No pension tension

The Reserve Bank of India's (RBI) advisory group on insurance regulations has recommended the formation of a separate regulatory body – on the lines of Occupational Pension Board of the UK – to regulate pension and gratuity funds. In its report, the advisory group has cited the lack of any regulatory control on several superannuation and gratuity trust funds operating in India.

Presently, the Insurance Regulatory and Development Authority (IRDA) is the body that is expected to monitor pension funds.

The advisory group has called for a close coordination between IRDA and the Securities Exchange Board of India (Sebi) – the mutual funds regulator – as both the sectors have similar products.

The insurance advisory group was constituted by the RBI's standing committee on international financial standards and codes to chalk out a road map for aligning Indian insurance industry's standards and practices with that of international best practices.

The insurance advisory group headed by Mr. R.Ramakrishnan, consulting actuary and a member of the Malhotra Committee on insurance reforms, submitted its report recently.

Except for a few regulations that have been framed by the IRDA, the insurance advisory group has found the domestic rules are in sync with international practices. The group has relied on the various reports of the International Association of Insurance Supervisors (IAIS) and the insurance guidelines issued by the Organisation of Economic Cooperation and Development (OECD).

Interestingly, some of the recommendations of the RBI sub-group are likely to irk new entrants though they are absolutely necessary in the industry's future interest.

For instance, on the issue of suitability of directors and senior management of a new insurance company, the advisory group recommends inclusion of directors and senior managers under the definition of key persons in an insurance company.

Currently, the Indian regulations define key persons as chief executive, chief marketing officer, appointed actuary, chief investment officer, chief internal audit and chief financial officer and excludes the directors.

The other sensitive recommendation is making public the natural and legal persons holding a direct or indirect control in an insurance company at the time of licensing an insurer player.

The advisory panel also states that the effectiveness and the spirit of Section 6A (relating to the ceiling on the shareholding of any one person), Section 35 (1) (restrictions on transfer of shares) and Section 3 (4) (dealing with cancellation of registration under certain conditions) of the Insurance Act, 1938, are ensured on a continuous basis.

On the issue of minimum capital requirements the advisory group is of the view that the Rs 100-crore start up capital for Indian insurers may perhaps be the highest as compared with the insurance legislation of any country.

Going further and citing IAIS guidelines, which state that the amount of minimum capital should be fixed taking into account the kind(s) of business to be underwritten, the group recommends adoption of similar method here.

The advisory group in its report states, "The minimum capital levels may be fixed for each class on scientific and a more transparent basis. The total minimum capital could be based on the classes of business that the company proposes to transact and not on the assumption that each company will be transacting all classes of business." The group also calls for a wider classification of life and non-life insurance business.

The group has also emphasised the importance of co-operatives in spreading the message of insurance in rural areas. Today, only joint stock companies are allowed to transact insurance business in India now.

"Co-operatives will pitch in only if the minimum start-up capital is pegged at a lower level than the present limit," adds Mr. Ramakrishnan, when asked to elaborate on his recommendation. According to him, the high start-up capital prevents several players getting into the field.

The other areas where the RBI's advisory group also differs from that of the existing regulations relates to the carrying of allied business activities by domestic insurers and outsourcing of various functions in view of the economies of scale and scope. According to the group, both these activities are prohibited by the IRDA.

Interestingly, the Ramakrishnan group does not agree with IAIS guidelines relating to compulsory reinsurance cessions to a national re-insurer.

The IAIS has said, "Compulsory cession of risks to local re-insurers, domestic market or discriminatory tax regimes against foreign reinsurance placement should be avoided."

On the other hand, the RBI's advisory group fully endorses IRDA' prescription of 20 per cent compulsory reinsurance cession to a national re-insurer so that new joint venture insurance companies do not become a front company/brokers of a foreign insurer.