STRUCTURE & FUNCTIONS OF IRDA

Subject: Global Insurance Regulations

MFS-405

Submitted to: Mr.P.R.K.Murti

Faculty,

Masters in Law of Financial

Services and Capital Markets

Submitted by: K.Samhitha,

Roll no: FS10-017,

IInd Year, IInd Semester

Masters in Law of Financial

Services and Capital Markets

NALSAR University of law Institute of Insurance and Risk Management

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Table of Contents

Topics Page no

Chapter-1

1.1-Introduction 4

1.2-History of Insurance 4

1.3-Insurance is Necessary for Economic Prosperity 8

1.4-A Competitive Insurance Market is in the National Interest 8

1.5-Regulation should be Adequate 10

1.6-Regulation should be Minimally Intrusive 11

Chapter-2

2.1-Introduction of IRDA 13

2.2-Expectations from IRDA 13

Chapter-3

3.1-Duties, Powers and Functions of IRDA 15

3.2-Structure of IRDA: 16

3.3-Establishment and incorporation of authority 17

3.4-Tenure of office of chairperson and other members 17

3.5-Removal from office 18

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3.6-Chairman selection process 18

3.7-Advisory committee 19

Chapter-4

4.1-Ombudsman 20

4.2-Appointment of Insurance Ombudsman 20

4.3-Power of Ombudsman 21

Chapter-5

Conclusion 22-25

BIBLIOGRAPHY 26

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Chapter-1

1.1-INTRODUCTION

The rationale underlying competition is that market forces are best at allocating resources and at

enhancing consumer choice and value. Thus, moves to render markets more competitive should

be encouraged, taking into account the level of development of the market and recognizing the

necessity for reasonable safeguards to protect the public. In this respect, the WTO Financial

Services Agreement marked an important milestone in the evolution toward competitive markets.

However, market access alone does not ensure vigorous, fair competition. Regulatory reforms

also are needed.

The next step toward structuring insurance markets that better serve the interest of each

country’s citizens is regulatory reform built on a set of pro-competitive principles designed to

ensure competitive, solvent, and fair markets. This report offers such a set of principles that are

designed to permit national insurance markets to serve the public interest better. These

principles are not an argument for elimination of regulation. In fact, pro-competitive regulation

requires a greater — not lesser — emphasis on solvency oversight, disclosure and consumer

information, and market monitoring. An insurance market structured around these principles

will be one in which regulation is adequate, impartial, and minimally intrusive and, importantly,

in which the regulatory process is transparent.

1.2-HISTORY OF INSURANCE

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu

( Manusmrithi ), Yagnavalkya (Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in

terms of pooling of resources that could be re-distributed in times of calamities such as fire,

floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient

Indian history has preserved the earliest traces of insurance in the form of marine trade loans and

carriers’ contracts. Insurance in India has evolved over time heavily drawing from other

countries, England in particular.

 

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   1818 saw the advent of life insurance business in India with the establishment of the Oriental

Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the

Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870

saw the enactment of the British Insurance Act and in the last three decades of the nineteenth

century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in

the Bombay Residency. This era, however, was dominated by foreign insurance offices which

did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and

London Globe Insurance and the Indian offices were up for hard competition from the foreign

companies.

 

     In 1914, the Government of India started publishing returns of Insurance Companies in India.

The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life

business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to

collect statistical information about both life and non-life business transacted in India by Indian

and foreign insurers including provident insurance societies. In 1938, with a view to protecting

the interest of the Insurance public, the earlier legislation was consolidated and amended by the

Insurance Act, 1938 with comprehensive provisions for effective control over the activities of

insurers.

 

   The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a

large number of insurance companies and the level of competition was high. There were also

allegations of unfair trade practices. The Government of India, therefore, decided to nationalize

insurance business.

 

      An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and

Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian,

16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The

LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.

 

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     The history of general insurance dates back to the Industrial Revolution in the west and the

consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a

legacy of British occupation. General Insurance in India has its roots in the establishment of

Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian

Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of

general insurance business.

1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton of

India. The General Insurance Council framed a code of conduct for ensuring fair conduct and

sound business practices.

 

    In 1968, the Insurance Act was amended to regulate investments and set minimum solvency

margins. The Tariff Advisory Committee was also set up then.

