'God Save Insurance Industry'

'Some of the astounding proposals, if translated into statutory provisions, would be suicidal.'
'This would not be a wonder cure for increasing insurance penetration and only result in mushrooming growth of players like paan kiosks with deleterious consequences.'

It is suicidal. It will bring back anarchy. Startling. There were some of the views expressed by a former chairman, Insurance Regulatory and Development Authority of India (IRDAI) and several other sectoral experts at the crucial amendments proposed to the insurance laws.

Their worry is altering the basic structure of the insurance regulations -- reduction in minimum capital to allow regional players, changes in the investment norms -- that has served the sector for more than two decades after the sector was opened up for private players.

Experts also welcomed some of the proposed amendments.

The Department of Financial Services under the ministry of finance has proposed amendments to the Insurance Act 1938, Insurance Regulatory and Development Authority Act 1999 and the Life Insurance Corporation Act 1956.

"God save the industry and the government. Slashing the minimum start-up capital to allow regional insurance companies on the pretext of increasing insurance penetration, changing investment norms would result in mushrooming of small insurers. It would also result in going back to the pre-1956 days," warns N Rangachary, the first chairman of IRDAI who had paved the regulatory way for private players in the insurance sector.

Before 1956 in India, there were hundreds of small life and general insurance companies selling insurance policies in a restricted manner without paying claims.

The government has proposed to halve the minimum capital for a general and life insurer to Rs 50 crore (Rs 500 million) for a class of insurers serving the underserved or special segment of the population, to increase insurance penetration in the rural areas.

Curiously, the new insurers come in with far more money than the minimum capital of Rs 100 crore (Rs 1 billion) and continue to infuse fresh capital at regular intervals.

India opened up the insurance sector for private players in 2000.

After more than two decades of opening up, insurance penetration -- number of Indians with an insurance policy -- has not increased.

And whatever increase has happened is largely due to central and state government programmes.

"Some of the astounding proposals, if translated into statutory provisions, would be suicidal and spell adverse consequences. For instance, the proposal for doing away with the existing minimum capital requirement norms for insurers, and instead, providing for differential capital requirements, solvency norms and composite insurance business are far-fetched," says D Varadarajan, a Supreme Court lawyer specialising in insurance and corporate law and a member on the K P Narasimhan committee on insurance laws and reforms and other expert groups constituted by IRDAI.

"This would not be a wonder cure for increasing insurance penetration and only result in mushrooming growth of players like paan kiosks with deleterious consequences," predicts Varadarajan, adding, "Sooner or later, the insurance sector would go back to the pre-nationalisation era and history would be repeated."

Rangachary said insurance companies cannot be compared with Regional Rural Banks. While the banks deal with assets, the insurers deal with risks. The relationship between a banker and his customer is short or medium term whereas the relationship between an insurer and the life insurance policyholder is long term.

A bank depositor can withdraw his money anytime in full, whereas a life insurance policyholder will not get the premium refund in full when s/he surrenders the policy, Rangachary points out.

In the event a bank fails, explains Rangachary, there is insurance cover for depositors whereas there is no guarantee for a policyholder -- life or general.

"A life insurer should be structured in a fail proof manner," Rangachary adds.

Presently the IRDAI structures any takeover of a sinking insurer by another player.

The proposed amendments are welcome to the extent that whatever has been suggested to weed out vintage and redundant provisions, says Varadarajan, which are consequential in nature and not beyond.

"There are many drastic changes, which would strike at the root of the basic structure of insurance laws, which have withstood the test of time, and as such, these require dispassionate re-consideration, both in the interests of orderly growth of insurance business and protection of the interests of the policyholders," says Varadarajan.

Thanks to the robust statutory frame-work in regard to investments and solvency norms, the insurance sector remained unscathed during the global meltdown, economic upheavals and financial scams. Hence, why tinker with the status quo? asks Varadarajan.

According to Varadarajan, ever since the insurance industry opened up, few insurers found it difficult to operate resulting in mergers and consolidation. But the policyholders did not suffer, thanks to the strong statutory edifice.

Industry experts were also surprised at the proposal to allow non-insurance players to take over an existing insurer.

The proposal to allow amalgamation or transfer of insurance business between an insurer and "any company not engaged in the insurance business" is startling, defies description, asserts Varadarajan.

As regards the regulator's power to appoint administrators, it would have been in the fitness of things to have restricted appointment of serving IRDAI officers as administrators to avoid conflict of interest and other obvious reasons, Varadarajan says.

Industry experts do not write off all the proposed amendments as bad.

"The proposal to loosen the restriction on insurance agents in regard to the number of companies for acting as agents is a welcome move. But it is for the regulator to guard against any market malpractices such as weaning away the customers of one insurance company to another in their quest for earning more commission and mis-selling," says Varadarajan.

"Composite registration allowing insurers to do life/general/health in a single registration/insurance company -- this promotes operational efficiency for insurers having common brands across different lines of business," points out Conjeevaram Baradhwaj, a company secretary specialising in insurance and corporate laws.

Baradhwaj welcomes the move to increase the foreign investment limit to 100% from the current 74% as it would attract newer players.

The proposals allow insurers to do other businesses -- the guarantee or indemnity business, managing and selling property possessed by the company, supporting entities formed for the benefit of employees or ex-employees or their dependents and activities incidental to or conducive to advancement of the insurance business.

However the last seems to be an omnibus one. Earlier it was proposed to allow insurers to sell financial products of other companies which was frowned upon by some sectoral experts.

By increasing the threshold limit for IRDAI's approval from 1% to 5% and the scrapping of the renewal of the intermediary licence every three years gives operational freedom, observes Baradhwaj.

The government has also proposed to increase the penalty from Rs 1 lakh to Rs 5 lakh per day and the maximum monetary limit hiked from Rs 1 crore to Rs 10 crore for non-compliance.

Similarly, a new provision on the penalty for misstatement or furnishing false documents of not less than Rs 1 crore and a maximum of Rs 5 crore has also been proposed by the government.

Venkatachari Jagannathan can be reached at venkatacharijagannathan@gmail.com