‘There’s need for greater amount of regulation in the initial stages’

‘There’s need for greater amount of regulation in the initial stages’

Hyderabad: Chairman of the Insurance Regulatory and Development Authority (Irda) Chellapilla Satyanarayana Rao has seen the industry he monitors grow by around 100% in the past year alone. Across the life and non-life businesses, Indian insurance firms now collect around Rs1 trillion in premiums. In an interview with Mint, Rao said he would like to see the industry move from its existing solvency-based capital model into a risk-based one. This would mean firms allocate varying amounts of capital to different businesses, thereby ensuring more efficient use of capital. Rao also said the industry requires more (not less) supervision and regulation for a few more years. Edited excerpts:

Are you satisfied with the way the insurance industry in India has grown?

Our insurance penetration has increased from about 2.3% in 2000 to 4.8% (this year), nearly doubling over the last seven years. Insurance density has improved from about $10 (Rs394) in 2000 to about $38. If we can sustain this rate, it is quite possible that in the next decade or so, we would have gone far beyond our Asian neighbours.

The market has grown at around 100% in the last year and it may be difficult to achieve similar growth rates going forward since the base itself has become very big. But the growth will definitely be higher. Today, the premium collected by the life and non-life insurance industry is more than Rs1 lakh crore as against around Rs20,000 crore seven years ago. I am quite satisfied with the way the market has grown, deepened and widened, so far.

The fact that a large number of companies in the West are looking for investment opportunities here for setting up new companies itself indicates that they sense a great scope for further expansion. That is on the life side. On the non-life side, I feel that there is a huge potential and growth possible in the health insurance.

When it comes to the structuring of products, the onus is on the regulator as it clears not just the product, but also the advertising campaign and the illustrations used. Both customers and companies can always blame Irda if things go wrong. Don’t you think companies should be encouraged to be more innovative with products? And should they not be held more responsible for their own products?

We look at two angles: whether the premium being charged is adequate to meet (the policy’s) commitment both internally and actuarially (in terms of risk and return). And second, whether the terms and conditions are fair or one-sided.

While companies innovate, there are certain products which perhaps require to be modified or even withdrawn. This is a continuous process of learning for insurance companies, consumers and the regulator. It is a process of experimentation and we encourage it, so that innovation is not killed.

In India, life insurance is now hugely capital-intensive because the solvency-based model is followed. Is there any plan to move towards the risk-based capital system that commercial banks and global insurance firms follow?

It requires a very large number of qualified people—both in insurance companies and the regulator’s office—to shift from the present system to risk-based capital. We will ultimately move in that direction. The regulator, through the Institute of Insurance and Risk Management, has set up a school of actuarial sciences.

If we have a required number of actuaries with sufficient amount of experience, we should be able to move to a risk-based capital model.

Why is the regulator taking two to three months to clear products? Is it because of lack of actuaries?

Clearing a product within two to three months is a big achievement. We are getting fairly unconventional and new products. Insurance companies themselves take a lot of time to arrive at such products. A number of issues require to be resolved and doubts clarified before clearing a product. Our attempt is to clear products as quickly as possible and in this regard, we have doubled our actuarial wing from four to eight.

In general insurance, detariffing kicked off early this year. Players, however, have gone slow in product designing fearing a price war...

We don’t want a price war just for the sake of grabbing business as it is not in the overall interest of the market. We would like an orderly transition. When you move from tariff to non-tariff, what we are saying is that insurers must determine the tariff based on risk perception of that particular client or that particular property being insured.

Price war is something that is better avoided. Systematic and scientific underwriting is what we would like to emphasize.

Globally, general and health insurance products are sold on the Internet and through call centres on a direct marketing platform. Will this be allowed here?

A committee had been constituted about two-three months ago and it may take a few months for them to come out with recommendations. In direct marketing, the intermediation cost is minimized, but we would like to see what are the things that have to be disclosed before a contract is concluded, so that the party is not put to any disadvantage at a later stage.

Most of the growth in the life insurance business in the past three years has been in unit-linked insurance policies (Ulips). In these, the insurance component of the product is usually small and the risk of investment is borne entirely by the customer. Do you have a problem with this?

