By Venkatachari Jagannathan

Chennai, Sep 13 (IANS): Allowing regional insurance companies, reducing minimum startup capital, changing investment norms and other measures may result in mushrooming of small insures and the return of pre-1956 period, said N. Rangachary, the first Chairman of the Insurance Regulatory and Development Authority of India (IRDAI).

Prior to 1956, there were several hundreds of small life insurers who were issuing policies in a restricted manner and sold in an unrealistic manner, while claims were not paid.

"There were benami agents through whom the promoters took back their investment. The premium collected was diverted to the other business of the promoters. Many companies went belly up leaving the policyholders in lurch. The Indian government nationalised the life insurance business and formed Life Insurance Corporation of India (LIC) in 1956," Rangachary told IANS in an interview.

He was responding to the government's reported move to reduce the start-up capital from the current Rs 100 crore for primary insurer and allow regional, micro insurance companies, change investment and solvency norms on the pretext of increasing the insurance penetration.

"Insurance companies cannot be compared with banks that have small finance banks, regional rural banks. The banks deal with assets while insurers deal with risks. The relationship between a banker and its depositors is short/medium term. A depositor can withdraw his money from a bank anytime," Rangachary said.

"On the other hand, a life insurance policyholder cannot get back his full money when he surrenders the policy. The relationship between a life insurance policyholder and a life insurer is long term, upwards of 15 years."

Again, in the case of a bank failure, the depositors have some deposit insurance whereas there is no such guarantee for a policyholder of a life/general insurer. Hence, a life insurer should be structured in a failproof manner, he remarked.

It was Rangachary and his team that had enabled drafting of the law, laid the rules, regulations for opening and the smooth functioning of the insurance sector since the year 2000.

Industry experts told IANS that owing to the stringent law and regulations that was drafted at the time of opening up of the sector no private insurer has gone belly up jeopardizing the policyholder's interest.

"The small players cannot be expected to develop the market with their small capital. It is for the sectoral regulator to create the market. When the market is there, private players will get in," Rangachary said.

According to him, when the sector was opened up, it was decided to allow only serious players and issue only pan India operations and not regional ones.

"As per our calculations, an insurer will be needing about Rs.85 crore capital during the initial years and further capital infusion at least during the first seven/eight years. Hence the startup capital was fixed at Rs 100 crore," he said.

The Rs 100 crore startup capital ensured only serious players come into the sector. Further only equity capital was allowed and not other forms like preference capital to avoid problems later.

Incidentally there are insurance companies which have started operations with over Rs 100 crore capital.

As life insurance is long term, a policyholder is taking a calculated risk that the private player will continue to exist at time of his policy maturity or the unfortunate event of his demise, Rangachary said.

The strict investment norms were drafted, investments only in rated securities, to ensure that the policyholder funds are safe and he gets back the money or the life insurer fulfils its promise of paying the claim.

The total investments of the insurance sector since it was opened up was about Rs 20 lakh crore, Rangachary said.

In order to ensure the insures are solvent, the solvency norm was fixed at 1.5 times of the liability while normally the ratio is 1:1, Rangachary added.

According to him, insurance is a service, the insurer, the service provider, initiates, maintains the policy/product and pays it off.

On the intermediaries, the IRDAI brought in the minimum norms for individual/corporate agents and other intermediaries.

Coming back on the issue of regional insurers, Rangachary said the risk of that area has to be studied. Reducing the start up capital is reducing the insurera¿s viability.

"LIC has a wide network of branches across the country. Can the new players be more competitive than LIC? And why is LIC not able to cover this segment? Is it because of lack of market potential or lack of activity on LIC's part."

He said there should be a proper analysis of the insurable population in India. If the market has a huge potential as being said then why there are no new players and why the foreign partners are not upping their stakes in their Indian joint ventures.

Pointing out the developmental role of IRDAI, Rangachary said the former should create awareness about the risk of living and the benefits of insurance.

Once that is done and a market is created, the insurers will do the remaining, he said.