 

    In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general

insurance business was nationalized with effect from 1st January, 1973. 107 insurers were

amalgamated and grouped into four companies, namely National Insurance Company Ltd., the

New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India

Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a

company in 1971 and it commence business on January 1sst 1973.

 

     This millennium has seen insurance come a full circle in a journey extending to nearly 200

years. The process of re-opening of the sector had begun in the early 1990s and the last decade

and more has seen it been opened up substantially. In 1993, the Government set up a committee

under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations

for reforms in the insurance sector.The objective was to complement the reforms initiated in the

financial sector. The committee submitted its report in 1994 wherein , among other things, it

recommended that the private sector be permitted to enter the insurance industry. They stated

that foreign companies be allowed to enter by floating Indian companies, preferably a joint

venture with Indian partners.

 

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     Following the recommendations of the Malhotra Committee report, in 1999, the Insurance

Regulatory and Development Authority (IRDA) was constituted as an autonomous body to

regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in

April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance

customer satisfaction through increased consumer choice and lower premiums, while ensuring

the financial security of the insurance market.

 

     The IRDA opened up the market in August 2000 with the invitation for application for

registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the

power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000

onwards framed various regulations ranging from registration of companies for carrying on

insurance business to protection of policyholders’ interests.

 

    In December, 2000, the subsidiaries of the General Insurance Corporation of India were

restructured as independent companies and at the same time GIC was converted into a national

re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002.

 

     Today there are 24 general insurance companies including the ECGC and Agriculture

Insurance Corporation of India and 23 life insurance companies operating in the country.

 

     The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together

with banking services, insurance services add about 7% to the country’s GDP. A well-developed

and evolved insurance sector is a boon for economic development as it provides long- term funds

for infrastructure development at the same time strengthening the risk taking ability of the

country.

 

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1.3-Insurance is Necessary for Economic Prosperity

Financial services generally and insurance in particular are of primordial importance to

economic development. The more developed and efficient a country’s insurance market, the

greater will be its contribution to economic prosperity. Insurance promotes economic prosperity

in seven ways:

First, insurance can promote financial stability and reduce anxiety.

Second, private insurance can substitute for and complement government security programs.

Third, insurance can facilitate trade and commerce.

Fourth, insurance can help mobilize national savings.

Fifth, insurers can enable risk to be managed more efficiently.

Sixth, insurers and reinsurers have economic incentives to help insured reduce losses.

Seventh, insurers foster a more efficient allocation of a country’s capital.

1.4-A Competitive Insurance Market is in the National Interest

That competitive insurance markets are in the national interest continues to be acknowledged

worldwide, although several governments seem tentative. Many governments continue to deny

their citizens and businesses access to low-priced, high-quality insurance policies and services.

These actions suggest either that (1) regulation exists more to protect established private interests

than the overall national interest or (2) policy makers remain skeptical that competitive markets

will deliver the benefits to the national economy as suggested above. The report analyzes each

of these issues, noting that the interests of private parties often override the greater interest of the

public at large – to the great detriment of the national economy and citizens.

All insurance markets have imperfections that justify some level of government intervention.

The report analyzes two classes of such problems, noting that information problems for

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insurance customers and attempts by competitors to gain market power warrant meaningful

regulatory oversight to ensure solvent, competitive markets.

Insurance Regulatory Approaches Vary Greatly

It is possible to distinguish three fundamental types of government intervention in insurance.

One approach emphasizes competitive markets and minimal intrusion with respect to market

forces and insurers’ decisions. The second approach relies on more restrictive regulation of

market forces and the partial or complete sheltering of private insurers from competition.

Countries that delegate the provision of insurance to the government fall into the third category.

Each of these systems faces a particular set of issues in restructuring markets and regulatory

systems to be more competitive in the national interest. The report offers a brief examination of

six countries’ insurance regulatory structures, to illustrate how the various areas of regulatory

policy come together.

The Path towards Competitive, Solvent Insurance Markets

In today’s globally competitive financial services world, the nature and specific features of each

government’s intervention into its market should be reassessed to ensure that every aspect is

essential and is accomplishing its goal at minimum market disruption. The most common

rationale for government intervention into insurance markets is to protect buyers — in economic

terms, to rectify market imperfections. To do this, insurance regulation should seek to ensure

that quality, reasonably-priced products are available from reliable insurers.

