Now that India has opened up its insurance market fully to FDI, over-regulation mustn’t play spoilsport

Foreign players were first invited a quarter of a century ago. Although several JVs entered the field, Indians are still short of insurance cover. According to a Swiss Re report, India’s market penetration is just 3.7%.

New insurers vying for a slice of it could make a difference—so long as they have space to differentiate their game for a market edge. This could depend on the sector’s finer rules.

In this context, recent talk of tighter compensation norms for insurer CEOs assumes relevance. The Insurance Regulatory and Development Authority, which regulates the sector, already has a set of guidelines for private insurers. Aimed at aligning pay packages with risk, these cover how the variable part must be awarded—tied to performance, i.e., but with such provisions as a clawback option for deferred-pay incentives in case a failure comes to light later.

This strictness can be justified by the uniqueness of the insurance business. Payout liabilities extend way into the future, while assets are long-range too. Since annual profits could mask longer-term risks, CEOs are best incentivized not just to maximize routine financial results, but ensure safety and stability as well.

Although ‘grievance redressal’ is among the risks to be taken into account, the regulator would be well advised not to link remuneration any closer with customer metrics.

Admittedly, policyholders tend to be ‘locked in’ for extended periods once they’ve signed up for an insurance deal. High costs of switching services are associated with low levels of service quality. Anecdotal evidence suggests that claim rejection complaints are frequent, especially in the health segment.

It may thus be tempting for the regulator to insist on claim ratios, policyholder ratings and the like in variable-pay formulas for CEOs.

Yet, in any competitive market, customer satisfaction is an outcome of sound management practices. Moreover, since market strategies differ—as they should if innovative ideas are to drive growth—businesses must not be too hamstrung in how they reward their top executives; after all, CEOs of private insurers, as with any business, are answerable to their shareholders.

State policy should focus on ensuring fair competition and increasing its intensity, which has its own way of punishing poor service and rewarding players that serve customers well. Rules that delve too deeply into details would risk regulatory overreach, which might deter FDI.

Now that a red carpet rolled out for global insurers has begun to draw them into a market with vast potential for expansion, let’s count on rivalry among insurers to do its job. Let market forces work.