Recent Industry Trends

Part 6

Indian Insurance Industry: Reaching out to Exponential Growth

Some recent regulatory reforms introduced by IRDA

Some recent regulatory reforms introduced by IRDAa) IRDA issued revised guidelines in the “File & Use Procedure” in the general insurance segment - Until very recently, the IRDAI's Guidelines on "File and Use" Requirements for General Insurance Products of 28th September 2006 governed the procedures and processes for introducing, modifying and withdrawing general insurance products.

Some recent regulatory reforms introduced by IRDA

The procedures and processes have now significantly changed with the introduction of the IRDAI's revised guidelines on "Product Filing Procedures for General Insurance Products", which were introduced on 18th February 2016. The revised guidelines come into force on 1st April 2016 and will, therefore, apply to all new general insurance products filed on or after 1st April 2016. The revised guidelines apply to all general insurance products except health, personal accident and travel insurance products which are governed by the IRDA (Health Insurance) Regulations 2013 and the accompanying guidelines.

Some recent regulatory reforms introduced by IRDA

As per the revised guidelines, all general insurance products are meant to be classified as "retail products" or "commercial products" where, broadly, retail products are those issued to individual customers (and their families) and commercial products are those issued to entities other than individuals such as firms, companies or trusts. The Revised Guidelines do not require products approved under the previous File & Use Guidelines to be re-filed, but if Insurers wish to continue offering those products, they will need to classify those products as "retail products" or "commercial products" and file a list of those products (duly certified by the CEO and Appointed Actuary) with the IRDAI within 60 days of the issuance of the revised guidelines. Insurers may also choose to withdraw any of their existing products by following the procedure set out in the Revised Guidelines.

Some recent regulatory reforms introduced by IRDA

The revised guidelines set out detailed guiding principles for product introduction, product design and rating. One of the most significant changes introduced by the Revised Guidelines is the role of the Product Management Committee (PMC). All Insurers are required to form a PMC which shall include "high level officers" of the Insurer and perhaps including the Appointed Actuary, Chief Underwriting Officer, Chief Financial Officer, Chief Marketing Officer, Chief Risk Officer, Compliance Officer and Head Reinsurance.

Some recent regulatory reforms introduced by IRDA

The PMC is required to act as a ‘self governing’ body to ensure quality product design, filing with complete compliance of the regulatory requirements and performance review. The revised guidelines make it clear that the CEO of the Insurer shall have overall responsibility to ensure that a robust due diligence process is in place to "mitigate risks of new and current products. Another significant change is the revised requirements pertaining to the lawyer's certification of the terms and conditions in each product.

Some recent regulatory reforms introduced by IRDA

The revised guidelines have been largely received positively within the industry. These guidelines are a significant step towards a self- regulated regime where Insurers will be required to carry out their own internal due diligence and certification with significantly increased responsibility on the management of the Insurer.

Some recent regulatory reforms introduced by IRDA

b) Revised listing guidelines for insurers- IRDA plans to come up with revised IPO guidelines soon to enable companies enter the capital markets. Besides improving transparency and corporate governance, listing would improve governance and disclosure to public and customer perception. Few big players like HDFC Standard Life and ICICI Prudential Life Insurance are already firming up plans to raise funds from the capital markets by diluting equity. As per the norms laid down earlier by the regulator, it was mandatory for companies in operation for more than 10 years to list their shares.

Some recent regulatory reforms introduced by IRDA

The regulator considers the financial performance, capital structure after offer and solvency margin, among other factors, to give its approval. Though it was earlier anticipated that life insurers would bring out IPOs soon after completing 10 years in the industry, none of them did so. That was due to stress in business, low foreign direct investment cap (it has now been raised to 49 per cent) and poor market conditions, among other things.

Some recent regulatory reforms introduced by IRDA

c) IRDA has issued the final norms on corporate governance for the insurance sector. It aims to strengthen the boards of insurance companies. As per the new norms, the Board will have to look at a broad range of areas such as overall direction of business of the insurance company, including policies, strategies and risk management across all functions. It would also have to look at projections on capital requirements, revenue streams, expenses and profitability. While laying down projections, the Board must address expectations of shareholders and policyholders. All compliance to the Insurance Act would rest with the Board. The Board is also required to set up committees like audit committee, risk management committee, policyholder protection committee, investment committee, nomination and remuneration committee and CSR committee.

Some recent regulatory reforms introduced by IRDA

d) IRDA has formulated a draft regulation, IRDAI (Obligations of Insures to Rural and Social Sectors) Regulations, 2015, in pursuance of the amendments brought about under section 32 B of the Insurance Laws (Amendment) Act, 2015. These regulations impose obligations on insurers towards providing insurance cover to the rural and economically weaker sections of the population. e) IRDAI has set up a 7-member committee for establishment of insurance service centers with an aim to provide prompt servicing of policyholder in the most cost efficient mannerf) IRDA has formed two committees to explore and suggest ways to promote e-commerce in the sector in order to increase insurance penetration and bring financial inclusion.

General insurers are making underwriting losses in the motor and health segment

g. General insurers are making underwriting losses in the motor and health segment Off late, it has been witnessed that General insurers are incurring substantial losses in their insurance business mainly due to underwriting losses in health and motor segments. Almost 75 percent of premiums in the industry come from motor and health segment. This is mainly on account of increasing trend of claims in health and motor insurance including own damage and third party claims. While Insurers are making profits in segments like fire, engineering and others where volumes are relatively small, the health and motor insurance are not profitable. With rising medical costs, there may be a requirement of price correction and change in the insurers’ business strategies to make health and motor insurance profitable in the times to come.

Conclusion & Way Forward

The insurance companies have played a major role in the development of the country. The Insurance sector has supported the Government’s various developmental activities, be it in providing capital for infrastructure projects or the implementation of government's insurance schemes. After going through a difficult phase in recent years, the forecast for the Indian life insurance industry looks buoyant. The recent spurt of regulatory reforms and positive policy action is expected to drive the next phase of growth in the insurance industry.

Conclusion & Way Forward

In order to realize its full potential, the industry must focus on building value for all its stakeholders- Customers, Distributors and Shareholders. Customer centricity and creating value for customer will go a long way in securing long their term loyalty. Insures can leverage global best practices from foreign partners to enhance the level of customer experience through the adoption of new and innovative mobile applications / technologies. The insurance industry also needs to create significant value for the distributor. This can be achieved by working towards developing distributor capabilities and creating an environment which offers them prospects for long term growth in earnings. The insurers should also aim to create substantial shareholder value.

Conclusion & Way Forward

This can be realized if it successfully caps costs across the value chain, primarily in the area of claims, by adopting robust claims administration systems, greater use of analytics for preventing frauds and adopting new methods of accurately pricing new business. Finally, the insurer should create value for itself by focusing on a sustainable growth. Besides employing the capital effectively, the insurer should also ensure adequate skilling of its employees and setting practices aimed to make it future ready. The insurance sector is now looking forward to a rejuvenated time ahead. A favorable regulatory framework and positive demographic factors such as growing middle class, young insurable population and growing awareness of the need for protection and retirement planning will support the growth of Indian insurance sector.

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