A well-structured competitive market will ensure that the quality, reasonable-pricing, and

availability goals are attained. Hence, an important role of government is to promote fair

competition to achieve these goals, while protecting buyers from misleading, collusive, and other

anti-competitive practices. At the same time, arguably the most important governmental role is

to ensure that insurers are reliable.

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To promote these twin goals of having a competitive and solvent insurance market, insurance

regulation should have the following traits:

• Adequacy

• Impartiality

• Minimal intrusiveness

• Transparency

1.5-Regulation Should be Adequate

Regulation should be adequate, meaning that it should be sufficient to rectify significant market

imperfections and, thereby, protect the public. Several principles of adequacy follow.

Competition Law. To establish an adequate system of regulation, governments must, first,

have necessary laws and regulations in place that create the framework for a competitive market.

Our first principle, therefore, is that: Governments should enact and enforce laws that provide

an effective framework for competitive insurance markets.

Prudential Regulation. Laws and regulations should address all relevant aspects of insurer

operations, from creation to liquidation. The most essential component relates to prudential

regulation, which brings us to the next principle related to adequacy of regulation: Governments

should enact and enforce laws that establish reasonable solvency standards and regulation as the

primary means of protecting the public. Resolving the problems of financial difficulties for

existing insurers should be a priority. Thus, our next principle would lead to the creation of

appropriate and consistent ways of dealing with insurers that incur financial difficulties. As a

part of reasonable solvency regulation, governments should establish, make public, and enforce

appropriate and consistent rules and procedures for identifying and dealing with financially

troubled insurers.

Regulatory Effectiveness. The next step to ensure adequate regulation in a competitive market

involves creating an independent regulatory agency with sufficient resources to enforce laws and

regulations efficiently, effectively, and impartially. Governments should establish an insurance

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regulatory agency that operates in the national interest and has sufficient resources to efficiently,

effectively, and impartially enforce the nation’s insurance laws and regulations.

Phased-In Liberalization. Observers correctly note that insurance regulatory oversight in many

emerging market-economy countries may not be sufficiently attuned to protecting consumers in a

liberalized, competitive market. They may need to enhance prudential supervision, competition

regulation, and market-conduct regulation as they deregulate and liberalize their insurance

markets. At the same time, the movement from a restrictive to a competitive market does not

take place overnight, which brings us to our next principle. Governments should develop and

implement pro-competitive insurance regulation in a way and at a pace that ensures adequate

protection of the public but that proceeds without undue delay and is subject to a reasonable

implementation timetable.

Regulation Should be Impartial

The principle of impartiality is fundamental to a competitive market. It means that governments

should accord no competitor or group of competitors more favorable treatment than that

extended to other competitors or groups of competitors. Thus, our next pro-competitive

regulatory principle is that: Governments should ensure that insurance regulation and

enforcement are applied with consistency and impartiality between competitors, irrespective of

the nationality.

1.6-Regulation Should be Minimally Intrusive

The Limits of Regulation. A government will have multiple ways of rectifying each

imperfection that it identifies. However, some means will prove far more disruptive to the

competitive market than others. In selecting among its many alternatives, governments should

select those that accomplish the purpose at minimal disruption to the smooth functioning of their

insurance markets. Thus, an important pro-competitive principle is that: Insurance regulation

should be limited to that which is (1) justified as providing meaningful protection and

(2) minimally intrusive to accomplish its purpose.

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Distribution and Product Regulation. Restrictive markets usually adopt a philosophy that

insurers may do only that which is expressly authorized. Such regulation can ensure a stable

market, but such markets are rarely innovative, typically offer high-priced insurance, and provide

comparatively limited consumer choice and value, as noted throughout this report.Thus,

consistent with the minimally intrusive standard, the next principle is: Subject only to that

regulatory oversight essential to protect the public, governments should allow the market to

determine (1) what financial services products should be developed and sold, (2) the methods by

which they are to be sold, and (3) the prices at which they will be sold

Disclosure and Consumer Information. When a government moves from a restrictive

regulatory system to greater reliance on competition, some consumer protection functions shift

from the government to consumers themselves. Government should ensure that insurance buyers

understand that such a fundamental shift has taken place. Government should ensure that

customers have access to sufficient information to be able to make informed purchase decisions

and protect their own interests. This brings us to our next principle: Governments should ensure

that insurance customers have access to information sufficient to enable them to make informed,

independent judgments as to (1) an insurer’s financial condition and (2) the benefits and value of

its products.

