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Tightening the screws

India’s insurance regulator now appears to be following the corporate sector’s credo—tough times are the right time to take difficult decisions.

Narayan Krishnamurthy | Print Edition: April 2, 2009

India’s insurance regulator now appears to be following the corporate sector’s credo—tough times are the right time to take difficult decisions. Unlike the usual warning on mis-selling by agents, this time the Insurance Regulatory and Development Authority (Irda) is also pulling up the insurers who are avoiding issues related to mandatory disclosures.

In order to provide greater transparency and enable policyholders to take more informed decisions, the regulator has asked insurance companies to disclose solvency margins, claim settlement records and loss ratios on a quarterly basis.

Irda cracks the whip...
...on insurers
• Insurance companies to disclose solvency margins, claim settlement records and loss ratios on a quarterly basis.
• Insurers may be required to share Ulip details with investors.
• Premium above Rs 50,000 not to be paid in cash.

...on agents

• Agents may be penalised if life insurance policies are not renewed. Commissions may be retracted from agents and credited to the policyholder’s account.

“Claim settlement will give an idea about the number of claims settled by the insurer, indicating the strength of the company he or she is dealing with,” says R. Kannan, member (actuary), Irda. This will also give the picture of an insurer’s underwriting capacity. The Irda is also drawing up plans to strictly monitor the insurers’ expenses and premiums charged for group and guaranteed return policies.

“We are contemplating asking the insurers to get all the payments made to a company over a threshold limit certified by an external auditor,” adds Kannan. The certificate should also specify the kind of services insurers receive from intermediaries for the payment they make.

The need for such stringent declaration is because the business is commission-driven. Increasing competition is forcing several insurers to make innovative accounting procedures, such as paying huge sums to corporate agents and bancassurance partners (banks that sell insurance policies). Many insurers pay banks and corporate agents a handsome joining premium too. Irda expects the expense certification process to check the loopholes that the insurers have thrived on.

The flurry of capital guaranteed products by insurers is yet another area where the regulator is taking steps to check on the capital adequacy ratios. Market experts agree that promoting such capital-intensive policies, where companies have to provide higher sums for solvency, is a bad business practice and could have disastrous consequences. For instance, imagine a situation where the stock market indices go up and then crash, the way they did a year ago. Capital guarantee will be invoked and can be tough on companies that have not provided for such swings in the market.

For agent distributors, the regulator is finally talking of steps that will impact the commission for agents who don’t service clients any longer, that is the agents who make a sale and vanish. In such cases, if a policyholder complains, the insurer assigns a new agent. However, Irda is looking at ways to do away with the agent’s subsequent commissions with the aim of checking the indiscriminate sale of policies.

The case for policy renewal is also an issue on which details have been sought from insurers as they tend to report new premium income with few details on the renewal premium income. This is important to understand policy delinquency: when moving from one insurer to another, or at the time of a new product launch, agents advise policyholders to move to new plans.

Such moves will be scrutinised and agents punished if found guilty. The issue of mis-selling of policies is a crisis that points to shortcomings in the system. Irda promises to come up with a solution for this problem by trying to put in place a grievance redressal mechanism for policyholders. All these measures are likely to find their way to the insurance bill to be tabled later this year. Until then, Irda will retain its watchdog status.

— By Narayan Krishnamurthy

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