Tag Archives: Joel Kopperund

Insurance Opportunity in India Is Knocking

The newly elected Indian government recently approved a proposal to increase foreign direct investment (FDI) limits in its insurance market to 49%, from 26%, and parliament has approved it. India’s business-friendly Bharatiya Janata Party (BJP) and new Prime Minister Narendra Modi are sending signals that there is opportunity in India. The country is open for business.

Overcoming cultural barriers and convincing foreign capitals to open their economic borders is a struggle that has plagued proponents of economic globalization for decades. The Council has long advocated for opening foreign markets to allow for more competition, to build economies and to drive down prices for consumers. We know countries with open economic borders see healthier competition and cheaper services for their citizens. But isolationism and nationalism are often synonymous, and overcoming these barriers can take years.

Rep. Joe Crowley, D-N.Y., vice chairman of the House Democratic Caucus and chair of the Congressional Caucus on India and Indian Americans, for years has championed India relaxing its limits on foreign direct investment.

“Raising the cap [is] a win for both the Indian and American economies and our citizens,” he says. “I am hopeful of the new changes being pushed by the new Indian prime minister and urge they be fully implemented. I hope it will come to fruition and expand the partnership between our two great countries.”

Victory has a hundred fathers, and this victory has millions. The Indian election in May had the highest voter turnout in the young democracy’s history, with more than 550 million votes cast. The election broke records in terms of dollars spent campaigning, and it included high-tech hologram campaign stints, which might now be in the future for U.S. campaigns.

In India’s case, the proposal to increase the FDI caps to 49% had been on the table for six years. Political backlash in the Indian parliament kept the issue from gaining momentum. But this time is different. We would like to say it’s because of the Council’s efforts. We’ve advocated, alongside our global counterparts, for increasing the current cap for insurance intermediaries, and our friends at the World Federation of Insurance Intermediaries have underscored the issue for European FTA negotiators as they work on an economic agreement with India.

This work has certainly helped put the issue on the BJP’s agenda, but it was the past election, which swept the BJP to power, that brought it to a head. The BJP’s win over India’s Congress party is akin to the Republican revolution in 1994 in the U.S., when the GOP broke the Democrats’ rule of the House of Representatives for the first time in 40 years.

I should note the measure will not be perfect (results of the political process rarely are), but it will be good. Frankly, we would love to see the foreign direct investment limit not just increased but abolished altogether. We also expect the FDI limit to include a stipulation requiring management control of intermediaries and insurers to remain with Indian investors. These are no doubt olive branches to ease the transition.

The take-up rate of both commercial and personal insurance coverage in India is significantly low, given the size of its economy. Measured as a percentage of GDP, penetration in the non-life sector was a staggering 0.78% in 2012. Life coverage was slightly higher, at 3.17%. Considering the Indian economy—the 10th-largest by nominal GDP and the third-largest by purchasing power—there’s a ripe opportunity for market penetration. There’s also convincing policy and political need for the coverage to keep the country’s growth sustainable. I’m again reminded of the adage: “Insurance is like oxygen to the economy.”

The Council wrote the new government to ensure its understanding of our business and the strengths our industry offers the Indian economy. To underscore our value, Council President Ken Crerar wrote: “Insurance intermediaries are distinctly different from insurance companies and do not pose any systemic risk to the insurance sector as a whole. Intermediaries serve the needs of individual and commercial insurance consumers, helping the purchasers of insurance navigate markets that can be extremely complex, particularly for consumers of commercial insurance products.

“Intermediaries not only assist with the purchase of insurance, but also assist consumers with maintenance and claims processes, offering consumers an array of expertise and proficiency in the global market. I would like to highlight the following points as you review the merits of increasing FDI limits:

  • Insurance brokers work for the policyholders and help in risk management, maintaining market efficiencies and protecting consumers.
  • Increasing the exchange of market intellect and expertise on risk management and process efficiency between different countries (and markets) will benefit Indian consumers.
  • Most countries across the globe allow 100% foreign direct investment in the insurance intermediary market, strengthening local markets and keeping costs down.
  • Strengthening the Indian intermediary market will also encourage international reinsurance to the domestic market, as it eases the exchange of risk and insurance products between countries and markets. This further helps consumers as it increases competition and drives costs down.”

Our message didn’t fall on deaf ears this time. Arun Jaitley, India’s new finance minister, told the upper house of parliament that Indian insurers need help maintaining a healthy capital base so they can offer a wider range of products, protect consumer interests against insolvency and deepen insurance penetration in India.

“The insurance sector is investment-starved,” Jaitley said. “Several segments need an expansion.”

Jaitley predicts India’s private insurance industry needs an estimated $6 billion (Rs360 billion) of additional capital over the next five years.

I’m optimistic India’s borders are opening, further increasing its international opportunity and economic strength.

If the Regulations Don’t Fit, You Must…

International regulatory bodies like the G20 and the Organization for Economic Cooperation and Development (OECD) are still pining for recommendations for regulators on how to avoid another financial crisis like the one that engulfed the global economy in 2008.

The groups are increasingly leaning toward stronger consumer regulations to prevent another catastrophe, just like sophisticated regulators in the U.S. and other countries across the globe. The OECD, unfortunately, is taking a shortsighted approach to its consumer protection recommendations by suggesting one-size-fits-all regulatory standards will work for every regulator across the globe.

The OECD’s consumer protection recommendations won’t be issued, or received, lightly. And suggesting misguided regulations is dangerous. The guidelines will be (rightly) considered by regulators in nearly every country, despite their very different levels of sophistication concerning financial markets and consumer awareness. We’ve seen movement on one-size-fits-all policies in this area for years, most recently with Solvency II and capital standard policies under consideration in Brussels. The latest version we struggle with is a recommendation for regulators on how to consider the OECD’s High-level Principles on Financial Consumer Protection.

The principles are focused on the following areas:

  • Legal, regulatory and supervisory framework
  • Role of oversight bodies
  • Equitable and fair treatment of consumers
  • Protection of consumer assets against fraud and misuse
  • Protection of consumer data and privacy
  • Competition.

And the OECD recently issued draft guidance (framed as a “toolkit”) to address how best to approach the recommendations. Of course, each principle offers broad recommendations on how to manage issues affecting intermediaries. These could ultimately hit broker remuneration, transparency requirements, cooperation among supervisors and the like. And if the draft recommendations gain momentum, our ability to educate our regulators and shape sound consumer protection policies could be diminished.

That’s why the World Federation of Insurance Intermediaries (WFII) has been following the proposed “toolkit” closely. The federation issued a strong response to the OECD’s suggestions, rightly calling out the organization’s shortsighted approach and its assumption that regulators should approach with the same vigor businesses large and small and products designed for individuals, multinational corporations and companies located anywhere in the world.

The comments filed with the OECD by WFII rightly stated: “the pure fact that an effective approach has been developed in a range of jurisdictions is, in our view, not an indication in itself that it is indeed an ‘effective’ approach. We believe that sound research, an impact assessment and a cost/benefit analysis should be undertaken each time by the regulator/supervisor of the particular jurisdiction before any of these so-called effective approaches summed up in this draft, regardless of them being categorized as a ‘common,’ ‘innovative’ or ‘emerging’ approach. We urge the drafting team to clearly include this need for sound research, an impact assessment and a cost/benefit analysis in the introduction.”

The federation went on to suggest that applying the same guidelines to multiple industries can be dangerous, and it suggested to the drafters that the language clearly define when various sectors should be considered equally and when they should be treated differently.

Perhaps the most relevant comment to our market is the federation’s position on regulating companies of widely disparate sizes and revenue models. The federation told the OECD that “proportionality is a fundamental principle that should be taken into account by all regulators and supervisors every time they consider imposing requirements on the financial sector. Given the importance of this principle, we believe requirements imposed on the financial sector should be proportional to the size of the market player and the complexity of its service.”

