Regulatory Row Affects Indian Insurance Market

Anshuman Jaswal
Insurance Experts' Forum, May 21, 2010

The Securities and Exchange Board of India (SEBI), India’s capital market regulator has succeeded in achieving its underlying objective in the recent row with the insurance regulator, Insurance Regulatory and Development Authority (IRDA). The removal of the front-load commissions for mutual funds by SEBI in mid-2009 had led to an environment in which the mutual funds were at a disadvantage against the insurance companies’ unit linked insurance plans (ULIPs), which had a large investment component.

For ULIPs, the commissions for the agents continued to be high—at times more than 40% for the initial installments. As a result, there was mis-selling (over-selling and resorting to unfair practices) on part of the insurance agents. By raising the issue of its role in the regulation of the investment component of the ULIPs, SEBI ensured that the IRDA was forced to take action to prevent SEBI from encroaching into its domain of insurance regulation. In the end, IRDA had to increase the insurance component of ULIPs, and also to create disincentives for people who were investing in ULIPs for a period of less than five years. Also, the commission structure of ULIPs had to become more transparent to prevent mis-selling.

The two main beneficiaries of this action have been the mutual funds that have regained their preeminence as a tool for investment, and the consumers who are enjoying more transparency in ULIPs than earlier, albeit at the cost of fewer choices, as the ULIPs are no longer directly competing with mutual funds.

There are some important issues that have been raised by this entire episode. The main one is that there needs to be a redressal mechanism through which the regulators can solve problems with each other. The ULIP episode has been a highly long-drawn public affair that caused a lot of confusion for the investors and companies alike. The insurance companies’ revenues due to ULIPs will also suffer as there would be less investment in them now. Furthermore, the episode does not reflect well on the reputations of the regulators or the Ministry of Finance. There were contradictory signals coming from the ministry as the Finance Minister referred the matter to the courts, but the his Minister for State supported the IRDA’s case in a written reply to the Upper House.

The early stage of development of financial regulation in India means that there will be more turf wars. The government is possibly trying to create the infrastructure for their quick resolution through the creation of the Financial Stability and Development Council (FSDC). Whether it is through the FSDC or some other means, it is important to lay down clear guidelines to be followed. Otherwise the Indian financial markets would more and more resemble the Wild West, entertaining for sure, but too chaotic to make sense of.

This issue has been dealt with in greater detail in a recent Celent report: Capital Market Regulation in India: Turf Wars Inevitable?

This blog has been reprinted with permission from Celent. Anshuman Jaswal is a senior analyst in Celent's Securities and Investments group, and is based in the India office. He can be reached at ajaswal@celent.com.

Readers are encouraged to respond to Anshuman using the “Add Your Comments” box below.

The opinions of bloggers on www.insurancenetworking.com do not necessarily reflect those of Insurance Networking News.

Comments (0)

Be the first to comment on this post using the section below.

Add Your Comments...

Already Registered?

If you have already registered to Insurance Networking News, please use the form below to login. When completed you will immeditely be directed to post a comment.

Forgot your password?

Not Registered?

You must be registered to post a comment. Click here to register.

Blog Archive

Why Insurers Need More Than a Policy Admin System

For some insurers, not being able to handle the volume of quotes that are being submitted to them means leaving significant money on the table.

The Pitfalls of Using Assembly Line Methods to Create Software

Most of the time, when the business needs IT, it is for custom software development, just like creating a concept car.

Next Step in the Internet of Things for Life Insurance

As the use of wearables increases, particularly for use beyond an individualís fitness, it will be critical for standards and services to emerge to bring this data to multiple users.

Wearables and Gamification in Life Insurance Goes Mainstream?

With so many U.S. households still uninsured, insurers are going have to try new things to re-position their product, focusing on consumer needs.

Will John Hancock Vitality Transform Insurance?

The Vitality program integrates this information directly into the rewards, giving you credit for the exercise, just by virtue of reporting it.

Why Customers Should Want Innovative Insurers

At a time when confidence in the insurance industry has been compromised, innovative companies can break the mold.