Eighth International Conference on insurance "Indian Insurance Sector: Achievements and Prospects"
October 15 - 16, 2003, New Delhi

Address by Mr C S Rao, Chairman, IRDA

At the outset, on behalf of the Insurance Regulatory And Development Authority, I must extend my sincere thanks to FICCI for organizing the Eighth International Conference on Insurance "Indian Insurance Sector: Achievements & Prospects". The theme very effectively sums up the business conditions we face today, and what we all aspire to achieve. It is gratifying to see insurance market players and practitioners coming together on an occasion like this to reinforce a common vision to create a progressive and dynamic insurance industry where each one of us have an important role to play.

After nearly a decade of intense debate a consensus developed in India for ending the public sector monopoly in insurance and open the industry to private sector participants subject to suitable prudential regulation. Today, to the credit of combined efforts by both the regulators and industry players, the benefits of insurance are widely acknowledged, public confidence in the industry has been very much restored and the industry on the whole is far more dynamic.

In the last two years alone, we have witnessed some fundamental changes in the landscape of the Indian insurance industry. The insurance industry has been opened up, with a restriction of 26% on foreign ownership to Indian insurers. The total Foreign Direct Investment in India in the insurance sector today stands at Rs. 812.50 crores. The total premium income of the Indian insurance industry, both life and non life for the year ending 31st March, 2003 stands at Rs 71376.11 crores. Out of this the share of life insurance premium is 78 percent i.e. Rs. 55738.11 crores and general insurance premium is 22 percent i.e. Rs. 15638 crores. This is contrast to the premium levels of Rs. 34898.48 crores in life insurance and Rs. 10087.03 crores in general insurance as on 31-03-2001. The growth rate of life insurance has been slightly over 26 percent and general insurance 23 percent and the combined growth rate stands at 25 percent over the last two years. The paid up equity of the insurance industry is Rs. 3916 crores today.

The emerging markets were of great interest not only to the insurance companies, but also to the insurance regulators. The regulators have been constantly studying the trends and the International Association of Insurance markets in general:-

• Weakness in the legislative framework;
  
• Lax management within insurance companies;
  
• Weak corporate governance;
  
• Ineffective market discipline; and
  
• Inadequate information flows due to a lack of transparency or undeveloped accounting systems.

How far are these concerns relevant in the Indian context? If so, how did we address them when we launched the reforms process?

Our approach to institutional reforms has been built on the belief that sustainable growth is only possible in an environment which values and promotes financial strength and stability, management capability and public accountability. I believe this is what is needed for insurers to compete effectively and to sustain growth in a global economy. We recognize that effective legislation is a necessary foundation for any meaningful reform. Therefore, in 1999, the governing legal framework was significantly strengthened with the enactment of the Insurance regulatory and Development Authority (IRDA) Act. To operationalise various provisions of the IRDA Act and Insurance Act, we have so far issued 21 regulations covering all aspects of insurance business. The Authority has always believed in openness and transparency and has followed the practice of prior consultation with various interests before finalisation of regulations. This has resulted in a broad acceptance of the regulations by various constituents of the market.

The Authority also recognizes that the intermediaries have an important role to play in insurance business. Appropriate regulations have been framed to strengthen the institutions of intermediaries. The Indian insurance industry relies heavily on the traditional agency distribution channel, with a large number of agents of varying levels of professionalism and productivity. There is thus scope for developing alternative distribution channels, which are often more efficient, and which can offer lower costs and better benefits for policyholders. We need to develop alternative distribution channels, which cost less, and can reach a wider target market.

There has been some concern in certain quarters on the appropriate remuneration structure for insurance agents and brokers, and also on the practice of offering special discount in lieu of agency commission or brokerage. Perhaps this has arisen as a result of introduction of the insurance brokers as an intermediary channel. The role of an insurance broker doesn't seem to have been properly understood and appreciated because of the all pervading role of tariff in the non life insurance segment. In addition the brokers have also not been able to deliver the value added services expected of them. The issues mentioned are currently being examined by a committee of insurance experts formed by IRDA and they are in the course of meeting various interest groups to elicit their views before submitting their recommendations to the Authority. Regulations have established professional conduct standards and laid down acceptable industry practices. These regulations have been looked into by many international bodies who are of the view that they conform to the high standards adopted in well developed markets. The Indian insurance industry is thus regulated on globally accepted standards.

The IRDA recognizes that weak corporate governance and lax management within the companies undermine the credibility of the general public in the companies as well as the Regulator and cause severe setback to the growth of the industry. This problem has been addressed through a rigorous system of scrutiny of applications for setting up insurance companies coupled with stringent norms relating to solvency. They are further reinforced with appropriate regulations on investment of funds by the companies.

