IRDA concerned over insurers' mounting losses

Q: Are you concerned about the mounting losses of this industry?

A: What concerns me is not the fact that they are making losses per se. That the insurance company particularly in the life sector will be making losses for at least eight to 10 years was well known even before they started. Most of them assumed that their business will show some bottomline blackening by about the eighth or ninth year. Now what we find is that that's not happening. When we examine the figures once again, what seems to have happened is they were actually selling more than they had originally planned to. So the rate of growth is actually too fast. And the effects of that are now being seen. So it is getting pushed by about two or three years.

Q: Do you think that their cost strategy has also failed in that sense?

A: What is increasing in the cost of the insurance company is non commission-related cost - not just commission, but other types of cost, whose rate of growth has been rather high and they should watch it.

Q: So have you conveyed to the insurance companies that they need to watch out their cost?

A: The Insurance Act sets a limit on the total management costs and insurance companies are expected to abide by it. We allow a leeway initially by not being very rigorous in the implementation of that regulation for the first five years of the genesis of the company because we expect that there will be far more administrative costs initially. After that, we expect them to comply.

Q: Have you found any of them violating?

A: Three of them are not compliant.

Q: What actions have you taken?

A: We have written to the management of these companies asking them to spell out the steps that they propose to take to bring it in line.

Q: A lot of the companies are coming closer to going public. Do you see a composite roadmap being evolved for the entire industry or is this going to be a case-by-case issue?

A: Not at all. It will be a structure and within that structure, these companies will have to operate, whichever company applies. So, it won't be on a case-by-case basis.

Q: You said you haven't heard from the government. But we have information that the Law Ministry has not found anything wrong with the law in relaxing it. Where does the matter stand?

A: The government has a proposal to reduce it to five years. They have called for our comments on their draft notification. And that's where the matter is.

Q: Are you in principle fine with that? Do you think insurance companies are ready to go public?

A: We have no issues with that. That is a call that the insurance company will have to take. What we are really concerned with is the kind of steps, the disclosures, the kind of measures that will have to be in place to ensure that when an IPO is issued it is fair to the investing public in terms of the disclosures and available knowledge in place.

Q: On the FDI bit, the Indian partner has to dilute, the FII, FDI clarity is not there. What are your thoughts on that?

A: Yes, I think that is indeed a blind spot in the proposed bill, and in the comments that have been called for, this has been pointed out. And we have pointed out that there is indeed such a requirement and I am sure that before the bill becomes an enactment it will be addressed.

Q: Principally, do you believe that as an equity dilution happens there should be ability; this 49% cap should be able to take the FII bit as well?

A: There are various ways in which a company can go from 26% to 49%. And yes, at the moment the bill is unclear as to which way is it going to be. So that will have to be clarified.

Q: Are you in principle opposed to the basic thought that commissions should be between a distributor/agent and consumer/investor or they should be embedded in the financial products?

A: I think that it is a very premature step given the width and the depth and the different types of the Indian market and the need to nurture much closer relationship between the policyholder and the agent. Therefore I think it will have to be embedded in the premium in times to come.

Q: Have you conveyed your reservation?

A: Yes, we have conveyed the reservation.

Q: The non-life industry is facing an actuarial crunch. They have their products in the life insurance industry.

A: No, when I said non-life, non-life currently also includes health, it covers them too. What I was saying is there is an actuarial shortage but I am saying there is also a shortage of data, shortage of skill sets and so on to correctly actuarially evaluate a product and all the set of risks before you can fix the rate. From the evidence, the range is incorrectly fixed. It might be because of the competition in the market. They have seen in other countries as well that India had a high tariff when it was regulated. In January after it was de-regulated the tariffs came down because of competition because it was free. Now maybe it will start moving up. This process in other countries has taken three to four years. So, we have finished January 2008 and we are coming close to the second year more or less.

So, even if it takes another two years for this loss to be adjusted, we are just repeating the pattern that we have seen in other countries too. So, in that sense, it is not a matter of concern. We should watch out for it, be careful about it, be sensitive to it.

Q: What are your observations on the health products in the life insurance industry?

A: Health products in life insurance industry are generally fine. The individual lines are faring better than health policies. Group health policies, the claim ratios are much more adverse than individual claims.

But a lot of work is being done in the health insurance space, a tremendous amount of work, again in collaboration with the industry and CII and FICCI and all that, because health insurance is a sector that is expanding quite rapidly. So, we have brought out a series of requirements for products and companies to follow health insurance. In terms of standardization of what is a disease, standardization of terms used, in terms of the claim forms, in terms of the application forms, and in terms of minimum requirements to ensure that elderly people in society are covered.