Paresh Parasnis, executive director at HDFC Standard Life attributed the continuing losses to inadequate risk management and insufficient capital. He explained, “What happened over the past few years was the result of inadequate focus on risk management. Going forward, insurers have to look at capturing all possible risks and dynamically managing these risks. They must ensure they have enough capital to back the kind of risks they are taking on their books.” He also highlighted the absence of an efficient long-term debt market as a hindrance to the growth of this sector. He said, “The fact that we have more than Rs700,000 crore of invested money in debt instruments and the fact that we don’t have a long-term debt market is an obvious problem for the insurance industry. We are writing contracts which are for 20/30 years duration, but at the same time investing in near term securities.”
Mayank Bathwal, CFO, Birla Sunlife Insurance, put the blame of high costs on the agency model of insurance. He explained that the high cost of commissions paid to agents was cutting into insurers’ profitability. He added, “Other than the variable component of commissions, there is a huge fixed cost component paid to management level executives that is affecting the sector as they continue earning high salary despite low business procurement.” He proposed a variable model to this category to improve efficiency.
Meanwhile, the regulator, IRDA, is considering major regulatory changes. First on its radar is introduction of disclosure norms for insurers to bring in greater transparency. IRDA chairman, J Hari Narayan said, “We are concerned about the disclosures of insurers, and should be able to come out with disclosure norms by the end of this month.”
The regulator is also mulling over guidelines for firms valuing insurance companies, which would bring greater clarity to valuations of insurers planning to come up with IPOs in the future. Mr Narayan said, “We are in discussion with SEBI to frame the IPO guidelines for insurers.” Some changes are also sought to be introduced in the bancassurance model. Another significant policy change is the proposed capping of premium charges.
Apart from these, the new Direct Tax Code (DTC) is also set to change the scenario in insurance. One aspect of the new DTC proposes to remove the tax benefit on insurance premium on certain policies. This is giving sleepless nights to insurers as it will significantly affect the policy off-take with consumers preferring to shift to other savings instruments providing tax relief. Said Paresh Parasnis, “The fact that tax benefit will be available only for small number of policies will bring a large part of the current market outside this area. Customers who were buying insurance policies purely for tax benefit will rethink their preferences. This will force insurers to redesign products and find ways to provide good value to customers.” – Sanket Dhanorkar [email protected]