Ashvin Parekh: One step forward, many backward

Insurance sector has breaks all past records of tall promises failing at the implementation stage

When we look at our record of reforms, in the context of the stated objectives, we find that there is a wide gap between the first articulation of our reforms and a big statement of promises and, thereafter, its subsequent execution. In fact, sometimes one is left wondering whether we were better off without these reforms and amendments in the first place.
 
The insurance sector is no exception. In fact, it breaks all past records of tall promises failing at the implementation stage.
 
The journey began with the opening of the sector to the domestic private sector and foreign companies. We made tall promises of a level playing field for the players, both from public and private sectors. We also made promises to empower a newly formed regulator adequately to develop and regulate the sector. All these measures, we were told, were aimed at providing the policyholders a fair deal. The benefit to the final customers: more transparency and efficient operations from public and private players by identifying and abolishing restrictive practices. In addition, deeper market penetration and widening the product and service solutions was envisaged.
 
Then came the reassessment of the stated objectives and a recognition that structural changes would be required to be made to the insurance statute and a few other statutes to remove some of the imperfections in the market. The original promise of allowing foreign players higher equity stake up to 49 per cent had to accompany several amendments which would go with this reform.
 
So in 2006-07, 248 amendments were drafted into the prevailing statute. These were aimed at, including several procedural matters, reforms in health insurance, equity increase for foreign partners of the joint ventures, the reinsurance sector and empowering the authority to conduct its work with little involvement of the government. Only a few critical areas were identified where the regulator was required to consult the government and where its approval was required.
 
The amendment required parliamentary acceptance, which happened after seven-eight years of debate and two successive governments. The number of amendments was also brought down from 248 to 96. The regulator, industry and policyholders accepted this diluted reform in the hope of a level playing field and reduction of some inefficiencies in future.
 
But things seem to be going awry still. In health insurance, we started with the objective of creating a conducive environment through disciplining the health care sector and incentivising more standalone health insurance companies by reducing the capital requirement. The new regulations are still awaited and there’s no debate around the core objective of reducing the burden of health cost and risk. Successive governments have reduced their outlays on public health from primary, secondary and tertiary sectors to below 10 per cent from a sizeable 25 per cent a decade earlier. The health insurance sector contributes a meagre four per cent to the total spend. The use of reforms to create an environment of risk pooling is blatantly missing.

Illustration: Ajaya Mohanty

 
The second area is the increase of the foreign partner’s equity to 49 per cent. This has been significantly diluted by the introduction of Indian ownership and management control. When the insurance sector was opened, we shamelessly collected differential (premium) pricing from the foreign partners in many partnerships, including those by the public sector banks. The increased shareholding was based on the stated objective of fair play. The amendment, therefore, went back on the nation’s promises that were originally made.
 
The area of reinsurance is perhaps an excellent example of retro stepping. When we drafted the provisions in 2007-08, we had accepted two fundamental premises. Reinsurance is a mechanism of exporting risk from books of the insurer to domestic and largely to overseas reinsurers. The second premise was that this risk transfer helps the country to provide more cover to policyholders from a limited capital that the existing public and private participants have at their disposal. Some risks like weather and crop insurance, natural catastrophes including flooding of dense urban areas, landslides and manmade risks including riots and terrorism are examples where risk transfer is essential.
 
The above two premises were on a sound footing as proved by recent flooding of Srinagar and Chennai. The risk is transferred eventually to those capital providers overseas who have capital (giving capacity) and have large risk pooling at the global level. However, recent developments in the policy and reputation flip-flops leaves one wondering why did we, as policymakers, make promises to global overseas players to set up branch operations here when there is preferred placement and ceding arrangement not only to the General Insurance Corporation of India but also to the hitherto missing Indian reinsurance companies. In doing so, we are denying the basic right of cedents/ insurers (and therefore the policyholders behind it) to offer risk to an admissible insurer (rating-based) on commercial basis. There is a huge adverse outcome of such flip-flops.
 
Finally, the dilution of additional powers to the regulator’s office. The government, including the bureaucracy, seems to be hesitant in rendering this. The outcome is a watered-down role for the regulator to create a level playing field and protect the policyholders’ interest.
 
There is a plea, therefore, to all the stakeholders to examine the reforms in the context of the stated objectives with which the legislative carries out the reforms and its final implementation and outcome. A nation must enjoy a sound reputation of fulfilling promises.
  The author is managing partner, Ashvin Parekh Advisory Services LLP. Views are personal