The Authority decided not to fix a limit with regard to the number of entrants. Instead a strict criteria or awarding licenses has been put in place. The basic features that the Authority laid emphasis on are:

Financial strength, track record and reputation of the promoters, with regard to compliance with regulations and the strength of internal control systems; commitment to contribute to India's development as a regional insurance hub and an international financial center. IRDA has been keen to see the industry develop in terms of product innovation and the use of alternative distribution channels. Applicants with a strong record in these areas, or in specialist and niche fields, and who have experience in health insurance business have received favourable consideration.

In addition to strict scrutiny at the point of entry, the regulators also provide for constant monitoring of the performance of the companies as a check against lax management practices which may result in loss to the policyholders. Regulators protect policyholders against excessive insolvency risk by requiring insurers to meet certain financial standards and to act prudently in managing their affairs. The statutes require insurers to meet minimum capital and surplus standards and financial reporting requirements and authorize regulators to take other actions to protect policyholders' interest.

Prudential investment norms have also been notified to further enhance the financial flexibility and risk management ability of insurers, and for better management of investment portfolios. We believe that as financial complexity and contagion exposure increases with globalisation, prudent investment management becomes increasingly critical to insurers in maintaining stability in their operations. In addition, guidelines on related-party transactions to ensure management integrity and public accountability in the conduct of insurance business are also in place. The guidelines reinforce the fiduciary duty owed by insurers to properly manage insurance funds in an independent and transparent manner for the interest of policyholders at all times. The total investment portfolio of the insurers as on 31-03-2003 stands at Rs. 291601 crores compared to Rs. 273589.92 crores as on 31-03-2002.

A rigorous scrutiny of the companies at the entry level coupled with diligent monitoring of their activities with special reference to maintenance of solvency margins and prudent investment policy would ensure that the management of the companies is not lax and that proper corporate governance practices are adopted by them. The experience so far in India is that the local partners are sound with an excellent track record in their respective fields, and their foreign collaborators are very well established insurance companies with vast experience in bot developed and emerging insurance markets. We have, thus, sound companies presently operating in the Indian insurance scene. What should be ensured is that they are remain healthy. Adherence to regulations and observance of sound principles of governance should ensure that.

Ineffective market discipline is one of the issues identified by the Association of Insurance Regulator as a threat to the emerging markets. This is an issue that has to be effectively tackled for the healthy growth of the insurance market. While the Regulator has a role to play in ensuring market discipline, the role played by the well informed public in bringing about discipline in the market place cannot be ignored. The key to effective market discipline lies in public disclosure and consumer education. Informed and educated consumers are often the most effective means of enforcing commercial discipline.

As our market develops, the role of the Self-Regulatory Organisations (SROs) will take on greater significance. The empowerment of the SRO's essentially involves grant of rights and responsibilities to market participants who, for their part, must be capable of ensuring effective regulation and must be able to meet these challenges. Failure to regulate effectively will lead to a deterioration of market integrity and stability and, ultimately, the intervention of the IRDA as supervisory regulator with oversight responsibilities, We hope such occasions would be rare. We also expect that, in time, much of the current developmental role currently played by the IRDA will be taken over by the SROs. We hope the life and non life councils will take active interest and evolve a code of conduct and enforce it on all the companies to facilitate a healthy growth of the sector.

International insurance supervisors are also concerned about lack of transparency due to underdeveloped accounting systems in the emerging markets. Luckily for us in India, our accounting standards are in alignment with international standards and are not a source of worry for the national or international observers of the Indian insurance scene. Our regulations set out in detail the manner in which the information is to be furnished to the Regulator and also the disclosure norms. We have a vast pool of trained technical manpower to maintain and supply the accounts at the level of the companies and an equally competent team to scrutinize these returns at various levels including the Regulatory office.

It would thus be seen that the concerns of International Association of Insurnace Supervisors about emerging markets are not directly relevant to the Indian market. The IAIS and its members are aware of it and are generally appreciative of the way the insurance sector was opened up in this country.

The transition from the State monopoly to free market has been achieved with remarkable ease. The beneficial effects of this move are already being felt by the general public. They have a wide range of products to choose, they are better informed about the products, they have the benefit of advice and counseling from trained agents and brokers in the selection of the product and there is better customer service. There is, however, a lot more that remains to be accomplished.

The opening of the sector was expected to bring in the benefits of the health insurance to a larger section of the population with a more comprehensive coverage.

Though the Insurance Act 1938 and the IRDA ct, 1999, prescribe that the regulatory would encourage the setting up of health insurance business on a stand-alone basis, there have been no requests to set up an exclusive health insurance business. Due to lack of applications in this particular area, the Authority has encouraged both life and general insurance companies, old and new, to go in for rider policies offering health covers. It is gratifying to note that the new companies have seized this opportunity and many of them have gone in for riders offering a variety of health products. The Authority hopes that in due course some of these rider policies would convert themselves into main health policies. Additionally, for a balanced development of the heath insurance portfolio, with the introduction of Third Party Administrators in this area cashless hospitalization covers have been introduced for the first time in India. The popularity of health insurance is evidenced by the fact that the growth of health insurance premium has increased from Rs. 471 crores in 2001-2002 to Rs. 1092.87 crores in 2002-2003.

