The success of the Bharat Bond issue where PSU bonds were sold through an exchange-traded fund (ETFs are mutual funds that mimic an index and list on the stock exchange) and the use of ETFs earlier for equity disinvestment of public sector firms has rung alarm bells in the plush offices of the life insurance industry. To see how they are connected, we will have to use a wide-angle lens and watch from 30,000 feet. The story is about who gets to be the pipe that connects savings to investments, and shaves off a few basis points to a few percentage points of costs, as it does so. Households and firms generate savings, which becomes the raw material for firms for their investments, that they use to start a new business or expand an existing one. Firms will either borrow or sell their equity to get the funds. Banks, insurance firms, mutual funds and pension funds are the pipes that connect savers to users (both borrowers and equity sellers).
Two and a half months after T.S. Vijayan retired, the insurance regulatory body, the Insurance Regulatory and Development Authority of India (Irdai), has got its 5th chairman, Subhash Chandra Khuntia. A former chief secretary to the Karnataka government, he has his desk overloaded as he takes over the wheel of a body that regulates firms managing over Rs28 trillion of household savings through life insurance and another Rs2.2 trillion in the non-life insurance space.
The insurance regulator has been an outlier in the financial regulatory space. While disagreements with the government by independent regulators are well reported, the conduct of the insurance regulator has left policy makers, the financial sector and analysts open mouthed. Many decisions over the past few years have been in the face of global moves by regulators on issues of costs and transparency. Raising front commissions in life insurance products, repackaging what were illegal payouts as “rewards”, doing away with a persistency target to ensure that agents don’t churn policyholders and continuing with fuzzy disclosures in both life and general insurance products are just some of the actions that have left households even more vulnerable to mis-selling and outright fraud by banks and agents.
I wrote about the removal of key consumer rights by the insurance regulator in my previous column. You can read it here: bit.ly/2njjAI1. Insurance Regulatory and Development Authority (Irdai) responded with a letter. In the interest of fairness, I’m using key arguments of the letter here and putting the rest online at: bit.ly/2nAhs2H. I will also respond to Irdai’s letter.
For many reasons, it is good that life insurance firms are opting for initial public offerings (IPOs). Big IPOs lead to market depth—crucial now for India because household money is finally coming to equities through institutions. It is also good for those tracking this industry because listings will encourage more public scrutiny of insurance firms through analysts covering the sector, through institutional investors such as mutual funds and pension funds, and products from this industry itself such as the unit-linked insurance plans (Ulips). It will be interesting to see which equity Ulips buy into what life insurance company stocks. Then there is the public debate that takes place around an IPO and its merits.
At a time when reducing costs and giving the Indian investor a fair deal is at the centre stage of policy and regulation, the insurance regulator, in a move that is stunning on many counts, has proposed to hike commissions and payouts to sellers of insurance, legitimise illegal payments and bring back hereditary commissions. In the draft rules (read here: http://bit.ly/1RlmiJ9) on commissions released last week, the Insurance Regulatory and Development Authority of India (Irdai) has raised total sales-linked compensation across the board.