Regulator outshines need for development
The Insurance Act of 1938 has been replaced by the Insurance (amendment act) 2015. The formation of Insurance Regulatory Development Authority (IRDA) in April 2000 was the eventual culmination of the Malhotra Committee’s recommendations, which opened the door to private players in both life and non-life related insurance sectors. This was done with a mission, “to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto”. In the last one and a half decade, more than 50 entities have been licensed to operate, in addition to nationalised companies like the Life Insurance Corporation of India and the Public Sector General Insurance Companies.
As things have turned out, the IRDA has, since its inception, given more importance to its regulatory functions instead of addressing the need for development through the speedy spread of insurance services in the country. In fact, apart from administrative regulations, the IRDA has introduced three sets of regulations for the distribution of insurance services. They include individual agents, corporate agents, and insurance brokers. Perplexingly, these regulations did not take into account the overriding fact that insurance is a push business and needs personal contact and canvassing. Moreover, insurance is sold and not bought; especially in the case of personal, life, and business insurance.
It was expected that after the newly amended Insurance Act, 2015 came into force, these fundamental facts would be recognised and regulations would be framed accordingly. These expectations have been largely belied, instead of easing restrictions imposed by the IRDA on distribution channels. The amended act intends to impose even more stringent restrictions on the distribution mechanisms for further inhibiting the intended growth and spread of insurance in India. In fact due to regulatory suffocation, coupled with a lack of encouragement, the alternative channels of insurance distribution through Corporate Agencies and Brokers have suffered a huge setback. The gross reduction in the number of active players (amongst Corporate Agencies) and the downwards growth of insurance market consistently from 2010 onwards, speak of the sector’s misery in general.
The IRDA seems to be obsessed with the phobia of misselling and now intends to be armed with regulations so stringent that they would make the selling of insurance products more difficult. This is especially the case with respect to the personal line of insurance products in both life and non-life across rural and semi-urban areas.
The most telling example of this restricted attitude towards the further development of the insurance business embodied in the amended Act is the blanket ban imposed on referrals and lead generations “with or without considerations”! It is common knowledge that selling insurance is a matter of personal contact and canvassing, where human interactions are indispensable for procuring business. This interaction involves the participation of unofficial agents who also deserve to be remunerated for their services. That apart, in a country like India, fixing educational qualification of at least 12th standard plus mandatory requirement for passing particular examination for each specified persons (who can only be involved in soliciting and procuring insurance for corporate agents) appears to be more than a luxury at the exorbitant cost of huge compromise with the growth momentum. Experts in insurance distributions are apprehending serious contraindication of such regulatory prescriptions as the same would cause substantial reduction in the human resource pool involved in insurance selling specially in rural and semi-urban areas. Consequently, the insurance penetration rate (which is even today far from satisfactory especially in rural and semi-urban areas) will suffer a massive setback. The city based preconceived idea and selling models have hardly any potential to meet the rural needs.
It is understood that in the draft IRDA regulations for corporate agents, “specified persons” are intended to be full-time employees of corporate agents. This is a patently unworkable suggestion as it would place a huge financial burden and even lead to their definite closure. The proposed regulations restricting the percentage of business to be placed with a particular insurance company will hinder growth and affect customer satisfaction.
The sole emphasis of the amended Act appears to be on raising the FDI limit from 26 per cent to 49 per cent shareholding of an insurance company in India. Far from achieving the desired capital infusion from foreign investors, the proposed regulatory regime is more likely to lead to a flight of foreign capital from this sector. As mentioned above if foreign investors in insurance companies do not see any prospect of widespread growth and coverage and profit, they are likely to shy away from entering this sector at all. Already, both Indian and foreign joint venture partners in some life and general insurance companies are in talks to exit the market due to regulatory constraints.