The Spectre Of Dual Regulation

Here is a question: do you buy insurance or does your insurance agent sell it to you? Silly as the question may seem, the courts’ answer — perhaps the Supreme Court’s — to that question will determine which agency will regulate unit- linked insurance plans (Ulips).

Residential real estate, for instance, is sold. If you decide to sell your house, you hire a broker, advertise and show people your house. Indian Premier League (IPL) players play their best cricket, talent scouts track their performance, and become part of an auction process where teams buy them.

But it is always not that clear. For instance, real estate firms can find old apartment buildings that can be redeveloped and offer to buy out home owners who live in them. In the case of Ulips, if the courts decide that they are a bought business, then the Securities and Exchange Board of India (Sebi) can regulate cost structures.

Insurance companies, on the other hand, have been arguing that insurance is a savings product that needs to be sold, even hard-sold; that, they say, justifies the high cost structures in the business.

“The fundamental worry is not regulation and it is not the framework,” says Ashvin Parekh, partner and national leader of the insurance business at global consulting firm Ernst & Young (EY) in Mumbai. “Sebi and the Insurance Regulation and Development Authority (Irda) have to determine what the nature of the insurance product is.”

This debate cropped up often, and Parekh suggests that we decide whether we need to build the insurance market or have more regulation. “There should be regulation of the sales teams and Irda continues to introduce robust sales practices,” says S.B. Mathur, secretary-general of the Life Insurance Council, an industry body. And, he adds, insurance companies invest in the market through brokers, who are regulated by Sebi.

The industry numbers underscore the importance of the entire debate. According to Quant Research, the insurance sector grew by 50 per cent year-on-year during March 2010 alone — measured in annualised premium terms — led by the Life Insurance Corporation of India (LIC). For the entire year, the industry grew 20 per cent in 2009-10 (FY10), state-owned LIC at 31 per cent and private players at a modest 12 per cent. The bulk of that growth came in from Ulips.

According to FY09 figures from Irda’s annual report, about Rs 1.72 lakh crore is Ulip money, out of a total of roughly Rs 11.3 lakh crore in life insurance assets, or around 15 per cent. What’s more, Ulips account for about 85 per cent of all business among private life insurance companies; for LIC, Ulips account for over 40 per cent of new business premium for the past five years.

That is a lot of assets under management (AUM). Compare that to the mutual fund industry, that has been around much longer, that had roughly Rs 4.2 lakh crore in AUM in FY09, or two-and-a-half times that of Ulips. Rough estimates put the AUM of Ulips at about Rs 2.5 lakh crore for FY10, a growth rate of over 40 per cent, compared to the AUM of the mutual fund industry at Rs 4.82 lakh crore (a growth of just over 12 per cent).

“But unlike the mutual fund industry, which aims at maximising returns to investors, life insurance investments require different investment approach,” says Kshitij Jain, chief executive officer of ING Vysya Life in Bangalore.

For Irda, it is a matter of balancing the development agenda of its mandate against the regulatory part; in almost all circumstances, the trade-offs are difficult to manage. This much seems clear: most insurance industry folk are not in favour of dual regulation. The ball is now in court.