Friday, March 23, 2018

India awaits new regulator

India is currently interviewing candidates vying to become its next regulatory chief — and whoever gets the job will have their hands full.

The finance ministry is in the process of divesting itself of more than 20 public-sector entities and announced in the latest budget in February that it planned to merge three general insurers before selling a stake in the merged company through an initial public offering. The deal would create a company with roughly one-third of the country’s non-life market and would require careful oversight by the incoming chairman of the Insurance Regulatory and Development Authority of India (Irdai).

On the life side, the new Irdai head will inherit a regulatory review process that aims to bridge the gap between insurers who want greater flexibility on pricing and product design, and the authority’s goal of protecting consumers from the mis-selling of unit-linked policies that was widespread before it capped fees in 2010.

The post has been vacant since February 20, when TS Vijayan stepped down after the completion of his five-year term. A government panel reportedly interviewed about eight candidates this week, with various industry and political figures said to be in contention, including New India Assurance chairman Gopalan Srinivasan, who has already managed a public-sector IPO, and Life Insurance Corporation chairman Vijay Kumar Sharma, who has Vijayan’s previous job.

However, the favourites to take the role are said to be former corporate affairs secretary Tapan Ray and former chief secretary of Karnataka Subhash Chandra Khuntia, according to the Press Trust of India. Both are insurance outsiders.

In addition to the three-way merger of National Insurance, United India and Oriental India, the finance ministry is said to be keen to push for further consolidation among state-owned insurance companies. One official was quoted in local media saying that “cash-rich insurers may be asked to buy out the smaller ones where there is operational synergy”.

While such consolidation will improve solvency levels, some observers are already concerned that the concentration of business in the hands of fewer, bigger public insurance companies may limit customers’ options.

“Such a merger may result in a monopoly-like situation with low focus on customer service,” Naresh Makhijani, head of financial services at KPMG in India, told Live Mint. “It also leads to concerns about ‘too big to fail’ due to the continuous operating losses reported by these entities.”

Ultimately, the goal of such efforts is to strengthen the industry and help insurers to increase the level of coverage in the country, which is still extremely low. In 2017, the amount of premiums underwritten by the industry was equivalent to 3.5% of the overall economy — compared to 4.8% in China and Malaysia, and 5.4% in Thailand.

But the real driver of premiums and penetration in the past has been from the sale of guaranteed unit-linked life policies. After the financial crisis, when interest rates sank to near zero, such products drew criticism for high fees and the penalties they charged policyholders who chose to exit before maturity.

In 2010, unit-linked plans became the subject of a regulatory tussle between Irdai and the securities regulator, which thought they should be subject to the same standards as mutual funds. Irdai won that battle and maintains its oversight role, but it nevertheless introduced stricter regulations on the sector, which came into effect in 2014. The result has been a significant slowdown in sales — and some in the industry have accused the regulator of micro-managing.

Last year, Irdai began a review process to come up with a new set of regulations for the sector. At a recent conference, Puneet Nanda, executive director of ICICI Prudential Life, was asked what he hoped the new Irdai chief would do. “Define what is good for the customer,” he said. “Mandate that, and beyond that give flexibility to the industry to design products and compensation models.”

While the industry would prefer someone with insurance experience to get the job, whoever becomes the new Irdai chairman is clearly going to have their work cut out.


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