Hari Narayan ran Irda like an insurance lobby


Vivek Kaul
What is it with outgoing Indian bureaucrats and their tendency to become remarkably honest about all that is wrong with the Indian system, once they retire?
The latest to join this long list is Jandhyala Hari Narayan, the recently retired chief of the Insurance Regulatory and Development Authority(IRDA) of India, the insurance regulator. In an interview to the 
Mint newspaper, a few days back, Hari Narayan said “I think there is a philosophical problem.I think the regulators are probably closer to the industry than they ought to be.”
While I don’t know whether its a philosophical problem, it definitely is a problem. Much through Hari Narayan’s stint at IRDA, the regulator acted more like an industry lobby, rather than an institution which was also supposed to protect the interests of those buying insurance policies.
Allow me to elaborate.
During Hari Narayan’s reign IRDA put out advertisements urging people to buy unit linked insurance plans (Ulips). Ulips are essentially investment plans carrying a dash of insurance. Ulips used to pay very high commissions to insurance agents, which has since fallen. So to put it in another way, they are high cost mutual funds, which also provide you with some insurance.
Now which regulator puts out advertisements asking people to buy the product that it regulates? This would be like the Securities and Exchange Board of India(Sebi) putting out advertisements asking people to buy mutual funds. Or the Telecom Regulatory Authority of India, the telecom regulator, putting out advertisements, asking people to buy mobile phone connections.
And if that wasn’t enough, Hari Narayan also cleared highest NAV guaranteed plans without understanding the damage they would cause to those investing. These plans were typically 10 year plans. Some of these plans guaranteed the investor the highest NAV achieved during the first seven years of the plan. Some others guaranteed the highest NAV achieved during the entire duration of the plan.
What is ironic is that these investment plans had the flexibility to invest up to 100% of the money they collected in the stock market. And how can the stock market and any guarantee go together? Those who still believe in this need to be reminded of this institution called Unit Trust of India (UTI), which tried to provide investors with assured returns by investing in the stock market and failed spectacularly.
Hari Narayan conveniently blamed the clearing of this product on the actuary at IRDA at that point of time. “I think there was a process of understanding even at Irda and I don’t think the then member actuary was really so clearly focused on policyholders’ welfare as he ought to have been. So it took some time to really figure it out,” he told 
Mint. Why clear a product which you don’t understand? I am amazed that this is how decision making happens at one of India’s foremost regulators.
What is interesting is the way these plans were sold by insurance companies. These plans were made to look like 100% stock market products. They gave an impression that the money collected would be invested in the stock market and the money would continue to remain invested in the stock market. And the highest NAV that the plan achieved during the course of its tenure would be paid out in the end, irrespective of the prevailing NAV.
Let me explain through an example. Let us say initially the NAV is Rs 10. The money collected is invested in the stock market. The value of these investments rises by 50% and the NAV increases to Rs 15 (Rs 10 + 50% of Rs 10). After this the stock market starts to fall and by the time the policy matures the NAV has fallen to Rs 12. So as per the terms of the policy the highest NAV of Rs 15 would be paid out to the policy holders.
This of course meant that the insurance company would have to pay out Rs 3 from its own pockets. Now it need not be said that insurance companies are in the business of making profits and not losses. So the way these plans were really structured was different. In all likelihood these plans would have a higher exposure to equity initially and gradually move the investments into debt as the date of maturity neared. Also, gains made on investing in stocks would be regularly booked and moved to debt, so as to ensure that the NAV did not rise beyond a certain level. But this is not how the product was sold.
This was misselling at its best. And this was not the only form of misselling that happened. There were other standard techniques of misselling. Investors were promised that there investment would double in three years. There was also a lot of churning. Investors were made to stop their investment in Ulips after three years and the new premium was directed into newer Ulips. This was done because Ulips paid higher commissions during the first two years. Irda turned a blind eye to all this.
And the results of all this misselling are now coming out. Those who invested in Ulips are now finding out a few years later, that instead of their investments doubling, they are still losing money on it. This is primarily because a lot of money they invested went to pay commission to insurance agents. In fact payments made to insurance agents have been more than what the Insurance Act permits. “These payment are more than what the (Insurance )Act permits,” Hari Narayan told 
The losses have led to more people surrendering their insurance policies before they matured. As a recent report in 
The Hindu Business Line points out “According to IRDA (Insurance Regulatory and Development Authority) data, in fiscal 2012 life insurers had to pay Rs 71,208 crore on account of surrenders (withdrawals), of which, LIC paid Rs 41,531 crore and private sector insurers, the balance. In fiscal 2012, ULIPs accounted for 68 per cent of the total surrender for LIC, and 97 per cent of the total for private insurers.”
So between April 1, 2011 and March 31, 2012, policy holders surrendered insurance policies worth around Rs 71,000 crore. And a major portion of this was Ulips.
An earlier report in the 
Mint points out that investors may have lost more than Rs 1,56,000 crore in the seven period ending on March 31, 2012, due to misselling by insurance companies. And that is clearly a lot of money. Hari Narayan was in-charge of IRDA during much of this period. What these losses also do is that they make the so called small or retail investor wary of anything to do with the stock market. And that is not a good sign in a developing economy like India which needs a lot of money to keep growing.
To give Hari Narayan due credit during the second half of his tenure he did try and set things right by cutting down Ulip commissions and also tried to do a thing or two about misselling. But by then the damage had already been done. It was a case of too little too late. The insurance companies simply moved towards selling traditional insurance policies, where the commissions continue to remain high. The guaranteed NAV plans continue to be sold.
Also, the bigger problem with Ulips remain. An investor still cannot figure out which is the best Ulip going around given that returns across different Ulips remain incomparable.
Hari Narayan has been replaced by T S Vijayan, a former Chairman of Life Insurance Corporation of India. Predictably the insurance companies have upped the rhetoric with one of their own taking over as the regulator. As a recent story in the
 Business Standard pointed out that insurers felt that there was no need to ban highest NAV guaranteed products. The story quoted a chief executive of a private life insurance company as saying “The products, per se, do not have any fundamental problem. The problem is it these have a tendency to be mis-sold, since the customer does not understand market fluctuations could be risky. Hence, disclosures should be made clearer, rather than banning the product.” As the American writer Upton Sinclair once wrote “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”
Given this, I expect the misselling in insurance to continue.
The article originally appeared on www.firstpost.com on February 26, 2013


(Vivek Kaul is a writer. He tweets at @kaul_vivek) 


Govt will use your LIC money to offload PSU shares – again

Vivek Kaul
When the going gets tough, the government gets desperate.
The recent auction of the 2G telecom spectrum was supposed to raise Rs 40,000 crore. It hardly raised anything close to that amount.
The disinvestment process which is supposed to raise Rs 30,000 crore during the course of the year has not raised a single rupee nearly eight months into the year.
Also what does not help is the fact that the amount of tax collected seems to be slowing down. As economist Shankar Acharya recently wrote in the Business Standard:“By end September the government’s tax receipts amounted to less than 40 percent of the year’s Budget target.”
During the first half of the financial year (i.e. between April 1 and September 30) the fiscal deficit was at Rs 3,36,000 crore or 65.6% of the targeted fiscal deficit of Rs 5,13,590 crore. Fiscal deficit is essentially the difference between what the government earns and what it spends.
What all this tells us is that the government of India is spending more and more money and is not earning enough of it. Also it is not in a position to control it expenditure.
And that has made it desperate enough to bend its own rules. The Economic Times reports that the finance ministry has allowed Life Insurance Corporation of India to own upto 25% of a listed company. The Insurance Regulatory and Development Authority(Irda) of India, the insurance regulator, allows insurance companies to own up to 10% stake in a listed company.
Irda has blasted the government for going ahead with this decision. As The Economic Times reports “The Insurance Regulatory & Developmental Authority, which had in 2008 amended investment norms to prohibit an insurer from holding more than a 10% stake in a company, openly criticised the government’s decision, with Chairman J Hari Narayan saying it was against prudence. “It is against the (Irda) Act and against any prudence,” he said.”
And for once I agree with Irda. There are multiple reasons for the same.  As George Orwell wrote in Animal Farm “All animals are equal, but some animals are more equal than others.” The government is working on this principle by allowing LIC of India to own up to 25% of a listed company when the other insurance companies can own only up to 10% of a listed company. There can’t be two separate rules for companies in the same line of business, which is insurance in this case.
Also what happens in a situation when LIC ends up investing in a company which turns out to be a dud? Imagine what would happen when LIC decides to get out of the shares of such a company. The stock price of the company will fall impacting returns of investors who have bought insurance plans from LIC. As the old saying goes “putting all eggs in one basket” is a pretty risky proposition and goes against the basic principles of investing.
So the question is why is the government going ahead with a move which is fundamentally so wrong? As Hari Narayan toldThe Economic Times They have to understand the gravity of the issue and the potential danger…I do not agree with the government.”
But the thing is that the government is desperate to raise money one way or another. Its attempts at selling the 2G telecom spectrum have flopped miserably. It also knows that with all the scams its credibility is at an all time low. And if it tries to sell shares of public sector companies in the open market, the process might flop in the same way that the recent 2G spectrum auction did.
Hence, in this scenario the biggest hope for the government is LIC. The trouble of course is that in some of the companies that the government wants to sell shares of, LIC may already have a stake which is close to the mandated 10%. So to get around this the government has raised it to 25%.
As The Economic Times put it “The enhanced limit could herald good news for the struggling disinvestment programme as the finance ministry could lean on state-run LIC, the largest insurer, to deploy its funds to buy hefty stakes in public sector companies that the government may find hard to sell in the open market.”
So the government is getting ready to dump its stake in various public sector units to LIC. Money is being moved from one arm of the government (LIC) to another(the central government’s annual budget).
As I had written in another piece recently when it comes to LIC it is best placed to carry out such operations in the last three months of the financial year (i.e. between January and March). At that point of the year people start seriously thinking about their tax saving investments and in large parts of the country that means buying a new LIC policy or paying the premium for the existing ones. And that’s when the insurance behemoth has a lot of cash which can be used to rescue the government by picking up shares of companies that it decides to disinvest. Given this, the change from 10% to 25% has been made just at the right time.
The only loser in the process is the individual who puts up his hard earned money into insurance plans of LIC and ends up financing the fiscal deficit of the government. This is nothing but another form of “financial repression” where the premium that Indians pay towards their LIC insurance policies will end up financing the fiscal deficit of the government.
Hence, don’t be surprised if you LIC agents aggressively marketing unit linked insurance plans (Ulips) which invest in stocks very aggressively for the remaining part of the year. They will have no other option. The instructions will come from right at the top.
Also what this does not do anything about the basic problem which is that the Indian government is spending much more than what it can write cheques for.
The article originally appeared on www.firstpost.com on November 21, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])

Why Chiddu wants insurance agents to mis-sell

Vivek Kaul
There’s nothing more thrilling than nailing an insurance company – Deck Shifflet (played by Danny DeVito) in The Rainmaker
Around three years back I suddenly got a call from my bank. “I am your relationship manager Sir,” the female voice at the other end said. “Since when did journalists start to have relationship managers,” was the first thought that came to my mind. It turned out she wanted to help me plan my finances.
Fair enough. But why did the bank have a sudden interest to plan my finances? I had been banking with them for close to four years and they hadn’t shown any such interest earlier. I checked my bank account and realised that there was a fair amount of cash lying around in my savings bank account. A friend had just repaid some money back and a fixed maturity plan which I had invested in had matured.
So the reason behind the bank’s sudden interest in planning my finances became clear to me. I asked my new relationship manager to come and meet me immediately. I was curious to see what financial plan she had in mind.
What she did not know was that my area of specialisation as a journalist was personal finance. The relationship manage soon turned up and within ten minutes she offered me the solution to all my financial problems in life, which as expected, turned out to be a unit linked insurance plan (Ulip).
The bank she worked for also has an insurance company and this particular Ulip was from that insurance company. I just checked the brochure she had brought along and was not surprised to find that the premium allocation charge for this Ulip for the first year was a whopping 60%. What this meant was that if I were to pay a premium of Rs 1 lakh, only Rs 40,000 would be actually invested. The remaining Rs 60,000 would be deducted as an expense.
A major part of the Rs 60,000 deducted as expense would be given to the insurance agent (in my case the bank) as commission. And it would help my relationship manager meet her rather stiff targets.
I pointed this out to my relationship manager and she realised that the game was over. I wouldn’t fall for her sales pitch. Then we got talking about other things and realised that we grew up in the same town. Before leaving she apologised for trying to sell me such a plan. She also told me that in the pressure to meet her target last year she had sold the same policy to her brother.
He had taken a policy with a premium of Rs 1 lakh of which Rs 40,000 had been invested. The stock markets had taken a beating since then and the value of the investment had fallen to Rs 32,000. “He doesn’t talk to me properly anymore,” she said, as she left with a tinge of regret in her voice.
Those were the heady days of mis-selling in insurance when even sisters sold Ulips to brothers so that they could earn a high commission and meet their targets. Since then commissions have been reduced and as a result the mis-selling has come down.
But if the finance minister P Chidambaram has his way with things,mis-selling is all set to return in the days to come. But before I get to that let me just share some numbers that the Insurance Regulatory and Development Authority, the insurance regulator, has released in its September 2012 journal.
For the period April 1 to June 30, 2012, the insurance companies in India collected Rs 12015.5 crore as first year’s premium by selling around 67.9 lakh new policies.  Given this the average premium per policy works out to around Rs 17,690 (Rs 12015.5 crore divided by 67.9 lakh).
