Regulatory Challenges for Emerging Insurance Industry and the Role of Insurance Sector in Financial Stability

Transcription

1 Regulatory Challenges for Emerging Insurance Industry and the Role of Insurance Sector in Financial Stability Presentation by Randip Singh Jagpal, IRDA 20 th Sep, 2013

2 AGENDA Insurance Banks vs Insurance Types of Insurance India Insurance Industry Status Challenges in financial regulation and supervision Response of the Regulator Focus of the regulatory policy Role of Insurance in Financial Stability 2

3 History Oriental Life (Life) Triton Insurance (General) 1871 Bombay Mutual Life (Indian) Indian Mercantile Insurance (General) 1912 Life Insurance Companies Act 1938 Insurance Act (Life & General) 1955/ 56 Nationalization of Life Insurance/ LIC Act (245) 1968 Social Controls (Gen Ins) General Insurance Business Nationalization Act

4 What was the need of Reforms TO ENHANCE Productivity TO IMPROVE Efficiency TO IMPROVE International Competitiveness TO STRENGTHEN Financial System TO ATTRACT Global Investments in the country

5 Key Financial Sector Reforms Regulated Prices => Market Prices External Sector Reforms Capital Market Reforms Fiscal Reforms Public Sector Reforms Banking Reforms Insurance and Pension Market Reforms Corporate Governance and disclosure Technological Upgradation Bankruptcy Reforms

6 Market Reforms ( Initial reforms) Reforms on the basis of recommendations of the Chakraborty, Vaghul & Narasimham Committees Shift from passive to active debt management Maximum Coupon enhanced from 6.5% to 11.5% Money Market rates freed Non-Banking Institutions permitted to lend in Money Market (Integration of markets) Introduced new Money Market instruments CD, CP, etc (discriminatory interest rates, dis-intermediation, securitization) Set up DFHI to activate Money Market

7 Market Reforms (Contd) Setting up of SEBI/ NSE DVP for security settlements at RBI Evolution of PDs to strengthen security market infrastructure Tarapore Committee - CAC Activating repo market Move to make call market purely interbank market Introduction of LAF Settling up of Clearing Corporation Insurance and Pension Sector Reforms

8 Impact of Financial Sector Reforms Market Risk Competitive Threats Operational Risk Business Opportunities Governance Credit Cycle

9 Insurance Sector Reforms 1994 Malhotra Committee Interim Insurance Regulatory Authority IRDA Act April, 2000 Establishment of IRDA July, 2000 Notification of first set of Regulations October, 2000 Grant of first set of Certificate of Registration (Licenses) 9

10 Evolution -New entrants/ for. invst - Level playing field - Consumer Protection -Competitive markets/ -Customer choices Regulated Market Free Market - No Regulations - Plagued by fraud - IRDA Act, 1999 Insurance Act, Market development - Standard products - absence of consumer choice -poor customer service - non-competitive market Nationalised Market LIC Act, 1956 GIBNA, 1972 Regulated Market - Urban centric - Directed investments - sub-optimal utilization of resources

11 Evolution (contd) Current Regulated market (Pre Ins Amendt Bill) New Entrants Foreign Investments Efficiency & customer choice Sectoral regulator Future Regulated Market (Post Ins Amendt Bill) Empowered regulator/ policyholder Growth of health insurance/ annuity business No further capital 11

12 Banks vs Insurance (Features) Banking Assured Payments Accept Deposits Transport money across time & space lend money maturity transformation asset liability management short term liabilities Insurance promise to pay contingent upon happening of an event/ accident/ period exchange of consideration sharing of risks pooling of funds loss of few is paid by premium of many transfer of risk to risk carriers facilitate trade bought not sold 12

13 Insurance Insurance (Principles) Uberrima fides (Utmost Good Faith) Insurable Interest Indemnity Subrogation & Contribution Proximate Cause 13

14 Types of Insurance Life Insurance Term Insurance Endowment (Money Back) Whole Life Unit Linked Annuities/ Pensions Group General Insurance Property Insurance Fire, Engineering, Marine Insurance Personal Insurance Motor, Health, Personal Accident Insurance Liability Insurance Employers Liability, Product, Public, D&O 14

15 INDIAN INSURANCE INDUSTRY 15

16 Insurance Penetration with Select Countries and World Average Year World India PR China Brazil World India PR China Brazil 16

17 Insurance Density with Select Countries and World Average Year India in ` India in $ PR China Brazil World in $ Insurance Density in INR

18 MISSION & COMPOSITION OF AUTHORITY Mission - To protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto Composition - IRDA Act, 1999 provides that the Authority shall consist of the following members: Chairperson Not more than five whole-time members Not more than four part-time members Presently the Authority has a composition of following members: Chairman Four whole-time members Four part-time members 18

19 Road travelled Financial Year ending No. of Insurers 6 52 No. of Offices 5,429 17,861 No. of Policies (crore) * No. of Employees (in lakh) * No. of Agents (in lakh) * Total Annual Premium (crore) 37,550 3,50342 Paid-up Capital (crore) ,039 FDI (crore) 0 7,632 Investment ( in 000 crore) 218 1,861 Insurance Penetration (% of GDP) Insurance Density (Per Capita Premium) `502 `2722 * 2012 data 1$ = ` $ = `

20 Life Insurance as a % of Household Savings Details Total Savings as a % of GDP of which Household Financial Savings as % of Total Savings Out of Household Financial Savings Deposits & Currency Of which deposits Life Insurance Provident & Pension Fund Shares & Debentures Others Deposits & Currency Life Insurance Provident & Pension Fund Shares & Debentures Others Source: Economic Survey & RBI AR

21 1st YEAR PREMIUM - LIC & PVT. SECTOR (LIFE INSURERS) `crore `CR Life Cos PVT MKT Share LIC MKT Share Total (4000%) 19,589 (102%) 39,386 (2.64%) 32,080 ( %) 30,750 (-4.15%) 1% 31% 28% 29% 87,012 (21.66% ) 81,862 (- 5.92%) 76,609 (-6.42%) 99% 69% 72% 71% 19,858 (104%) 1,26,39 8 (15.02%) 1,13,94 2 (-9.85%) 1,07,359 (-5.78%) st YEAR PREMIUM - LIC & PVT SECTOR (LIFE INSURERS) 0 LIC Private YEAR Note: Figures in brackets represents growth over previous year 21

22 Average Growth of Total Premium of Life Industry Pre & Post Liberalization `crore Life Insurers Private Sector ,399 Public Sector 16,277 34,892 49,821 2,08,791 Grand Total 16,277 34,898 50,093 2,87,190 Average growth 19.78% 20.11% 22

23 Trend of First Year Premium - ULIP & Traditional Life Insurers (5yrs) `crore YEAR ULIP TRD TOTAL ULIP TRD

24 Performance of Life Insurance Industry Total Premium Investment Income Total Revenue EOM Benefits Paid Profit

25 INVESTMENTS OF INSURERS `crore Life Business Sector Traditional 1,94,009 12,11,287 13,98,668 Life 1,94,009 15,81,259 (11%) 17,41,175 (10.11%) ULIP 0 3,69,972 3,42,507 General 24,462 99,268 (20%) 1,19,325 (20.20%) Total 1,94,009 15,81,259 17,41,175 Total 2,18,471 16,80,527 (11%) 18,60,500 (10.70%) Note: Figures are cumulative and those in brackets are growth over previous year 25

26 LIFE INSURANCE - TRENDS Growth at CAGR has been exceptional compared to other segments in the financial sector ( ) Penetration increased from 1.77% in 2000 to 3.17% in Density increased from `332 in 2000 to `2185 in 2012 Equity share capital - `25,519 crore. AUM - `17.41 lakh crore as at March 2013 Significant investor in capital market Continues to mop retail household savings, which invests in Capital Market Equity exposure of `3.85 lakh crore (22%) as at March

27 `CR GROSS WRITTEN PREMIUM GENERAL INSURERS `crore General Insurers GROSS WRITTEN PREMIUM GENERAL INSURERS PVT Sector 467 ( %) 17,425 (24.67 %) 22,315 (28.07 %) 27,951 (25.26 %) Mkt Share 4 % 40 % 41 % 44 % PSU 11,917 (13.59 %) 26,417 (20.96 %) 32,263 (22.13 %) 35,201 (9.10 %) Mkt Share 96 % 60 % 59 % 56 % Total 12,384 (17.97 %) 43,842 (22.41 %) 54,578 (24.49 %) 63,152 (15.71 %) Private Public YEAR Note: Figures in brackets represents growth over previous year 27

28 Average Growth Of Gross Direct Premium In India Pre & Post Liberalization `crore General Insurers Private Sector ,315 27,951 Public Sector 7,347 9,799 10,979 30,532 35,201 Grand Total 7,347 9,806 11,446 53,032 63,152 Av. Growth 9.66% 16.89% 28

29 `crore Performance of General Insurance Industry Net Earned Premium Net Claim Incured Expenses of Management Underwriting Profit/Loss Total Investments Profit after Tax

