FICCI's 10th Conference on Insurance
November 23-24, 2005, New Delhi

Address by Mr. C. S. Rao, Chairman, Insurance Regulatory and Development Authority (IRDA)

I am thankful to Dr. Mitra and the FICCI for continuing the tradition of giving the Regulator the opportunity to give the Keynote address at the annual conference. It is a pleasure to participate in the annual conference. We have always benefited from the presentations made in these conferences. I would like to compliment the FICCI for their continued interest in this sector and the manner in which they organize this conference every year. This is not only an occasion for introspection but also an opportunity for chalking out the plan action for the next year.

The year that has gone by was an exceedingly good year for the insurance market. The first year premium underwritten by life insurers in 2004-05 registered a healthy growth of 30% which is second only to 104% growth recorded in 2001-2002. This increase comes on a 10% growth registered in 2003-2004. While the growth registered in 2001-2002 could not be sustained, I am confident that it would be possible to maintain last year's growth rate in the current year also. The non life industry recorded a growth of 12% which is at the same level as that registered in 2003-2004. The main driver of growth in the life segment is the Unit Linked products; In the case of non-life insurance, the motor and health insurance portfolios have been expanding rapidly. Inspite of an impressive growth in the life premium, there has been a decline of 8% in the number of policies issued. The decline is primarily attributable to the drop in the number of policies issued by the LIC though it registered a 22% increase in premium. The reasons for this decline in policies require to be examined in detail. In the case of general insurance, out of a total increase in premium of Rs.l900 crores in 2004-05 over last year, motor and health account for Rs. 1500 crores. In view of the large increases in these portfolios a proper management of the portfolios is critical to sustain the level of growth.

The expanding market demands a large agency force. The insurers have, therefore, been recruiting agency force on a continuous basis. As the end of March 2005, there are 20 lakh individual agents and 4711 Corporate Agents. A significant development noticed last year is the arrangements entered into between the insurers and Commercial Banks for marketing the contracts either as Corporate Agents or on referral basis providing data
base to the insurers.

The demand for tied agency force has lead to a situation where the resources of the Institutes providing training have been stretched and a number of irregularities in imparting training have come to the notice of the Authority. The inspections by the Authority of these institutes have revealed a number of areas where improvements were
called for. It was noticed that some of the Institutes did not have the infrastructure to conduct classes and the faculty was drawn on an adhoc basis and the courses conducted in a short span as a result of which many of the agents did not receive adequate training. It was also noticed that the licensed training institutes allowed franchisees to conduct training on their behalf which was irregular. The insurers, in their anxiety to recruit agents, did not pay any attention to the type of training imparted. The Authority had, during 2004, streamlined the system of training and impressed on the insurers the need for greater attention being paid to the training of their agency force. The revised guidelines were issued after extensive consultations with the stakeholders and it is hoped that this effort would result in improving the quality of the agency force. The Authority is keen that the agency force should be properly equipped as the insurance products are no longer simple and the agent should be able to assess the requirements and advise on the appropriate policy.

The Authority has also been in close contact with the Insurance Institute of India for streamlining the examination system as instances have been noticed where the sanctity of the examination process was sought to be compromised by a few interested parties. The CEOs of the insurance companies were requested to advise their marketing staff to exercise vigilance and ensure that the examination process was in no way compromised.

I have no doubt that the Chief Executive Officers of the Insurance Companies are as much interested in procuring the services of qualified people as advisors as we are in ensuring that only trained workforce enter the insurance market for canvassing sale of policies. Since there is convergence of views on this crucial issue there is no reason why, together, we cannot improve the training and examination standards for insurance agents. I think the time has come for us to make a concerted effort at improving the quality of the insurance agents.

The institution of corporate agents was a new experiment started by the Authority to facilitate sale of insurance policies through existing institutions which are in contact with a large section of the population in the discharge of their normal activities. The Authority has come across cases where corporate agents have resorted to use of introducers or finders or sub agents who, in fact, sold the contracts and the corporate agent passed on
varying levels of commission to them. Since insurance contracts are technical in nature, the Regulations issued by the Authority stipulated that the canvassing should be done only by specified persons "who are qualified to be Agents". With a view to streamlining the system of licensing of corporate agents, the Authority issued a set of instructions to be followed by the insurers while issuing licenses to corporate agents. An attempt was also
made to remove some of the aberrations that have crept into the sale of group insurance policies.

The Authority believes that unless appropriate standards are set and followed by the insurers and the intermediaries, there is distinct possibility of the insurance market getting distorted which would affect the interests of the insured as well as the insurer. We would like to see a healthy growth of the market even if it means moderate growth of the market. We do not want the long term interests of the market to be sacrificed at the altar of immediate gains in premium.

