As the life industry contracts, why Irda may be feeling Sebi-ish
Degrowth in the life insurance industry has brought the knives out. Its finally the industry vs the regulator. And that’s how it should be
Monika Halan, Mint 15/2/2012
The Rs2.9 trillion Indian life insurance industry has, for the first time since privatization in 2000, seen contraction over two consecutive financial years. Fiscal 2010-11 saw a shrinking of 20% and the full year 2011-12, estimates the insurance regulator, will contract 15%. This means that enough of us did not buy an additional policy last year or this year, or did not renew an ongoing policy, or that new investors were not found by insurance sellers.
It is a cause for worry when an industry stagnates. But if there is contraction, the worry changes to a call to action. While in most industries, it is the companies that get active and lobby the government for sops and policy relaxations, when it is the life insurance industry that sees the contraction, the wrinkle is equally on the brow of the government. You wouldn’t have guessed that the Rs1 lakh you did not fork over for another junk policy was going to cost the government its disinvestment plan. And that is partly the reason for the ministerial worry and action. A bit of history first. For decades the life insurance industry in India was synonymous with the Life Insurance Corporation of India (LIC) and being government-owned, this meant that its crores of assets became a sort of a default sovereign wealth fund for the Indian government. Market falling at an inconvenient time would see the call going from North Block to the office of the LIC chairman. The need to drum up interest for a public sector IPO would see help from the defacto investment chest for the government. With the entry of private sector firms, though the market share of the state-owned behemoth has fallen, its clout surely has not within the government in terms of the quantity of assets under management. The falling business numbers in life insurance in general and LIC in particular, therefore, have worried the ministry of finance mandarins enough to call for an industry meeting in Delhi. And the regulator was not invited.
The meeting held in Delhi two weeks ago with the life insurance chiefs saw the knives coming out. Unlike other times, this time it is not the media or the capital market regulator that was the target, but the Insurance Regulatory and Development Authority (Irda) itself. For an industry that is wary of going public against the regulator (insurance companies are not even allowed to form an independent association, they need to work through the Life Insurance Council, an Irda-constituted industry body) the mini free-for-all saw a public venting against the regulator. The industry is angry over flip-flops in regulation and knee-jerk reactions to issues. It accuses the regulator of killing the pension product and of not thinking through some of its decisions. A part of the angst has been about the attitude of the regulator that, they say, wants to project itself as a messiah of consumers and sees all companies as offenders. But, says one insurance CEO, hurting the companies may end up hurting the consumers.
I agree that some of the consumer-interest communication that goes out from Hyderabad, where Irda is based, is immature. Take, for instance, the TV ad that showed the consumer being saved by the super-man like regulator or the calls that the regulator’s staff seem to be making to customers to scare them into changing a unit-linked insurance policy (Ulip) to a traditional plan—but to be fair, some part of the clean-up by Irda, that was pushed by the government to do so in 2009, has been good for consumers. The Ulip product has got cleaned up to a large extent and no amount of mis-selling of traditional products will expose investors to the risk of short-term market movements. Given my past run-ins with the regulatory body, I did not think the day would come when this keyboard would bang out words in defence of the insurance watchdog, but I don’t see why Irda should be blamed for the insurance sector shrinking. The contraction has happened because companies greedy for business used the faulty Ulip product to cheat consumers. Twin pressures of losing the trust of investors and of the changed regulatory environment that makes mis-selling the Ulip not worth the effort have caused the dip in revenue and not the regulator.
Since its battle with the Securities and Exhange Board of India (Sebi) two years ago, Irda today may be more empathetic to its elder sibling, the capital market regulator. Accused of causing a decline in mutual fund assets under management two years ago for making mutual funds no-load, Sebi stuck to its stand and eventually the industry has settled down. Irda should remember that once the froth subsides and genuinely consumer friendly rules begin to take over, the business stabilizes and gives the industry a strong base.
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