Onus is now on the regulator

Insurance Act’s proving a dampener to new entrants

Kumkum Sen

As a part of its WTO obligations, India is required to open up the insurance, banking, accounting and legal services sectors by 1st January, 2005 to global competition. The banking and accountancy sector opened up without much to-do. The opposition has been in the legal and insurance sectors. In India, the insurance business had been completely controlled by the state through the Life Insurance Corporation of India and the General Insurance Corporation of India, till August, 2000, when the market opened up.

The recommendations of the Malhotra Committee on insurance sector reform led to the constitution of the interim Insurance Regulatory Authority. However, the actual regulation and operation of the insurance business remained with the statutory corporations, where bureaucratic red tape combined with supreme inefficiency in service, had rendered the benefits flowing to the insured both inaccessible and ineffectual.
The first initiative taken to ameliorate this state of affairs — the Insurance Regulatory Authority Bill, 1998 — lapsed; partly, because of the government’s concurrent intent to amend the LIC and GIC Nationalisation Act, which actually threatened vested interests. Further, since the proposed opening up was to foreign investors as well, it brought upon itself the wrath of the swadeshis. In this context, the passage of the Insurance Regulatory and Development Authority Act, 1999 must be seen as a victory for sound reason.
Complying with international obligations without adequate preparation is foolhardy: witness the fiasco taking place with amendments to the Patents Act. But this is not all. An inadequately developed insurance sector forces Indian industry to bear a large part of risks associated with commerce, thereby, creating a high cost economy. In a liberalising environment, this can spell doom for the Indian economy.

The Irda Act was ultimately passed with the objective of promotion, regulation of growth of the industry, and protection of interests of the insured parties. The Irda Act provides for assumption of the powers and functions of the interim IRA, financial authority of accounts and audit of the central government, both over the private entrants and existing government companies. Rural and social sector insurance has been made mandatory for all insurers with stringent penalty for private companies for default, and strict solvency norms. A minimum equity capital of Rs 100 crore has been stipulated for new entrants. Norms have also been laid down for deployment and investment of funds by companies to the extent of 65 per cent in govt securities and infrastructure.

It is expected that the Irda Act will improve service standards, increase competition, and, over time, expand the market, as has happened in other countries where the sector has opened up. The putative foreign partners are also expected to bring global expertise along with funds. New products in the health and pension segments are badly needed here. A strong and effective Insurance Regulatory and Development Authority has, therefore, a crucial role in the emerging environment. If given a free hand, a competent and legally effective Irda can create an encouraging environment for higher domestic savings and investments, capital market expansion, infrastructure financing, foreign capital inflow and increased employment; and for the customer, innovative products, efficient services, and economic pricing.

So far, the Irda has moved relatively quickly and promulgated regulations on the above issues, as well on actuarial appointment and duties, licensing of agents, disclosure norms, preparation of financial statements, etc. So what’s holding up things? Why, when more than 100 private companies were nationalised, are there only a dozen new entrants, that too mostly in life insurance? Why is the customer still shy? Why are new products not particularly innovative? True, waters need to be tested before taking the plunge. But in addition, two dimensions of the Act need consideration.

Section 14 (2)(i) empowers the regulator to “control and regulate the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business “; Section 14 (2)(k) permits him to “regulate investment of funds by insurance companies”. Each provision taken by itself is unexceptionable. The first to prevent misuse of monopoly powers in pricing, and the second for prudential reasons. Taken together, however, they can severely restrict the scope for differentiation and innovation. In such a situation, the sheer size and reach of the incumbents, GIC and its offsprings , can prove a serious dampener to new entrants. After all, there is a limit to what can be achieved simply by providing better service for the same product. Insurance companies need at least one degree of freedom to be able to compete. Tying both hands defeats the effort at liberalisation.

But a first step has been taken. And, the removal of road blocks is a sequential process. But must we cross each major hurdle by dint of trial and error, or can we at least avoid the more obvious ones upfront? The onus is now on the regulator. He can choose not to exercise some of the powers vested in him by the Act and thereby justify the second part of his appellation — the Insurance Regulatory and Development Authority. Amen.

Kumkum Sen is a practising corporate lawyer and a partner of Khaitan & Khaitan, a Delhi law firm