Mayur Shetty, ET Bureau

In a few days, it will be a decade since ICICI Prudential and HDFC Life sold their first policy, marking the opening of the insurance industry after the Insurance Regulatory and Development Authority, or IRDA, set up shop in 2000. But the anniversary is not restricted to IRDA’s birth or the opening up of the life sector.

The coming weeks will also mark a decade of Ulips and the creation of four independent state-owned, non-life companies, following their demerger from GIC.

While it is clear that growth has far exceeded expectations, it will be interesting to look at how these new ideas, which took shape at the turn of the century, have evolved in the past 10 years.

IRDA guidelines
IRDA: The insurance regulatory authority has seen three chiefs since its birth, each of who has left his mark. The founding-chairman N Rangachary made a mark as a decisive regulator, who built a framework within record time of the Bill being passed.

He also played a developmental role by articulating the time-table for new guidelines and putting in place a transparent system for new products. His successor, CS Rao, drove the push into more inclusive products such as microinsurance and allowed the life industry to metamorphose from one led by traditional products to one that thrived on investment products.

The highlight of the current chief, J Harinarayan’s, tenure has been predominantly consumer protection and bringing about discipline in a growth-focused industry.

IRDA has set a level of standardisation

In hindsight, IRDA has been extremely successful in its development role and in creating an enabling environment for growth and permitting innovation in distribution. More recently, the regulator has got the industry moving towards some level of standardisation.

However, some of the dramatic changes in regulation are a fallout of the regulator’s failure to rein in life companies when distribution practices got out of hand.

Also, being housed in Hyderabad kept the regulator away from the country’s financial centres and, hence, its market intelligence gathering strategies were weak.

Many feel that had IRDA been based in Mumbai, it would have reacted much faster to issues such as mis-selling and development of inappropriate products. The turf war with market regulator Sebi also showed that co-ordination was poor, although Ulips led to a growing overlap with the capital markets.

ULIPs success

Ulips: When the life industry was being opened up, the then finance minister reassured reform-wary Left party lawmakers that investment guidelines would not be relaxed and life companies won’t be allowed to redirect retirement savings into speculative investments (read the stock market). And, indeed, the investment guidelines for traditional products continue to be maintained till date. But within a few months of opening of the sector, private life insurer Birla Sun Life announced a product that would give investors the choice of assets.

Not many paid attention to this product, which was then seen as an outlier in the insurance space, and most companies focused on the traditional money back and ‘with profits’ endowment plan. But the flexibility and transparency of returns in this product was such a big hit, that within a few years 80% of the life industry’s revenue came from Ulips and half of this money was going into stocks. The greatest success of the Ulip scheme was the fact that it allowed investment in highly-productive assets and was seen to be superior to mutual funds that had failed to meet investor expectations. The insurance industry also managed to make a success out of this product because it had the one crucial element missing in the mutual fund industry — an effective distribution network.

But the initial success of Ulips was overshadowed by subsequent misdemeanors that included overlooking mis-selling by agents, creating complex products that penalised early exits and focusing almost entirely on investment rather than life cover. The inability of the industry to regulate itself led to the turf war with Sebi and a regulatory backlash that has thrown all growth and profitability numbers off-kilter.

Private insurance companies

Private life companies: When the industry was thrown open with the passage of the IRDA Bill in 2000, expectations were muted. Foreign investment was expected to be limited, since overseas investors could hold at most 26%. There was also general scepticism over private financial institutions, after a record number of non-banking finance companies closed shop in the preceding years.

A survey by a market research company had shown that individuals were reluctant to park their retirement savings with private companies. While 100 individuals were willing to put their money in LIC, around 60 were willing to invest in a company floated by state-owned SBI and only a handful of individuals were willing to invest in companies floated by private life insurers. Today, the scepticism is gone and most individuals are quite open to handing over their retirement savings to a private life company.

Having started during the internet era, companies started business with a strong technology platform and also spent thousands of crores in training. Several companies were well on schedule to achieving profits in the eighth year of operations. But that was until some equity analysts started assigning multi-billion dollar valuation to life companies using make-believe numbers since topline sales was the only figure companies disclosed. These valuations prompted promoters to pump in more investments in the hope of multiplying their money. But the end result was a business that was highly susceptible to lapses that would translate into higher losses.

GIC RE and non-life industry

GIC RE and non-life industry: A decade ago, the government was faced with two choices — merge non-life businesses into its parent General Insurance Corporation, or GIC, or to grant independence to the subsidiaries and restrict GIC to reinsurance. The government chose the latter. The then GIC chairman, SV Mony, had quit in protest, but the die was cast. In hindsight, it would appear that one giant corporation would have helped prevent the feuding non-life companies from indulging in unhealthy competition for topline growth. Instead of growing the market, the focus on grabbing business had overshadowed every other initiative, whether it is on technology or distribution.

Also, a merged entity would have been a regional giant with a much larger base. But the picture is not all that dismal. The four companies — National Insurance, New India Assurance, Oriental Insurance and United India Assurance — continue to have a strong capital base and are able to cover risks, such as terror attacks, that other countries have found difficult to cover. The biggest success of the state-owned, non-life insurance industry has been the introduction of ‘cashless facility’, where health insurance policyholders can get treatment without having to make any upfront payment.

To sum it, as Deepak Parekh, chairman, HDFC, puts it, even after 10 years, it is too early to pass a judgement on the performance of the insurance industry. At the end of a decade, the insurance industry is all set to make a new start. The new guidelines on Ulips, the cap on charges, new norms on distribution and likely relaxation in foreign investment norms mean that the game has changed again before the industry investors had even begun to earn money.

Source : The Economic Times