The State Capacity Initiative at the Centre for Policy Research (CPR), the Forum of Indian Regulators (FOIR) and the Indian Institute of Corporate Affairs (IICA) organised the following talk in the ‘Know Your Regulator’ talk series:
‘Know Your Regulator’: Mr Debasish Panda, Chairperson, Insurance Regulatory and Development Authority of India
Mr Debasish Panda, Chairperson, Insurance Regulatory and Development Authority of India
Dr KP Krishnan, Honorary Research Professor, CPR
Dr Abha Yadav, Associate Professor, IICA and Director, FOIR
Dr Rohit Chandra, Assistant Professor, School of Public Policy, IIT Delhi and Visiting Fellow, CPR
Problems that IRDAI was set up to address
The evolution of the insurance sector in India has three distinct phases –
1. 1938 – 1956: In the pre-nationalisation era, small and medium-sized insurance companies operated under the Controller of Insurance. This period is marked by considerable dissatisfaction among policy holders for not getting their dues on time. This was also a time where many mergers and liquidations took place. There were no clear regulations to protect policyholders.
2. 1956 – 2000: This era is marked by nationalisation. The Life Insurance Corporation (LIC) was nationalised in 1956 and subsequently, five non-life companies were nationalised in 1972. While policyholders’ interests were better protected in this era, growth was slow and there was little choice for consumers because of a rather monopolistic market consisting of four or five public sector companies.
3. Post-2000: The Malhotra Committee was set up and recommended a series of reforms for the insurance sector. IRDAI was given shape during this time. Initially, it was a purely regulatory body and at some point, based on Parliamentary committee recommendations, IRDAI was also assigned a development mandate.
In the era prior to liberalisation, there were several issues concerning policyholders and the slow growth of the sector. Specifically, these issues included a limited choice of products, costly products, low awareness and customer dissatisfaction regarding claim settlements. There were also issues with respect to the lapse of policies; term plans were not encouraged. In addition to these, there was also a limited spread of rural and welfare-oriented insurance.
The supply side was marked by a lack of competition because a lot of items were under tariff. In general, the lack of market discipline was witnessed. Professional standards in underwriting and risk management were not set. The aforementioned issues did not enable the sector to grow in an anticipated manner.
The IRDAI was set up with a clear mandate to protect policyholders and to ensure an orderly growth of the insurance industry. The liberalisation era witnessed the re-entry of the private sector alongside the public sector. Foreign Direct Investment (FDI) was allowed in the insurance sector. Companies also began listing during this regime. With such interventions, a number of companies came into the insurance market. In general terms, this is how the sector evolved.
The insurance industry also supports the economy in a huge way. The Assets Under Management (AUM) pump fuel into the economy by putting these resources into productive instruments for growth and development, promoting trade and commerce and promoting infrastructure development in the country.
Regulatory method: elements of executive, adjudicatory and legislative functions
Executive functions: Section 14 of the IRDAI Act casts a duty on the authority to regulate, promote and ensure orderly growth of the insurance and reinsurance business. This is done through a host of regulations. The Authority also issues directions, master circulars and guidelines. Through these means, the industry is regulated in an orderly manner, making sure that it is always in a position to honour the commitment made to citizens/constituents. The Authority also plays a supervisory role, as part of which it keeps a watch on the risk profile of insurance companies including whether they have maintained requisite solvency at all points of time, where the risks are sitting on company balance sheets etc. Crucial aspects such as these are constantly monitored through either an offsite mechanism or an onsite examination. It is through such mechanisms that the Authority tries to ensure the financial soundness of the company and its market contribution.
The IRDAI is also empowered to register and regulate the insurance entities. Once registered with the IRDAI, insurance entities are free to operate in the market, i.e. sell their products and service their clients. The Authority also approves changes in the shareholding, to make sure that risk is not concentrated in the hands of a few. The Authority also allows the issuance of other forms of capital other than equity or shareholders’ own money. The appointment and remuneration of the CEO and other corporate governance-related matters are handled by the IRDAI. This ensures that the entities are regulated in a proper manner.
