Insurance

Private sector insurance companies started operating in India in 2000, several years after the first proposal to allow their entry. The Insurance Regulatory and Development Authority (IRDA) has been set up as the apex regulator for this sector. It is still too early to assess the likely impact of the new players. In the first few months, however, the new entrants do appear to have injected greater competition and dynamism into India’s insurance industry. The IRDA has also embarked on a regulatory programme that encourages greater professionalization and modernization of this sector. It has taken commendable initiatives for training and certification of insurance agents and for encouraging the development of an actuarial profession. In the past, bright students who were attracted to the actuarial profession by its potential to apply mathematical concepts to real life problems discarded the idea because of the total lack of scope for actuaries in India’s nationalised insurance industry.
The major area where insurance reforms have not been sufficiently far reaching is in the area
of investment restrictions. Sections 27 and 27A of the Insurance Act place restrictions on
investments in shares and corporate bonds. Not only are the quantitative ceilings
unnecessarily restrictive, but the qualitative restrictions are not in tune with a modern capital
market. For example, the eligibility conditions for corporate debt do not involve the notion of
credit rating at all, but depend on quite meaningless backward looking notions of financial
soundness.
The key question that remains to be seen is how receptive the regulatory regime would be to
financial innovation. The IRDA could play a catalytic and facilitating role here though the
restrictive features of the Insurance Act would restrict its freedom.
Of particular importance would be the regulatory stance towards capital market linked
insurance products like variable life and universal life policies. The Life Insurance
Corporation has introduced a variable life policy called Bima Plus. Unlike in the United
States where such products are subject to regulation as mutual funds by the securities
regulator also, Bima Plus appears to be regulated only as an insurance product and not as a
mutual fund. Whether this would spur innovation or lead to regulatory arbitrage remains to be
seen.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved