Opinions from one and all

I am referring to the proposed amendments to the Insurance Act, that has evinced opinions from one and all, at least those who are from the insurance industry -- right at the center or at the peripheries. The first question is -- Will the amendments related to insurance be tabled in the winter session of parliament? No definitive answer here. Perhaps yes, perhaps no. The next question is what are the major changes proposed in the Insurance Act? Before looking at the major proposals, it would be necessary to understand that amendments are proposed to the following Acts - Insurance Act, 1938, LIC Act, 1956 & the IRDAI Act, 1999.

The main idea behind the proposed amendments is threefold:

1) Enhanced penetration, ensuring 'Insurance for All by 2047'.

2) The ultimate focal point, the policyholder benefits by way of wider choice of products, better service, optimum premium levels.

3) Making life easier for the insurance ecosystem.

So, any opinion on the major amendments proposed should be given, only after looking at the proposals through the above three lenses -- whether it meets one or more of the three focal points. Instead, what we find are four types of opinions, on this:

a) The 'Gaga' opinion: Going gaga over the proposals, stating that these are the best that can happen to the industry.

b) The 'Na-Na' opinion: The exact opposite, a negative opinion. Nothing is going to change, and the insurance industry will move and grow at its own pace.

c) The 'politically right opinion': Even if you believe or do not believe, that these changes could create better/worse outcomes, for the same of diplomacy or political correctness, opine something contrary to your own belief.

d) The 'pragmatic opinion': The balanced or realistic opinion derived by taking a holistic view of the major amendments, without jumping the gun and looking at time frames too.

The intent behind this article is not to provide a pragmatic opinion, but provide the pointers, that would enable you derive a pragmatic opinion.

I) 100% FDI in insurance companies: Foreign direct investment in insurance companies cannot exceed 74% as of now. This cap is sought to be removed, enabling a 100% foreign-owned insurance company to operate in India. The aim is to bring in more foreign investments, that could help increase the size of the insurance industry, with more players, meaning more options, better products, better prices, better service for the customers. This, in turn, is expected to bring in more people and businesses under insurance protection.

Looking back, when FDI in insurance companies was raised from the earlier 49% to 74% (controlling interest, as prevailing now), all the foreign partners in the Indian insurance JVs did not increase their stake to 74%. So, how many of the existing ones and how many new entrants would take advantage of the 100% FDI remains to be seen. Possibly, this will be for the long term. Blue-blooded insurers are wary of the Indian insurance market practices and prices, with the only saving grace being the ‘cash before cover’ regulations. The ones who may evince interest to enter are the Private Equity funds, who typically have a timeline of 5-7 years ------- but insurance companies take at least 10 years to stabilize and mature.

II)  Reduction in share capital to INR 50 crores for some insurers: Instead of the INR 100 crores minimum capital required to start an insurance company, it is proposed to bring it down to INR 50 crores for some classes of insurers, possibly the ones who would sell only specialised insurance products or operate in a limited geographical area. This is perceived to bring in specialized insurers players and enhance the size of the insurance market and also bring in wider choice, better products and prices to the customers over a period of time.

Insurance, especially life insurance business is capital-intensive, and one can see that even though the minimum capital requirement at present is INR 100 crores, almost all insurers have capital far in excess of this minimum limit and even the initial capital brought in during inception would be in excess of INR 100 crores. Point is, 100 crores was never and should never be an entry-barrier for an insurer. If we look at ther educed capital, as applicable to insurers with limited operations in terms of products, geographies, etc., here too, the amount in today’s context appears small and any serious entrant would definitely start off with a higher initial capital. Regional insurers, state-level insurers, etc. would face the risk of accumulations too, on AOG perils, leading to possibly higher reinsurance costs.  Will they be able to offer lower pricing remains to be seen.

III) Composite license to insurers to underwrite and sell life, non-life and health insurance policies under a single company:  At present, licenses issued are for life, non-life and standalone health insurance companies separately. The proposal is to issue a single license enabling an insurer to offer all 3 classes of insurance under one roof. In developed insurance markets, this practice is quite common, although many of them do not write health insurance, which is often the preserve of specialized standalone insurers. Not many of them mix non-life insurance (P &C) with Health, while life and health are more prevalent. Not too sure about how this meets any of the three basic criteria for introducing the amendments. Perhaps, it is felt that customers can get all their insurance requirements under one roof and the insurers too can cross-sell, apart from having common service functions that would help reduce overall costs, with the benefits being passed on to the customers by way of lower premiums.

 In developed markets, composite insurers do operate, but internally they work as separate companies, with very strict accounting norms and arm’s length approach, given the fact that the accounting, investments, as also the skill sets required for the businesses are different – Life being very long tail, while non-life typically has annual contracts. One needs to visualise if Indian accounting standards and compliance with the same are on par with international standards. Moreover, the element of cross-subsidy, though we may choose to call it cross-sell) is not prevalent in advanced markets.

IV) Permanent license to brokers and other intermediaries: At present a broker’s license has to be renewed every 3 years through application and payment of requisite fees, whereas for an insurer, the license is permanent unless cancelled. It is proposed that the license once issued to a broker would be perpetual, subject to payment of annual renewal fees and not indulging in any acts/activities that could lead to a cancellation of license by the regulator. This makes life easier for the insurance ecosystem. Permanence of business is a huge positive no doubt, but how much of local and FDI would flow in, because of this change, remains to be seen. 100% FDI in broking is already in place. The administrative work of the regulator gets greatly reduced but whether a permanent license or a once-in-three years renewal of a broker, is of interest to a customer, needs to be evaluated.

 V) Open architecture for insurance agents: In its original form, an agent had a sole relationship with one life insurance company and one non-life insurance company. This has now been enhanced to 3 each from life, non-life and health insurance companies. Gone are the days of agent loyalty and career agents, with agents holding multiple licences in the family to deal with multiple insurers. The amendment to allow agents to deal with 9 life, 9 non-life and 9 health insurers, or 27 in all, is possibly aimed at regularising the practice of having multiple agency codes in the family.  What is to be evaluated is whether this benefits the customer or not. The agent will be almost a ‘mini broker’, but without the stringent broker regulations, aimed at protecting the customers ultimately.  The question to be asked is, why are insurers, pushing for ‘open architecture’, as they call it.  Presumably to have a larger distribution channel at their disposal: but how will the agents choose one insurer over the other or rather, how will insurers attract agents to place business with them? Higher commissions? How this will benefit the customer or be detrimental to him is to be answered. The most important aspect, this could come in the way of enhanced penetration or spread, with many agents and insurers fighting for a larger share in the existing pie.

 Look forward to your pragmatic opinions now.