regulatory challenges for emerging insurance industry … challenges for emerging insurance industry...
TRANSCRIPT
Regulatory Challenges for Emerging
Insurance Industry
and
the Role of Insurance Sector in
Financial Stability
Presentation by
Randip Singh Jagpal, IRDA
20th 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
History
1818 - Oriental Life (Life)
1850 - Triton Insurance (General)
1871 – Bombay Mutual Life (Indian)
1907 - 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)
1972 - General Insurance Business Nationalization Act
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
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
Market Reforms (1985-91 - 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
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 inter-
bank market
Introduction of LAF
Settling up of Clearing Corporation
Insurance and Pension Sector Reforms
Impact of Financial Sector Reforms
Market Risk
Competitive Threats
Operational Risk
Business Opportunities
Governance
Credit Cycle
Insurance Sector Reforms
1994 – Malhotra Committee
1996 - Interim Insurance Regulatory Authority
1999 - 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
Evolution
Nationalised
Market
Regulated
Market
Free
Market
Regulated
Market
Insurance Act, 1938
LIC Act, 1956
GIBNA, 1972
IRDA Act, 1999
- No Regulations
- Plagued by fraud
-
- Urban centric
- Directed investments
- sub-optimal utilization
of resources
- Market development
- Standard products
- absence of consumer
choice
-poor customer service
- non-competitive market
-New entrants/ for. invst
- Level playing field
- Consumer Protection
-Competitive markets/
-Customer choices
Evolution (contd)
Current
Regulated market (Pre
Ins Amendt Bill)
New Entrants
Foreign Investments
Efficiency & customer
choice
Sectoral regulator
11
Future
Regulated Market
(Post Ins Amendt Bill)
Empowered regulator/
policyholder
Growth of health
insurance/ annuity
business
No further capital
12
Banks vs Insurance (Features)
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
bought not sold
Banking
Assured Payments
Accept Deposits
Transport money across
time & space
lend money
maturity transformation
asset – liability management
short term liabilities
facilitate trade
13
Insurance (Principles)
Insurance
Uberrima fides (Utmost Good Faith)
Insurable Interest
Indemnity
Subrogation & Contribution
Proximate Cause
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
INDIAN INSURANCE INDUSTRY
15
Insurance Penetration with Select Countries and World Average
16
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
World 4.68 4.76 4.59 4.55 4.34 4.5 4.4 4.1 4 4.01 3.8 3.69
India 2.15 2.59 2.26 2.53 2.53 4.1 4 4 4.6 4.4 3.4 3.17
PR
China 1.34 2.03 2.3 2.21 1.78 1.7 1.8 2.2 2.3 2.5 1.8 1.7
Brazil 0.36 1.05 1.28 1.36 1.33 1.3 1.4 1.4 1.6 1.6 1.7 1.99
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
World
India
PR China
Brazil
Insurance Density with Select Countries and World Average
17
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
India in ` 424 571 613 681 801 1481 1761 1647 2430 2487 2212 2185
India in $ 9.1 11.7 12.9 15.7 18.3 33.2 40.4 41.2 47.7 55.7 49 42.7
PR China 12.2 19.2 25.1 27.3 30.5 34.1 44.2 71.7 81.1 105.5 99 102.9
Brazil 10.8 27.2 35.8 45.9 56.8 72.5 95.3 115.4 127.9 169.9 208 225.5
World in $ 235.0 247.3 267.1 291.5 299.5 330.6 358.1 369.7 341.7 364.3 378.0 372.6
0
500
1000
1500
2000
2500
3000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Insurance Density in INR
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
MISSION & COMPOSITION OF AUTHORITY
Road travelled
19
Financial Year ending 2000 2013
No. of Insurers 6 52
No. of Offices 5,429 17,861
No. of Policies (crore) 12.45 42.10*
No. of Employees (in lakh) 2.1 3.43*
No. of Agents (in lakh) 7.58 27.21*
Total Annual Premium (crore) 37,550 3,50342
Paid-up Capital (crore) 545 35,039
FDI (crore) 0 7,632
Investment ( in ‘000 crore) 218 1,861
Insurance Penetration (% of GDP) 2.32 3.96
Insurance Density (Per Capita Premium) `502 `2722
* 2012 data 1$ = `43.62 1$ = `51.16
Life Insurance as a % of Household Savings
Details 09-10 10-11 11-12
Total Savings as a %
of GDP 33.70 34.00 30.80
of which Household
Financial Savings as
% of Total Savings
35.60 30.60 26.00
Out of Household Financial Savings
Deposits & Currency
Of which deposits
51.70
41.90
59.40
45.60
64.10
52.80
Life Insurance 26.20 22.30 23.10
Provident & Pension
Fund 13.10 14.00 15.60
Shares &
Debentures 4.50 0.20 -0.70
Others 4.50 4.10 -2.10
Source: Economic Survey 2012-13 & RBI AR
2012-13 20
64.10
23.10
15.60
-0.70 -2.10
-10
0
10
20
30
40
50
60
70
Deposits &Currency
LifeInsurance
Provident &Pension Fund
Shares &Debentures
Others
2009-10 2010-11 2011-12
1st YEAR PREMIUM - LIC & PVT. SECTOR (LIFE
INSURERS) `crore
Life
Cos 01-02 10-11 11-12 12-13
PVT 269
(4000%)
39,386 (2.64%)
32,080 (-
18.55%)
30,750 (-4.15%)
MKT
Share 1% 31% 28% 29%
LIC 19,589
(102%)
87,012
(21.66%
)
81,862
(-
5.92%)
76,609 (-6.42%)
MKT
Share 99% 69% 72% 71%
Total 19,858
(104%)
1,26,39
8 (15.02%)
1,13,94
2 (-9.85%)
1,07,359 (-5.78%)
Note: Figures in brackets represents growth over previous year
21
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
01-02
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
`CR
YEAR
