Home / Opinion / Online-views /  A regulator retires and an industry insider takes over

India’s third insurance regulator J. Hari Narayan demitted office last week and it would be no exaggeration to say that Indian insurance rules were rewritten during his tenure in the teeth of very strong opposition and lobbying by the industry. The regulator worked at turning an institution that looked at market development as its key role to one that focussed on consumer protection in a very short period of just over two years. But it took him the first half of his tenure that began in 2008 to understand the ground realities of insurance. By the middle of his tenure, Hari Narayan figured out that the industry was running rings around him and it is to his credit that he took a U-turn on his world-view of insurance and how it should run in India and put in a consumer-first structure.

When he took over as chief of the Insurance Regulatory and Development Authority (Irda), Hari Narayan inherited the mess that had piled up under the watch of his predecessor C.S. Rao, who headed the agency in 2003-08. The biggest issue was that of misselling of, first, unit linked insurance plans (Ulips) and then even the non-linked plans by an industry that was rushing to build a top-line driven business. The pressures on some of the companies to get a good valuation from overseas partners as and when the foreign direct investment (FDI) limit was raised moved the entire industry into a frenzy of producing and hard-selling toxic products that finally have cost the Indian retail investor more than 1.5 trillion. The red flags on this malpractice were raised by 2007 and had reached the doors of the ministry of finance. A panel called Committee on Regulation of Investment Advisers in Non-Securities Markets, 2008, headed by Rao, was set up to explore if financial advisors should be regulated. The agenda for the committee was to put the missales in financial products on the table and then find a way to curb them. The committee, however, concluded that nothing was pressing enough to mandate such new regulation. It preferred what is known as the “disclose and educate" method that looks at pages of legalese and some tired seminars that drone on about what is a stock market. Some committee members who did not believe that status quo was a good option expressed their dissent. Had the committee taken a different view, the mess in Ulips may not have cost the retail investor so much. The other mess was in the third-party motor insurance pool that was dismantled in 2011 to give way to a declined pool system that limits the losses to insurance companies.

After an initial period of being in denial, the regulator began to clean up the industry by changing the structure of the Ulip to cap costs and surrender charges. He followed that up with other changes like dismantling the third party pool, finding innovative ways to get around the 5 lakh penalty limit that the Insurance Act has and then finally to fixing changes in the non-linked product. Having tracked the insurance industry and regulation for about a decade, the first time I realised that things were changing in Irda was when chief executives of insurance companies suddenly began to complain about their regulator almost a year-and-a-half back. Used to hearing only praise for their great leader, I was surprised to hear first a grumble, then a rumble and then a full-on mutiny that culminated in a meeting in North Block where the blame for a slowing industry was put at the door of a reformist regulator who, the industry said, was killing business. However, the industry that Hari Narayan leaves behind is possibly smaller than it would have been without the regulatory changes, but it will certainly be steadier than one that could have imploded had the earlier market riot continued.

End Note: The good thing about having a veteran insurance professional as the regulator is that he can hit the ground running and the learning curve that his predecessor had to climb to understand the tough business will be missing. From what we hear, the bubbly has been pulled out by the industry – “it’s one of our own who will now be setting the agenda" – in response to T.S. Vijayan, a former chief of the Life Insurance Corporation of India, taking over last week as Irda chief. It may be a bit hasty, I think, for the world looks different as the position you view it from changes. There is a global move towards a consumer-first regulatory regime and it will be a brave regulator who will reverse rules that ensure consumer safety.

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. She can be reached at expenseaccount@livemint.com

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