If you see our Ulip guidelines, we have said the product should at least have a minimum of five-year tenure. It is not a short-term product as in the case of a mutual fund. We also said there should be a minimum lock-in period of three years. There should also be a relationship between the amount of premium that is collected and the kind of coverage given. So long as it is disclosed upfront, I have no problems with it.

What about accusations of micromanagement against Irda?

This is an issue which a regulator has to live with—whether it is micromanaging or doing only an overall broad management. Insurance regulation is relatively new because all these years players were from the public sector. In a rule-based regulation, you are bound to have, to some extent, a micromanagement as opposed to principle-based regulation.

Having opened up the sector only a few years ago, I feel there is need for some greater amount of supervision and regulation in the initial stages.

Some Life Insurance Corp. (LIC) agents allegedly misrepresented Ulips a year ago with absurd rate of returns which was brought to Irda’s notice. Are there penalties for such selling methods?

Yes. The chairman of LIC himself advised the public not to get misled by such pamphlets. So, we do take cognizance of such things. We are also initiating action against the agents concerned once they are identified.

Companies themselves are taking appropriate action. If we feel that the violation is a major one, we may even cancel the licence of the agent.

There are insurance advisory services offered by individuals and companies that are already regulated by capital markets regulator Sebi or banking regulator RBI. How do you deal with such companies?

Where the other regulators have already licensed the entities, we still want them to go through our own licensing requirement. We feel that insurance is a highly specialized field and they (agents employed by such companies) have to go through a 50-hour training programme and pass an examination to be able to render advice on insurance matters.

Compulsory handover of reinsurance business to national reinsurer General Insurance Corp. (GIC) has been reduced from 20% to 15% this year. The finance ministry plans to bring it down to 10% in future. What is your stand on this?

We are in favour of it. We have a reinsurance advisory committee that recommends what should be the compulsory reinsurance.

We would like GIC to compete in the market for the purpose of getting business. In a free market, insurer should have the freedom to choose his reinsurer and the reinsurer also should have the freedom to approach various insurers and give them different terms and conditions.

How will regulations adapt where premiums are quoted on personalized data such as driving and health records moving away from one-size-fits-all?

We would like premium rates to be left to the insurers. We only want to see whether the terms and conditions are fair. These are all mass market products. We don’t want to control the rates.

Will Irda eventually ask for some kind of compartmentalization between different businesses of general insurers? Industry says one reason for slow progress in health insurance is cross-subsidy between fire and health policies for corporates, for instance.

That is no longer valid because we have now done detariffing. Once detariffing has taken place, the cushion that is available in fire and engineering has gone because of competition. I think each segment will have to stand on its own—whether it is fire or engineering or health or motor.

In the case of an individual if I am insuring my house, car buying health and life insurance, it is possible that I may get a better package than somebody else.

Penetration of health insurance in the country is still discouraging inspite of encouraging pure play stand-alone health insurance companies. Will minimum capital requirement for them be brought down from Rs100 crore to Rs50 crore?

Any variation in the size of the capital will require legislative change. Within the purview of the existing legislation, two stand alone health insurance companies have already come into existence. It is possible that if they do well and if they sense there is good business available, then many more players may come to us.

But more than that, the general insurers sense a possibility of increasing their business here, especially when their income from corporate business is coming down. Health insurance business will grow with or without stand-alone health insurance companies.

To ensure that poor benefit from insurance, Irda has introduced microinsurance regulations. When do you think it will take off ?

Microinsurance in the country will take off in a big way, the way microcredit has because of the felt need of the people. We would like to consciously encourage microinsurance and I think the ability for microinsurance to penetrate into the rural areas and to the weaker sections will be much higher because of the regulatory support that we have given.

We have introduced the concept of microinsurance agent and allowed the existing non-governmental organizations, self-help groups, cooperatives and others to enrol as microinsurance agents without going through rigmarole of training and passing of examination because we feel that these are small products and the risks and rewards can easily be explained.

When can India have composite insurance players who offer life as well as non-life products?

I don’t expect such a possibility at all because in countries where you have composite insurers, they are moving away from the concept. I think what we have done is the right thing.

What’s your take on consolidation in the industry?

From regulatory point of view, the thing that we really look at is whether the companies remain solvent or not. If they are solvent, they can continue to do business. I don’t see any possibility in the immediate future for any consolidations taking place.