Why ‘industry friendly’ Irda is a dangerous idea

The five-year term of India’s chief insurance regulator, chairman of the Insurance Regulatory and Development Authority (Irda), comes to an end in February. According to news reports, there’s quite a race to become the next Irda boss — as many as 30 people have applied for the post, including some from the insurance industry.

The choice of the Irda chief by the government is one of the more important decisions that will directly impact the savings and investments that a huge number of Indians make. After banking, insurance is the financial service that most Indians use, giving Irda a much wider direct reach than Sebi has. By itself, that wouldn’t have mattered had Irda’s approach to its job and the shape of the insurance products in India was a settled matter. Had that been the case, the government’s choice of the chief wouldn’t have mattered so much.

But the fact of the matter is that insurance regulations are in a state of flux. Under the current chairman, J Hari Narayan, Irda has pivoted quite sharply in its attitude towards the industry and the insurance industry has been chafing under the current regime. If he is replaced with an industry insider or with someone who is excessively ‘friendly’ to the insurers, then that will be a setback for the customers.

To understand why this is the case, one has to appreciate the fact that the last decade — the period from the large-scale entry of private insurers till 2010 — was a disaster for insurance customers in India. Helped by theraging bull market in equities that lasted till 2008, life insurance companies focused almost exclusively on unit linked insurance plans (Ulips). As they were then structured, Ulips had very little element of insurance about them. They were largely equity investment products, somewhat like mutual funds but with high expenses and commissions, and poor transparency.

Moreover, the fine prints of Ulip investments seemed written to ensure that a good proportion of the policies lapsed after the first few years, having served the purpose of being gutted for the initial commission and expenses. Till 2009, this continued unchecked and despite some negative publicity Irda did not really catch on or act against what was happening.

The robust returns from the equity markets meant that despite everything, many Ulip policyholders still got some returns and did not really protest. All this changed after the markets crashed in early 2008. It was no longer possible to hide that the general conduct of the insurance industry was deeply anti-customer. By the end of 2010, Irda had drastically overhauled the structure of Ulips.

However, the overhaul went much deeper into the attitude of the regulator. As any insurance industry insider will tell you, the period since then has been one of almost continuous confrontation, with Irda appearing to fully appreciate that it has to watch insurers like a hawk without any let up. One curious response has been that there is a new narrative that the industry has gradually adopted, which is that the Irda’s attitude is harming the investment situation in the country. The idea is that if the insurance industry is allowed to rake in money without regard to investors’ interests, then those funds will flow into the equity markets.

The current whispers of the need for an ‘industry friendly’ Irda is an effort in this direction. This is a dangerous idea. The job of the regulator is to protect the customers. If it is indeed the case that the insurers cannot flourish without trampling on consumers’ interests, then this proves that the path that the regulator is taking is the correct one. Insurance penetration in India is still very far from where it should be. The logic of opening up the insurance sector was that Indians are grossly underinsured.

However, insurance here should really mean life cover, as in the money that your family gets when you die. Unfortunately, more than a decade has instead been wasted in this cat-and-mouse game of insurers selling dodgy investment products and the regulator trying to deal with that. Hopefully, Irda’s leadership will find renewed focus on the real goal, which is real insurance for the under-insured.

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