The Hindu Business Line : Tasks ahead for the insurance regulator

The Insurance Regulatory and Development Authority (IRDA) was set up in 1999 to protect the interests of policyholders and to regulate, promote and ensure orderly growth of the insurance industry.

With the opening up of the economy, a number of new players were issued licences and the IRDA played a promotional role, taking insurance even to the rural areas. It also freed general insurers from the shackles of tariff rates and ushered in the d e-tariff regime.

Consequently, fire premium rates dropped by 80-90 per cent for major industrial accounts without regard to risk factors, as private insurers were keen to grow their business at any cost.

Moreover, public sector insurers had not built up reliable statistical data to help guide private insurers in fixing an equitable rate commensurate with risk.

With the de-tariffing of rates, the Tariff Advisory Committee, which collected statistical data, was abolished and the directives of the IRDA that such reduction shall not be more than 50 per cent of then existing rates went unheeded.

High premium?

This gives the impression that if the current rates were the correct rates for risks, then all along the insurers were charging exorbitant premium disproportionate to the risks.

The moot point is whether the reserve fund would be adequate to meet large losses when on a future date major claims wipe out the built up reserves.

Insurers may quote a disproportionately high rate of premium which may result in poor insurance cover for a particular industry. With commission of insurance brokers substantially reduced, and in some cases even denied by the bargaining insurers, many brokers are likely to be ‘de-commissioned’.

A right step would have been to retain the level of premium before the introduction of de-tariff measures and confer the benefit of a wider cover to policyholders with revaluation of assets on reinstatement basis.

A reduction in premium rates for well-managed risks could be given once in two years, more or less on the pattern of motor insurance with a no-claim discount for claim-free years.

This will enable insurers compile reliable data of premium and losses, and risks can be rated.

The IRDA formed as many as eight committees and many of their recommendations have not come to the limelight. It is not known why the recommendations have not been accepted and what alternatives have been thought of to tide over difficult situations and problems.

As per the Insurance Advisory Committee (Meetings) Regulations, 2000 at least three meetings should be held in a year to advise the Authority on matters relating to drafting regulations under Sections 25 and 26 of the Act. The last meeting, as per available information, was held on August 17, 2005.

Some proposals

The IRDA could, perhaps, consider some of the following suggestions:

In respect of life insurance, the longevity of Indians has improved and the number of senior citizens as a percentage of the population has gone up and this will have to be reflected in the rates of premium charged. Physically challenged persons may be given life cover and the IRDA can classify and compile data and make available the same to all life insurers.

Health insurance policies are not issued to senior citizens and those with “pre-existing disease” are granted only after a waiting period of four years.

Insuring only healthy lives defeats the basic objective and principles of insurance.

Health insurance premiums have zoomed lately, overtaking even the galloping rate of inflation.

The General Insurance Council can come out with a standard health insurance cover with defined benefits and any increase in these benefits can be given by levying additional premium.

The resources of the IRDA could be used for promotional activities, such as to set up an insurance research body with a focus on identifying, understanding, and communicating industry trends, emerging issues, and innovations — and the areas could be product development, competitive intelligence, actuarial science, strategic planning, marketing, and other disciplines.

International insurance markets are on course to a fundamental transformation.In the UK, for instance, since 1999, insurance-linked securitisation is practised as a technique to tap the world’s capital markets. The IRDA could come out with a project paper on this subject with simple and adoptable guidelines on the UK model

The General Insurance Corporation had a subsidiary called Loss Prevention Association of India set up with the objective of conducting safety audit, fire claims survey/investigation, road safety, research and development of industrial and other allied risks.

As a service provider, this company played a useful role but it was dissolved recently for reasons not known. This organisation needs to be reactivated so as to serve as a research body for the insurance industry.

For dissemination of knowledge on insurance the IRDA can set up an IT based central digital library, equipped with insurance and management books. With fast improving Net connectivity one should be able to have free access to any textbook or information relevant to insurance.

The IRDA’s system of redress of policyholder grievances is inadequate, with little follow-up action and, many a times, the issues remain unsolved.

Any insurance claim rejected by an insurer should be properly substantiated and the IRDA should evolve a system to be followed by the insurers.

Restrictive clauses

Insurance policies contain a restrictive arbitration clause by which a policyholder can invoke arbitration only if liability is admitted but the quantum is in dispute.

This clause in all insurance policies should be altered to provide for reference of any dispute/claim under the policy contract to arbitration.

A strange limitation period of two years is included in the fire policy, whereby no suit shall be brought on the policy against the insurer after two years from the date of fire accident.

This condition seeks to curtail the ordinary period of limitation and it is void under Section 28 of the Indian Contract Act, 1872, which was amended on January 8, 1997. Any agreement by which a party is restricted absolutely from enforcing his rights under the contract, or any provision which limits the time within which he may enforce his rights, is void to that extent.

(The author is an insurance consultant)

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