Insurance regulator should change focus

The insurance industry has enjoyed strong growth since 2000. Economic development, spurred by reforms, has been the driver of growth for India, at large, and the insurance industry, in particular.

 Domestic players still dominate but foreign capital and expertise is increasingly playing a supportive role.

The penetration rate is low and the per capita spend gives scope for substantial growth when compared with $3,747 in a developed market like Japan.

Entry barriers to most emerging markets have been reduced over the last decade. The market share of foreign-owned insurers in the life sector in the Asian region ranges from 2-87%, the range of share of the non-life sector is 1-74%.

India’s insurance market is still at a stage of relative immaturity despite rapid economic growth in recent years. India is a large and populous country and there are huge regional disparities as the relative wealth of the major cities contrasts with rural areas.

Awareness of the concept of insurance remains low among much of the population, particularly in the rural areas. However, this is set to change. India can be regarded as a collection of regional markets, the size and character of which vary with population and economic development. Regional disparities between the urban and rural areas are significant.

Indian life insurance market is still underdeveloped, notwithstanding that growth has been rapid. Some of the reasons behind the underdevelopment were cited in a recent survey, that only a few per cent of the population had a modest knowledge of the benefits of life insurance.

Aggressive and sometimes misleading sales practices have created wrong direction among consumers.

The Insurance Regulatory and Development Authority (IRDA) has issued a large number of regulations dealing with issues such as minimum capital, investment regulations and reserving standards, but not the establishment of a policyholders’ protection fund.

A further relaxation of investment rules should enable life insurers to match the maturities of their assets and liabilities more efficiently and enhance returns. In the non-life market, the introduction of motor third party liability pool is a retrograde step.

In order to achieve its broad objective of a large, financially secure and customer-focused insurance industry, IRDA should change its own focus from micro regulation to consumer protection. New legislation and revisions to existing rules should promote efficiency.

Product and pricing controls have to be abolished fully, not partly, and new solvency criteria have to be introduced as per global convergence norms.

A further relaxation of investment rules may benefit domestic and foreign JV insurance companies.

Skill shortages exist in most areas of the insurance industry including product development, financial management, general management, the actuarial field and technology.

Non-life insurers are required to establish unearned premium reserves, catastrophe reserves and loss reserves on actuarial basis. Reserves may be established net of ceded reinsurance.

Outstanding loss reserves must represent the full settlement cost of both reported and incurred but not reported claims. Claims reserves must be established on a gross basis and may not be discounted for the time value of money.

There is again flutter about gross amendment of insurance act. The matter is quietly referred to a group of ministers. Though the final contours are still anybody’s guess, it is almost sure that some of the public policy issues are not likely to be addressed even under the new amendments.

Only noise audible even to the deaf is the increase of FDI in insurance to 49% from 26%. Let there be arousal for larger and more substantive issues.

The writer is director,
National Insurance Academy, Pune