The federation concluded its comments by suggesting regulators should engage market players and industry representatives with direct knowledge of the market practices as key rules are written. This point is particularly important for emerging regulators to consider, as their markets are among the fastest-growing in the world. A thoughtful and democratic approach to market guidelines ought to be encouraged to ensure their continued strength.

Nearly every developed economy continues to struggle with how to avoid another economic collapse, and the OECD has a strong role to play by issuing sound recommendations. It’s our sincere hope the suggestions to scale back its one-size-fits-all approach are heard loud and clear.

This article first appeared in Leader’s Edge magazine.

The Gristle in Dodd-Frank

I love using the phrase “unintended consequences” when talking about our issues on Capitol Hill. It’s so commonly understood among veteran staffers that legislative actions produce market reactions, some that are unexpected and unintended. Whoops!

Sometimes these unintended consequences are significant, like when Congress passed the behemoth rewrite of financial regulations in the Dodd-Frank Act.

A big unintended consequence of that law gave the Federal Reserve the authority to regulate non-bank “systemically important financial institutions” (SIFI), as designated by the Financial Stability Oversight Council (FSOC), with the same capital standards that they impose on banks. Insurance companies at risk of being regulated by the Federal Reserve, like MetLife, Prudential and AIG, are facing the big threat of being held to an additional layer of capital standards that are bank-centric and threaten their regulatory compliance models and ultimate product safety.

The thing is, the business of insurance is very different from banking, and regulatory capital standards designed to protect consumers should reflect those differences. Property-casualty and life insurance products are underwritten with sophisticated data and predictable global risk-sharing schemes that inherently withstand most market fluctuations. And to protect consumers, different capital standards are imposed on insurance companies for the different models and products they produce. Traditional banks, however, have different economic threats, requiring different standards. There cannot be a run on insurers with claims the way there can be on banks.

The last economic crisis demonstrated that varying insurance capital standards protected the insurance industry throughout the global debacle. Even AIG’s insurance operations were well protected (it was AIG’s non-insurance financial products division that led to the company’s near-demise). Allowing the Fed to regulate insurers with the same standards as banks not only threatens corporate compliance models but also ultimately makes it more expensive for insurers to share risk, increases the cost for the same level of coverage and spikes prices for consumers.

Even the congressional authors of the too-big-to-fail language recognize the issue and are pushing to correct it. Sen. Susan Collins, R-Maine, who originally wrote the Dodd-Frank provision to allow the FSOC to designate insurance companies as SIFIs, recognizes that any capital standards imposed by the Fed should be duly tailored for insurance companies. She said in congressional testimony: “I want to emphasize my belief that the Federal Reserve is able to take into account—and should take into account—the differences between insurance and other financial activities…. While it is essential that insurers subject to Federal Reserve Board oversight be adequately capitalized on a consolidated basis, it would be improper, and not in keeping with Congress’s intent, for federal regulators to supplant prudential state-based insurance regulation with a bank-centric capital regime for insurance activities.”

Fed Chair Janet Yellen, who is responsible for implementing the law, agrees.

So there’s now legislation in the grinder designed to fix the problem by giving the Fed flexibility to tailor capital standards to the unique characteristics of the insurance industry. The bill passed the Senate without opposition but at the time of this writing is stalled in the House and risks being caught in the partisan battle between the House and Senate’s varying legislative vehicles.

It’s rightly frustrating to stakeholders and lawmakers that the fix is held up, but it’s not surprising that another serious unintended consequence is facing our industry. I’ve used the term when discussing the Foreign Account Tax Compliance Act (FATCA), flood reform, and the Affordable Care Act (ACA). I hope we can see the legislative fix to this latest unintended consequence signed into law soon.

This article first appeared in Leader’s Edge magazine.