The Indian insurance architecture must partake of principle-based primary legislations, and empowering the regulator with adequate powers to conduct insurance development and supervision through principle-based secondary legislations/regulations, to dynamically respond to market requirements.
A transformative agenda for Indian Insurance, for the well-articulated vision of “Insurance for All by 2047”, requires the regulatory focus to be firmly on providing Ease of Doing Insurance Business Framework (EoDIBF). This necessitates two things: a) Progressive and proportional regulations, and b) The Insurance Regulatory and “Development” Authority of India (IRDAI), and the other insurance regulators offering Single Window Ownership (for their own collaborative verticals, as also for cross-sectoral support from allied functions).
There seems to be a common “understanding” that more capital is required for deeper penetration. However, various findings suggest that enabling policy actions to become “inclusive, progressive and high performing” sector will mean much less additional capital requirement to affect a paradigm change in the insurance market. The EoDIBF requires a legal, regulatory and institutional framework (LRIF). The Indian insurance architecture must partake of principle-based primary legislations, and empowering the regulator with adequate powers to conduct insurance development and supervision through principle-based secondary legislations/regulations, to dynamically respond to market requirements. The hard coding of the primary laws makes the regulatory management inflexible, and the regulator cannot cater to an ever-evolving market. The Government’s legislative agenda must, therefore, allow all the primary legislations undergo prudential transformation to allow IRDAI the direction, flexibility and accountability to promote development, and effective, globally benchmarked supervision of the insurance industry. In any case, the quintessential character of insurance is ‘global’ as it is based on spreading of risks.
One of the important elements of the EoDIBF is the regulatory seat. The IRDAI operates out of Hyderabad, but Mumbai is where the financial ecosystem is, and where bulk of the commercial insurance market operates from. Experientially, the global centres of excellence thrive on clustering, and it is the cross-pollination of ideations between the ‘market’ and the ‘regulator’ that makes the regulatory governance ‘richer’, and further improves EoDIBF. The Regulatory Responsibility further entails, among many others, a clear division and understanding between the ‘Prudential’ and ‘Conduct Standards’. There also requires a paradigm shift on the true understanding of ‘Protecting Policyholders’ interests, which are essentially around two pillars of ‘contract certainty’ and ‘effective litigation’ – as part of LRIF. Additionally, the Self-Regulatory Organisations (SROs), responsible for regulating itself, lend depth and gravitas to the whole market, thus making it easy for the harnessing of markets’ technical expertise/distribution reach etc.
There is increasing evidence to show that a move away from the buyer-beware market is the road ahead in financial regulation. The current insistence on “insurance being a subject matter of solicitation” is rooted in the theory where insurance was considered only “buying”. ‘Seller beware’ might be an idea whose time has come. Transforming the Indian Insurance Industry will, ultimately, mean ensuring competition with a level playing field that drives efficiency and efficiency that in turn drives growth. By contrast, protectionism (involving government firms) and heavily regulated market (rule-based and compliance oriented) makes firms less competitive besides, impacting the penetration. With a transformed framework, India can be put on the road to having a Global Insurance Centre at Mumbai and a Global Reinsurance Hub at International Financial Services Centre (IFSC) – GIFT City, as planned, with a symbiotic and administratively workable relationship between the two.
Legislatively, the IRDAI Mission must be aligned with International Association of Insurance Supervisors (IAIS) mission, which is to “Promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders”. The Government of India has already demonstrated demand led transformation through its marquee programmes such as PM Suraksha Bima Yojna (PMSBY), PM Jeevan Jyoti Bima Yojna (PMJJBY), PM Fasal Bima Yojna (PMFBY) and PM Jan Arogya Yojna (PMJAY) etc. reminding all that the market is not just supply driven. Therefore, the insurance market requires an active understanding of development perspective rather than just relying on supply-side mechanisms, particularly which ride on quotas and penal regimes. Moreover, the social objectives, with its set of mandates and penalties, under a commercial dispensation, are an anachronism and have the potential to impede efficiency which in turn impacts growth. The Insurance Act in India does not recognize mutual concept of Insurance which is in vogue globally. The mutual and cooperative sector is one sector that can change the face of deprived and destitute in India by putting people before profit. In the paradigm of developmental work, the ‘pooling’ and ‘community’ deliver best results. The Insurance Act also need changes to allow for the establishment of Insurance Linked Securities to cater to the alternative disaster risk financing mechanisms. The ongoing changes around composite/captive licences will have natural traction as well. The Insurance Act 2015 is the most significant reform of UK insurance contract law for a century. An equivalent India code is necessary for laws relating to insurance contracts. The Public Liability (Amendment) Act, after its enactment in the year 1991, following the Bhopal disaster needs to be recast and aligned to reflect societal obligations to better protect the Indian consumers. The present form of Redressal of Public Grievances Rules, 1998 (RPG Rules) needs to be worked into a dispute adjudication procedure that can be relied upon by the retail customers (irrespective of any limits) and the insurers. An improved and fully empowered Ombudsman office should handle entire traffic of grievances as an adjudicative process for personal line and life businesses. It is equally vital that Motor Third Party liabilities are allowed to be managed as First Party claims administration, without taking away the right to Third Party adjudication, to provide for efficacious, timely, just and fair compensation to the victims of road traffic accidents.
Since modern regulatory arrangements are driven by rule of law, with minimal control and optimal deterrence, it requires robust, proficient and transparent legal, regulatory, taxation and modern Dispute Resolution mechanisms. An overarching entrepreneurial business environment will encourage, attract and develop talent. The regulatory tools would include flatter IRDAI with specialism and accountable ownerships: “Nudge” in policy design (Behavioural economics provides principles to understand how policies affect behaviour, and to utilise them to effect behavioural change). For a high performing culture, the Board, the Insurance Advisory Committee, and the Executive Management must have the best of Indian and Global financial/(re)insurance leadership, along with sectoral experts. Finally, IRDAI must have a strong risk management framework for its own entities (urgent adoption of risk-based capital and solvency models, in discussion since 2011) and the ‘risks’ they cover where prevention, improving resilience, and mitigation are the ultimate goals. The developed country vision for 2047 has two clear messages: First, incremental reform is incapable of coping with the disruptions, and aspirations. Second, the government needs to take a decisive approach on the financial/insurance architecture in India that provides clarity and balance. Research has established that a 1% rise in insurance penetration translates into a 13% reduction in uninsured losses – a 22% reduction in the taxpayers’ contribution following a disaster – and increased investment equivalent to of 2% of national GDP. The fact that India is a single market for insurance helps in underwriting human endeavours, especially for catastrophes and climate risks’ disruptions, apart from other known unknowns. The government, the regulators, and the markets are part of larger sweepstakes.
A former CEO, and recipient of Lifetime Achievement Award at the 24th Asia Insurance Industry Awards, 2020 Singapore, Arun Agarwal has been publishing research papers, and has recently edited and authored (along with others) a book, “Time for Bharat”, which raises educated conversations on public governance, in an encompassing way.