Two and a half months after T.S. Vijayan retired, the insurance regulatory body, the Insurance Regulatory and Development Authority of India (Irdai), has got its 5th chairman, Subhash Chandra Khuntia. A former chief secretary to the Karnataka government, he has his desk overloaded as he takes over the wheel of a body that regulates firms managing over Rs28 trillion of household savings through life insurance and another Rs2.2 trillion in the non-life insurance space.
The insurance regulator has been an outlier in the financial regulatory space. While disagreements with the government by independent regulators are well reported, the conduct of the insurance regulator has left policy makers, the financial sector and analysts open mouthed. Many decisions over the past few years have been in the face of global moves by regulators on issues of costs and transparency. Raising front commissions in life insurance products, repackaging what were illegal payouts as “rewards”, doing away with a persistency target to ensure that agents don’t churn policyholders and continuing with fuzzy disclosures in both life and general insurance products are just some of the actions that have left households even more vulnerable to mis-selling and outright fraud by banks and agents.
It is good news that an outsider to the insurance industry is taking over as chairman because there is now the possibility of pressing a reset button on the LIC mindset that pervades the regulator. The LIC mindset refers to a monopoly view of a market that lags changes in products, consumer needs and a protect-the-agent attitude. The new chairman must take quick steps to clean the stink of mis-selling the life insurance industry is known for in India. Investor losses have been mapped at over Rs1.5 trillion over a 7-year period ending in 2012 in the big Ulip scam. Post that, as the industry shifted to selling opaque high-cost traditional plans, the destruction of household savings continues due to lapsed polices.
The new regulator has a chance to reset the industry to get it ready to solve actual problems of households, rather than hard sell the 1970s kind of savings products that don’t give either a good life cover or a positive real return. There is a case for the life insurance industry specialising in three kinds of products. One, pure term covers that give the largest bang for the premium buck. Two, long-term guaranteed return products that benchmark to a third-party metric; for example, a g-sec rate, to describe transparently what the investor will get after 15-30 years. Three, develop the annuities market away from poor returns and structure products that exist today.
He must raise his head from the nitty-gritty of protecting the agency network and clearing ads that firms put out, to see the Indian market and economy with a distance view lens. When a previous chairman told the industry: as long as we buy government bonds, we won’t get touched, he was referring to the bargaining power the regulator had over the ministry of finance because of their role in funding the fiscal deficit. Investment rules framed in the Insurance Act force insurance firms to buy government bonds. In FY2017, life insurance firms held Rs9.3 trillion worth of just central government bonds. Captive household savings that earn poor returns to fund government spending is a text book case of financial repression. This has been unavoidable given India’s struggle to get people to pay taxes. Read more about this here.
The new regulator needs to take note of two changes, rising tax-GDP ratio and more binding Financial Responsibility and Budget Management (FRBM) targets, that will redefine its relationship with the ministry of finance and how much rope the regulator will get. A mixture of successful GST implementation, the Aadhar-PAN link smoking out tax-evaders and the use of big data to chase taxpayers into paying more is already resulting in buoyancy in the tax-GDP ratio. Both these point to better control on fiscal deficit, which will reduce the need for financial repression leading to dismantling of controls in both banking and insurance.
An insurance regulator who sees the big picture of retail finance helping solve financial problems of households and opens its doors to change is desperately needed as the Indian market struggles to keep pace with technology and millennial demand changing the way financial products are bought and sold. The regulator must stop being captured by firms and the agency network.