Reforms in insurance sector must, but not at personal cost
After a long lull the Government in power seems to be going gung-ho in flooding the Indian economy with reforms, thereby proving their mettle and sending out a strong message to the global economy about the growth prospects in the country. This reforms rush have revitalised investor sentiments which were clearly reflected in benchmark index (i.e. the BSE Sensex), as it has risen by around 6% since the reforms kicked in.
In order to keep the momentum going and improving the investment climate in the country, the Government is now mulling ways to boost the insurance sector, particularly life insurance. The Finance Ministry along with the insurance regulator- the Insurance Regulatory and Development Authority (IRDA) are about to revamp the ailing insurance sector by addressing to various aspects such as:
- Relaxation of investment norms for insurance companies;
- Release more funds for the infrastructure sector;
- Taxation of life insurance policies;
- Revival of Unit Linked Insurance Products (ULIPs);
- Faster regulatory approval for new products;
- Tax on pension products;
- Open architecture on bancassurance; and
- More relaxed licensing norms.
At present, according to the IRDA guidelines, insurance companies are allowed to invest up to 50% of their funds in government securities, 15% in infrastructure bonds, and 35% in corporate bonds and equities. Moreover, they can invest only in the highest rated ‘AAA’ or ‘AA’ bonds. There is also a cap of 20% for investing in equity and debt instruments of one company in the infrastructure sector. However, an additional 5% can be invested with board approval. Such investment restrictions impede the flow of capital in the equity markets.
Insurance companies have urged IRDA to improve commissions for ULIPs, which accounted for about 70% of sales in 2008-09. Their share in new business premium fell to 15% in 2011-12 due to regulatory changes and volatile stock markets. Revival of ULIPs could also form part of the Finance Minister’s broader strategy to boost stock markets and prepare the ground for divestment of Public Sector Undertakings (PSUs).
We are of the view that, reforms are necessary to revive the flagging economy. In the insurance sector too, wherein the penetration of the insurance in country is very miniscule (about 5% - insurance premium as a percentage of GDP) reforms could help strengthen the sector. However, reforms should not take place at the cost of policyholder’s interest. For instance, if norms related to issuance of ULIPs are made lenient (which were made strict in order to avoid rampant mis-selling) it will once again give nightmares to gullible investors.
Even if ULIP selling or issuance norms are relaxed, the IRDA should see to it that the disclosure norms are in place and insurance agents are following proper code of conduct while pitching it to prospective policyholders. IRDA should not compromise on at least norms related to curb mis-selling. A clear and transparent policy for selling insurance products will automatically help improve the penetration of insurance in the country. Moreover, the insurance agents should be encouraged to undertake need-based selling of insurance products and insurers should focus on conducting educational programmes creating awareness of insurance in the country.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm