IRDA Directive and Reasons Behind It

( Budget saga continues)

Recently IRDA (Insurance Regulatory and Development Authority) the governing body of Insurance industry in India came out with a directive to restrict various charges that life Insurance companies were charging from customers on insurance premium.

At first look it looked like an act of catching up with SEBI, on its directive to remove entry load from mutual funds.

Then feeling came that this is an appreciable act which will benefit customers as now they will have to pay less charges.

Suddenly a thought came that with low charges, giving attractive commissions to insurance agents won’t be possible. So now Insurance companies will find difficult to hire new agents hence impacting the growth of over all industry and specially new Insurance companies who as of now have small army of agents. Thus this seems a conspiracy by old established Insurance companies against new insurance companies.

While discussing this issue with some of my friends, I was informed that it could be a move by government to prop up the dwindling market share of LIC as now, selling ULIP will become more difficult so good old endowment plans and money back plans will make come back and these plans are the forte of LIC, hence benefit for them. Well, this theory made sense but there was one question, why will government strangulate the growth of a growing industry ? Which not only provides revenue but is also responsible for direct and indirect employment of lakhs of people.

Another question came to mind was, what stopped all the insurance companies to switch from ULIPs to traditional plans? Absolutely nothing. As these companies have been selling ULIPs so now they will start selling traditional plans. Once these companies start selling traditional plan again there will be the problem of charges.

In ULIP atleast charges are transparent and where the money is being invested is known but in traditional plans no body knows what are the charges and where the money is being invested and still IRDA is calling it a consumer friendly step? There is still some piece in this puzzle which is missing. What is that?

Well by now one thing was sure, that this entire exercise has some thing to do with traditional plans or should we say promoting traditional plans. But why?

Suddenly that missing piece of puzzle was visible. All this is being done to ensure more traditional plans are sold than the ULIPs because ULIPs invest money in stock market while traditional plans invest money in government securities and bonds (as they have to give assured returns) hence this entire money goes to the government coffers.

Now the question is, what is the motive for government to do this? Simple, to generate resources from additional sources to meet the big expenditures planned, in this budget.

This theory could also be confirmed with the timing of this announcement by IRDA which came with in 15 days of budget being tabled in parliament.

Second development which can confirm this theory is SBI has reduced its interest rates on fixed deposits immediately after this announcement by IRDA. While it was talking of hardening of interest rates after the budget.

To understand what kind of money that the government is targeting is, we have to look at the Insurance business in India for financial year 2008-09 and it was approx 88thousand crore(as per IRDA website) including all type of premiums like individual, group and single premium. This we are talking about is for first year premium, imagine what could be the sum if renewal premiums are added to it.

Today more than 80% of this premium comes through ULIPs and goes into stock market but now, as ULIPs are strangulated, Insurance companies will move towards traditional plans and just imagine what kind of money government will raise through securities and bonds if say 80% of insurance business starts coming from traditional plan. Add renewals to new business every year and imagine a big chunk of it coming through traditional plan and going to government securities and bonds. Well government has insured itself with continues flow of large cash in its coffers with out  impacting the credit flow in the economy.

Further this new regime is being implemented from 1^st October, and major chunk of the business for insurance industry comes in last 6 months of the financial year. Which by some estimates is as high as 75%. So inspite of government forgoing 6 months of this financial year, actually will not loose out much on, investment.

As I have discussed in my previous blogs, this budget leaves government with no option but to print money and go for large borrowings form the market. With targeting money from life insurance industry what government has done is, to larger extent has restricted it’s borrowings from banks and financial institution hence restricting the liquidity crunch and rising interest rates. Some smart move by finance ministry.

Now will they promote the sarkari babu who would have thought this?

Every silver lining is found with clouds. The bad news here is Indian stock markets will become more dependent on whims and fancies of FIIs and over all growth of stock market will be impacted.

Also what if moving from ULIPs to traditional plans impact the over all sale of the insurance industry ?

Now lets wait and see more antics of the finance minister and his team to fund the deficit in its budget.