J Hari Narayan IRDA Chairman's first Interview

Insurers will get more options to invest in bonds
Changes in investment norms will ensure better returns for policyholders, IRDA chief Hari Narayan tells Hema Ramakrishnan
J Hari Narayan, the new chairman of Insurance Regulatory and Development Authority (IRDA), takes charge at a challenging phase, when the government is keen on pushing a legislation to increase the Foreign Direct Investment (FDI) in the insurance sector. Given the impressive growth in the life industry, the stage is all set for the next phase of reforms. The non-life industry is also set for a take-off. In his first interview after taking over, Mr Narayan dwelt on a range of issues in the insurance sector and the road ahead.
Do you expect several new entrants in the sector when the cap on FDI in insurance is hiked from 26% to 49%?
A large number of private players are already operating life and general insurance sectors.
Had the size of investment been an inhibiting factor, they would not have come in. I do not
expect several new players to rush for joint venture tie-ups if the cap on FDI in insurance is
raised. But existing players may increase their stake, which, in turn, will enhance FDI inflows.
Capital has so far not been a major constraint for the insurance industry, given the way they
have been expanding their business. Some Indian promoters have restructured their joint
ventures to expand their relative shareholding in the company. This is, perhaps, reflective of
their relative strength. But insurers need capital to meet unexpected claims, expense overruns
and investment losses. And we do see some strain among Indian partners in raising capital
whenever there is a call for greater shareholder funds. A hike in the FDI cap would help then.
Also, comprehensive changes in the insurance legislation will give IRDA flexibility to respond to
emerging market developments.
Promoters of private insurance companies were expected to dilute their shareholding through an initial public offering within 10 years of operations. Is this timeline being reviewed?
The dilution of equity stake would hinge on the final decision on the FDI cap. As the market
matures, the insurance sector would also witness churning in the form of mergers and
acquisitions (M&As). A realistic valuation of companies would be crucial. We need to do some
homework on these issues and are looking at setting up an expert group.
The hike in interest rates and downslide in the stock market have seen a dip in sales of Unit-Linked Insurance Plans. Are you concerned about it?
A rise in yields may yield better returns on fixed income plans. But Ulip sales have dipped,
which is reflected in the first quarter numbers. The data show a drop in the new business
premium of LIC. However, private companies have recorded a higher growth. The average
growth for the life insurance industry is around 14%. But these are dull months. The investment
risks in Ulips are borne entirely by the investor channelling his longterm savings in the equity
market. We will make exposure norms mandatory for Ulips to mitigate the risks arising from
investments in a few companies.
How are you tackling complaints on misselling of Ulips?
We have made it mandatory for companies to give a break-up of the charges in Ulips and the exact amount that will be available for investment during the premium payment period. The policyholder and the marketing official selling the product have to sign the premium-cum-charges statement. Any change in the charges while under-writing or finalising
the deal also has to be approved by the policy holder. We will also codify all complaints from
consumers buying insurance products systematically to have a proper data base.
Are you acting on the recommendations of the panel to provide cheaper mediclaim?

What are the core issues in health insurance?
Voluntary health insurance policies such as mediclaim come up for renewal annually.
Companies can look at a longer-renewal period. Can we have medium and long-term health
insurance products? We also need to look at actuarial issues in the pricing health insurance
products. Can we draw from countries such as Brazil and Chile that have advanced health
insurance schemes?
When will you change the investment regulation norms for insurers?
We are planning to notify the changes in investment norms shortly to give greater flexibility
to insurers to invest in debt and equity instruments. Insurance companies will be given more
options to invest in bonds floated by infrastructure companies. They will also have the leeway to
invest in mortgage-backed securities. The changes will also ensure better returns for
policyholders.
When will general insurers be given the freedom to innovate and offer composite
products?
The issue here is one of tariff wordings. The General Insurance Council (GIC) is ready with
common tariff wordings, but a section of the industry reckons that there could be scope for
misunderstanding in some terms and expressions used. GIC has been asked to take a relook at
this. The new tariff wordings will be ready by the end of this year. We will remove impediments,
if any, to product innovation.
Will you allow banks to have tie-ups with multiple insurers?
Banks are allowed to tie up now only with one company in life and one in general insurance.
One option is to have open architecture which would mean giving banks the flexibility to act as
a corporate agent for multiple insurers. We also need to have more professional insurance
agents to deepen insurance penetration in the country.
Are you looking at a risk-based capital model for the insurance sector?
Insurance companies have to transit to a risk-based model in future. This transition and the
adoption of International Financial Reporting Standards (IFRS) by 2011 have several
commonalities.
It will equip companies to handle future accounting standards and also have proper risk
management systems. When Indian insurers adopt this model, known as Solvency II, they
would have to set aside much less capital than they do now, say, for (Ulips) compared with
traditional insurance products.