Adjudicatory functions – Section 14(2) of the IRDAI Act empowers the regulator to adjudicate disputes between insurers and intermediaries or between the insurance intermediaries. It also provides powers to adjudicate and impose penalties, if required.
Legislative functions – The government frames the rules under the Act, whereas the Authority can frame regulations, as mentioned previously.
Role of the Central Government
The Central Government determines the policy framework, the broad guidelines and decides the sectoral focus that it wants. It is in charge of the statute and amendments made to the statute from time to time, depending on the needs of the citizens and the markets. Rules under the statute are framed by the government. It also appoints the Chairperson, other members and part-time Directors of the Authority. There are mechanisms where the Authority works closely with the government, for instance, the Financial Sector Development Council (FSDC), which is chaired by the Union Finance Minister. All the regulators are part of this forum, and inter-regulatory issues or issues that a regulator needs to flag before the government secretaries of the concerned ministries are discussed. This is an important and responsible committee which looks at issues pertaining to regulators including inter- regulatory issues.
The Authority has a Chairperson with five full-time members and four part-time members. The city of Hyderabad is the headquarters for the IRDAI. It has two regional offices, one each in Mumbai and Delhi. There are close to 250 officers working in IRDAI. The Authority also has the flexibility of adding more personnel who may be recruited directly from the market at the level of assistant managers, through an all-India competitive examination and through an independent entity agency. There are officers in levels such as assistant managers and executive directors, who go up in the hierarchy through written examination and interviews. They also gain marks for the qualifications acquired through their course of service in the Authority. The Authority has professionals with wide-ranging experience, with qualifications in actuarial sciences, chartered accountancy, cost accountancy, law, engineering, technology and management. I think the organisation is rightly sized at present, but maybe as we go along we will add more layers of domain experts as required.
How IRDAI fulfils the objective of consumer protection
The essence lies in ensuring adequate access, affordability and fair value of insurance products for, both, prospective and existing policy holders. This has to be supported by necessary awareness, guidance and seamless servicing of claims. The third is a 360-degree framework which would include insurance, multiple distribution channels and service providers, academic institutions, data repositories and a network of ombudsmen (for speedy redressal of grievances). All of the aforementioned are in position to facilitate access, to service insurance and claim settlement process of the policyholders. The Authority has also framed the Protection of Policyholders Regulations, in 2017, which is applicable to all insurers, distribution channels and intermediaries, other regulators, and to policyholders. The broader objective of all this is: (i) policyholder-centric governance; (ii) fulfilment of obligations towards policy holders; (iii) best practices of sales and services of insurance policies in order to protect policyholders’ interest. Through these regulations, we have asked insurance companies to mandate a board-approved policy which would include the steps they are taking to enhance insurance awareness, service parameters including the turnaround time for settlement of claims, procedures they have established within their companies for expeditious complaint resolution, and the steps taken to prevent mis-selling and unfair business practices. They have also been mandated to display the service parameters and turnaround time prominently on their website for the benefit of consumers. The Authority also prescribed that certain essential data be provided in the insurance prospectus, for a prospective policyholder to read it and understand the scope of the benefits, the extent of insurance cover and the exclusions, policy conditions, and contact details of the insurer in case of the need for correspondence.
There is a concept of a free look policy, where the consumer can opt-out of the policy if it does not work for them. For a refund of the premium, the consumer can opt-out within 15 days if the policy was obtained physically, and can similarly opt-out within 30 days if it has been obtained online. Barring only the adjustments made for risk premium, and expenses such as medical tests or stamp duty, the consumer will receive a full refund. In case of a delay in refund, there is a penal interest of 2% above bank rate which the insurance company pays to the policyholder.
