Disruption is a favourite word for management consultants and there are various opinions about the efficacy of disruptive changes in a business. The trigger for a planned disruption is normally the performance challenges a business or even an industry faces. Regulatory disruptions fall into a different category altogether and reflect the realignment of the policy environment in a given sector. In this context,—proposed changes in the insurance sector give rise to a fundamental question: What has necessitated the changes in the regulatory framework?
The buzzword is ‘insurance for all’ and, noble as it may be, it sometimes overlooks the fundamental fact that the spread of insurance is governed by the overall economic environment in a country. It is, therefore, important to reflect on the significant changes suggested in the proposed amendments to the Insurance Act.
As a starting point, a major evolutionary change is the removal of restriction on foreign ownership, which is currently capped at 74%. If this change is approved, foreign ownership can go up to 100%. Would this really make a difference in terms of opening up the floodgates for FDI (foreign direct investment)? Welcome as the change may be, the fact remains that not many foreign partners of existing insurance companies have taken advantage of the existing ceiling to raise their holdings from 49% to 74%.
There could be two possible reasons for it—either the valuation clauses in the existing joint venture agreements are making it prohibitively expensive for the foreign partners to buy the additional stake from their Indian partner, or the foreign companies do not find the Indian insurance market as attractive as it was assumed to be a few years ago.
Those who follow the industry closely know that a lot of this growth has been built on the back of two factors—growth in motor vehicle production of all types (which has gone up from a few hundred thousand to a few million per year), and the growth in the so-called 'health insurance' mainly because the standard of care in government hospitals has gone from bad to worse and those who can, prefer to go to private hospitals.
Another big contributor to the growth of health insurance premiums is the various schemes sponsored by state governments, which essentially pay the premium on behalf of specified segments of the population to the insurance companies. Claims servicing in this area is spectacularly bad. In other non-sponsored schemes as well as individual health insurance policies, premiums go up every year beyond normal inflation.
This change, therefore, is unlikely to help expand the footprint of insurance coverage in the country, except that it possibly gives an opportunity to the sub-optimal players to get out of the game by selling the business to a foreign party. Western companies consider health insurance entirely different from their core capability—life or non-life—and all are less than enthusiastic about doing health insurance. Therefore, if one takes out this component of the insurance pie, the market does not look big enough for another large entrant.
One serendipitous fallout is that the rent-seeking opportunity for local business houses will vanish. In the past, when an Indian promoter was mandatory, many Indian partners extracted substantial premiums from foreign insurers to lend their names.
The second—and more noteworthy—change is the provision for granting composite licences, which means an insurance company can carry out life and non-life business under one licence. Hitherto, separate licences were required for life insurance business and non-life insurance, to which a third category was subsequently added as a stand-alone health insurance company, basically enabling the regulator to reduce the initial capital requirement from Rs100 crore to Rs50 crore.
It is worth remembering that a non-life company could still do health insurance business, which probably accounts for the fact that of the early starters, one company was merged with another general insurer and barring one south-based company, others are struggling to make a mark.
Composite licence is a double-edged sword, and, like any sharp weapon, it can turn out to be deadly in the hands of the uninitiated. Whereas many jurisdictions worldwide allow a composite licence, very few jurisdictions encourage such composite businesses, except for allowing the legacy companies to carry on. In fact, many such legacy companies have gradually restricted themselves to one of these two categories, given the complexity of managing such a widespread business. Even from a regulatory perspective, it may be sub-optimal to exercise oversight over composite companies.
It is easy to overlook the difference between the two. Life insurance is a misnomer; the correct description is life assurance, assuring an agreed payout in the event of death or disability, regardless of adequacy or otherwise of the sum insured. On the other hand, general insurance considers the relationship between the sum insured and the extent of the loss. Another difference is the reliability of mortality tables and the accuracy of long-term investment returns.
There are other differences too, but the foregoing should help understand the challenges in bringing the two distinct activities under one umbrella. While stipulating separate sets of accounts for the two classes, the proposed regulations do not specify any other guardrails, such as a separate supervisory board or a separate management structure.
The level of corporate governance in our country is still a work-in-progress and it can be dangerous to rely solely on the good intentions of owners and managers. As far as one can extrapolate the hindsight, a composite licence carries the risk of making the insurance business an open season for unscrupulous practitioners - diversion of funds, obfuscation of commission payouts, compromising on customer interest, data protection challenges and capital adequacy.
Talking of the latter, although the proposed amendments broadly provide for a separate capital structure for each class of business, it is difficult to monitor and manage the assignment of capital to different business streams if this is under one ownership or management. This is a regulatory change that should possibly be deferred to a later date, or a higher minimum capital requirement should be introduced in the case of a composite licence.
Another change related to the grant of composite licences is the reclassification of businesses, especially in general insurance. Hitherto, the business had an archaic classification of broadly three types: fire, marine and miscellaneous, the last of which, the miscellaneous class, acted as a carpet for sweeping all other types of business under it.
The classification of motor business as miscellaneous is scandalous, to say the least. Even within that, it is difficult to know how much of it is third-party liability insurance and how much motor physical damage is. As a result, third-party liability essentially subsidises the physical damage part of the motor business, regardless of the pricing review that is carried out every year.
Strangely enough, personal accident and travel insurance policies have been placed under health insurance classification, which defies any logic since these are completely separate classes, even if personal accident and travel insurance may provide for medical expense reimbursement under certain circumstances.
A new provision being introduced is section 3AB, which seems to leave the field wide open for a number of other activities, sometimes only peripherally related to the main business of insurance. Insurance companies are now allowed to do “….all such other things as are incidental or conducive to the promotion or advancement of the business of the compan...”
A legitimate question is: Who will determine what is conducive to the promotion or advancement of the company”?
Would starting a broking company, for example, not qualify under this provision?
To stretch it to another extreme, perhaps setting up a premium financing company may be ‘conducive’? These kind of blanket provisions are prone to misuse and regulators may not necessarily have the bandwidth to deal with such diversification.
A critical amendment is reducing the minimum capital requirement to Rs50 crore across both life and non-life businesses. Currently, this low capital base is available only to health insurance companies, which can be justified to some extent given that a very large single claim on a health insurance policy is unlikely.
While the proposed amendments suggest that such capital criteria can be applied separately to each class of business, it is difficult to monitor the integrity of capital adequacy in the case of new businesses. This is counterintuitive and needs to be straight-jacketed to avoid creating additional regulatory challenges for the already overburdened regulatory apparatus.
One welcome change is removing the restriction on insurance agencies—earlier insurance agents were restricted to working for one insurer each: life, non-life and health. Enabling insurance agents to have more than one insurance company on their panel will enable more choices for the buying public. Given this change, it may be timely to create a separate category of ‘independent agents’ to differentiate a multi-company agent from an insurance company’s own agency force.
There are a range of amendments suggested with respect to investments, compliance, and powers of the government and the regulator, which merit detailed consideration, but for the sake of space, these are not being addressed here.
Suffice it to say that these amendments are likely to prove disruptive in more than one sense and need further deliberation, which is unlikely given the prevailing apathy at one end of the spectrum and the hubris at the other end.
(Shrirang V Samant has worked in senior leadership roles in the general insurance industry, both in public and private sectors, in India and abroad. He has been privy to the transition of this industry from public to private sector in the country and was the founding CEO of a multinational insurance joint venture- JV in India.)