The total sum assured (or what is in general terms referred to as a life cover i.e. essentially the money the nominee will get if the policyholder dies) on these policies was Rs 1,50.902.8 crore. So the average life cover per policy works out to around Rs 2.22 lakh (Rs 1,50,902.8crore divided by 67.9lakh).
Hence, for the first quarter of 2012, the average premium on a life insurance policy was Rs 17,690 and it had an average life cover of Rs 2.22 lakh. If a 35 year old were to just buy a pure life cover of Rs 2.22 lakh, the premium works out to around Rs 500-700 per year on a 25 year policy. Assuming that a pure life cover of Rs 2.22 lakh can be bought for a premium of Rs 700 per year that would mean a premium of Rs 17,000 is left over.
And this is the amount that is invested by insurance companies after deducting the commission paid. In the year 2010-2011(i.e. between April 1, 2010 and March 31, 2011), the average commission paid on the first year premium was 8.89%. This is the latest data that is available.
Assuming this to be rate of commission, the commission on a premium of Rs 17,690 works out to Rs 1573 (8.89% of Rs 17,690). Deducting this from Rs 17,000, around Rs 15,417 is left over. This is the amount that is invested depending upon the mandate chosen by the policyholder which could vary from 100% stocks to 100% debt.
So what this basically tells us is that Indian insurance companies do not sell life insurance, they sell high commission paying mutual funds. As my calculations show less than 4% (Rs 700 expressed as a % of Rs 17,690) of the total premium goes towards actual insurance. Around 9% is paid as commission and the remaining amount is invested depending on the mandate given by the policy holder.
The finance minister P Chidambaram now wants to encourage the sales of these high cost mutual funds masquerading as insurance policies. He is in the process of offering a series of sops to insurance companies so that they can sell more. Among the proposed sops are greater tax deductions on insurance premiums, banks being allowed to sell insurance policies of more than one insurance company etc.
This is being done so that insurance companies are able to sell more policies and in the process more money from the domestic investors is channelised into the stock market. Since the beginning of the year domestic institutional investors have sold stocks worth around Rs 38,475 crore. The government wants to turn this tide in order to ensure that the stock market continues to go up.
This is very important if the government hopes to divest its stake in a lot of public sector companies. The disinvestment target for the year is Rs 30,000 crore. But a lot more shares will have to be sold if the government wants to control the burgeoning fiscal deficit. (you can read a detailed argument on this here).
So the higher the stock market goes the more the number of shares that the government will be able to sell. And for that happen more and money from domestic investors needs to come into the stock market. And that will only happen if the insurance companies are able to sell more policies.
As anybody who does not make money selling insurance policies or is honest enough, will tell you that mutual funds remain a better investment option. So the question that crops up here is why does Chidambaram want to encourage only insurance companies to sell more and not mutual funds?
Mutual funds are much more transparent. There performance when it comes to generating returns is much better than insurance companies. They don’t pay 9% commissions to their agents. And it is very easy to figure out which are the best mutual funds going around in the market. I haven’t seen anybody who makes a living out of selling insurance talk about returns generated by insurance policies till date.
There are a couple of reasons for Chidambaram encouraging insurance companies and not mutual funds. One is that commission offered by mutual funds is very low compared to the commission offered by insurance companies. Hence, agents of all kinds prefer to sell insurance rather than mutual funds. Chidambaram needs a lot of money to enter the stock market and he needs it to come quickly. That being the case, it’s easier for insurance companies to do this than mutual funds.
The second and more important reason is the fact that Life Insurance Corporation(LIC) of India which is India’s biggest insurance company, is government run. Between April and July of this financial year LIC collected 76.5% of the total first year’s premium. So three fourths of insurance in India is basically LIC.
The money collected by LIC can be directed by the government into specific stocks. If the stock market does not how enough interest in shares of a company being divested by the government, LIC can be instructed to pick up those shares.
If Chidambaram had encouraged mutual funds instead of insurance companies he wouldn’t have had this flexibility. So once these measures to help insurance companies are pushed through, insurance companies and agents will be back to doing what they do best i.e. mis-sell. Don’t be surprised if in the days to come you run into insurance agents promising you the moon, from your investment doubling in three years to you having to pay premiums only for five years.
And in this case this renewed attempt at mis-selling will be a result of the Finance Minister P Chidambaram encouraging insurance at the cost of mutual funds. The more insurance agents mis-sell, the greater will be the money invested in the stock market which will lead to the stock markets rallying and thus help the government sell more shares than it had originally planned.
The article originally appeared on www.firstpost.com on October 5, 2012. http://www.firstpost.com/economy/why-chiddu-wants-insurance-agents-to-mis-sell-480473.html
(Vivek Kaul is a writer. He can be reached at [email protected])