Nature of complaints made to the IRDAI
Generally, the complaints would be regarding settlement amounts being less than expected, mis-selling, delay in claims settlement, operational details about the policy etc. A host of such issues come up before the IRDAI from the policyholders. The Authority has now asked insurance companies to appoint grievance redressal officers. We are toying with the idea of having an internal ombudsman within the organisation, because a grievance redressal officer will have limited capacity to deal with complaints, whereas an internal ombudsman will perhaps be given a greater responsibility to settle the claim taking into account the policyholders’ complaints.
The IRDAI has also set up a portal called the Integrated Grievance Management System (IGMS), that acts as an interface between policyholders, IRDAI and the other entities (insurance companies and intermediaries). All complaints are registered in this System, and then sent to the insurance companies, after which the latter takes appropriate corrective action. This System is being analysed in detail, and we want to bring in data analytics to understand the number and nature of complaints, companies and their locations. Data analytics will help us identify the root cause of complaints and also take immediate corrective action.
We are also trying to revive the IGMS, which we now intend to call Bima Bharosa. This portal will be a more dynamic one and shall take care of customers’ needs in a time-bound manner. It will also take feedback directly from the customer, which helps in further improving the system. Thus, in the next couple of months we should have a more robust redressal system.
Key players in the insurance sector
The key stakeholders in the insurance ecosystem are insurers, policyholders, and intermediaries (about 40 to 50 lakh agents and entities). We periodically interact with all of them. We are trying to introduce an institutional arrangement to make these interactions more frequent, so that we understand the pain points that the industry is facing. The focus is on reaching out to every citizen in the country. The goal is to have a fully insured society – in order to do this, we are doing a gap analysis, trying to understand the current capacity and the number of additional companies and the capital to be augmented to existing players, whether distribution channels are working properly, their productivity, whether we need more technology-based solutions etc. All of these are on our drawing board. We are working to increase insurance penetration not only in terms of number of policyholders, but also the number of new policies issued.
Aspects of the insurance business that need regulatory scrutiny
The Authority has two roles to play: (i) a developmental role, where we need to ensure that insurance penetration, density and reach grows; and the (ii) regulation of financial soundness and market conduct of companies. We are trying to balance both such that the insurance sector grows in an orderly fashion.
Regulatory supervision is exercised on all relevant aspects – financial soundness, prudential norms, valuation of actuarial liabilities (existing and future), matching capital requirements, maintaining solvency at all points of time (since one does not know when the risk is going to unfold). All these aspects are factored through our prudential norms. How do we do this? This is done through onsite and offsite supervision, monitoring and overseeing various periodical returns and submissions that the insurance entities provide to the Authority, inspections (onsite) by a team of officers from IRDAI, regulatory actions wherever required (through issuance of directions, advisories, show cause notices and imposition of penalties).
As far as investment of assets (aggregated through policyholders’ money) are concerned, the IRDAI has a set of regulations on how such money is to be invested – some of this is in the statute and some are in the regulations we issue. Together, these give us an insight into how insurance companies are doing in terms of their investment returns, solvency, capital matching with the business they underwrite.
Regarding the governance issue, positions like CEO, CFO, Chief Actuarial Officer, Chief Distribution Officer, Chief Risk Officer, are critical in addressing the issues that we are concerned with. Currently, the IRDAI uses a traditional method of looking at risk factors – we are trying to move towards a risk-based supervision framework which will be enabled by technology. Within the IRDAI, we have created a vertical which is working on mission mode and engaging with industry so that we move hand-in-hand. We are also trying to move away from the factor-based method of considering solvency, towards a risk-based capital framework. There are countries which use a risk-based capital regime. We have a dedicated vertical working on this, engaging with stakeholders and building the technology required for this. The risk-based supervisory framework is expected to be ready in six to nine months, and the risk-based capital regime is expected to take two to three years’ time.
