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Time to fix insurance — for good

Lack of policy attention has made the sector an anti-consumer island. This must end. Gautam Chikermane elaborates.

india Updated: Jun 21, 2009 21:19 IST
Gautam Chikermane
Gautam Chikermane
Hindustan Times

An innocuous, almost obvious piece of regulation that should have been introduced in 1994 when mutual funds were opened up to private asset management companies (AMC) finally saw the light of day last week. It may have taken a decade-and-a-half in coming, but to me, it’s a huge relief to see a regulator serve its first function: to protect the interests of investors.

“There shall be no entry load for the schemes, existing or new, of a mutual fund,” a June 18 decision of Securities and Exchange Board of India (SEBI) board meeting stated. “The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors.”

There’s pandemonium among AMCs — companies that are authorised by SEBI to float mutual funds. The reason is not that distributors who sell the funds to investors will not get the 2.25 per cent commission on every equity fund purchase we make. Compared to the 40 per cent commissions on investment products masquerading as insurance, mutual funds were doomed to begin with in this arena.

The reason is that with no incentive to sell low-cost, high-disclosure and transparently cost-structured mutual funds under an able and investor-friendly SEBI chairman C.B. Bhave, the only investment instrument distributors will now sell will be high-cost, opaque and terribly mis-sold insurance products.

Meanwhile, the leadership of the insurance regulator, the Insurance Regulatory and Development Authority (IRDA) seems to be “serial investor unfriendly.” J. Hari Narayan is the third chairman of IRDA who has done -- and is doing -- nothing to stem the rot that the industry and its distributors have been inflicting on consumers for years. All through, IRDA has, like a bystander, allowed this first product of finance to be mis-sold, through its pious focus on ‘penetration’ and not the first clause of its mission: to protect the interests of policyholders.

The fight in Indian financial services seen from the consumer’s point of view is one of skewed commission structures. When an agent sells an insurance investment he pockets Rs 40,000 for every Rs 1 lakh invested. The same investment gets him Rs 2,250 when he sells an equity mutual fund (it’s lower for debt funds). And when he sells a pension fund, he gets Rs 100. Put yourself in the agent’s shoes and ask yourself this question: which product will you sell?

The answer is clear to consumers in urban areas as well as rural ones. When I was studying farming in four villages of Uttarakhand last month to see what the problem with agriculture is, I noticed that apart from biscuits, tea and mobile connections, the one financial product that many of the “poor” people owned that was like their urban cousins was a high-cost insurance policy-- an investment product in the garb of life insurance.

“While the elaborate sales and distribution model has contributed to the popularity of life insurance, this has come at considerable cost by way of high commissions and a large per cent of lapsed policies,” notes ‘A Hundred Small Steps: Report of the Committee on Financial Sector Reforms,’ a Planning Commission report chaired by Raghuram G. Rajan.

“Policy lapses are low only in the highest income quartile, while in all other segments at least 20 per cent respondents
have had a policy lapse. The penetration of non-life insurance products is negligible. For example, only 1 per cent of the population appears to have medical insurance,” it says.

The problem, therefore, is not with the distributor, who will naturally seek higher returns, or with insurance companies, who look for sales.

The problem only partially lies with inept regulators --- tucked away in Hyderabad, with little exposure or interest in the nuances finance or consumer interest, and rendered largely toothless.

To me, the problem is that the political economy of the NDA regime could not prevent Chandrababu Naidu, who acting in the best interest of his state thought he was earning the people’s mandate by getting IRDA to be housed in Hyderabad. This action needs to be reversed. Today, Prime Minister Manmohan Singh has a political mandate that gives him a chance to fix the mess in India’s regulatory space, much in tune with the rest of the world. There are lessons to be learnt from US President Barack Obama’s straight speaking and regulatory overhaul this month.

Here are three ways I think Singh can fix this problem for good.

One, set up an agency like Obama’s Consumer Financial Protection Agency with a mandate to protect consumers of credit, savings, payment, and other consumer financial products and services, and to regulate providers of such products and
services, across regulators.

Two, initiate a new legislation for financial intermediaries and bring all distributors, agents, advisors under its single ambit.

And three, move IRDA to Mumbai, the financial centre.

First Published: Jun 21, 2009 20:53 IST