Regulators need to forget where they came from
4 min read 01 Oct 2013, 07:26 PM ISTIndia is still on the learning curve as far as market regulators are concerned.
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When I met the head of one of the largest private sector life insurance companies last week in Mumbai, he was clear that the 1 October 2013 deadline to re-engineer the traditional (money-back, endowment, whole life) plans in life insurance would at most be breached by two weeks to a month. (Market-linked plans, the unit-linked insurance plans, or Ulips, got a makeover in 2010). He said that most private sector companies he knew had their basic product suites in place and were ready to bring the new products to the market by 1 October. He said that the regulator had been working hard to approve at least one product in each category for every company in the industry. Mint Money spoke to several other private sector life insurance companies which said the same thing: we are ready. So what happened that the industry has been given a three-month extension when most companies were ready to go?
Some quick background first. The insurance regulator has been working for the past three years to make both life and health insurance products fairer for the customer with better transparency on costs, lower costs, higher death benefits (life insurance companies were selling mutual funds masquerading as insurance policies by giving them a tiny crust of life cover) and capping what the companies can deduct as penalties for stopping the product midway. The changes in health insurance products aim to make the products more buyer-friendly by making them renewable lifelong and allowing customers to move policies between companies—much like telecom portability. Read in detail what the exact changes are: https://goo.gl/0CHYKz . 1 October was fixed as the deadline in February 2013 by the Insurance Regulatory and Development Authority (Irda) for both life and health insurance policies to switch to their new avatars.
The main problem that the industry worried about was the regulatory speed in clearing new products before the deadline approached, but it seems the regulator was working overtime to get the new products ready before the deadline. While the health insurance companies have brought the new policies to the market from 1 October, the life insurance industry has got a three-month extension to switch over. Remember that the last two months have seen an escalation in agent push to hawk the older traditional life policies claiming falsely that investors would be worse off when the new policies come to the market. Read the story that nails this lie here: https://goo.gl/8lYynv.
Why was the extension given when most of the private sector products were in place? It seems that the Life Insurance Corp. of India (LIC) was not ready with its plans. The buzz in the industry is that the product filing for LIC began as late as end-September. Said Sudhin Roy Chowdhury, member life, Irda, in a comment to this paper (https://goo.gl/GUDmmP): “We realize that these are productive months for the insurers. All 24 insurers have filed their products but most of these products particularly that of the Life Insurance Corp. of India’s came to us in the last week of September. So we have decided to give an extension."
This is an unfortunate decision for many reasons. One, regulators need an arm’s length distance from their earlier organizations, especially when they come from the industry that they now regulate. The current Irda regulator retired as the managing director of LIC in 2012 (after serving as chairman, LIC earlier) and this extension has sent a message across this 1.07 trillion market (of which LIC straddles a chunky 71.25%) that old ties are important. Two, insurance industry watchers and analysts believe that he has given the industry three more months to push products that are investor unfriendly. If Irda had given even one statement saying that companies mis-selling policies before the deadline by lying to investors would be penalized, the decision to give an extension may have been viewed differently.
India is still on the learning curve as far as market regulators are concerned. Should their role be to develop the market they oversee or should it be to protect investors? Should ex-bureaucrats hold regulatory reins or should market insiders be given the job? While the learning curve of bureaucrats (at least those who choose to learn) is very long in technical industries like insurance, the industry insider has a chance to to hit the ground running. Both the Reserve Bank of India and Irda have non-bureaucrats as heads right now. So obviously favouring your erstwhile company without an explanation damages this experiment of using experts in the industry as regulators. The situation may get salvaged if Irda were to come down with a very heavy hand on the blatant lies that agents and the banking channel is telling investors to sell policies before the deadline.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor Mint Money, and Yale World Fellow 2011 and is on the board of FPSB India. She can be reached at expenseaccount@livemint.com