30 Trends in Non-Life Insurance Sector CAGR of 20% in General & 27% Health insurance business Retention ratio increased in to in Underwriting losses are largely due to under-pricing in motor third party and group health insurance. Declared profits are solely because of sale of accumulated investments. This is more prominent in public sector companies. Penetration increased to 0.78% in 2012 (0.71% in 2011) Density increased to `537 in 2012 (`451 in 2011) Average growth of premium from : 16.89% (9.66% from ) Indian Motor Third Party Insurance Pool (IMTPIP) was dismantled with effect from and redesigned to Declined Risk Pool (DR Pool) with effect from

31 CHALLENGES IN FINANCIAL REGULATION

32 CHALLENGES IN FINANCIAL REG - I Principle based regulation vs Rule based regulation Solvency Margin Factor based (Solvency I) vs Risk based (Solvency II) Products standard products vs different products Product approvals file & use vs use & file Commissions variable/ percentage based vs fee based Distribution closed architecture vs open architecture Reinsurance maximising retentions vs risk diversification Office set-up branch vs subsidiary model 32

33 CHALLENGES IN FINANCIAL REG - II Assets Conservative (Book Value) vs Fair Value Equity Faire Value Not for solvency Debts and other securities Book Value Investments directed vs risk weighted Liabilities conservative vs discounting Accounting Standards IFRS Acquisition costs upfront vs deferred Outsourcing V/s In House Taxation Issues if assets valued on Fair Value Others Financial Inclusion High Operating Cost 33

34 RESPONSE OF THE REGULATOR

35 RESPONSE OF THE REGULATOR Steps taken by IRDA Tilted towards Rule based regulation IRDA s Approach is for risk based solvency strengthening of IIB ad data collection discussions paper issued on standard products & file & use Percentage based till Act amendments Movement towards open architecture banks as brokers / bancassurance Maximising retentions both branch & subsidiary IFRS : Insurance sector will be subject to IFRS on finailsation of revised standard Financial Inclusion : CSCs Operation Cost : Repository to reduce operating cost 35

36 FOCUS OF REGULATORY POLICY

37 FOCUS OF REGULATORY POLICY Regulatory focus Increased surveillance and inspections Early warning systems will warn IRDA in advance Detariffing liberalism and consumer benefit Innovations in product design Add-on covers Health reforms pre-existing disease, senior citizen, renewability clause Careful approach to licensing fit & proper players Consultative approach interest of stakeholders considered 37

38 ROLE OF INSURANCE IN FINANCIAL STABILITY

39 The Indian Financial System Diverse but largely within a defined regulatory perimeter Scheduled Commercial Banks and LABs Urban Cooperative Banks 13.5 Rural Cooperative Credit Institutions and RRBs NBFCs Development Financial Institutions Insurance Companies 5.8 Provident and Pension Funds 2.3 Mutual Funds Percentage Share in total financial assets

40 What is Financial Stability? It is a condition in which the financial system is capable of withstanding shocks thus reducing the likelihood of disruptions in the financial intermediation process Any disruption can significantly impair the allocation of savings to profitable investment opportunities. Three parts of the financial system: financial intermediaries, such as banks, insurance companies and other institutional investors that direct funds from those willing to invest/lend to those who want to borrow. financial markets, where lenders and borrowers meet. financial market infrastructures through which money and financial assets flow between buyers and sellers.. The dimensions of financial stability are broad and encompassing and is forward looking

41 Factors affecting financial stability Vulnerabilities in the real economy Global imbalances and rapid capital flows Asset price bubbles Shadow banking system Light touch regulation Interconnected markets and too big to fail counterparties Highly accommodative Monetary Policy

42 Financial Network Analysis The network of the financial system

43 Systemic Risk Defn: risk of widespread disruptions to the provision of financial services that have serious negative consequences for the real economy. Two objectives of macro prudential policy: the first it to strengthen the resilience of the financial system to economic downturns and other adverse aggregate shocks To actively limit the build up of financial risks. Such leaning against the financial cycle seeks to reduce the probability or magnitude of a financial bust.

