In 1993, with the beginning of liberalisation of the Indian economy, the then government set up a committee under the chairmanship of RN Malhotra, former governor of RBI, to propose recommendations for reforms in the insurance sector. The committee recommended that the private sector be permitted to enter the insurance industry and that foreign companies be permitted to participate, preferably through joint venture with Indian partners. Following the recommendations of the committee in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry.
The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.
Indian insurance sector
The total number of insurance companies in India are just 58, of which 24 are life insurers and the rest non-life insurers. The other stakeholders in the Indian insurance market include agents (individual and corporate), brokers, surveyors and third-party administrators servicing health insurance claims. FDI up to 49% is allowed in insurance companies while 100% FDI is allowed in insurance intermediaries.
The measure of insurance penetration and density reflects the level of development of the sector. While insurance penetration is measured as the percentage of the insurance premium to GDP, insurance density is calculated as the ratio of premium (in US $) to the total population (per capita premium).
Insurance penetration in India is only 3.7%, compared to a global average of 6%. The life insurance penetration level is only around 2.75% in India, whereas the non-life insurance penetration is less than 1%. Compared to advanced economies, India lags in terms of density. The global average of density is $682 compared to $74 in India; the highest density in the world is in Hong Kong with $8,863.
Indian demographic aspects of the rising middle class, increasing awareness of the need for protection and a young insurable population will drive insurance sector growth over the next many years.
With the formal opening of this sector only 20 years ago, most of the learnings and business assumptions are from the public sector enterprise. While they have served consumers for long before the sector opened up, it would be fair to mention that they served the consumers when it was “licence raj" and pricing & product choice was determined by the government. The concept of inclusion started only when the sector started having competition and more product choices developed. Also this sector historically built the sector as combination of ‘Protection’ product and ‘investment’ product. This issue of treating and even selling insurance products as “investment product" is not a correct one and the industry needs to understand that the concept of insurance is “to protect". Some of these have led to challenges of mistrust between consumers and the industry.
Functions and duties of IRDA:
The critical regulatory & supervisory functions of IRDA, amongst many objectives it is tasked under the IRDA Act of 1999, are:
-protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance
-calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organisations connected with the insurance business
-regulating investment of funds by insurance companies
-regulating maintenance of solvency margins
Philosophy of supervision
The regulatory role is to develop any legislation to address the objectives of rule-making for the sector, including promoting innovation in the industry to address consumer needs. Whereas, the supervisory role is to ensure compliance with rules & regulations and to taking punitive action against any breaches.
A well-run supervision should contribute to the wider financial stability. As more issues keep cropping up about the irregularities in the sector or consumer-trust issues, the need for stronger vigilance and supervision is needed.
Due to the complexity of insurance entities and the nature of long-term monies that they handle, it is important to maintain a tight watch over anything that could bring in a systemic impact to the insurance market. Risk-based supervision might help in this need for early warning system of flagging off potential issues. For an efficient and unbiased Insurance supervision, the supervisory body should be empowered with adequate powers; including the ability to revoke licences and / or merge a weak entity with a stronger one, the ability to change key management of an entity.
An insurance supervisory body should have executive independence and should be seen by the stakeholders as a truly independent and fair entity. Without this, the confidence in the sector consumers seeking redressal and the industry entities wanting to share their learnings would drastically reduce. Also for a good supervisory body, the ability to take punitive action is critical. In short, the stakeholders should see the supervisory body as having authority and the willingness to take bold decisions; which in turn, builds their credibility and reputation.
As a best practice, in case of unified regulatory & supervisory bodies, the teams that handle supervision (which is almost an audit function) are not involved in rule-making function. A strong sense of collaboration between the supervisory and regulatory functions is prime.
Supervisory independence is the core idea for any independent financial supervisor. And to achieve its role, it needs to safeguard the integrity of the supervisory function. An insurance supervisor should be independent in deciding enforcement actions based on rules-based interventions, and for this, statutory protection of supervisors should be established. Supervisory independence should have adequate legal protection for the supervisory cadre and also from political and industry persecution, to ensure that they can take action without fear of legal action being taken.
Case for new-age talent & new-look supervision
From regulatory body’s institutional vintage perspective, IRDA is quite young and has done tremendous work in the short time. It’s also short-staffed to handle the size of potential consumer grievances, given the wide geographic reach, volume of insurance holders and the complexity of this specialised sector.
It is but natural, in early stages of its presence, for a regulatory & supervisory body, to have a large amount of expertise available from those experts, who built this sector as part of the state owned entities. As the industry expands , it would need more openness, in learning from across the industry players and to building additional capability in supervision. The supervisory body needs to invest in latest digital technologies and to keep pace with the industry players. It needs to have global connectedness with insurance regulators around the world as India allows more foreign players to invest into the insurance sector.
This is a good time to bring the concept of separate supervision vertical or to outsource supervision to outside entity owned by the government, when the insurance sector is set to increase its business volumes and the assets under management of its premiums collected. It would be easier to make the switch now when the industry is at the cusp of growth. With bulk of the insurance companies based out of the commercial capital of the country, it might also be efficient to have the supervisory teams located out of Mumbai. A good supervision is not just routine inspection but also advance indications, which being based in commercial capital could help with market inputs and chatter.
The Human Resource initiatives and capacity building generally takes a long time to be efficient, if it is organic way of nurturing those skill sets. IRDA should invest in enhancing its bench strength. Being a regulator and supervisor of a critical sector that is essential part of the Indian financial stability, it is critical to have sufficient number of experts from various functions in its talent pool. It cannot afford to have lesser than requisite talent. Institutionally it might be the right time to allow for lateral hires to bring in requisite skill-set that are unique and contemporary. It has been observed that cross-pollination of talent between regulatory bodies & industry entities, has added value across the sector, as long as nepotism is not allowed.
A recent example of separate regulation and supervision done by separate entities is that of RBI regulating housing finance sector while the National Housing Bank (NHB) supervising the industry. IRDA might want to explore such an idea as an alternate to the option of having policy development vertical separate from supervisory inspection vertical.
To having an independent approach to supervision and regulation, to addressing growing complexities, size and inter-connectedness of larger financial system, and dealing more effectively with potential systemic risks that could arise due to possible supervisory arbitrage and information asymmetry, it might be prudent to have a separate insurance supervisory organisation.
(The author is an independent markets commentator. The views expressed in this article are his own)