In the area of reinsurance the Indian Terrorism Pool was formed in April jointly by the public and private insurance companies and managed by GIC. This is a singular example of how the market responded to the post 9/11 events. The contributing share of each company was directly related to its premium income. Terrorism Pool offers insurance cover against terrorism for a maximum of Rs 200 crore per cover. Those who seek a terrorism cover for more than Rs 200 crore are free to go to foreign insurance companies, but the rates from the overseas players are much steeper.

Although the net account for catastrophic losses is protected by Excess of Loss covers, a series of such losses can erode and insurer's net account and its financial stability. Indian insurers have not yet set up specific reserve provisions for catastrophes. Expert opinion suggests that it shall be prudent for insurers to maintain a Catastrophe Reserve at 2% of net premium of individual companies with a cap, based on a stipulated percentage, to allow for accumulation to take place in this account for a specified number of years. However, in the absence of incentives to these funds in the form of tax exemptions very little of paid premiums shall become available to meet future catastrophe claims liabilities under the policies issued. This is an area of concern and requires to be addressed.

There needs to be a much greater effort in the years to come in extending the benefits of insurance to the rural areas. While the lead will have to be taken by the Public sector insurers because of their geographical spread and market share, it is equally important that the private companies intensify their efforts to cover its segment of the population with policies suited to their requirements. The coverage of rural areas of concern and requires to be addressed.

There needs to be a much greater effort in the years to come in the extending the benefits of insurance to the rural areas. While the lead will have to be taken by the Public Sector insurers because of their geographical spread and market share, it is equally important that the private companies intensify their efforts to cover this segment of the population with policies suited to their requirements. The coverage of rural areas and social sectors should not be viewed as discharging a legal obligation but as a sound business proportion. The rural areas of the 21st century are not what they used to be at the time of independence. Sustained investments in irrigation and power have brought prosperity and affluence to a sizable population. It makes sound business sense to study these markets and tap the vast potential that exists today.

The general insurance market has been predominantly a tariff market. World over its well recognized that deregulation and tariff cannot exist together. However, in order to ensure that dismantling of tariffs do not result in rate wars and insurers are able to rate the risks they underwrite in a scientific manner based on historical data, the initial step in regard to detariffing of the premium structure has been proposed in the case of the own damage portion of the motor insurance effective 1st April, 2005, To consider the alternatives available to have a free market availability of the products in this regard and to suggest to the Authority, the measures to be taken in this regard including adoption of differential rating, the Authority has also formed and expert group to recommend the road map. The detariffing of the other portfolio will be considered thereafter.

The current statue was drafted in 1938 and has seen numerous amendments and changes. Many of its provisions have become outdated and some have lost their relevance, New developments have taken place in the insurance world, which do not find a reflection in the law. Therefore there is an urgent need to overhaul the Insurance Act, 1938 is order it to reflect the new circumstances that exist today. For this purpose discussions have already taken place and the suggestions received from various quarters sent to the Government. We hope to see the new insurance legislation in times to come.

In the near future the industry is expected to grow both in stature and strength. While the industry has seen some significant changes over the last tow of years, the changes that are expected to materialize in the near future can also be foreseen. Insurers, in particular, shall be less financially vulnerable to the vagaries of the market because of the adoption of a prudential regulatory regime, which has set very high solvency requirements and capital adequacy norms. Domestic institutions, be they insurers or intermediaries are expected to catch up wit their international counterparts in terms of efficiency, innovation and customer services. Productivity levels are expected to be as per international best practices. The level of market penetration is also expected to substantially improve.

So far as regulatory regime is concerned it is to be recognized that at the rate at which businesses evolve, rules and regulations become obsolete almost as soon as they are formulated. Regulators in emerging markets have to keep up with the burst of product innovations, alternative distribution channels, electronically-linked payment systems, e-commerce, investment avenues and alternative risk transfers, just to mention a few. These developments create intricate links in commercial chain which are potentially fragile in the sense that if one link snaps. The whole chain comes apart. No member of the chain will be spared from the domino effects of a crisis anywhere along the chain.

With such complex and unique interdependencies, it would be virtually impossible to prescribe regulations that deal with every possible contingency. Firstly, regulators may not even be aware of the potential risk factors emerging every day. Secondly, regulators may be faced with constraints of jurisdiction. The answer to this delemma is not deregulation but finding the right regulatory structure.

IRDA will monitor the progress of the industry and make further changes where necessary. It will continue to consult industry representatives in developing a conducive regulatory environment, and formulating incentives to enhance the operational capabilities of insurers, for instance, in product development, distribution and asset management. Such partnership and dialogue will be vital for the growth of the industry, and for meeting the challenge of making India a regional insurance hub and an international financial center.