Challenges faced by IRDAI in regulatory enforcement and possible solutions
Enforcement is required when compliance is not up to the mark. Currently, a lot of supervision is compliance-based, but the risk-based supervisory framework is a much more potent tool. We have a lot of rule-based regulation here – with the industry maturing, we want to move away from rule-based to principle-based regulation. The principle gives bandwidth to the insurance companies and other stakeholders to operate within that framework. The regulator then does not need to specify each and every thing. For example, until now, every product to be launched by the insurance company needed prior approval of the regulator. We have now done away with it because the industry is mature and knows what price to set based on actuarial calculations (done by actuaries who are certified by the IRDAI). We have asked them to have a board-level policy for product certification – this will create internal checks and balances. After this, the regulator will obviously monitor how the product behaves in the market and what traction it gets, what complaints it receives on the product, and so on. As such, consumers have more choice now since companies can come up with more innovations and launch their products on-time without being delayed by the regulator. All health and non- life products do not need prior regulatory approval, except for the category of small ticket policyholders. For life products, we have given away all term-policy covers. Prior approval is still needed for long- term savings and pension products, but this will be further liberalised.
Through technology, a lot of offsite enforcement and monitoring of deviations can be done. We are also looking at newer tools. For example, through the IGMS website, which we now call the Bima Bharosa, we will get a lot of feedback on whether compliance is happening despite the regulations being in place. Thus, this newer regime that we are moving towards will see a lot of issues being resolved through the use of technology and data. Data is crucial for (i) proper pricing, which will give consumers better choices; (ii) processing of claims; and (iii) designing products that are more personalised. In order to address this, we have a repository or transactional data bureau called the Insurance Information Bureau (IIB). This is not optimally functioning, hence we are focusing on reforming the body into a professional body comprising people with the requisite background and expertise (for instance, a chief data scientist, a chief technology officer, CEO and so on). This body is probably going to be industry-led, with the regulator having an oversight function – because this data is most useful for the industry for appreciating and processing claims, which ultimately benefits the customer. This service should also come up in the next few months.
Professional organisations that IRDAI regulates
Typically, we do not regulate these organisations, but there is some kind of an oversight – otherwise, these are all self-regulatory bodies.
The most important one for us is the Institute of Actuaries in India because actuarial sciences is critical to insurance. It is a self-regulatory body but we have a representative on the Board who tries to bring up issues faced by the insurance sector. Some time ago, the insurance sector was struggling to find actuaries, but with efforts taken through IRDAI representatives and adequate steps taken by the government, there is now a reasonable supply of good actuaries in the country. In fact, a host of young people who joined IRDAI as engineers or management graduates have now acquired the actuarial qualification.
We are also closely associated with the Institute of Chartered Accountants of India (ICAI) and the Institute of Company Secretaries of India (ICSI). There is another professional body called the Indian Institute of Insurance Surveyors and Loss Assessors (IIISLA) which we associate with. As far as the councils are concerned, the General Insurance Council (GIC) and Life Insurance Council (LIC) are represented largely by insurers and other stakeholders (some nominees are from IRDAI and some from the government). These bodies are expected to take up issues concerning their respective industries, stakeholders and policyholders. While these two councils have existed for years, we discovered a lack of professional approach to bring up issues. We have recently met with the Chairpersons of the bodies and asked them to bring in more experts and knowledge partners so that they not only look at issues faced by the insurance companies in the country but also learn from international best practices. These councils can come up with papers to the IRDAI on a continuous or periodic basis so that we as a regulator are alive to the problems faced by them and can take care of them in a manner serving the larger interests of the sector. We are working to make these councils more professional, vibrant and robust so that they can complement and supplement our efforts and be responsive to the needs of the industry. The councils have already started that process – I recently saw an advertisement for a CEO with market-driven salary.
