A case for scrapping Irdai

The latest bailout for three state-run insurers highlights the incompetence of the regulator in anticipating their crises

The additional capital support of ~12,450 crore for the three staterun insurance companies — Oriental, National and United India — can help only if the three companies and their regulator, the Insurance Regulatory Authority of India (Irdai), are overhauled. Otherwise these companies will remain basket cases.

It is understood that the finance ministry has handed these companies a list of key performance indicators (KPI). Should there be a KPI for Irdai as well? India has 70 insurance companies (including 12 reinsurance) with the regulator steering it for 20 years, sufficient time for the industry to mature.

Yet in these two decades, if three of the top five companies in one market segment fall sick and need a bailout, it only points to the weakness of the regulator.

The latest annual report of Irdai 201819 underlines the point. In the 200-page document, there is only one para (number 1.4.2.3) in which the regulator noted that the solvency ratio of the three state-owned companies had slipped below prudential levels. The bald narration makes no attempt to explain in nontechnical language the gravity of the problem. It reads: “The Authority had granted dispensation to National Insurance Co. Ltd, to consider 100% of Fair Value Change Account and to discount the net IBNR towards Motor TP by 2.50% for solvency purpose”. There is an identical para for Oriental and United too.

Decoded, this paragraph means that these companies are unable to operate as going concerns so Irdai has had to ask them to set aside a larger portion of their premiums to pay claims. The finance ministry bail out in a year when the economy is grappling with the massive economic challenge from the Covid-19 pandemic shows how grim the situation is.

No doubt, the money had to the paid by the government as these companies’ owner, but there was no early warning signal from the regulator of the crisis. There is a huge unstated risk in this behaviour. Irdai also regulated Life Insurance Corporation (LIC). If the regulator cannot bring itself to police the smaller general insurance companies adequately, the scale of problems it may be brushing under LIC’S carpet is too scary to contemplate.

In fact, the magnitude of the risk may make it worthwhile to consider bringing the insurance sector under either the market regulator Securities and

Exchange Board of India or the Reserve Bank of India, with an Irdai playing a limited role as a self-regulatory organisation to manage insurance policy issues, agnostic of the financial health of the companies.

There is a precedent,too. After trying for decades, the government has removed the National Housing Bank (NHB) from its role as the regulator of the housing finance companies. The government has correctly argued that the NHB has too few resources, financial or human, to dictate to lenders.

The 70 insurance companies can do a far larger damage to the Indian financial sector. In the first place, there were too many of them to be viable, given the size of India’s insurance market. In the past few years, several of these companies have begun the sensible process of

mergers, a significant step in which Irdai has no role (this is the Competition Commission of India’s domain, or if a bank is involved, then the RBI). Nor is it in a position to decide if a company has the financial to muscle to be listed. At one stage, it discouraged companies from approaching the securities market (now it has reversed that position). It has no experience either way to suggest the reasons for its opinion.

There is no evidence, unlike RBI or Sebi, of Irdai having a conversation with the government about the health of the state-run companies. Incidentally unlike the banking sector, where the state-run banks are always saddled with loss-making credit portfolios, the government insurance companies have faced little pressure from North Block (except, perhaps, for insisting that they cannot refuse third party insurance for motor vehicles). For instance, United India had to stop its group mediclaim insurance owing to improper practices and not because the government had asked it to take on more liabilities than its books could handle.

The latest bailout also raises concerns about the need for a through relook at the quality of the managerial talent in these companies, including making room for lateral entry and much else just as it has been gradually implemented for state-run banks. There has been some thought in this direction. Recruitment of officers to these insurance companies has been stopped since 2017 on government’s orders.

No major economies have an independent insurance regulator. USA runs a hybrid with the National Association of Insurance Commissioners created by the state insurance departments. But the key call is taken by the Federal Reserve. China has a common regulator for banking and insurance, while the UK has the Prudential Regulatory Authority within the Bank of England. They are none the worse for it.

India has plans to position itself as the key insurance and reinsurance market for South Asia, which is a useful goal to set. The percentage of insurance premiums to GDP for India hover at 3.7 per cent, a climb back after declining for several years. Only Indonesia is lower while China is above 4 and Malaysia is close to 5 (developed economies are all in double digits). An under-capitalised regulator that has so spectacularly failed is unlikely to generate confidence. The experiment with a standalone regulator for insurance must be scrapped before there is a far larger damage.