The Regulatory Process Should be Transparent

Transparency in the regulatory process is fundamental to ensuring a competitive market. This

brings us to one of the most important pro-competitive principles: Governments should make

existing insurance laws and regulations easily available to the public, including to consumers and

businesses and to insurers and other financial services providers. Another dimension of the

transparency principle applies to proposed laws and regulations. This dimension requires that all

interested parties have the opportunity to know about and to comment on proposed regulations

and that methods to challenge regulatory decisions be available.

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Chapter-2

2.1-Introduction of IRDA

The IRDA (Insurance Regulatory and Development Authority) is the national regulatory body

for Insurance industry (both Life and Non-Life Insurance Companies) under the auspices of

Government of India, situated at Hyderabad.

IRDA was established by an act enacted in Indian Parliament known as IRDA Act 1999 and was

amended in 2002 to incorporate some emerging requirements as well as to overcome some

deficiencies in the entire process.

Mission of IRDA

• a) To protect the interests of the policyholders

• b) To promote, regulate and ensure orderly growth of the insurance industry and for

matters connected therewith or incidental thereto

• c) Conduction of insurance businesses across India in an ethical manner.

2.2-Expectations from IRDA

The law of India has following expectations from IRDA...

To protect the interest of and secure fair treatment to policyholders.

To bring about speedy and orderly growth of the insurance industry (including annuity

and superannuation payments), for the benefit of the common man, and to provide long

term funds for accelerating growth of the economy.

To set, promote, monitor and enforce high standards of integrity, financial soundness, fair

dealing and competence of those it regulates.

To ensure that insurance customers receive precise, clear and correct information about

products and services and make them aware of their responsibilities and duties in this

regard.

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To ensure speedy settlement of genuine claims, to prevent insurance frauds and other

malpractices and put in place effective grievance redressal machinery.

To promote fairness, transparency and orderly conduct in financial markets dealing with

insurance and build a reliable management information system to enforce high standards

of financial soundness amongst market players.

To ensure that insurance customers receive precise, clear and correct information about

products and services and make them aware of their responsibilities and duties in this

regard.

To ensure speedy settlement of genuine claims, to prevent insurance frauds and other

malpractices and put in place effective grievance redressal machinery.

To promote fairness, transparency and orderly conduct in financial markets dealing with

insurance and build a reliable management information system to enforce high standards

of financial soundness amongst market players.

To take action where such standards are inadequate or ineffectively enforced.

To bring about optimum amount of self-regulation in day to day working of the industry

consistent with the requirements of prudential regulation.

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Chapter-3

3.1-DUTIES, POWERS AND FUNCTIONS OF IRDA

Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA

1. Subject to the provisions of this Act and any other law for the time being in force, the

Authority shall have the duty to regulate, promote and ensure orderly growth of the

insurance business and re-insurance business.

2. Without prejudice to the generality of the provisions contained in sub-section (1), the

powers and functions of the Authority shall include,

1. issue to the applicant a certificate of registration, renew, modify, withdraw,

suspend or cancel such registration;

2. protection of the interests of the policy holders in matters concerning assigning

of policy, nomination by policy holders, insurable interest, settlement of

insurance claim, surrender value of policy and other terms and conditions of

contracts of insurance;

3. specifying requisite qualifications, code of conduct and practical training for

intermediary or insurance intermediaries and agents;

4. specifying the code of conduct for surveyors and loss assessors;

5. promoting efficiency in the conduct of insurance business;

6. promoting and regulating professional organizations connected with the

insurance and re-insurance business;

7. levying fees and other charges for carrying out the purposes of this Act;

8. calling for information from, undertaking inspection of, conducting enquiries and

investigations including audit of the insurers, intermediaries, insurance

intermediaries and other organizations connected with the insurance business;

9. control and regulation of the rates, advantages, terms and conditions that may be

offered by insurers in respect of general insurance business not so controlled and

regulated by the Tariff Advisory Committee under section 64U of the Insurance

Act, 1938 (4 of 1938);

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10. specifying the form and manner in which books of account shall be maintained

and statement of accounts shall be rendered by insurers and other insurance

intermediaries;

11. regulating investment of funds by insurance companies;

12. regulating maintenance of margin of solvency;