44 Sources of systemic risk Time dimension: Financial imbalances that build up gradually over time may unravel suddenly. -procyclicality Cross sectional dimensions: Contagion risk - an initially idiosyncratic problem that becomes more widespread, often in a sequential fashion. Shared exposure to financial market shocks or adverse macroeconomic developments that affect a range of financial intermediaries and markets at the same time

45 Policy instruments Capital based tools (eg countercyclical capital buffers, sectoral capital requirements, and dynamic provisions) Liquidity based tools( countercyclical liquidity requirements, margins and haircuts) asset based tools such as LTV and DTI Managing capital account an instrument for LDCs and emerging markets

46 Financial Stability and Development Council The FSDC, set up in 2010, is a body consisting all regulators and the Ministry of Finance. It is the highest forum in matters relating to financial stability. The Council is chaired by the Union Finance Minister Financial Stability Interregulatory coordination Financial literacy and financial inclusion The responsibility of FSDC includes Financial Sector Development Macro prudential surveillance of the economy

47 Financial Sector : Banking & Insurance Crisis 1. Core Insurance Not Systematically Risk 2. Insurance Pools Risks (Cash Premium) Provides Protection Long Term Contracts Tight Investment Regulations Reinsurance (Diversification) No Liquidity Risk /Source of Stability

48 Source of Stability Inverse : Maturity Transformation (Life) Buyers : When Fire Sales occur in Money, Debt & Equity Market Risk : Idiosyncratic & Uncorrelated. Not linked to Business Cycle Asset Base : Marketable /Rated Securities Payment System : Not Running & Administering unlike Banks

49 Why no Liquidity Risk? Upfront Premium Strong Cash Flows Controlled Outflows Inverted Cycle of production No Leverage

50 AIG : A Case Study AIG Global Insurance Giant CRISIS- AAA rated CDS on CDO of AAA rated mortgage by its London Office to AA - the company had to post additional collateral, which it was unable to do without support. AAA rated securities Liquidity CRISIS : Bailout in US 85billion US$- The largest bailout

51 Crisis In Insurance Industry in India Life Insurance Industry : AMP Sanmar Life Insurance Co. Ltd : Measures : Stake Sale Non-life Insurance Industry : Underprovisioning of Motor TP Losses Measures Taken 1. Infuse Additional Capital and 2. relaxation in Solvency 3. Inflation linked hike in Premium

52 Lessons from crisis That price stability and macroeconomic stability do not guarantee financial stability Radical change in thinking on regulatory philosophy and the Efficient Market Hypothesis Need to strengthen the macro-prudential framework The need to better identify, assess and manage the systemic risks prevailing in the financial sector. Renewed policymaker interest in developing and improving tools to promote financial stability

53 Monitoring Mechanism in Insurance Sector (i) Solvency statement (ii) Financial Condition Report (FCR) (iii) Investment Returns (iv) Return Shareholding pattern (v) Disclosure Requirement (vi) Grievance Redressal Mechanism (vii) Asset Liability Management and Stress Testing Report (viii) Corporate Governance Guidelines

54 Powers of the Authority Section 33 of the Insurance Act Power of investigation and Inspection by the Authority Section 34 - Power of the Authority to issue direction Section 34B Power of the Authority to remove managerial person from Office Section 34C Power of the Authority to appoint additional directors Section 34E the Authority may caution or prohibit insurers against entering into any particulars transaction or class of transactions and generally give advice to any insurer.

55 Powers of the Authority Section 34 G Power of Authority to order closure of foreign branches Section 37A of the Act provides for the IRDA to prepare a scheme of amalgamation Section 52A of the Act provides life insurers is undertaking life insurance business to be prejudicial to the interests of the holders of life insurance policies. Section 54H of the Act further provides for the power of the Central Government to acquire an undertaking of insurers in certain cases.

56 Crisis Management Template- IRDA Solvency position- Ladder of Intervention Persistency Ratio (Life), Capital market volatility (ULIP) Calamity / Catastrophe (Life & Non-life) Contagion Risk- Arising from Regulatory Action or Otherwise (Reputational Risk etc.) In Addition, a close watch is kept on the development in the global market including equity indices, bonds and innovation in insurance sectors and its likely impact on the insurance industry. Cont

57 Impact of Increase in Interest Yield Increase in interest rate on G Sec coupled with the fall the equity price may attract the insurers to invest more in G Sec due to the following two reasons G Sec qualify under approved securities The rate of return on G Sec will be attracted with zero risk of default LIC has purchase G-Sec worth of Rs. 20,000 Crores. The increase in the interest rates of the corporate Bonds and money market has also provided an opportunity to the insurers to invest for example LIC, in the month of August, 2013, has invested a sum of Rs. 4000crores in Bonds.

58 Impact of fall in Capital Market Redemption pressure on ULIP. Insurance Companies are not going to add to the fall in the capital market as the evidence available so far suggests that the role of the insurance function in financial crisis has had a stabilizing rather than a destabilizing influence on the system as a whole. Insurance companies are large investors and they(especially life insurers) typically have longer-term investment horizons than several other financial institutions such as banks. The fall in the capital has provided an opportunity to the insurance companies to invest for example LIC has invested a sum of Rs.3000Crores during the month of August, 2013

59 THANK YOU