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Life Insurance - Using a hammer to swat a fly

17 Jul 2010

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rs and trucks on an American inter-state highway after an accident. First, the Securities Exchange Board of India (SEBI) crashes into a number of insurance companies issuing unit-linked insurance policies (ULIP).

Then the speeding Insurance Regulatory Authority of India (IRDA) rams into the SEBI. The Government, the omniscient cop whom everyone expects to be calm, cool and collected, gets into an agitated state, and ploughs into the debris with a catch-all Securities and Insurance Laws (Amendment and Validation) Ordinance. Often such pile-ups boomerang on vehicles which are innocently coursing along in their lanes, having nothing to do with the original mishap.

The Reserve Bank of India (RBI) suddenly finds itself in that position, becoming part of the all round confusion which is worse confounded by everybody taking off simultaneously in all directions. Pretty exciting (for the onlookers) and excruciating (for those affected) state of affairs, that!

Okay, what was the rumpus (or, ruckus, if you will) about? Simple. SEBI discovered on April 9 that 14 insurance companies were issuing ULIPs that served part as insurance and part as investment. It interpreted them as securities since investment in stock, bonds and mutual fund was involved and decided that the insurance firms had no business to keep it outside the loop and ordered them to come within its fold by registering themselves with it.

This immediately raised the hackles of the IRDA in whose view the insurance component of the ULIPs overrode their investment component and hence, they were to be treated as insurance policies subject to its regulation and control. It promptly directed the insurance companies to ignore SEBI's orders.

Unedifying spat

Both SEBI and IRDA conducted themselves in this affair in a hasty and immature fashion. Since ULIPs are hybrid products with characteristics of both insurance and investment, the proper thing to do was to quietly sort out the issue by mutual consultation between the SEBI and the IRDA, taking the advice of the Attorney-General, or, maybe even the Finance Ministry, if necessary, instead of both institutions indulging in an unedifying turf war or ego trip in public.

The initial stand of the Government with respect to the ugly situation was exactly right: It asked the SEBI to get an authoritative judicial interpretation by approaching the relevant Court, although even at that stage it was not too late for both SEBI and IRDA to meet and come to an understanding.

It is a puzzle why, instead of allowing time for the issue to be settled in a dignified manner, the Government chose to complicate the situation by issuing a cumbersome Ordinance encompassing a whole host of laws governing SEBI, IRDA, Pension Fund Regulatory Authority and the RBI, when essentially only SEBI and IRDA are involved. The question arises especially because in each of the laws the Government has the reserve power to give policy directions and even lay down what constitutes policy.

All it needed to do was to issue a simple directive to both SEBI and IRDA indicating within whose charter it wanted the ULIPs to be dealt with. All this contretemps could then have been avoided and the dust would have automatically settled down.

Viewed in this light, nothing of what has been so elaborately set out in the Ordinance in the form of a whole new chapter in the Reserve Bank of India Act, meddling in the regulatory bodies' functions, can be said to be either necessary or defensible. For this reason alone, it should be allowed to lapse. This is quite apart from the debate whether or not it eats into the RBI's role.

Source: Business Line

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