On granting composite licenses, general insurers say,suddenly letting companies to enter into any segment will result in chaos and fragmentation of existing markets. This will also harm the interests of the existing policyholders in both life and nonlife segments,
On their opposition to the proposal for reducing the capital requirements for the general insurers, the general insurers have explained that the insurance sector is money intensive and following a policy where banks (with different sizes) require different capital is fallacious
New Delhi:
The general insurance industry, with 31 players, has opposed a few major amendments in the existing Insurance Acts- The Insurance Act 1938, The Insurance Regulatory & Development Authority Act, 1999 and The Insurance Laws (AMENDMENT) ACT, 2015 as proposed by the insurance regulator IRDAI and the government.
Earlier in this month, the government had said in view of changing needs of the insurance sector, a comprehensive review of the legislative framework governing the sector has been done in consultation with IRDAI and industry.
The department of financial services(DFS), through an office memorandum had asked for public comments on the proposed amendments by December 15.
In their feedbacks to the government, the industry has staunchly opposed any changes in the capital requirements, granting composite licenses(allowing insurers to do both life and non-life business in one license) and allowing insurers to sell larger number of financial products.
Explaining their stand ,the general insures have said though such regulations of granting composite licenses exist in UK and Singapore, the Indian context has been different from day one.
Having institutionalised this compartment since the opening of the industry, it may not be fair on the part of the government, to throw open all segments for competition, caution the general insurer.
In case composite licenses are issued, what prevents life industry which are selling fixed benefit products (characteristic of life business) from offering indemnity-based products (which is characteristic of health/non-life business), asked the industry.
The stand alone health companies, which have done so well in basically spreading awareness of health insurance in India and today has more than 25% of the market share of the health business, would be treated wrong way if life insurers are allowed in health too, said the insurers.
Suddenly letting companies to enter into any segment will result in chaos and fragmentation of existing markets. This will also harm the interests of the existing policyholders in both life and nonlife segments.
When the focus is on customer, merging too many businesses might lead to issues in customer servicing and lack of specialisation which may not be in the interest of the policyholders and orderly growth of the insurance industry.
Before introducing the concept of composite/Unified licensing, there needs to be review of various aspects as it will lead to cross subsidization across various class of business.
The medium- and long-term interest of various classes of business and the interest of the customers also needs to be taken into account while allowing this by incorporating appropriate control measures including regulations affecting the same, said the general insurers.
On their opposition to the proposal for reducing the capital requirements for the general insurers, the general insurers have explained that the insurance sector is money intensive and following policy of different capital requirements for banks is fallacious. .
“Considering inflation in the last 22 years, the requirement of capital must be increased so that only serious players are there in this business. There is also a need to protect the policyholders’ interests which are paramount whether in life or general or health.’’ argued the general insurers.
Unlike the banking industry where the capital adequacy ratio is eight times or the amount of business is eight times the absolute amount of capital employed, the insurance industry can only take a percentage of the capital employed due to the huge amounts of risks which is covered.
Even in this scenario, not all companies whether in life or in general are making profits considering the gestation and the payback period. Further, banks play with depositors’ money subject to Reserve Bank of India (RBI) regulations.
If the banking industry gets a greater return than the rate offered to the depositors, the income over the return to the depositors is booked as investment income to the banks.
Insurance companies have to have two sets of books one for the policyholder and another for the shareholder. In case of insurance, only the surplus income over and above that pertains to policyholders is booked as income to shareholders, explain the insurers.
There is also a proposal to permit insurers to distribute other financial products, as may be specified by regulations to be issued by the IRDAI.
There is a need for insurers to be customer specific in their approach towards products and services and offer a range of value added services to their customers in addition to the core insurance product, said the insurers.
Typically, value added services include non core services in an industry, or enhancements made to the core product or service offered to the customers. E.g. A Health insurer may offer a wellness advise to its customers through tie-up with clinics in addition to covering his health policy, explained the insurers.
A Motor insurer investing in a garage to offer seamless repair service to his policyholders etc. However, there should be clarity that the offering of “value added services” should be permitted to Conduct of business that is incidental to the business of insurance only, pointed out the insurers.
In case, the IRDAI allows cross selling like distribution of mutual funds, financial products etc., there should be clarity on the role of the insurance vis-à-vis the appropriate regulations under which these products are being sold.
The general insurers have said that that the offering of “value added services” should be permitted to conduct of business that is incidental to the business of insurance only and that too in general insurance segment, they suggested.
The proposed amendments primarily focus on enhancing the financial security of the policy holders, promoting policy holders’ interests, improving returns to the policyholders, facilitating entry of more players in insurance market leading to economic growth and employment generation, enhancing efficiencies of the insurance industry operational as well as financial and enabling ease of doing business, explained the DFS.