Capacity building in IRDAI
Every organisation needs some amount of capacity building since market trends change over time and new market instruments emerge. With the advent of technology, these challenges will be greater and we need to be alive to that. At IRDAI, I would say that we have a good amount of expertise in finance, actuarial science, management, technology and risk management, however, capacity augmentation and development is a continuous process. We have a series of programs for capacity building by way of training of people within the country and abroad to acquire domain expertise. We make it free of cost for people to acquire the requisite skill set. At the same time, we mandate some of the training that people must undergo. We are trying to build capacity in four areas– (i) risk-based supervisory framework; (ii) risk-based capital regime; (iii) human resources; and (iv) IFRS and IndAS.
Emerging technologies in the insurance sector
I recently met more than 200 players in the Insurtech world in Bangalore – there were interactions, presentations and roundtable discussions, and this ecosystem is raring to go. At IRDAI, we have already developed a regulatory sandbox mechanism where the proof of a concept is being allowed to be tested on the ground. We have found that the regulatory sandbox has certain shortcomings, for instance, currently, an applicant can only apply in two cohorts. We are revamping the system to make it a continuous process. Earlier, we allowed applicants to test their product for up to six months, now we are proposing to expand that to three years particularly for life products. Thus, we are working on a dynamic regulation that shall come up in the next few days. With new insurance technology coming in, we need to build capacity to regulate them in a manner that they do what they ought to do in terms of market conduct.
Finally, we are looking at allowing smaller players in the market. The penetration of banking in this country has happened through differentiated players. Similarly, for insurance, we are looking at micro-insurance players – niche players and regional players – coming into the segment. This will entail amendments to the Act, to allow companies with lesser capital to enter. However, it will help us with the objective of insurance penetration in unserved and underserved areas in the country.
Consumer protection issues and how IRDAI is addressing them
The IRDAI is reviewing existing systems, and trying to make them more responsive and robust. We are working on root cause analyses, on bringing in other forms of technology like robotic process automation, and so on. We are running a hackathon (shortly) where we will state these problems and how to resolve them using technology.
Bima Bharosa portal will become more vibrant, robust, responsive and take care of many issues. For the ombudsman mechanism, we have tasked the responsibility with an insurance ombudsman committee, where we have experts being led by a former Additional Chief Secretary level officer from the IAS. We are also contemplating an internal ombudsman within insurance companies.
We are trying to make disclosures furthermore in the larger interest of the policyholders. They ought to have more information to make a choice of what kind of policy to buy. Claim servicing and settlement is also something we will focus on very closely as far as turnaround times are concerned. All of this will need to happen on a technology platform. Hence, we are mainstreaming technology and incentivising adoption of technology in our regulations (which is expected to be out in a month’s time). The policyholder remains at the centre of our framework, and we are working to ensure that grievances do not arise, even if it means changing the terms of policy.
Views on regulatory convergence and a larger reform of the financial sector
The FSDC will be a very useful forum. One example of a common regulatory issue is the KYC. There is no need to reinvent the wheel each time when the same KYC can be used by all regulators. I believe a new mechanism is being contemplated by the Department of Revenue – e-KYC Setu – a bridge between me, the customer and the UPI. The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) is another repository that has all the data. There is some element of concern with regard to the Prevention of Money Laundering Act (PMLA) where the last user of the CKYC data will have to update the information with regard to residential address, etc. which actually amounts to redoing the whole exercise once again. This is a concern that we will try to address in the next FSDC meeting. With the advent of new technologies, we should be able to take care of problems faced by the customer, whether they buy a financial, banking or insurance product. This forum is going to be important in addressing these concerns.
In terms of the reform of the financial sector, the IRDAI wants to move from rule-based to principle-based regulation. We have already delegated the product certification to insurance companies, and are considering some other things that the regulator currently does that can be delegated to the companies. We are looking at mainstreaming technology, a risk-based supervisory framework, risk-based capital regime, IFRS – these are some of the new reforms we have initiated and are trying to take forward.
We are also looking at value-added services to be incorporated in insurance. For example, a person aged around thirty five years would be reluctant to take health cover since they do not expect to go to the hospital in the next ten-fifteen years. Insurance companies can offer them services to make insurance attractive to this population segment – for example, offering a yoga membership, gym membership, an annual check-up, free ambulance service to their parents or nursing services – all of this should come in the bucket of value-added services.
