Will the RBI and IRDA dump their principles and follow the FM’s diktat?
Moneylife Digital Team 02 October 2012

Finance minister P Chidambaram wants a slew of changes which will mean getting the banking and insurance regulators to do what he says. Can he? The FM’s other moves, too, may not have many takers

The finance ministry has come out with a slew of changes to jolt the slumping life insurance business. Here are the proposals and the reality on the ground:

Tax incentive for pension products and service tax easing – Apart from NPS (National Pension Scheme), pension plans may get a separate limit of Rs20,000, which will be over the above the 80C limit of Rs1 lakh. Today, premium paid towards pension products (80CCC) fall in the same bucket of 80C, unlike in the past when it had its own exemption limit of Rs10,000.

Reduction in service tax on first-year regular premium as well as single-premium policies is also proposed.

What it really means: Taxation related amendments will need approval from the Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC). The FM may be able to get this done but tax benefits may not lead to more pension products since insurance companies do not want to launch guaranteed return products. And the public is not interested in buying a variable return product even if it is tax-free.

Opening bancassurance – Banks may be allowed to set up broking arms to sell products from multiple insurance companies. This will put the onus on banks to have properly trained personnel that can possibly reduce mis-selling.

What it really means: This move from the finance ministry trashes the Insurance Regulatory and Development Authority’s (IRDA) draft guidelines on the complicated zonal tie-up to partially open bancassurance. Currently, IRDA allows a bank to sell the products of only one insurer. Moreover, the Reserve Bank of India (RBI) is not in favour of allowing banks to set up broking arms as their performance will affect the balance sheet of the bank itself, which will not be in the interest of depositors.

Moneylife is of the opinion that making banks accountable has not been successful till now and going for an open architecture can further complicate the matter. It remains to be seen whether the FM can hammer the RBI and IRDA to agree to his ideas so quickly. Both are headed by seasoned officers of the Indian Administrative Service who have their own ideas.

Use-and-file escape route The FM wants to make it easier for insurance companies to launch new products. Under the existing “file and use” procedure, approval of the filed product is needed before launching it in the market. The finance ministry wants “use and file” for standard products. IRDA will prepare a list of standard products that qualify for the “use and file” system which entails allowing the insurer to market the product if there is no regulatory objection within 15 days. IRDA will also draw up guidelines so all products can be cleared within a period of 30 days.

What it really means: Moneylife view is that the proposed change empowers the insurance company more than what may be desirable. Insurance products, except pure term plans, are complex for customers and hence coming up with standard products list is prone to error. In the past, IRDA had to ban products like Universal Life Plan (ULP) which it had approved. IRDA is still debating for a long time if it needs to ban highest NAV products. “Use and file” is good for insurance companies, not consumers. The pressure on IRDA to approve products within 30 days seems unrealistic. Instead of listening to the industry, the finance ministry should find out the reasons for delay in product approval by IRDA.

Remove the differences between traditional products and ULIPs - Today the commission on traditional products is 30%-40% of first year premium while that on ULIPs is half of that or lower. The FM has talked of rationalising it.

What it really means: If the arbitrage between traditional and ULIP products is removed, it will mean a big fall in the sales of traditional products. The commission itself was driving the sales after regulatory changes in ULIP after September 2010. LIC has seen a complete reversal in its portfolio. Traditional product business is 80% and ULIP 20% when it used to be 80% ULIP and 20% traditional before September 2010 ULIP changes. Moneylife feels that this is good news for consumers. There could be resistance from insurance companies on this contentious issue.

Investment norms – The FM has promised to allow debt investment of up to 12.5% of investments in products rated lower than AAA (the highest credit rating).

What it really means: Nothing. The LIC may be ‘persuaded’ to invest in lower grade debt instruments but private insurers will continue to follow their risk-control measures.

Dayananda Kamath k
1 decade ago
india was fortunate enough that last time chidambaram wanted to follow the southeast asian policiies as commerce minister and was fully prepared to impliment it to import the south east asian crisis into india. luckily the southeast asian crisis brokeout and his policy was not implimented. even though his election petition is pending since last 3and half years in courts he is preparing to strike back to sell india by his policies. may be he has been
1 decade ago
Bankers who do other than banking is a sure way to get into trouble. It also does not provide level playing field for agents/brokers. As of to day the bankers are selling the policy only by arm twisting the borrowers at the time of lending. The competition of India should look in to this. Some times insurance companies by pass the intermediaries. This is also unethical practice.

Some of the insurance companies are trying to y pass the agents/brokers who get them the business in the renewal business by asking the customers on-line renewal if they want to place the business directly.
1 decade ago
Individidual agents should be allowed to multi company insurance products in life and general like they sell multi amc products in mutual funds. Upfront commission should be 2% net of all taxes, deductions etc. Insurers and fund companies should be banned to launch promotional schemes to boost sales and some mechanism must be there to concentrate on numbers like no. of policies, no. of sips etc. and a system to recognize genuine sellers, advisors should be established. If commission on Insurance is reduced to 2% 99% of misselling will automatically stop. Those who need pension will eventually buy NPS this this the stand taken by PFRDA then why insurance companies cant take such a stand. Real thing is this is only a discussion of intellectuals and experts etc. but actually in practice everybody wants money by whatever means. Otherwise why govt. should give different incentives to boost sales of insurance and why should rather they not identify the people who are ready to sell insurance for insurance and happy to do this at just 2% of commmission?
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