Chennai: For the Indian insurance sector, the news couldn’t have come at a better time.

After numerous false-starts and crossing many hurdles, the Insurance Amendment Bill 2002 (amending the Insurance Act 1938) and the General Insurance Business (Nationalisation) Amendment Bill 2002 (amending the General Insurance Business Nationalisation Act [Gibna] 1972) got the Parliament sanction, with the Rajya Sabha deciding to ‘underwrite’ or pass the bills on 30 July 2002.

The amendment to the Insurance Act paves way for the entry of cooperatives, brokers and other intermediaries into this sector. Further, much to the relief of many aspiring corporate agents, the amendment has diluted the qualifying stipulations.

While these are the popular outcomes in general, the crucial amendment for life insurers is in Section 49. The new law increases the shareholders’ share of valuation surplus (the difference between assets and liabilities, excluding shareholders’ funds) to 10 per cent from 7.5 per cent. In the case of non-participating policies the entire surplus was given to the shareholders.

The amended law now enables premium payment through alternate means - credit cards, the Internet and others. Presently, the premium has to be paid only by cash, cheque or demand draft. The rule that the premium has to be paid in advance - before the insurance cover begins - remains unaltered.

On other hand, the amendment to Gibna effectively delinks General Insurance Corporation of India (GIC) and its four subsidiaries. Henceforth, GIC will be the national reinsurer transacting only reinsurance business. With the amendment the government gets the legal sanction for an administrative action taken earlier.

Mixed reactions
Reacting to the passage of the two bills, AMP Sanmar Life Assurance Company CEO S V Mony says: “The passage of the two bills is a significant event for the [life and non-life] insurance industry and more so for the life insurers. Now one will witness lots of changes in the existing structure.”

Mony says the increase in the shareholders’ share of valuation surplus is a move in the right direction as the stakeholders have to get better returns on their heavy investments. Some time back, several private life insurers had in fact infused additional equity; this is apart from the initial capital of Rs 100 crore.

Mony, earlier chairman and managing director of GIC, adds: “The insurance distribution network will see lots of changes in the general insurance industry with the entry of brokers, banks and other corporate agents.”

SBI Life Insurance Company managing director and CEO R Krishnamurthy says: “I expect the new intermediary of brokers in insurance to come to play a major role in deepening the penetration levels in insurance in India. We will see a good deal of foreign firms entering the sector, leading to profound changes in the pattern of distribution. We can anticipate a higher degree of professionalism to develop in the insurance industry. The subject of risk management will now attract serious attention, both at the academic and industry levels.”

“The passage of these Bill has been long awaited by both consumers and insurers as it allows payment of premiums by credit cards and also amends the regulations relating to a corporate agency. This will allow many more organisations to establish themselves as corporate agents, and give that necessary push for the full development of bancassurance,” says a spokesman for Royal Sundaram Alliance Insurance, a leading general insurer in the private sector.

He says his company will fully exploit the bancassurance channel for selling its products - already several banks have signed insurance products’ distribution deals.

Agreeing with him is Birla Sun Life Insurance associate director (alternate channels) P Nandagopal: “The amendments augur well for insurers like us having multi-channel distribution. Similarly, bancassurance will develop fast now. But banks should have a clear focus.”

While the private insurers are happy with the amendments, it is business as usual at government companies like United India Insurance Company and Life Insurance Corporation of India (LIC). An LIC spokesman, however, says: “I cannot comment on the development without seeing the final Bill.”

More forthcoming was United India’s chairman and managing director V Jagannathan: “Much has been talked about the threat that private insurers will pose to our existence. But nothing of that sort has happened. On the hand, we have registered a premium growth.” He believes that the Indian insurance market is agent-driven.

“For big corporates we will continue our role as advisors and risk management experts while insuring their assets. It is this segment that brokers will target. We hope corporates will stick to us. Well, vis-à-vis medium-sized industries, households and individuals… brokers will not find them interesting,” he adds. “But when it comes to crunch, United India will not hesitate to deal with brokers.”

About the role of a broker and whether the brokerage (17.5 per cent of the premium procured) would increase the costs, a Royal Sundaram official says: “The broker works on behalf of the insured, and the agent on behalf of the insurance company. Therefore, the broker will be taking on a larger role than an agent, such as issuing policies and facilitating claims - costs that would have been incurred by the insurer.”

In the same vein he adds that the brokers will not underwrite the risks, which will be the duty of the insurer. “They will look to create insurance solutions for their clients and obtain the best deals in terms of coverage and premium from insurers.”

Unions down, but not out
Now, the insurance unions are not amused. Nor are they taking the developments lying down. About the delinking of GIC from its four subsidiaries, All-India Insurance Employees Association (AIIEA) general secretary N M Sundaram says: “Consolidation is happening globally. Strangely in India, the government, instead of merging GIC and four subsidiaries, is separating them despite the recommendations of the Committee on Public Undertakings, [a parliamentary committee headed by Prof Vijay Kumar Malhotra, a Bharatiya Janata Party MP].”

Sundaram says AIIEA collected 84,393 letters written by prominent citizens to the Indian prime minister and the Lok Sabha speaker. “Subsequently, when Rupchand Pal, MP, moved the issue in the Lok Sabha on 2 August 2001 it was referred to the Petitions Committee of the Parliament to review the whole process of opening up of the insurance sector. I am surprised how the two bills were passed when the Petitions Committee is looking into the matter.”

It has been a chequered journey for both the bills with Left parties, insurance unions and occasionally other political parties, based on their convenience, opposing them. Originally the bills were tabled last August 2001, but were referred to a parliamentary standing committee. As a matter of fact the insurance industry itself was opened up in 1999 though the actual process started way back in 1991.

Unable to get the two bills passed during the last budget session, finance ministry officials this time around sought priority listing of them. “No law is permanent anywhere in the world,” adds Sundaram.

The road ahead
As it stands, now the ball is back in the Insurance Regulatory and Development Authority’s (IRDA) court. The regulator has to redraft the regulations to governing brokers and corporate agents. The broker regulations drafted earlier were withdrawn by IRDA in the wake of a pending amendment to the Insurance Act.

The Royal Sundaram official says: “As with any new regulatory framework, there are certain aspects that will be developed over a certain time. Some proposals are pending, including the foreign shareholding limits for brokers. IRDA will, no doubt, review all proposals and consider them, if further redrafting of regulations is required.”

One of the regulations that the industry demands to be redrafted pertains to brokerage. The earlier draft fixed a ceiling of 17.5 per cent. There is a school of thought that believes that brokerage should not be subject to regulatory ceilings. “The parties to the contract - insurer and the broker - should be allowed to decide on that quantum.”

But such a method will be discriminating because the Insurance Act levies a ceiling on the commission paid to individual agents. And there will be channel conflict. Moreover, it may result in the re-emergence of the managing agents system abolished by the Companies Act. “Certainly there should be a statutory ceiling on the brokerage or else it would result in several unsavoury episodes,” says Nandagopal.

“The regulations for brokers and corporate agents will be drafted by us in 15 days’ time. It will then be approved by the advisory committee,” assures IRDA chairman N Rangachary.