Several global insurance companies that were looking for a joint venture with Indian insurers have put their plans on hold due to new guidelines from Insurance Regulatory and Development Authority (IRDA) and uncertain policy framework. The new IRDA guidelines have resulted in an overall increase in costs.
Among the international insurers include South Korea’s Samsung Life Insurance, French firm Scor Global Life and Canada-based Manulife that were interested in entering the Indian market and were looking for domestic partners.
Many life insurers that are already present in India have started restructuring exercise. They have significantly reduced their employees to cut costs. Several midsized insurers were also looking for a tie-up with a third partner to support their businesses. The insurance regulator has also capped surrender charges for ULIPs (unit linked insurance policies) and reduced agent commissions. The move would benefit customers as the charges become more transparent while preventing mis-selling.
Neeraj Tuli, senior partner, Tuli & Co, said “The IRDA has a statutory responsibility to safeguard the interests of consumers and also to promote the orderly growth of the insurance industry. The question is whether the right balance has been struck. There are certainly those in the industry who are saying that the pendulum may be swinging too far towards the policyholder and away from the industry, particularly the life insurance industry. The aim must be to keep an eye on the line between the reasonable protection of a policyholder’s interests without impacting on the development of the market, but there have been widely publicised grievances about a spate of regulatory issues that have imposed a wider and more rigorous compliance mandate on Insurers, and forced a change in business plans, budgets, and even business models. The consequent strain on capital, particularly for life Insurers, is unwelcome.”
Akshay Mehrotra, CMO, Policybazaar.com, said, “Insurance industry traditionally has been very distributor friendly and less consumer centric, but the regulator in the last two years has made many changes, some of which are largely focused on consumer benefit like lower charges. On the other hand, the insurers have found them to be too stringent, as it is difficult for insurers to work with-in these set of guidelines.”
Mr Tuli further said, “A single regulatory change should not be viewed out of context, because it is the cumulative effect of changes to the regulatory environment that matters far more, as well as the extent to which the promised progressive lifting of the FDI cap is a promise that is going to be kept. If we step back and view the industry as a whole, we can see that it has played its part in bolstering the Indian economy. Of course there have been problems, but there were problems before liberalisation and problems are to be expected in any newly liberalised market. Problems therefore need to be put in proper context. With all that in mind, no one can seriously want a return to the pre-liberalisation model, but at the same time it is grossly unfair to encourage overseas Insurers to invest in Indian Insurers in the expectation that the FDI limit will be increased, commit their time, effort and resources to their ventures here, and then delay the lifting of that limit. That inherent unfairness coupled with the fluid regulatory environment has seen at least two joint ventures where the foreign partner has exited, and similar exits seem to be in the offing. In a growth market like India, with the potential that India has for insurance that just appears to be incongruous.”
Mehrotra further elaborated, “Recently, there were new guidelines issued for pension plans, which required the insurers to ensure long-term guaranteed return on pension plan, but from an insurer point of view this is an impossibility without long-term government bonds, which makes the returns look less attractive. Consumer centric charges are welcome but rules-based regulation makes it difficult to function and remain profitable for insurers.”
Niraj Jain, CEO & principal officer, www.insurancemall.in, said, “The new IRDA guidelines are a welcome change and a breather for institutions and individuals selling insurance and not investments in the disguise of endowments and ULIPs. Its high time insurance companies start realising that their job is to underwrite risk and not just collect premium and invest in market through fund managers. IRDA is getting stricter and transparent with ULIPs to a great extent. Mis–selling of insurance plans to the end customer will be curbed.” www.insurancemall.in is a compare and buy online insurance broking shopping portal.
Insurers are worried as the move will reduce their profitability. Mr Jain further added, “Prima facie, the new IRDA guidelines will drop insurance sales but certainly will lead to a lot of innovation and product development within the industry. Off lately, one would have seen a lot of advertisements focusing more on term policies, pension benefits and protection against home loans which were not the case earlier. The economy and industry will certainly grow and also lead to increase in the average life sum insured of an individual. People will start buying insurance for its true utility and not as tax saving or investment instruments.”
Mr Mehrotra said, “Even after 11years of opening of the industry insurance penetration is only 4.4% which is very low for our economy. General insurers’ profits have shrunk in the last two years and most life insurers have still not turned profitable. The industry has seen a 17% decline from last year. Such a scenario is not very good for the economy as the insurance industry is expecting a further increase in FDI limit which can help these insurers boost up their current performance and increase the growth rates.”
“We also need to ask whether the regulatory regime has contributed to the problems. For example, in a vast potential market such as India distribution is key and banks have the largest obvious distribution networks and synergies with Insurers. Why then restrict banks to selling only for one insurer? That simply forces up the value of the bank’s distribution network, and forces insurers to compete to secure the bank’s distribution network. If that is the origin of the advance payments issues, the most effective solution seems to be to free up distribution networks from regulatory restrictions,” said Mr Tuli.
The regulator is also expected to come up with a product guideline soon. On Wednesday, Prime Minister Manmohan Singh, who took charges of the finance ministry, has indicated that the government would take steps to revive the insurance sector.