Considering the overlap in their regulatory turf, SEBI and IRDA can’t afford to work at cross-purposes The insurance industry is in a happy position today. They have the regulator firmly in their camp and virtually lobbying their cause (notice the ‘investor education’ advertisements promoting unit-linked insurance products—ULIPs). When the Securities and Exchange Board of India (SEBI) tried to classify some annuity products of insurance as collective investment schemes and, therefore, requiring SEBI’s okay, the finance ministry categorically told it not to try to extend its turf by trying to regulate insurers whose schemes are cleared by the Insurance Regulatory and Development Authority (IRDA). And all this has happened when IRDA is discussing disclosure norms for initial public offerings (IPOs) by insurance companies with SEBI as many private players have now crossed the 10-year limit imposed by the government on insurance companies for raising equity from the public.
How and why is all this important? Well, for starters, our Cover Story this time explains at length what is wrong with the way insurance is sold in India. A simple dipstick survey would reveal that most people who buy ULIPs have no idea about the high commissions and other costs that are loaded on to the product. The entire business is riding on the gullibility of people who are lured by advertisements (endorsed by celebrities) promising a secure future, coupled with malicious hard-sell by the friendly neighbourhood insurance salesman. A few months ago, after persistent criticism, IRDA capped the charges a bit. This was partly triggered by the Swarup Committee recommendation that entry-loads and commissions on all products must be scrapped. But the opposition to the Swarup Committee is so strong, that its report has not been released to the public, nor has it been discussed even at the High Level Coordination Committee comprising all regulators, highly placed sources tell us.
Meanwhile, several capital-market-related developments have exerted pressure on the insurance regulator to rein in costs and commissions charged by insurance companies. SEBI’s hasty decision to scrap entry-loads has hurt the mutual fund industry and led to a clear shift of investments into ULIPs but it has also led to lower charges for ULIPs. SEBI’s show-cause notice to insurers dubbing their products as ‘collective investment schemes’ had an interesting fallout. Although IRDA challenged SEBI’s attempt to encroach on its jurisdiction, it was clear that the insurance business would have to change too. Further, with the early private-sector insurers all set to meet the 10-year threshold for stock exchange listing, IRDA realises it will have to work with SEBI on disclosure and reporting norms for the industry, especially when most private players are either making losses or are barely profitable.
So IRDA, while remaining the biggest champion of insurance companies, began to make changes. It capped the costs and commissions on certain products, initiated action against several fraudulent companies masquerading as multinational insurance companies (such as Bengaluru-based Aetna Healthcare Networks, Mumbai-based Darwin Platform Life Insurance and Finance Company, DP Life Insurance Finance claiming Nordic parentage, and another that claimed to be a Belarus company). This will be followed by new disclosure norms which will mandate transparency and ask insurers to reveal key financial data on the performance of ULIPs.
But a lot more needs to be done to stop the rampant mis-selling of insurance products. At the same time, we need to recognise that IRDA does not have the same degree of regulatory powers as SEBI and also regulates an extremely asymmetrical industry. Life Insurance Corporation (LIC) and the public-sector general insurers continue to loom large over the entire sector. LIC, especially, is the big daddy—it has the largest reach, highest number of agents and is among the most aggressive marketers of ULIPs as well as endowment and money-back policies. Also, LIC enjoys extraordinarily high clout as the only big pool of money that the government dips into for the bailout of its disinvestment programme or, as in the 2008 financial crisis, for providing quiet doles to private corporations, banks as well as realty companies. This alone will ensure that IRDA’s regulatory clout will be much weaker than that of the capital market regulator.
Instead of the ham-handed show-cause notices to insurers and the clumsy attempts to dub them as collective investment schemes, a little smart thinking on SEBI’s part would have helped insurance buyers too. SEBI had an excellent opportunity to mandate stringent disclosure of commissions, cost and other deductions on insurance products in the offer document for initial public offerings (IPOs). Indeed, SEBI is still in discussions with IRDA over what needs to be included in the IPO document. However, it has lost the moral high ground it would have had before being asked by the finance ministry to back off from its attempt at ‘backdoor regulation’ of the insurance sector.
Media reports suggest that the two regulators are, indeed, working on wide-ranging disclosures, including risk factors, capital requirements, solvency margins and data on claims and disbursements, including repudiations, as well as the number of policies lapsed or surrendered. These will initially apply to private insurers who wish to tap the market. But, unless IRDA is able to mandate all these disclosures across the industry, LIC, the biggest of them all, may remain out of its purview. Given its clout, it will be interesting to see if LIC falls in line and accepts the same disclosure and transparency discipline or uses its clout to wriggle out. — Sucheta Dalal