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If Your Interests Are Not Long-Term, Don't Get Into This Business

Business Standard, 01 January, 2012

If Your Interests Are Not Long-Term, Don`t Get Into This Business  
Amid a decline in growth in the life insurance business and mounting losses from the ever-expanding non-life portfolio, insurance companies recorded losses this year. Owing to the long-term nature of the insurance business, one doesn't expect a reversal in the trend overnight. Insurance companies would have to minimise losses through efficient claim management, says Insurance Regulatory and Development Authority (Irda) chairman J Hari Narayan, in an interview with B Dasarath Reddy. Edited excerpts:
The figures released by Irda suggest there is negative growth in life insurance and losses have also gone up this year.
Yes, losses have increased this year. The overall situation at the moment is also dull, but one need not lose sight of the future. Companies would have to learn to live with downturns and that would make these stronger and only the strong would survive. In any case, insurance is a long-term business. There are no young insurance companies in the world and all the successful ones are 100 years old. I always tell these if your interests are not long-term, don't get into this business.
I think companies are aware in a downturn, one has to wait. Provisioning must be correctly provided. You cannot underprovide and declare profits. I am going through it sector by sector. Last year, I examined the third-party pool. Now, I am thinking of looking at other important segments like fire and health.
There is a perception that the rise in losses was also on account of regulatory interventions.
The regulator's prime ground is protection of the policyholder. It is the policyholder's money that is involved in this business. Now, if someone thinks the whole problem is not real, and that only the regulatory architecture is to be blamed, I must say it is an incorrect description of what is actually happening. The market itself is behaving like that. Also, why, for instance, are traditional products doing alright? Welfare of the policyholder is the priority for any regulator, whether in India, the UK or the US.
Dismantling of the third party (TP) motor pool was a significant decision taken by the regulator this year. What made the TP pool unsustainable just four years after it came into existence?
This is an idiotic system. A policy is sold by a company at one end, and the claims are settled at the other end by GIC, which manages the pool. This provides scope for higher claims and frauds. No one is accountable in this system. If the company manages the claim, it would directly negotiate with the third party, and settle at a reasonable price. In the current system, there is practically nobody to manage the claim, which is why the number of claims and average amounts of settlements are rising. Accordingly, losses in third-party insurance are also going up.
Basically, I have done this to protect the companies. Otherwise, the rise in the TP pool is quite frightening. How would the companies grow if these record huge losses in the TP pool? This year, the losses could be Rs 6,000-7,000 crore. This would have been much worse, had it been continued.
Why is there so much complexity in the TP insurance business?
Third-party motor insurance is a long tail product. It may take even nine years to record 99 per cent claims. This pattern is common to almost all countries. Companies have to provide reserves or make provisioning in their balance sheets for all these years. An insurance policy may be sold in a particular year, but accidents may happen anytime. This means one would be subjected to the effects of inflation on one side, and the effects of time gap on the other.
In India, if a company collects a premium of Rs 100 from all vehicles put together, TP claims arising out of these policies would be around Rs 185, turning this into a loss-making portfolio. This was the situation even after raising the rates every four years or so in the past, and more recently, in 2010 and 2011.
When I commissioned an audit by the UK government's actuary department last year, the findings said the provisioning required was in fact 215 per cent, not 185 per cent.
Is TP motor insurance essentially a loss making proposition?
It need not be so, if it is manages properly. It may not record profits, but it need not record losses either. If the company goes down, how would the transport industry sustain and grow? In recent discussions, even transport associations have acknowledged this fact.
What may be the outcomes of the new declined pool system?
Now, we have a declined pool restricted to only TP. Therefore, companies would become cautious in managing claims. Frauds would not go unnoticed. Companies can manage the business with gradual escalation, according to the formula introduced last year. There would be no change in rates, at least in my period (Hari Narayan would retire in 2013) and may be revised two-three years down the line, after a relook at the new data.
Smaller companies would be under pressure, and rightly so, as these have to improve and start writing more to TP insurance. They cannot take a free ride on someone else's money. Losses would continue, but may decline. Once these reduce, the capacity of the companies to underwrite risks in other businesses would increase.
Has the recent intervention in health insurance yielded positive results?
Health is doing well. Slowly, even hospitals and the insurance sector are becoming more sensible about pricing. Hospitals understood the fact that these cannot be unfair in their billing practices. Most losses arising out of the health portfolio are owing to group businesses with companies. This would be set right in a year or two. The problem started when prices were regulated and companies sold non-life products like fire insurance by offering group health covers for employees at discount through cross subsidy. Last, we are not approving any new product that cannot admit new members, at least up to the age of 65. We renew policies when the policyholder aged 75 years or more really needs a health cover.
How are companies faring on the product innovation front?
There is a lot of scope for improvement. Product improvement would happen when a company has a more professional approach to pricing and other issues. This means companies must have stronger actuaries. India is still weak in the actuarial department. But things would improve in five-six years.

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