It really is time to act

Finance Minister P Chidambaram intervened and brought them on the discussion table to resolve the impasse between the regulator and the industry players. Post discussions there were several steps that the minister announced. The week also saw Cabinet clearing the proposal to increase foreign direct investment into the insurance sector to 49 per cent from current 26 per cent. But players haven8217;t started celebrating. They are waiting for real action.

LIFE INSURERS VS IRDA

Since the sector was opened up in the year 2000,life insurance companies more or less struggled to control their expenses. While the sector saw huge growth in the period before financial crisis in 2008,it was only recently that some of the private players could hit the break-even point. Lack of foreign capital and frequent regulatory changes marred the growth prospects of the industry. 8217;For a country like ours,which has huge market potential and large boundaries,insurers have been struggling to maximise geographical outreach,both because of the nature of the business and large capital investments which are needed to scale up business, said Yashish Dahiya,CEO of Policy Bazaar.

In September 2010,IRDA announced major changes in Ulip products. Post that there were frequent changes in the way pension products were to be designed and the minimum return that could be expected from them. These coupled with the fact that IRDA was not able to clear the product pipeline for a long time,brought life insurance sector to a standstill.

In a recent interview to The Indian Express,IRDA Chairman J Harinarayan said,insurers are worried because they are happy without regulations. Till now our focus was to work as a development authority but now it has been more than a decade and it is time to act as a regulatory authority. The insurance industry,on the other hand,had its own set of complaints. We told the regulator that the industry has three basic demandsfaster approvals,FDI hike,and product reforms. Substantial discussion took place between the industry and the regulator, said P Nandgopal,MD and CEO of IndiaFirst Life Insurance.

While there were several rounds of discussions between the regulator and the industry,the impasse could be broken only with the intervention of Finance Ministry. On September 4,Chidambaram met chief executives of life insurance companies along with the IRDA chairman to discuss the issues. Another meeting was held between the minister and the regulator on September 26 and 27. Finally,last week,in an unusually long press note,minister said,8221;I am happy to state that IRDA has agreed to examine the following steps and take appropriate action.

MAJOR STEPS

IRDA should identify/ design certain standard products which can be used by the industry under use and file system. This means that an insurer will be able to launch a product within the standard products category and later file it with regulator. Currently every product has to be first filed with regulator and only upon clearance can it be launched.

IRDA will issue guidelines in order to reduce the arbitrage between Ulips and traditional products. After the September,2010 Ulip guidelines,the commissions on such products were substantially reduced,while the commissions on the traditional products continued to be high. This provided agents an incentive to focus on traditional products than on Ulips. This completely changed the portfolio of insurance industry and it moved from predominantly Ulip focussed to traditional products.

Separate need for Know Your Customer KYC is not needed as IRDA will accept the KYC done by banks,the release said. This will reduce hassles for the customers and bring down the costs for the insurers.

To provide fillip to the distribution system of insurance products,IRDA will consider notifying banks as insurance brokers. Currently,one bank can sell insurance products of only one life and one non-life insurance company. However,as an insurance broker,the bank would have the flexibility to sell products of more than one insurance company.

IRDA will allow investments in an infrastructure special purpose vehicle SPV floated by any company. The debt instrument issues by the SPV must be guaranteed by the parent company and should have due regard to rating criteria.

IRDA will consider relaxing norms with regards to debt investments into AAA rated debt instruments.

Several proposals in direct and indirect taxes with regards to life insurance sector have been suggested.

Rajesh Sud,CEO and MD,Max Life Insurance said,we will await IRDA8217;s detailed guidelines to better understand and implement these. Some of the suggestions like brokerage model for bancassurance require further detailing such as whether this is optional or compulsory for all banks,the RBI8217;s stance towards banks becoming brokers and the degree of accountability banks would have towards ensure right selling of products to customers.

There is also a critical need to better understand the regulatory view on participating design of traditional products and whether the thinking around reduction of arbitrage between unit linked and traditional products will include review of the profit share rule of 90:10,which is unique to par products, Sud said.

FDI IN INSURANCE

In another surprise for the sector,the Cabinet last week gave approval to a long-pending demand of the insurers hike in FDI in insurance sector from current 26 per cent to 49 per cent. This comes as a good news to the capital intensive insurance sector which is currently starving for additional funds. The life insurance industry is long term in nature and requires years of capital infusion before it can sustain itself.

Few companies,including MetLife have only recently turned profitable. However,these profits are not yet significant to wipe out existing losses and require even more capital for future growth. Current Indian promoters are finding it difficult to continue investing additional capital required for growth. For the insurance companies to continue growing and increase penetration,the FDI increase to 49 per cent is essential and will help grow the industry,which is currently facing a slowdown, said Rajesh Relan,MD and country manager,MetLife India Insurance.

However,the industry is cautious this time and is shying away from celebrating the recent positive developments. The big question remains: Will the FDI hike be cleared by the Parliament? It could have been a Diwali gift for the sector,had the final guidelines from IRDA were in place and the FDI cleared by the Parliament. However,till the sector actually sees all the announcements taking final shape,celebration is still a far cry.

ritukant.ojhaexpressindia.com