people to come except in some highly specialized positions. For example, the actuarial position is highly specialized, so there is a lot of competition from the private sector.