Close on the heels of the finance ministry’s warning to public sector general insurance companies for huge underwriting losses and their dependence on investment income for profits, a report co-authored by a former Member of the Insurance Regulatory and Development Authority of India (IRDAI) has blamed the regulatory framework and support system which tend to “over-regulate”, high cost of compliance and less “development oriented” policies for the segment’s woes. “The regulatory anchors relating to products, pricing, placement and promotion, outsourcing and many more under the banner of protecting policy holders interest, do not meet modern and global standards,” said the report authored by H Ansari, former member, IRDAI, and Arun Agarwal, former Lloyd’s India representative.
“The regulatory framework and support system tends to over-regulate (plethora of regulations with caveats, exception and quotas). Predictably, the cost of compliance is high and regulatory policy is less ‘development oriented’. The essential elements of ‘ease of doing business’ framework has not been incubated within the policy and regulatory framework to establish a credible, proportionate and supportive regulatory regime,” said the report which was submitted to the finance ministry, Niti Aayog and IRDAI .
Enlisting the growth barriers, the report explained that currently the regulations are prescriptive and rule-based, and often there is carping on ‘market not mature’ and ‘data not adequate’. Private players reported underwriting losses of Rs 2,500 crore in FY2017 while losses of PSU insurers were Rs 10,800 crore. Stating that the liberalised Indian insurance industry needs a comprehensive over-haul across the segments to boost its performance, they said the lack of profitability and underwriting disciplines mean that the right talent is not attracted and there is virtually no research in lowering the risk thresholds. The capital accumulation is not enough to fund more growth and the fresh capital is not easy to get — internal accruals, public listing, external borrowing or equity – all of which demand greater control and improved performances. “This results in India remaining poorly and inadequately penetrated. Converting into a virtuous cycle is both a challenge and opportunity,’’ they said in the report “A Transformative agenda for the Indian insurance industry and its policy framework”.
In a letter to the chiefs of PSU non-life insurers recently, the Department of Financial Services said, “it has been brought to the notice of this department that the public sector general insurance companies (PSGIC) are violating government advisories leading to huge underwriting losses. As a result, these companies are solely dependent upon the investment income (profit from sale of investment).”
These are limited investments and are fast depleting as a result of indiscriminate disposal by the companies to make up for the losses on underwriting premiums, the DFS letter said.
The report points out that the industry too has strengthened the current intrusive regulatory mechanisms with investment-led rather than underwriting-led profits — with life insurance industry delivering returns below the cost of capital for years and non-life insurance industry having the highest combined ratios across developed and emerging countries for the last many years.