The reason why insurance companies do not do this now is because the legal framework does not have clarity on this. As such, we need to carve out a space for these services. Further, a lot of capital will be required for companies to provide value-added services along with insurance because the same solvency norms will apply to them. If we can provide for them to set up a joint venture or a subsidiary and charge a fee for it rather than charging a premium, more people will be attracted to buying these kinds of insurance products. IRDAI is working on providing the technological platform for insurance companies to be able to provide these services.
Major disruptions that IRDAI is envisioning – the future of insurance sales
Technology is going to be the major disruptor. Everyone has to adapt to this sooner or later. We are nudging insurance companies to come up with a technology-backed insurance platform that they can create or their own or co-create or partner or collaborate on. A large number of players that want to enter the insurance sector are coming in with a technology solution. For instance, I found a crop insurance idea interesting – a parametric kind of insurance based on technology. Similarly, in the case of health insurance, for outpatient charges, there are concerns about frauds but a couple of players with technology solutions have already filed their applications on this subject.
Technology will be the enabler that allows reach to thousands of people at a point in time as opposed to the traditional agency network that only allows reach of two-four persons in a day. While we still need the agency network and some of the other traditional channels, we are nudging them to go down the technology route. Standalone digital players are now coming in, niche players have started filing applications, and as we go along, there will be a larger number of players backed by technology and end-to-end solutions. I expect them to come up with solutions that will compete with each other in terms of turnaround time for settlement of claims. Thus, technology would be the biggest disruptor and enabler in terms of customer satisfaction and reaching out to millions of people.
The key focus areas for us are as follows: (i) every life in this country must be insured – nobody should die without life insurance; technology will be crucial to achieve this goal, (ii) property insurance – people at the bottom of the pyramid (lower income segments and those who are calamity-prone) should be able afford property insurance cover, (iii) micro, small and medium-sized enterprises should be insured because there is a lot of potential in covering business risks and hopefully we will come up with solutions for this.
We constantly engage with the industry and have institutionalised bi-monthly meetings with insurance companies and other stakeholders, and open houses on the 15 th of every month. This is how we are looking to take care of disruptions.
Balancing public sector and private sector insurance
I think the market is so huge, innovations are so large and the scope is so broad that there is plenty of room for both public and private insurance to operate within the system. At IRDAI, we are completely agnostic about whether insurance offered is public or private. We want robust players with more capital so that they can underwrite more. The IRDAI has made the entry of new players absolutely seamless now – in a span of two Board meetings we are nudging them to come up with their final submission so that we can hand them a registration certificate to operate. In the past one and a half months, we have had more than twelve new applicants who want to start their own entity for insurance in India.
Financial independence of IRDAI
Financially, we are self-reliant. We do not need as much money to operate, but we put to good use whatever we have.
Risk profiles of individual entities
The risk-based supervisory framework and the risk-based capital regime are going to be game changers.
Balancing the commercial/market-related aspects of regulation with the more procedural aspects
The IRDAI is comfortable in balancing the expectations of the government, the public, the industry, the intermediaries and the professional organisations that are operating in this ecosystem. I view the regulator’s role here as one of a big facilitator apart from its supervisory role Some issues on which I plan to engage further with the industry includes how to facilitate growth of the sector by 15-20% CAGR or more, how to bring our insurance penetration closer to the world average in the next 4-5 years and then the G7 average. These are the aspirations we have at the IRDAI. Additionally, work that is underway includes putting in place more robust frameworks as far as prudential norms are concerned. The FSDC mechanism is another important platform for us to sort out a lot of issues which are inter- regulatory in nature. The insurance sector has tremendous potential, a huge market, and an increasing number of investors are looking to enter the sector. The policyholders will end up with a better deal as we go along, replete with more technology tools, better pricing, better underwriting, better claim servicing and processing.