Govt considers complete makeover for insurance laws.
Discussion with IAI,
officials of FSLRC’s working group on insurance
Mumbai: The government’s financial
reforms panel is considering a complete makeover of the country’s insurance
laws that would end the monopoly of state-owned Life Insurance Corp. of India
(LIC), shift control of the government to the insurance regulator, and create a
legal system to deal with any failure of insurers.
Following a discussion last month,
the Financial Sector Legislative Reforms Commission (FSLRC) recently took up
the recommendations of the Institute of Actuaries of India (IAI), the
government’s supervisory body for actuaries, which if accepted, will change the
face of India’s insurance industry.
The government set up the commission
last year to rewrite and synchronize the financial sector legislation, rules
and regulations so as to address the contemporary requirements of the sector,
including insurance. The commission’s term ends in March.
In its discussion with IAI,
officials of FSLRC’s working group on insurance, chaired by D. Swarup, chairman
of Financial Planning Standards Board India, considered at least 20 areas of
possible changes in laws both for life and non-life insurance.
It is likely to compile a final
report in a few weeks, which will then need to be vetted by the parliamentary
standing committee on finance before the laws can get amended. A copy of
FSLRC’s communication with IAI and the latter’s recommendations to the
commission is with Mint.
“LIC versus private sector insurers
is an issue. The commission feels that exemptions are heavily loaded in LIC’s
favour, which needs to be changed,” said L. Khan, president, IAI.
There are 23 life insurers in India
with combined assets of at least Rs. 16 trillion. LIC is the largest with
assets of at least Rs. 13 trillion alone.
FSLRC asked IAI if the present laws
for state-owned insurers have an adverse impact on competition and how the
issues involving government’s ownership in some insurers should be addressed.
Existing laws exempt LIC from certain sections of the Insurance Act.
The actuaries institute recommended
that capital and solvency requirements of LIC should be aligned with that of
private life insurers and LIC should be restrained from using its
policyholders’ money as solvency margin. For private insurers, solvency margin
is met from shareholders’ money.
If the recommendations are accepted,
the government will have to infuse a substantial amount to cover LIC’s future
liabilities and capital needs. This, in turn, may not only slow LIC’s pace of
growth but also reduce the government’s net income from the dividend paid by
LIC every year on its surplus.
It was also proposed to empower the
Insurance Regulatory and Development Authority (Irda) to regulate LIC’s
investment norms and business conduct on par with private insurers. Despite
Irda’s restrictions on insurance firms to hold over 10% stake in a listed
entity, LIC holds above 10% in several companies. Even to protect policyholders
from the risk of an insurer’s investment concentration, Irda has limited say as
the government dictates the investments made by state-owned insurers to meet
its own capital needs.
To address such issues, the
regulator may also get the power to suspend or cancel the licence of
state-owned insurers, including LIC, if the recommendations are accepted.
The commission is also looking at
introducing resolution mechanisms to deal with any failure of any insurance
firm—a legal system to protect the interests of policyholders and ensure
financial stability.
FSLRC asked IAI if some form of
deposit insurance or compensation scheme is required to protect consumers of
failed insurance firms. At present, there is no specific law for such a scheme,
which exposes policyholders of life insurers, except LIC, to the risk of losing
money in the event of an adverse economic situation.
LIC Act extends a sovereign
guarantee by the central government to LIC. Though, the extant Irda norms
safeguard the interests of policyholders of all insurers and minimize the risks
of losing money, a sovereign guarantee for LIC gives it a business edge over
private insurers.
IAI suggested the creation of an
Insurance Guarantee Corporation to address this issue. “Such a corporation
could be created to at least partly bear the liability of policyholders in the
event of failure of an insurance firm,” said Khan. But while creating a guarantee
corporation, the costs incurred in paying the claims should be levied both on
shareholders and policyholders, IAI said. The proposals, if accepted, will not
only curb the risks for policyholders but also end the domination of LIC in the
industry.
The proposals are aimed to end the
discrimination of policyholders of state-owned insurers with that of private
insurers. To achieve this, FSLRC also looked at the possibility of shifting
certain powers from the government to Irda to avoid monopoly of any insurer in
the industry.
FSLRC is also likely to revisit the
current investment laws and suggest amendments to enable Irda to frame rules
for agents’ commission, solvency norms, capital requirement norms, loans and
advances by insurers, among other things. At present, these norms are largely
governed by the Insurance Act.
IAI recommended enabling the
regulator with powers to issue guidelines for insurers to invest in new asset
classes such as real estate, derivatives, and asset-backed securities. It also
suggested flexibility in not setting the investment management function for the
unit-linked business in-house. At present, it is compulsory for insurers to
have in-house investment managers for all their fund management businesses.
FSLRC is also looking at allowing
insurance companies to invest a part of their funds in overseas investments. At
present, overseas investments are allowed only in government securities of the
UK to the extent of meeting liabilities of certain funds under an insurer.
Overseas exposures will allow a
wider range of assets for investment diversification and access to potentially
higher returns, IAI proposed. To enable such investments, the Insurance Act
needs to be amended. If it is allowed, it will hold out prospects of better
returns for policyholders, especially for those in unit linked insurance
policies.
Key recommendations
• Empower
Irda to fully regulate investment norms, solvency, limits on distributor
compensation, share capital, divestment, dividend distribution and limits on
loans and advances by insurers.
•
Framework to achieve level playing field for both public and private sector
players.
•
Create an Insurance Guarantee Corporation to partly handle policyholders’
liability in the event of an insurer’s failure.
•
Central government to infuse adequate funds to meet solvency needs of
state-owned insurers, including LIC.
•
Create legal framework for the regulator to force capital injection by
shareholders, weaken the solvency rules and de-risk the business of an insurer
in the event of a failure.
• Allow
overseas investments by insurers, flexibility for insurers to not set up
in-house investment management for Ulips, and allow investments in new asset
classes such as real estate, derivatives and asset-backed securities.
•
Abolish the two councils—Life Insurance Council and General Insurance
Council—to restructure Irda.
•
Align capital and solvency requirement of LIC on par with other life insurers
in the private sector.
Excellent stuff on insurance.
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