13. adjudication of disputes between insurers and intermediaries or insurance

intermediaries;

14. supervising the functioning of the Tariff Advisory Committee;

15. specifying the percentage of premium income of the insurer to finance schemes

for promoting and regulating professional organizations referred to in clause (f);

16. specifying the percentage of life insurance business and general insurance

business to be undertaken by the insurer in the rural or social sector; and

17. exercising such other powers as may be prescribed from time to time,

3.2-STRUCTURE OF IRDA:

As per the section 4 of IRDA Act' 1999, Insurance Regulatory and Development Authority

(IRDA, which was constituted by an act of parliament) specify the composition of Authority 

The Authority is a ten member team consisting of

a) A Chairman;

b)  Five whole-time members;

c) Four part-time members, 

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(all appointed by the Government of India)

3.3-Establishment and incorporation of authority

(1) With effect from such date as the Central Government may, by notification, appoint, there

shall be established, for the purposes of this Act, an Authority to be called "the Insurance

Regulatory and Development Authority".

(2) The Authority shall be a body corporate by the name aforesaid having perpetual

succession and a common seal with power, subject to the provisions of this Act, to acquire,

hold and dispose of property, both movable and immovable, and to contract and shall, by the

said name, sue or be sued.

(3) The head office of the Authority shall be at such place as the Central Government may

decide from time to time.

(4) The Authority may establish offices at other places in India.

3.4-Tenure of office of chairperson and other members

(1) The Chairperson and every other whole-time member shall hold office for a term of five

years from the date on which he enters upon his office and shall be eligible for

reappointment:

Provided that no person shall hold office as a Chairperson after he has attained the age of

sixty-five years:

Provided further that no person shall hold office as a whole-time member after he has

attained the age of sixty-two years.

(2) A part-time member shall hold office for a term not exceeding five years from the date on

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which he enters upon his office.

(3) Notwithstanding anything contained in sub-section (1) or sub-section (2), a member may -

(a) relinquish his office by giving in writing to the Central Government notice of

not less than three months; or

(b) be removed from his office in accordance with the provisions of section

3.5-Removal from office

(1) The Central Government may remove from office any member who-

(a) is, or at any time has been, adjudged as an insolvent; or

(b) has become physically or mentally incapable of acting as a member; or

(c) has been convicted of any offence which, in the opinion of the Central

Government, involves moral turpitude; or

(d) has acquired such financial or other interest as is likely to affect prejudicially his

functions as a member; or

(e) has so abused his position as to render his continuation in office detrimental to

the public interest.

(2) No such member shall be removed under clause (d) or clause (e) of sub-section (1)

unless he has been given a reasonable opportunity of being heard in the matter.

3.6-Chairman selection process

Government of India has circulated to broad base IRDA chairman selection process. It is felt

in the market that placing of retired civil servants as IRDA Chairman has served the purpose

of administrative fiefdom of the regulator. Mostly, the regulator has become passive to

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market realities and most of the original public policy intentions have been systematically

replaced by personal preferences. There seems to be no oversight of public policy erosions.

Taking advantage of the completion of term of current incumbent, there seem to be an

attempt to correct the future course but people do not perceive any outcome to result as the

market does not seem to throw up candidates of the stature of Howard Davies for Indian

market. But a right leadership is the solution to the requirement of this booming market.

3.7-Advisory committee

 Is the current Chairman of IRDA.

Full-time Members: Currently, they are Mr. K K Srinivasan (Nonlife Member), Sri G

Prabhakara (Life Member), Dr R Kannan(Member, Actuary) and Sri R.K. Nair (Member,

F & I). There is provision for a panel of other members and part time members. IRDA

formed a high powered Insurance Law Reforms Committee known as KPN Committee

with important insurance advisors like Mr. N Govardhan and Dr K C Mishra as its

members. There were also a few non-advisory committee members like Mr. Liaquat

Khan and Mr. T Viswanathan etc.

Full force and utility of various institutions like Advisory Committee and self-regulatory

organizations are not yet realized as the regulator seems to be in a long learning mode. Due to

over delegations, Individual incumbents decide the pace and extent of utilization of prudential

and statutory bodies. Research is limited to opinion seeking through legacy channels. Market

waits for revision of insurance act and establishment meaningfully functioning regulatory

organs devoid of excess delegation and subjective localization of development agencies.