Absence of data has been a hurdle in general insurance for taking any major initiatives. We have been working on collection of data in both motor and health portfolios for the last two years. The efforts made last year in identifying the sources of data and the manner in which it is stored and how it could be retrieved has met with some success. A pilot study undertaken with data collected in a few Divisional Offices in and around Mumbai has thrown up some interesting possibilities. It is noticed that data is available in electronic form in various stand alone computers and it could be accessed by writing a simple programme. But the data that is available shows that in terms of classification there are inadequacies. These can be addressed and future records could be built up by removing the existing imperfections. It is also possible to clean up the data by going to original records in select cases and build up a representative sample. With a little more effort it should be possible to build up the whole record by verifying basic records at least in respect of third party liabilities. It is hoped that in a couple of months we should have credible data on motor insurance for at least two years. A similar exercise was also conducted on health insurance data by collecting records from the TPAs. The information in respect of 2 million policies has been collected and it is being checked for internal consistency. The experiments at data collection in both motor and health have helped us in understanding the manner in which data is managed at the operational level and our interaction with the public sector insurers indicates that it should be possible to improve the quality of data with a little effort on the part of the insurers.

Inspite of the constraints inherent in a tariff regime, we have witnessed a significant growth in the number of applicants for grant of broker's license. We have sought to enlarge the opportunities for the brokers to operate in the market by increasing the threshold limit at which the discount in premium is allowed for contracts concluded directly with the insurers with out intermediation by brokers. We believe that this would facilitate the entry of brokers in general insurance market so that they gain enough experience to be of assistance to the insured when complete de-tariffing takes place. The broking community should realize that they have a major role to play in enlarging the market through innovative packaging and by creating new products. In the areas where they are already operating they should ask themselves the question whether they have been able to provide value added service to their clients.

There has been a persistent demand for freeing the general insurance market from the rigidities inherent in a regime where tariffs are prescribed by an outside agency. It has been argued that tariffs and free market do not go together and the insurers should be able to determine what risks they are prepared to underwrite and the rate at which they would underwrite the risk. It was also pointed out that the present system of having tariffs in some risks and free rates for others is leading to distortions in pricing as the insurers are underwriting risks not covered by tariff at throwaway prices in order to gain access to lucrative fire and engineering covers which are covered by tariff.

The Authority recognizes that the consumer would normally stand to gain when there is a free market. We are also convinced that de-tariffing is an essential pre-requisite for the healthy growth of the market. It has to be, however, recognized that absence of data and lack of experience in underwriting could upset the market with adverse consequences for the insurer as well as the insured.

The Authority has, therefore, laid stress on the need for an orderly transition from the present tariff market to free market. While agreeing with the suggestion of the insurers for removing the tariff a clear road map to be followed has been given to make the transition as smooth as possible.

In a market free of tariffs, any responsible insurer should have in place infernal capabilities to do underwriting, have rating support and develop policy terms and conditions which would pass scrutiny by any judicial body. We feel that the function of underwriting and rating of insurance business should be independent of the business development function.We would like to ensure that sound underwriting principles are not sacrificed for gaining access to business. Just as actuaries are in short supply, so are people who have specialized in underwriting. They have to be recruited and properly trained. The road map provides a year's time to the insurers to identify the right kind of people and place them in appropriate positions to undertake this work when the tariff regime is replaced by free tariffs on 1st January, 2007.

The Authority has suggested that so far as policy terms and conditions arc concerned, the insurers may adopt the existing conditions. However, where the insurer wishes to modify the terms the approval of the Authority would be required. In respect of risks which are rated on the basis of international market terms, they may continue to be governed by the terms and conditions acceptable to the insurer.

The General Insurance Council which consists of all the general insurers has considered the road map and they seem to be convinced that they would be able to adhere to the road map laid out by the Authority. There was some apprehension about motor tariff and all the insurers have stressed the need for detariffing motor premium along with the rest. We see no difficulty in agreeing to this suggestion. However, we would like to ensure that no vehicle which has a valid registration and has permission to ply on the road goes without a proper insurance cover. We have, therefore, suggested creation of a Declined Motor Insurance Pool. I understand that the General Insurance Council has created two sub-committees to monitor the preparedness of insurers to meet the challenges of a detariffed regime and to work out the modalities for creation of the Declined Motor Insurance Pool.

I have tried to briefly outline the developments that have taken place in the insurance market in the last one year. We have come a long way in our road to deepen the insurance market. The overall growth has shown positive signs. Global players are interested in this market. There is vast untapped potential with a major portion of household savings parked in the Banking sector .

The economy itself is growing consistently at a high rate with inflation in check. The Government is making a major effort at improving infrastructure through public-private partnership. Insurance industry has a major role to play in nurturing this partnership and in providing the required resources to sustain investments in infrastructure. I have no doubt that the insurers would not be found wanting in this effort at transforming the Indian economy.