The insurance regulator’s 70's mindset is not serving the purpose in 2020

It is almost as if you can see the conflict: there is the desire to do the right thing by the customer, but the DNA of an institution that does not believe in consumer rights comes in the way. The insurance regulator is torn with this dichotomy, of watching its capital market counterpart take giant strides in investor protection and disclosures, wanting to do the same, but not being able to. Insurance industry insiders say that the Insurance Regulatory and Development Authority of India (Irdai) chairman is keen to bring about change in favour of the consumer but is hampered by the tight ring of bureaucracy of a PSU monopoly mindset that thrived in a supply-starved market of the 1970s of a socialist India.

Two moves that should have brought accolades need to do much more in policyholder interest, but are good announcements of a regulator beginning to think about customers rather than agents, brokers and firms. One, the idea of a standard term life cover that can be bought off the shelf with standard features and no frills. Each insurance firm from 1 January 2021 will have to launch a standard pure term (only insurance cover, no investment) cover called Saral Jeevan Beema (read the circular here: bit.ly/37I6ii8). Great move, but it is unclear why there is a ₹25 lakh upper limit for the sum assured, and then the asterisk that firms can offer more cover if they like. It seems that firms will have to offer a cover of up to ₹25 lakh and can offer a higher one if they choose to. Pure covers have a rule of thumb of 10 times your income. So, an income of ₹2.5 lakh a year will need a ₹25 lakh cover. To me it looks like a carve out for insurance firms so that they don’t really have to offer a policy to the market that is actually buying term covers—those covers are of a much higher value— ₹50 lakh or more.

In addition, insurance is about the claims experience and what good is a policy that will see poor claims payouts? The rules do talk about denial of claim only in the case of suicide, but the data of the actual claims experience will need to be seen to believe that firms will actually pay out honestly. And for that to happen, Irdai will have to mandate policy-wise claims experience disclosures—something it has resisted doing for no apparent reason. The data is generated by each firm. What holds back the regulator from making it part of standard public disclosure at policy level?

The second is almost as if Irdai is trying to copy the Securities and Exchange Board of India (Sebi) in marking risk in products. Sebi has just released the rules of a really smart risk-o-meter that is dynamic and will become a part of the decision-making when buying a mutual fund. Irdai wants to colour code health insurance products as green, orange and red with green being simple and red being very complex. The colour rating will be based on a score that, in turn, will depend on seven parameters, including features such as disease options, percentage of co-pay, waiting period months, sub-limits and where they are applicable, deductibles, the number of permanent exclusions and simplicity of terms and conditions. This is an excellent first step in demystifying a needlessly opaque product. Looking at the draft exposure, it seems to me that only products colour coded green should be bought and that the colour coding is not about complexity but a good versus a poor policy.

This is a great road to take for the regulator, but the parameters don’t take into account key attributes of an insurance policy—claims and redress. Unless there is policy-level disclosure of the claims experience, the decision on buying the policy is not fully informed. Irdai needs to urgently ask insurance firms to disclose policy-level claims experience data. Today the disclosure clubs group and individual claims making a mockery of the principle of disclosure that aims to facilitate informed buying. Irdai should take a look at the methodology of the Mint SecureNow Mediclaim Ratings to see what are the parameters needed to classify and rate insurance policies.

I expect a truck-load of industry and internal push-back on even the very basic disclosures in the colour coding being attempted by Irdai. The chairman needs to learn from Narendra Modi’s PMO on how to smash through the bureaucracy when you really want to get something done. Irdai is taking good steps in introducing the standard health insurance policy, the standard life insurance policy and colour coding for complexity. But these stand half-baked and need far more attention to individual consumer interest and not that of the firms. The protection role of Irdai needs to take precedence over the development role—the industry has had two decades of free play.

Source: Live Mint