1st YEAR PREMIUM - LIC & PVT SECTOR (LIFE INSURERS)
LIC
Private
22
Life Insurers 1996-97 2000-01 2001-02 2012-13
Private Sector - 6 272 78,399
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%
Average Growth of Total Premium of Life Industry
Pre & Post Liberalization `crore
23
Trend of First Year Premium - ULIP & Traditional
Life Insurers (5yrs) `crore
YEAR 2008-09 2009-10 2010-11 2011-12 2012-13
ULIP 44660 59925 53560 17382 10877
TRD 42671 49969 72838 96560 96482
TOTAL 87331 109894 126398 113942 107359
0
20000
40000
60000
80000
100000
2008-09 2009-10 2010-11 2011-12 2012-13
ULIP
TRD
24
-989 2657 5974
-50000
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
2009-10 2010-11 2011-12
Total Premium
Investment Income
Total Revenue
EOM
Benefits Paid
Profit
Performance of Life Insurance Industry
INVESTMENTS OF INSURERS
Note: Figures are cumulative and those in brackets are growth over previous year
Sector 2000-01 2011-12 2012-13
Life 1,94,009 15,81,259
(11%) 17,41,175 (10.11%)
General 24,462 99,268 (20%)
1,19,325 (20.20%)
Total 2,18,471 16,80,527
(11%) 18,60,500 (10.70%)
Life Business
2000-01 2011-12 2012-13
Traditional 1,94,009 12,11,287 13,98,668
ULIP 0 3,69,972 3,42,507
Total 1,94,009 15,81,259 17,41,175
`crore
25
LIFE INSURANCE - TRENDS
26
Growth at 20.11 CAGR has been exceptional compared to other
segments in the financial sector (2004-13)
Penetration increased from 1.77% in 2000 to 3.17% in 2012.
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 2013
General Insurers
01-02 10-11 11-12 12-13
PVT Sector
467 (6453.98%)
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 %)
GROSS WRITTEN PREMIUM – GENERAL INSURERS
Note: Figures in brackets represents growth over previous year
`crore
27
0
5000
10000
15000
20000
25000
30000
35000
40000
01-02
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
`CR
YEAR
GROSS WRITTEN PREMIUM GENERAL INSURERS
Private Public
28
General Insurers
1996-97 2000-01 2001-02 2011-12 2012-13
Private Sector - 7 467 22,315 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%
Average Growth Of Gross Direct Premium In India Pre & Post Liberalization
`crore
29
-9944 -8816
-6958
-10000
0
10000
20000
30000
40000
50000
2010-11 2011-12 2012-13
Net EarnedPremium
Net Claim Incured
Expenses ofManagement
UnderwritingProfit/Loss
Total Investments
Profit after Tax
`cro
re
Performance of General Insurance Industry
Trends in Non-Life Insurance Sector
CAGR of 20% in General & 27% Health insurance business
Retention ratio increased - 81.44 in 2011-12 to 82.20 in 2012-13
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 2001-2013 : 16.89% (9.66% from 1997 -2001)
• Indian Motor Third Party Insurance Pool (IMTPIP) was dismantled with effect from 31.03.2012 and redesigned to Declined Risk Pool (DR Pool) with effect from 01.04.2012.
30
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
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
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
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
ROLE OF INSURANCE IN
FINANCIAL STABILITY
The Indian Financial System
Percentage Share in total financial assets
59.3
2.3
5.8
6.5
2.4
13.5
4.1
6 Scheduled Commercial Banks and LABs
Urban Cooperative Banks
Rural Cooperative Credit Institutionsand RRBs
NBFCs
Development Financial Institutions
Insurance Companies
Provident and Pension Funds
Mutual Funds
Diverse but largely within a defined
regulatory perimeter
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
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
Financial Network Analysis
The network of the financial system
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.
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
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
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
Financial Sector Development
Macro prudential
surveillance of the
economy
Financial literacy and
financial inclusion
Inter-regulatory
coordination The responsibility of
FSDC includes
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
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
Why no Liquidity Risk?
Upfront Premium
Strong Cash Flows
Controlled Outflows
Inverted Cycle of production
No Leverage
AIG : A Case Study
• AIG – Global Insurance Giant
• 2008- CRISIS- AAA rated – CDS on CDO of AAA rated mortgage by its London Office
• AAA rated securities to AA - the company had to post additional collateral, which it was unable to do without support.
• Liquidity CRISIS : Bailout in US 85billion US$- The largest bailout
Crisis In Insurance Industry in India
• Life Insurance Industry : AMP Sanmar Life Insurance Co. Ltd :
Measures : Stake Sale
• Non-life Insurance Industry : Under-provisioning of Motor TP Losses
Measures Taken
1. Infuse Additional Capital and
2. relaxation in Solvency
3. Inflation linked hike in Premium
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
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
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.
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.
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
d.
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.
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
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