Challenges facing the new insurance chief

T S Vijayan was holidaying at his home town in Kerala when news came that he has been appointed the new chairman of the Hyderabad-based Insurance Regulatory and Development Authority.

He covered the 1,300-plus km distance in a short period of time and joined office promptly.

But the distance that Vijayan will have to travel to get the insurance industry back in shape will surely be a much longer one.

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A turbulent economy coupled with a tough regulatory environment has led to uncertainty in the sector, with business numbers seeing a drop and joint venture partners exiting existing ventures.

Development first and regulation later -- that's what the industry is asking for.

Ironically, that's something Vijayan, who will be the first insurance regulator with long experience in the industry, may have pitched for when he was the chairman of Life Insurance Corporation.

But today, he may have a different world view.

First, let's look at the numbers.

Irda's Annual Report for 2011-12 shows that since the insurance sector was opened to private participation in 2000, the year 2011 saw the first-ever fall in life insurance density -- to $49 (about Rs 2,695), from $55.7 (about Rs 3,063) in 2010.

Density had risen every year from 2001.

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Ashvin Parekh, national leader, global financial services, Ernst and Young, said, "What the industry needs is development.

"Regulations can come after Irda has dealt with dwindling growth."

Insurance penetration and density are measures that reflect the level of development of a country's insurance sector.

While insurance penetration is measured as the percentage of total insurance premium to gross domestic product, insurance density is calculated as the ratio of premium to population (ie., per capita premium).

Insurance penetration, which surged consistently till 2009, then slipped for two consecutive years, to 4.1 per cent in 2011, from 5.1 per cent in 2010.

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This has been attributed to a slower rate of growth in life insurance premiums, compared with the rate of growth of the Indian economy.

Amitabh Chaudhry, managing director and chief executive officer, HDFC Life Insurance, said that the new chairman should not micro-regulate, but should take a big-picture view while assessing products.

"I do not expect any significant changes in the short term," he said.

The life insurance industry has seen a big dip in premiums, due to fluctuations in the group segment and the single premium segment.

Even the country's largest insurer, LIC, saw a six per cent drop in new business premiums for the April-January period of the current fiscal year.

Private insurers collected Rs 21,220.45 crore (Rs 212.2 billion) -- a dip of five per cent over last year.

While the much-awaited traditional-product guidelines have been finalised, insurers are yet to come to terms with the guidelines.

The rules pertaining to similar treatment of non-linked variable insurance products (index-linked products, or Ilips) and unit-linked products have not gone down well with life insurers.

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Vijayan will not only have to ensure that life insurers re-file their existing products on time, but also prevent Ilips from facing the fate of Ulips.

In September 2010, Irda had issued a regulation capping charges and commissions on unit-linked products.

This resulted in a steep drop in Ulip sales, which fell to 30 per cent of the total portfolio, from almost 55-60 per cent earlier.

Owing to low commissions, agents were also not interested in selling Ulips.

Bancassurance will provide a big boost for the growth of the insurance sector.

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With banks being allowed to sell products of only one life and one non-life insurer, newer insurance companies have lost out on the opportunity to explore this channel.

Though Irda has proposed an open architecture for bancassurance, where banks can act as brokers, it is yet to get a go-ahead from the Reserve Bank of India on this front.

Industry players said that the new chairman will have to get a consensus from all players quickly and pass the regulation.

P Nandagopal, managing director and chief executive officer of IndiaFirst Life Insurance, said that distribution reforms were key to the industry's growth.

Agent attrition is also a major issue, with almost 45-50 per cent of business coming from insurance agents.

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Higher incentives for agents, while ensuring that the customer's wallet is not pinched, along with a definite career progression path, according to insurers, is required to attract and retain agents in the sector.

The most common complaint of Indian insurers is that the regulator takes too long to approve new products.

On  average, 20 to 30 products are approved every month.

Indian insurers have presented a demand for a use-and-file mechanism, where they can start selling a product by following the basic guidelines.

Presently, a file-and-use mechanism is followed, where each product has to be first approved by Irda before its sale is permitted.

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G Srinivasan, chairman and managing director of New India Assurance, said, "The new chairman would need to focus on insurance penetration via faster product approvals.

"Instead of looking at every minute detail, Irda should have a framework for clearing products by looking at the basic features, leaving some room for innovation by companies."

At a time when additional players are needed in the insurance market, existing joint venture players are slowly exiting.

New York Life exiting its life insurance joint venture with Max India and ING announcing its exit from its life insurance joint venture ING Vysya Life Insurance have been the industry's low points.

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Further, Pantaloon Retail has decided to sell a 22.5 per cent stake in Future Generali India Life Insurance to Industrial Investment Trust Limited.

Also, both Indian and foreign joint venture partners in several life and general insurance firms are in talks to exit the ventures, owing to regulatory constraints and tough economic conditions.

Incentivising existing players and attracting foreign players, say industry experts, would be key to the sector's survival.

Price corrections have been described as one of the biggest needs of the general insurance industry, if it is to flourish.

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While a lot of the damage done to insurers' books has been un-done by dismantling the third-party pool, insurers are looking for regular premium increases in the motor and health insurance segments, to match the rise in inflation.

The challenge, here, would be to maintain a balance between the customer's ability to pay and charging an adequate price for services provided.

Probably the biggest challenge before Vijayan would be to give equal priority to the industry's growth and customer welfare.

While the former chairman, J Hari Narayan, had made it clear that he was all for the customer, it remains to be seen which side the new chairman (who is also an industry insider) will be in favour of.

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Whether he is in favour of the customer or the industry, one thing that has clearly emerged in the insurance sector is the need for an individual who can bring both stakeholders on a single platform.

This is the herculean task that Vijayan faces.

 T S VIJAYAN'S TO-DO LIST:

• Ensure the right mix of customer welfare and industry growth
• Attract new investment into the sector
• Incentivise agents
• Pursue development, followed by regulatory changes
• Promote alternate distribution channels like bancassurance
• Allow reasonable premium increases to support industry
• Speed up the process of product approvals

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KEY INSURANCE REFORMS IN 2012 AND 2013

• Pension-product regulations: Called for non-zero guaranteed returns for customers, which must be disclosed up-front.

Earlier, insurers were required to give a 4.5 per cent guarantee on pension products

• Traditional-product guidelines: Revised product structures and commissions, and specified that non-linked variable insurance products will be treated on a par with unit-linked products
• Investment regulations: Equity investment in a company fixed at 10 per cent, 12 per cent and 15 per cent, based on the size of the funds of a company.
  Sectoral exposure limits set at 15 per cent
• Health-insurance guidelines: Standardised product structures and fixed entry-age for policies.
  Also mentioned a list of critical illnesses and standard exclusions in a policy. Allowed non-allopathic treatment to be covered.
• Third-party pool guidelines: Dismantled third-party pool with declined risk pool. Hike in motor premiums proposed.
  Under the declined pool, insurers have the right to refuse or decline third-party insurance if it finds it too risky to underwrite.
  The declined vehicle would then be given a cover by another insurer.
  However, the risk would be ceded or transferred to the declined pool
• IPO guidelines for general insurers: Only general insurance companies that have been in operation for 10 years entitled to bring out an initial public offering.

 Until March 2013