A regulator retires and an industry insider takes over

Expense Account, Mint

India’s third insurance regulator J. Hari Narayan demitted office last week and it would be no exaggeration to say that Indian insurance rules were rewritten during his tenure in the teeth of very strong opposition and lobbying by the industry. The regulator worked at turning an institution that looked at market development as its key role to one that focussed on consumer protection in a very short period of just over two years. But it took him the first half of his tenure that began in 2008 to understand the ground realities of insurance. By the middle of his tenure, Hari Narayan figured out that the industry was running rings around him and it is to his credit that he took a U-turn on his world-view of insurance and how it should run in India and put in a consumer-first structure.

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How to steal a trillion

Expense Account, Mint

When one lives in a country of over a billion people, big numbers seldom come as a surprise. But when I looked at the number of Rs.1.5 trillion, I was astounded. That’s about 1.5% of the Indian gross domestic product, was the first thought. But the number in the excel sheet looked back with the certainty of coming out of a formula run on actual premium data sourced from the regulator: that’s the money retail investors have lost from mis-sold life insurance policies over seven years. Knowing that the industry will come after this number, as my colleague in this work so graphically put it, with their bazookas, we did the numbers again. And again. And several times again. Checked and re-checked the methodology with insurance industry experts, actuaries and academics. We used another, totally different method to see if we were way off the mark. But the final number refused to back down. Retail investors lost a minimum ofRs.1.5 trillion to the insurance industry and its agents over a period of seven years that ended in the financial year 2011-12. You can read the full story of this lost money that appeared in Mint on 6 February 2013 here: http://bit.ly/X3YJDY.

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Life cover with a post-2007 SBI home loan? Expect a refund

Expense Account, Mint

An increasingly consumer-focused insurance regulator pushed the envelope just a bit further last week. On 5 October, the insurance regulator asked SBI Life to refund Rs.84 crore to policy holders, you can read the order here:http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo1798&flag=1.

The Insurance Regulatory and Development Authority (Irda) rules for group insurance (notified in 2005) mandate that beyond the prescribed limits of commissions, there must be no other payments to agents (as management or documentation expenses, profit commissions or bulk discounts—words used by many insurance companies to pass over commissions in excess of limits) who are individuals or corporates. Irda has found SBI Life guilty of breaking this rule over a period November 2007 to August 2010 for paying its master policy holders (entities who buy the group cover) commission beyond what is allowed under various heads.

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Insurance regulator reads out the riot act to insurers

Expense Account, Mint

The relief across the financial sector is palpable. North Block is now under the control of a minister who has not delegated the work to a compromised cabal. And even better, he is a person who understands the markets and finance. After the mutual fund announcements last week, this week the ministerial gaze turns to life insurance. The aim is possibly to rework the broken parts of the insurance industry, with the worry being that the life insurance sector has seen falling business. Life insurance premiums have been the traditional way in India to plug small savings into big finance. Insurance companies, especially the public sector behemoth the Life Insurance Corp. of India (LIC) has been ready with large war chests to soak up public issues and prop up markets.

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Irda opens the door to getting banks to focus on mis-selling

Expense Account, Mint

The increasing confidence of the Insurance Regulatory and Development Authority (Irda) showed two weeks ago when it slapped a fine of Rs 1.47 crore on HDFC Standard Life for some five violations out of a list of 25 charges. Indian regulators are not known to levy large sums as fines. Probably the highest fine levied by the regulator till now, the move showcased Irda’s ability to go beyond the defunct Rs 5 lakh limit that the Insurance Act insists on. Fines and penalties are governed by the Insurance Act of 1938 that caps fines at Rs 5 lakh. Must’ve been a large amount 70 years ago, but now it does not even buy the paper that an insurance company will write its policies on. Inflation indexed at 6% a year, that limit should’ve been at Rs 3.7 crore today and this would have translated into a Rs 109 crore fine for HDFC Standard Life or almost 40% of its 2011-12 profits. Right now the fine bites less than half a percent of profits. The world has moved on from 1938 and now the limit should be reworked to a floor and not a ceiling. The stalled Insurance Bill has been frustrating not just for companies that wanted the foreign direct investment (FDI), but also for the regulator, which wants more teeth. Irda has been innovating on the fly to bite down harder on the companies. It is splitting the fine across years, across aggrieved policy holders, across any category it can find to impose the maximum fine of Rs 5 lakh in a more meaningful manner. HDFC Standard Life, for example, has been fined Rs 1.05 crore for ignoring an Irda notice to waive the 90-day waiting period in home loan-linked life insurance policies in 2003. There were 21 policy holders whose claims were rejected and apportioning Rs 5 lakh each to them, Irda has instructed the insurance company to not only pay the claim but also pay a fine.

