Here's What IRDAI's Changes In Rules Mean For Insurers, Policyholders

While changes in rules by the insurance regulator may offer flexibility to insurers, actual benefits remain uncertain even as customers' best interest may get compromised in some cases, according to analysts.

The Insurance Regulatory and Development Authority of India on Nov. 25 announced amendments to investment, solvency and distribution rules to open up the sector in line with its vision of "Insurance for all" by 2047.

• Private equity firms are allowed to directly invest in insurance companies with the special purpose vehicle route made optional. Subsidiary companies are allowed to be promoters of insurance company subject to conditions.

• Investments up to 25%—compared to 10% earlier—of paid-up capital by one investor and 50%—25% earlier—collectively by all investors are allowed.

• Corporate agents such banks and NBFCs can tie up with up to nine life, general and health insurance companies each, as compared to three insurers earlier. For insurance marketing firms, six tie-ups are permitted as compared to two earlier with life, general and health insurance companies each.

• Enhanced limit of subordinated debt and/or preference share in solvency capital to 50% of paid-up share capital and securities premium from 25% at present, subject to 50% of net worth limit. Requirement of prior approval from the regulator to raise this capital has been removed.

• Extending the time limit for regulatory sandbox products to 36 months from the existing six months and providing approvals on a continuous basis. The regulatory sandbox is a framework providing a testing environment to companies to experiment and test innovative products and technologies in a controlled regulatory setting.

• Certain solvency norms for general and life insurers have been eased. For crop insurance, it has been reduced to 0.5 from 0.7. It is expected to ease capital requirements for insurers by around Rs 1,460 crore.

• Among life insurers, for unit linked business (without guarantees) solvency requirement has been reduced to 0.6% from 0.8%. For the Pradhan Mantri Jeevan Jyoti Bima Yojana, it has been reduced to 0.05% from 0.1%. The regulator expects these to provide a relaxation in capital requirements by around Rs 2,000 crore.

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• Opening up distribution should facilitate the reach of insurance to the last mile and provide policyholders/prospects with a wider choice.

• Raising threshold limits for subordinated debt and preference share should provide flexibility to insurers in terms of fundraising.

• The regulator has introduced a new provision allowing promoters to dilute their stake up to 26%, subject to the insurer having a satisfactory solvency record for preceding five years and being a listed entity.

• Lock-in periods of investment for investors and promoters have been stipulated on the basis of the age of the insurers.

• The changes in the investor and promoter-related guidelines will allow ICICI Bank to reduce its stake in ICICI Lombard to 30%, from 48%, under the RBI regulations.

• This may be done by making a strategic sale to either a single private equity investor or group of investors.

• Increase in tie-ups to nine from three in each of the segments may not be as beneficial.

• Only 28%/33%/7% of corporate agents are utilising the current maximum tie-up limit of three in life/general/health insurance, respectively.

• Enhanced limit for raising subordinate debt will enable insurance companies to boost their solvency ratio by raising funds via subordinated debt or preference shares, rather than going for equity capital raise.

• Changes in solvency norms will help improve solvency position of the underlying insurers.

• It will enable them to focus on premium growth thus, driving better insurance penetration over the medium term.

• Changes in expense of management and commission will give flexibility to insurers to create commission structures by adequately incentivising the intermediaries to grow in the chosen segments and also making insurance more affordable.

• The latest measures provide more flexibility to insurers.

• The rise in distribution tie-up limits renders more freedom to intermediaries; however, it may not really change things until the IRDAI also limits the proportion of business that an insurer can underwrite via a single partner.

• The increase in limit for the number of insurers under each category—life, general and health—for corporate agents does not look too promising for policyholders. Corporate agents might use this as an opportunity to push products based on the benefit they get rather than in the customers’ best interest.

• Increase in limit for tie-ups and the relaxed commission norms would harm policyholders by making distributors more dictatorial.

• Increasing flexibility in utilising quasi-equity—preference shares and subordinated debt—for solvency capital is a welcome move.

• It provides the management of an insurance company greater flexibility in capital structure optimisation, and, at the same time, offers sufficient risk capital.

The regulator has proposed changes to the August draft on management expenses.

For life insurance, the limits of expenses for certain segments are proposed to be enhanced, with overall monitoring at the company level.

For commissions, the maximum limits as specified in the current regulations are proposed to be removed with fees being linked to the overall management expense cap.

"This will enable insurers to devise commission structures incentivising the intermediaries in line with their solicitation efforts and also making insurance more affordable," the regulator said in the filing.

Key Changes From the August draft:

• Abolish separate cap on commission across life, general and health insurers, while prescribing an overall cap for management expenses—including commissions and operating expenses.

• Increasing the management expenses cap for health insurance to 35% from 30%.

• Increase in management expenses limits for deferred annuity products.