Unlike other Indian administrative Regulatory Agencies IRDA is perceived as a silent

regulator with activities confined to its local existence.

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Chapter-4

4.1-OMBUDSMAN

The institution of Insurance Ombudsman was created by a Government of India

Notification dated 11th November, 1998 with the purpose of quick disposal of the

grievances of the insured customers and to mitigate their problems involved in

redressal of those grievances. This institution is of great importance and relevance for

the protection of interests of policy holders and also in building their confidence in the

system. The institution has helped to generate and sustain the faith and confidence

amongst the consumers and insurers.

4.2-Appointment of Insurance Ombudsman

The governing body of insurance council issues orders of appointment of the

insurance Ombudsman on the recommendations of the committee comprising of

Chairman, IRDA, Chairman, LIC, Chairman, GIC and a representative of the Central

Government. Insurance council comprises of members of the Life Insurance council

and general insurance council formed under Section 40 C of the Insurance Act, 1938.

The governing body of insurance council consists of representatives of insurance

companies. 

4.3-Power of Ombudsman

Insurance Ombudsman has two types of functions to perform (1) conciliation, (2)

Award making. The insurance Ombudsman is empowered to receive and consider

complaints in respect of personal lines of insurance from any person who has any

grievance against an insurer. The complaint may relate to any grievance against the

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insurer i.e. (a) any partial or total repudiation of claims by the insurance companies,

(b) any dispute regarding premium paid or payable, (c) dispute on legal construction

of policy wordings in case such disputes relate to claims, (d) delay in settlement of

claims & (e) non-issue of any insurance document.

Ombudsman powers are restricted to insurance contracts of value not exceeding 20

lakhs. The insurance companies are required to comply with the awards passed by the

Ombudsman within 3 months.

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Chapter-5

CONCLUSION

IRDA needs to improve the distribution and design of products as well as enhance

communication within the sector

Since the entry of private sector, the Indian insurance sector has changed dramatically to offer a

variety of insurance solutions through a distribution network spread across the country. The

Insurance Regulatory and Development Authority (Irda) has played an important role in

providing direction to the industry.

The initial phase of the insurance industry experienced high growth fuelled by a buoyant

economy. As the industry moved from its infancy towards maturity, the regulatory architecture

played an important role by guiding and steering the industry on the right track. It has helped in

building a robust insurance industry and made favourable initiatives to give the industry an

additional boost.

However, as the industry moved into the second decade, and post the global financial turmoil,

the expectations from IRDA changed. This is the phase where the industry can grow

exponentially if presented with a favorable policy framework to assist the development of

insurance in India.

There was an opportunity to develop a roadmap for the industry in consultation with all

stakeholders, including insurers and industry bodies. However, in its quest to drive stability and

improve systems and processes in the industry, the regulator came out with stringent regulations

in quick succession over the last few years that have had a negative impact on the growth of the

insurance sector.

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Distribution:

Insurance is sold through a consultative sales process. Agency distribution is one of the main

channels for insurers and best suited not only to provide reach but also the customised solutions

based on a comprehensive need assessment. The regulator has taken some positive steps to

define the role of agent advisors not just as distributors but also the advisors through the full

tenure of the policy by implementing guidelines on a minimum persistency ratio to be

maintained by each agent. Even the discussion draft on orphan policies management aims to

ensure continued service to policyholders. The exposure draft on need-based selling is another

attempt by the regulator in the correct direction towards curbing mis-selling.

Along with these efforts, it is important to create a professional agent force and attract the right

talent. There are many agents who operate part-time and leave the profession within the first two

years and are under-productive. On the other hand, there are professional agents who earn their

living only through this profession. Such professional agents need to be encouraged. There could

be more talent drawn to the industry if it can be given a corporate structure by segmenting agents

on the basis of their performance. Also, qualified professionals such as CA, CFP, ICWA, etc, can

be allowed auto-enrollment to become an insurance agent. At a time when the insurance industry

is facing agent attrition, all these measures by the regulator will help recruit better talent for the

industry.

Corporate agents should be treated differently from retail individual agents because corporate

agents not only help reduce the distribution expenses, they also act as bankers, a group

policyholder and even a shareholder in some cases. Also, in a relatively new market for

insurance, the role of alternate channels should not be undermined as it brings readily available

distribution networks to enhance reach. Though the initial costs are high for these channels, over

time through economies of scale, corporate agents would bring down costs and the benefits of

that will ultimately flow to policyholders.

