Recent stories regarding the vulnerability of our banking system to organised fraud has completely shaken the confidence of the depositors. The investigating agencies are busy finding the loop holes but the fact is that lakhs of crores of deposits in banks have been squandered by the unscrupulous borrowers. The total NPA in our banking system is more than Rs 11 lakh crore because the rate of recovery is below 11%. With these developments, I think it is high time that the boards of insurance companies stay alert and assess their fund and risk management systems so that they avoid experiencing the disgrace and trauma that the banks have been experiencing today. In terms of wealth under management, the fund size of insurers is almost equal to that of the banks.
Investment of funds
The IRDAI exercises fair amount of control on fund management by life and non-life insurers through various regulations and inspections. They have prescribed system-based control on investment of funds. But what is critical to the whole issue is understanding of the whole process of the movement of funds from the customer’s account to the investees account and the perception, attitude and interest of the people involved both inside and outside of the organisation. During a decade of my association with the boards, I found the oversight of the finances and the investments of companies is merely ritualistic. In most of the cases the chairman would not have enough time to enforce in-depth evaluation of the reports presented by the management. The sub-committees of the board entrusted with the task of scrutinising reports and accounts of investments also avoid being tough on serious issues and end up with accepting what the management team wants the board to accept and approve.
If any director would like to make serious observations and suggest remedial steps he would normally be assured by the management team in the presence of the chairman that due care would be taken. But while preparing minutes, the concerned remarks may not be recorded. The time given to the auditors to present report to the board is always very brief. Hence no serious discussion is permitted.
Risks and vulnerability
In such a scenario, the responsibility regarding proper management of the finances and investments of the insurers rests with the CEOs only. The amount invested by insurance companies in equities or in the form of loan to various industries is as high as the amount invested by the banks. Hence overlooking the potential risk and vulnerability of the insurers may one day prove costly to the stakeholders.
Most of the CEOs in Indian insurance companies do not possess natural talent or insight for understanding financial issues. They generally focus on driving growth in respect of number of policies and total premium. When the CEOs hiring process starts the committee mandates the search agencies to find a person who can drive growth by building a good team and providing clear vision to the team. Today the boards have given unbridled power to the CEOs of the insurance companies and have abdicated their role of supervision and control. There is none to track the income, wealth and the lifestyle of the top executives.
The insurance regulator has very clearly issued guidelines for framing standard operating procedure by the insurers, mandating segregation of role and responsibility of employees in front, mid and back office for executing investments. All operations today are system controlled and there is a provision of concurrent audit so that slippages are detected and reported on real time basis. In the front office there is total segregation of fund managers and dealers through authority matrix.
There are limits on investment in a particular company or in subscribing to the IPO. There are guidelines for classifying assets into standard and sub-standard so that no investment remains out of sight of the investment committee. But frauds and NPAs are today plaguing the banking sectors on a massive scale in spite of as powerful a regulator as the RBI. I think insurance industry needs to wake up and learn lessons from the banking sector before the hopes and trust of the policyholders too suffers a rude shock.
The writer is former MD & CEO, Star Union Dai-ichi Life Insurance