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Front-loaders get front-loaded

Expense Account, Mint

If you hear of a company selling a stake in itself, and then giving money to the buyer to buy that stake, what would you think? There’s something wrong with the deal. That’s the story in the bancassurance market right now and the rush of life insurance companies to tie up with a bank has reached a level that is making the whole bancassurance model unstable. The latest deal between Syndicate Bank Ltd and Birla Sun Life Insurance Co. Ltd (BSLI) has finally got insurance industry insiders upset enough to begin talking. From what I hear, Birla Sun Life will pay Syndicate Bank Rs 600 crore that, it seems, the bank will use to buy 6% of BSLI equity. What’s not clear yet is how exactly Birla Sun Life will account for this money. Other questions arise as well. What if the bank can’t sell enough? With this kind of money to recover from the business, how persuasive will the banks need to be to get their customers to buy products? By approving such deals the banking regulator is benignly looking at a potential banking debacle. But let’s stay with insurance for this column.

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As the life industry contracts, why Irda may be feeling Sebi-ish

Expense Account, Mint

The Rs2.9 trillion Indian life insurance industry has, for the first time since privatization in 2000, seen contraction over two consecutive financial years. Fiscal 2010-11 saw a shrinking of 20% and the full year 2011-12, estimates the insurance regulator, will contract 15%. This means that enough of us did not buy an additional policy last year or this year, or did not renew an ongoing policy, or that new investors were not found by insurance sellers.

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You’ve been mis-sold a policy if…

If you, the customer, are a day late in a credit card bill payment or a phone or electricity bill, you’re fined. Don’t pay for some time and you begin to get legal notices. The electric supply company will simply cut supply. The phone company will cut the connection. A small error in home loan repayment will make your credit history tainted. And you really have to run around to rectify that. Even after the problem is long solved. So what happens when the company makes an error? Usually you have to still pay for their systems being in error unless you really run around. But what if there is no error but a wilful intent to cheat. What should you do if your financial life is at risk due to a product that was sold to you by deceit?

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Ulips: re-made in India

Expense Account, Mint

Armed with basic knowledge of an Excel sheet and some dribbles of wisdom after a basic capital markets course, when I opened a unit-linked insurance plan (Ulip) brochure five years ago and tried to do the math, I fell off my chair. The sheet showed me a product that was so inherently unfair and loaded against the investor that I thought I had mis-understood it. But long hours spent decoding various products (with lots of work put in by a trainee who is now India’s ace insurance reporter and works in Mint) told me that the conclusion was right: The Ulip product was a trap. What do you call a product that allows the entire first-year investment to be used as cost? What do you call a product that swallows the entire first- and second-year investment if you dare stop funding the product? What do you call a product that pushes forward a lifetime of costs in the first two years and then pushes you to exit—leaving your money behind? All those who were mis-sold the Ulip product in the last few years are now understanding the extent of the fraud.

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Act IV, scene 2: Ulip clean-up

Expense Account, Mint

Why has cost become so central to the insurance product? Nobody talked about costs for decades when we all bought endowment and money-back plans. Those of us who are old enough to have these in our portfolio remember how they were sold—the promise was of a certain sum that would come back, either periodically, or at the end of 10 to 15 to 20 years. That Rs20,000 a year would finally come back as Rs3.8 lakh after 15 years. If this meant a rate of return of just 3.5%, we were happy to buy into the product for the comfort of having the neighbour uncle push us into investing, the compounding and of course, the tax break. Nobody thought of cost because in a guaranteed return product, cost does not matter to the investor since he is looking at what he puts in and what he gets back. And if the return was just 3.5%, and he was fine with it, he invested.

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