Bancassurance is another critical distribution channel that has gained significance, especially

over the last few years. Banks with an existing branch network can help enhance insurance

ownership in low penetration areas. The proposed open architecture system puts zonal

restrictions on primary bancassurance relationships. This proposal does not provide incremental

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reach or product options to customers and at the same time creates execution challenges in terms

of training and consistency of customer experience.

Liberalisation of the bancassurance sector in a phased manner and optimising the architecture to

improve penetration and growth from a long-term perspective could be significant for the future

of the bancassurance channel.

Product design:

Over the past couple of years, the lifeline of the insurance sector—products—have been the

worst hit. Frequent changes in product designs have led to a negative growth trend for the

industry. Ideally, IRDA should put in place a broad framework for product design, in

consultation with insurers and shift to a ‘use and file’ regime. The Appointed Actuary and the

CEO of each life insurance company could be made responsible to certify that the product design

is within the framework. This change will not only make the product approval process easy, it

will provide an impetus to product novelty, resulting in better distributors’ interest as they will be

able to offer innovative products based on their customers’ needs.

The new pension regulation mandates capital guarantees both on maturity and on the surrender

of policy. This restricts the freedom to invest in equities that as per all empirical studies provide

best returns on investment over the long-term. It is imperative that the capital guarantee at the

time of surrender should be done away with to provide the true benefit of pension plans.

Governance framework:

In any relationship, communication is the most important factor for long term association. Both

insurers and the regulator should have a constructive engagement on a regular basis for the

development of the insurance sector in India. Ultimately, the goals for both of them are the same

—to see a thriving insurance industry that serves customers.

It may be easier to achieve this by conducting various regulatory working groups under the Life

Insurance Council, General Insurance Council and specialist representatives from IRDA could

participate in these groups. This will reduce gaps in understanding between the regulator and

regulated entities, thus helping in creating a mutual and acceptable regulatory regime.

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Insurance is a business that makes long-term assumptions. It takes a few years before these

assumptions are evaluated against experience and adopted for revision in pricing. Frequent

regulatory changes made the long-term assumptions and capital investments infructuous. As a

result, most insurance companies spend their time and energy on customising their processes and

systems to the new regulations. A well laid-out governance structure will help IRDA regularly

interact with industry representatives. What IRDA, in consultation with industry bodies, can do

is create a regulatory roadmap for the next 3-5 years and provide an adequate time-frame for

implementation of any regulation. It can move to a principle based regulatory regime from the

current rule-based regulatory framework. And this agenda of self-regulation can be driven by the

LIC & GIC.

IRDA should also play a more proactive role in protecting industry interests in policy decisions

and in the implementation of rules and regulations framed by the government. A case in point is

the new tax exemption eligibility condition under section 80C and 10(10D), which has been

revised from the previous sum assured to a multiple of 5 times to 10 times. While this is

consistent with the life insurance industry’s thought, it is a substantial change to be implemented

in such a short timeframe. This provision has lost its significance as IRDA has already taken care

of this issue to a great extent through a minimum tenure and lock-in period for life insurance

plans. This provision almost excludes older people from life insurance benefit as the policy

tenure will have to be increased to create viable products. A proactive discussion between the

ministry of finance and IRDA could have helped solve the issue.

The insurance industry is continuing in its efforts towards making profitable growth. That too, at

a time when the global and domestic economic situation is volatile. The insurers would need

some reassurance from the regulator and together they can drive the agenda of both protecting

the consumers and driving the growth of the industry. Shareholders, who have invested almost

R33,000 crore of capital, deserve to get decent returns on their investment. Catering to the needs

of the customers should be the topmost priority; however, it is time for a favorable regulatory

environment to enable equitable distribution of financial outcomes amongst all stakeholders.

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BIBLIOGRAPHY

1. http://www.financialexpress.com/news/regulating-insurance-for-growth/947546/0

2. http://www.myinsuranceclub.com/glossary/irda

3. http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo101

4. http://en.wikipedia.org/wiki/Insurance_Regulatory_and_Development_Authority

5. http://www.medindia.net/patients/insurance/insurance-concepts-and-irda-duties-power-

function.htm

6. http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo233&mid=7.1

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