The Insurance Regulatory and Development Authority of India recently approved a number of proposals to make ‘Insurance for All’ a reality by 2047. The regulator is making it easier for public insurers to raise capital, widen their distribution channels and enjoy greater flexibility in compensating agents.
While these measures may help increase the number of insurance companies in the country, many of the proposals could work against policyholder interests. With the industry hampered by high product commissions and rampant mis-selling which result in weak persistency ratio, the regulator ought to focus on improving these aspects. The insurance regulator has done away with the need for private equity and venture capital players to invest in insurance companies through special purpose vehicles. This will no doubt attract more PE and VC investors to the industry, but increasing the presence of these investors who have a relatively shorter investment horizon of 7-8 years, could push insurers to prioritise profits over policyholder returns.
IRDAI has allowed insurers to raise capital through subordinated debt and preference shares without prior approval and the threshold for these instruments has also been increased from 25 to 50 per cent of paid-up capital and premium. Given that this is a capital-intensive business, it is good that other avenues of capital are being made available to the insurers. Perhaps with the same intent, the regulator has proposed lower solvency requirements for the unit linked business (without guarantee) from 0.80 per cent to 0.60 per cent and for PMJJBY from 0.10 per cent to 0.05 per cent. But lowering solvency ratios in order to free up capital reduces the margin of safety available to policyholders, as insurers will have lower reserves against their future claims and obligations. In PM Fasal Bima Yojana, besides lowering the solvency factor related to crop insurance from 0.70 to 0.50, the period for recognising delay in premium dues has been increased from 180 days to 365 days. With crop insurance being a high-risk business given the vagaries of nature, these tweaks can lead to considerable difficulties for the industry going ahead.
Of greater concern is the draft paper on expenses and commissions which is open for public comment. The regulator is considering giving greater freedom to insurance companies by removing segmental limits and imposing a single overall limit for expenses of management in general and health insurance. Also, the current limits for agents’ commission are proposed to be removed and the cap is to be linked to the overall expenses of management. While this may give insurers more operational flexibility on how they defray business expenses, it may not be so good for insurance investors who already bear the brunt of commissions that are much higher than most other financial products, including mutual funds and bank deposits. Overall, building credibility and customer-friendliness in the insurance industry may be a better route to achieving higher product penetration.