Govt considers complete makeover for insurance laws

Govt considers complete makeover for insurance laws

Mumbai: The government’s financial reforms panel is considering a complete makeover of the country’s insurance laws that would end the monopoly of state-owned Life Insurance Corp. of India (LIC), shift control of the government to the insurance regulator, and create a legal system to deal with any failure of insurers.

Following a discussion last month, the Financial Sector Legislative Reforms Commission (FSLRC) recently took up the recommendations of the Institute of Actuaries of India (IAI), the government’s supervisory body for actuaries, which if accepted, will change the face of India’s insurance industry.

The government set up the commission last year to rewrite and synchronize the financial sector legislation, rules and regulations so as to address the contemporary requirements of the sector, including insurance. The commission’s term ends in March.

It is likely to compile a final report in a few weeks, which will then need to be vetted by the parliamentary standing committee on finance before the laws can get amended. A copy of FSLRC’s communication with IAI and the latter’s recommendations to the commission is with Mint.

“LIC versus private sector insurers is an issue. The commission feels that exemptions are heavily loaded in LIC’s favour, which needs to be changed," said L. Khan, president, IAI.

There are 23 life insurers in India with combined assets of at least 16 trillion. LIC is the largest with assets of at least 13 trillion alone.

FSLRC asked IAI if the present laws for state-owned insurers have an adverse impact on competition and how the issues involving government’s ownership in some insurers should be addressed. Existing laws exempt LIC from certain sections of the Insurance Act.

The actuaries institute recommended that capital and solvency requirements of LIC should be aligned with that of private life insurers and LIC should be restrained from using its policyholders’ money as solvency margin. For private insurers, solvency margin is met from shareholders’ money.

If the recommendations are accepted, the government will have to infuse a substantial amount to cover LIC’s future liabilities and capital needs. This, in turn, may not only slow LIC’s pace of growth but also reduce the government’s net income from the dividend paid by LIC every year on its surplus.

It was also proposed to empower the Insurance Regulatory and Development Authority (Irda) to regulate LIC’s investment norms and business conduct on par with private insurers. Despite Irda’s restrictions on insurance firms to hold over 10% stake in a listed entity, LIC holds above 10% in several companies. Even to protect policyholders from the risk of an insurer’s investment concentration, Irda has limited say as the government dictates the investments made by state-owned insurers to meet its own capital needs.

To address such issues, the regulator may also get the power to suspend or cancel the licence of state-owned insurers, including LIC, if the recommendations are accepted.

The commission is also looking at introducing resolution mechanisms to deal with any failure of any insurance firm—a legal system to protect the interests of policyholders and ensure financial stability.

FSLRC asked IAI if some form of deposit insurance or compensation scheme is required to protect consumers of failed insurance firms. At present, there is no specific law for such a scheme, which exposes policyholders of life insurers, except LIC, to the risk of losing money in the event of an adverse economic situation.

LIC Act extends a sovereign guarantee by the central government to LIC. Though, the extant Irda norms safeguard the interests of policyholders of all insurers and minimize the risks of losing money, a sovereign guarantee for LIC gives it a business edge over private insurers.

IAI suggested the creation of an Insurance Guarantee Corporation to address this issue. “Such a corporation could be created to at least partly bear the liability of policyholders in the event of failure of an insurance firm," said Khan.

But while creating a guarantee corporation, the costs incurred in paying the claims should be levied both on shareholders and policyholders, IAI said.

The proposals, if accepted, will not only curb the risks for policyholders but also end the domination of LIC in the industry.

The proposals are aimed to end the discrimination of policyholders of state-owned insurers with that of private insurers. To achieve this, FSLRC also looked at the possibility of shifting certain powers from the government to Irda to avoid monopoly of any insurer in the industry.

FSLRC is also likely to revisit the current investment laws and suggest amendments to enable Irda to frame rules for agents’ commission, solvency norms, capital requirement norms, loans and advances by insurers, among other things. At present, these norms are largely governed by the Insurance Act.

IAI recommended enabling the regulator with powers to issue guidelines for insurers to invest in new asset classes such as real estate, derivatives, and asset-backed securities. It also suggested flexibility in not setting the investment management function for the unit-linked business in-house. At present, it is compulsory for insurers to have in-house investment managers for all their fund management businesses.

FSLRC is also looking at allowing insurance companies to invest a part of their funds in overseas investments. At present, overseas investments are allowed only in government securities of the UK to the extent of meeting liabilities of certain funds under an insurer.

Overseas exposures will allow a wider range of assets for investment diversification and access to potentially higher returns, IAI proposed. To enable such investments, the Insurance Act needs to be amended. If it is allowed, it will hold out prospects of better returns for policyholders, especially for those in unit linked insurance policies.


Key recommendations

Empower Irda to fully regulate investment norms, solvency, limits on distributor compensation, share capital, divestment, dividend distribution and limits on loans and advances by insurers.

Framework to achieve level playing field for both public and private sector players.

Create an Insurance Guarantee Corporation to partly handle policyholders’ liability in the event of an insurer’s failure.

Central government to infuse adequate funds to meet solvency needs of state-owned insurers, including LIC.

Create legal framework for the regulator to force capital injection by shareholders, weaken the solvency rules and de-risk the business of an insurer in the event of a failure.

Allow overseas investments by insurers, flexibility for insurers to not set up in-house investment management for Ulips, and allow investments in new asset classes such as real estate, derivatives and asset-backed securities.

Abolish the two councils—Life Insurance Council and General Insurance Council—to restructure Irda.

Align capital and solvency requirement of LIC on par with other life insurers in the private sector.