The address to the Parliament by President Pratibha Patil opened on an optimistic note, though the budget did not do justice to the Presidential commitment relating to insurance sector reforms. June was a month of expectations, some fulfilled, some failed - like the monsoon that became the hottest topic. Some companies were preparing for IPO and some to let the overseas partner to increase shareholding from 26 per cent to 49 per cent based on the Insurance Act amendment.

Preparations continued, as we had reported last month to bring in more reforms in the sector. IRDA published a comprehensive guideline that will take insurance sector towards International Financial Reporting Standards (IFRS) compliance, a commitment from the country by 2011. As readers would appreciate, the liabilities of an insurance company are estimates in most cases and so there is always a situation of these being contested. There have been situations when the auditors of the insurer differed with the management on the quantum of liabilities that were presented in the annual reports. The guidelines deal with all areas of accounting policies, estimates and errors covering assets and liabilities of the insurer. The initiative of the regulator should be appreciated as it tries to bring in a semblance of common methodology. A beginning is being made in allowing deferred acquisition costs (spreading some of the costs over multiple years) in some cases for life insurers, which will be welcome.

One more area of study is the embedded value of life insurance contracts which the Institution of Actuaries is studying and is expected to suggest modifications in a couple of months.

Handsome growth in first premium

Good news for life insurers was that the premium growth (first premiums) clocked 29 per cent and customers moved more towards traditional life insurance products away from the market linked ULIPs. Similarly growth was driven by the two PSU behemoths - LIC and SBI Life - and by group and single premium business while private sector declined marginally.

People living longer may not be good news to all! Institute of Actuaries is expected to publish revised mortality tables that will show a higher life expectancy and life insurance premium will have a natural movement south.

Premium, however, was destined for increase in the aviation sector due to Air France crash. Under the current global situation, a major calamity such as the one in Atlantic, where the insurers estimate a significant outgo, will have a serious impact in the reinsurance market.

Cyclone Alia had created devastation in West Bengal with an estimated loss of over Rs. 500 crore worth of crop but it is stated that insurers will pay out almost nothing. This is because the nature of damage is not entirely within the scope as well as large amount of uninsured crop. Weather and crop insurance in India has a huge scope for improvement.

Health insurance premia on the rise…

At last, the high cost of health insurance is hitting corporates who are more than ever before asking the employees to share either the premium or the claims out of the insurance policy. Employee health insurance has not been a pleasant business for insurers who, in the golden days of administered price for property insurance, saw the merit of subsidising the health insurance cost from the profitable property portfolio. Now that the rates there have plunged with an average reduction of about 40 per cent, there is no margin left to cross-subsidise. This leaves health to be charged on its merits - which means an increase in price. Competition was holding the price for about a year; but now that private insurers are shunning loss making groups and PSU insurers are operating as a group more often than not, the price has started increasing. Add the fact that downturn did mean that employee retention was less focused on - you get the recipe, share the loss or insure your parents separately.

On the question of elders getting insurance, IRDA has increased the entry age into health insurance to 65 and has brought in some protective measures to avoid arbitrary denial of insurance to the senior citizens.

'CBDT effect' trying to play 'El Nino'…

With insurers and TPAs struggling to put in place a good mechanism for consistent customer service, the 'CBDT effect' is trying to play an El Nino. The most important improvement in customer service in the past decade has been the cashless arrangements with the hospitals that help customers get treated and discharged without having to pay the bill and wait for the amount to be reimbursed from the insurance company. The amount payable is settled by the TPA directly to the hospital on behalf of the insurer with the customer as a beneficiary. This transaction is being called to come under the TDS rule of section 194J of IT Act, which primarily is intended to provide for TDS on professional services availed by non-individuals.

The IT department's act of sending notices to various TPAs shows no prudence since the bills from the hospitals are raised in the name of the insured person and what the insurer or TPA is doing is only as much as a credit card company does in facilitating payment. An additional complication is the packaging of treatment by the hospitals where the material used (which has suffered sales tax) and professional charges are combined. The result of this could be that cost- effective packages may vanish or hospitals may require the patients to pay and claim under insurance, both of which are counter-productive to the customer. Most importantly, the levying of TDS (which will not add much to IT dept's coffers) on an emotional area like healthcare, while hotels are exempted, does not show the aam aadmi sensitivity that the government is trying hard to project.

National Insurance Company got a new leader in NSR Chandra Prasad, who has taken over from V Ramaswamy. The company has been effective in portraying its 'Simple socho' campaign, but Prasad's task is definitely not going to be simple, with the company said to be suffering consistent losses in motor - especially in its partnership with manufacturers such as Maruti and Hero Honda.

Other developments:

• SBI's foray into general insurance has got the IRDA nod
• AIG is to repay $25 billion of the $40 billion assistance
• Satyam's claim under its D&O policy has been disputed by its insurer, Tata AIG
• The apex court ruled that an insurance surveyor's report is not binding on the insurer