Growth in life insurance industry has come to a grinding halt after several years of high double-digit growth. To improve returns under the unit-linked insurance plans (Ulips), the regulator capped the amount insurance companies can charge the fund. The cap improves returns for policyholders, but it reduces margins for insurance companies. Life Insurance Council secretary general and former LIC chairman S B Mathur speaks to Mayur Shetty of the challenges for the sector. Excerpts:
What is the industry reaction to the regulatory cap on charges by life insurance companies?
Normally, in a competitive environment, charges should be determined by demand and supply. But given the developments in other sectors, capping of charges was inevitable in the short to medium term. It will definitely improve yield to policyholders. At the same time, companies will have to be very careful with their expenses — management costs or distribution costs or investing in future growth. Distribution is always an investment that is expensive in the short term and probably profitable in the long term. If the idea is to create some parity or level playing field with mutual funds, then there are other factors that influence the cost of insurance products.
Insurers have to sell 18% in rural areas. Why don’t we exempt Ulips from rural obligation as mutual funds are not bound so?
Besides, there is the issue of tax that raises cost for policyholders. For instance, the industry pays Rs 4,000 crore of service tax. Who bears the cost of these taxes? Likewise under income tax law, companies suffer double taxation as surpluses transferred from shareholder funds to policyholder funds to pay bonuses are taxed twice. Life companies pay a few hundred crores as stamp duty, which is merely a collection of revenue for the government. Ironically even this revenue collected for the government is subjected to service tax.
Will the cap push back break-even dates for life companies?
It could in some cases as companies that began their businesses a few years ago did so with a business plan. These plans will have to be recast in terms of net inflows.
The draft direct taxes code proposes to tax benefits of insurance policies. What is your reaction?
In life policies, payout is typically in a lump sum. If this gets added to income and there is no compensatory provision, then a person in a 10% tax bracket could move to a 30% bracket. Secondly, it is unfair because in a country like India as there is a corrosion in real value of savings. This also does not make sense taking into account the Indian ethos.
In India people not only save for the long term but also for the medium term such as school admissions, higher studies of children and their marriage and for buying a house. Retirement savings is not the only objective. I do not see the tax code promoting savings. In every sphere we borrow western concept without relating them to Indian environment. We saw that happen with a pension product that LIC introduced in 1969: the most popular selling product in the west — pension for life without return of capital — was a non-starter in India.
The IRDA has proposed a combi-product with life and non-life features...
There are some issues with the combi-product. Firstly, there are no real economies as they are two independent products clubbed together and sold by a common intermediary. The common intermediary has to be qualified life and non-life agent. So, a whole lot of agents will be disqualified. While the customer gets both policies at one place, he does not get the economies of scale. The combi-product will have to compete with stand-alone products with better features.
There is some confusion over whether a company can go public within 10 years of operations?
Earlier 10 years was prescribed as the time limit for dilution of promoters holding. The present guidelines clearly says dilution can happen only after 10 years. But in a situation where capital is scarce, there should be some dispensation allowing companies to go for IPO if promoters have the confidence.
What is your view on concerns that Indian promoters would become minority partner if FDI cap is raised to 49%?
Our understanding is that 49% would be an enabling provision. The level of promoter stake will depend on the agreement between two partners.
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