Policyholders protection fund mooted

Life and non-life insurance companies have mooted the setting up of a policyholders' protection fund on the lines of the funds in existence in western countries.

The fund would be a pool created through contributions by insurers to pay policyholders in the event an insurance company goes bankrupt or becomes insolvent.

K N Bhandari, secretary general of the General Insurance Council (GIC), said suggestions have been made both by the GIC and the Life Insurance Council.

"There is no urgency in forming such a fund as of now but there have been some suggestions from both the councils," added Bhandari.

The Indian insurance industry does not have a social welfare net or adequate safeguards to ensure that a policyholder gets back his money in case an insurance company goes insolvent.

The UK has a Policyholder Protection Act according to which insurers contribute to a fund that takes care of claimants' money in case an insurance company becomes insolvent.

Under the terms of the fund, 10 per cent of the claimants' money is taken from the insolvent insurer and the remaining 90 per cent of the money is contributed by the protection fund, said Dhananjay Date, managing director of Swiss Re Services India.

Speaking at the CII's tenth insurance summit 2006 today, C S Rao, chairman of Insurance Regulatory Development Authority of India, said, "The insurance sector has become buoyant because of the entry of private players. These players have brought not only brought Rs 100 crore as the minimum capital requirement but also keep infusing additional capital. Compared with life insurance industry, non-life players have received a lukewarm response and we have only eight private players. But this is not because of the 100 crore minimum capital requiremnt or FDI but because of other constraints such as tariff. But once detariffing takes place next year, more interest from multinationals operating in other countries will be seen. Consumers woll get more innovative specialised products."

Dalip Varma, MD and CEO of Tata-Aig General Insurance, said general insurance industry would be in for two-three years of "instability" with all risks set to be freed from tariff controls from January 2007.

"Robust regulation is required for detariffing. We don't have such regulations as 70 per cent of the non-life market is under tariff," he pointed out.

Varma said after detariffing in Turkey, 10 insurance companies went bankrupt between 1999 and 2005, as insurers chased market share and not "sensible" underwriting.