Can IRDA claim control over postal life insurance?

PLI was launched on February 1, 1884, as a welfare measure for employees of the Post & Telegraph department and then extended gradually. File Photo: K. Murali Kumar

PLI was launched on February 1, 1884, as a welfare measure for employees of the Post & Telegraph department and then extended gradually. File Photo: K. Murali Kumar   | Photo Credit: FILE PHOTO

Life insurance is in the news, again for the wrong reasons. After the high key row between the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority, a low key controversy has surfaced between the IRDA and Postal Life Insurance (PLI).

PLI was launched on February 1, 1884, as a welfare measure for employees of the Post & Telegraph department and then extended gradually, over a century, to cover employees of Central and State governments, local bodies, nationalised banks, public sector undertakings and government aided schools.

As per the recommendations of the Malhotra Committee, rural postal life insurance was launched on March 24, 1995 to extend insurance benefits to the rural population.

Low profile operation

The institution runs a low profile operation and caters to the middle and poorer classes of the society. The average sum assured under its policies, at Rs.35, 000, is quite low. Its premium rates are the lowest.

With a small average sum assured and low premiums, an insurance organisation cannot be viable, experts will say. But, PLI is making good profits and offers (on the basis of actuarial valuations) the highest bonus rates.

It markets half a dozen basic plans and keeps not only marketing and servicing expenses but also rates of lapsation of policies at very low levels. By the end of 2009, the number of in-force policies serviced by PLI, including rural PLI, was one crore, with a fund of Rs.15,000 crore.

Till 2006, its funds were invested in the Special Deposit Scheme of the Central government. Later, the responsibility for managing the funds was distributed evenly between the mutual funds of the Unit Trust of India and State Bank of India. The two fund managers function in line with the strategy formulated by an investment board set up by the government.

The controversy

What is the controversy between PLI and the IRDA that has surfaced, ironically, soon after PLI's 125th year celebrations and, that too, when it has decided to incorporate all the good features in IRDA's regulations. The difference of opinion appears to be over marketing (distribution) and investment policies of PLI, with the regulator stating that appropriate action may be taken in case of non-compliance.

Has the IRDA any jurisdiction over PLI? Sub-sec. (2) of Sec. 14 of the IRDA Act defines the powers and functions of the IRDA vis-a-vis insurers. But, is PLI an insurer? Sub-sec. (9) of Sec.2 of the Insurance Act defines ‘insurer' as any individual or unincorporated body of individuals or body corporate incorporated under the law of any country other than India or a body corporate incorporated under any law for the time being in force in India and the like.

Sec. 44 of the LIC Act describes PLI as a "scheme run by the Central Government'. So, PLI is neither a company nor a body corporate, but is part of a department of the Central government and so will not come under the definition of ‘insurer'. Consequently, the IRDA can only advise PLI, and that too not in its capacity as a regulator but just as a well-wisher. The PLI too, in a similar capacity, and based on its 125 years of experience, can advise the IRDA on how to control operational costs of insurance companies. But, neither has the authority to enforce its advice on the other.

Panel suggestions

It would be interesting to see the recommendations of the Malhotra Committee in respect of PLI (Sec. 7.14 of the Report). The report says, "There was a view that PLI could perhaps become a separate corporation. In that event, however, its present advantage which flows from its being an integral part of the Department of Posts would be lost and the costs could rise. There is, therefore, advantage in maintaining PLI as part of the Department of Posts with appropriate changes so as to enable it to handle a much higher volume of life business.'' This recommendation, which was accepted by the government, conclusively proves that the IRDA has no jurisdiction over PLI.

At a time when regulators and entrepreneurs around the world are trying to convince everyone that life insurance is a capital intensive industry and the actuaries are advising that premiums being charged should be loaded also for the cost of capital, PLI is making high profits by charging the lowest premiums and deploying no capital. The IRDA has a lot to learn from this organisation which has one decade of experience for every year's experience of the regulator.

The country has now three different sectors of insurance: (a) the private sector, deploying thousands of crores of rupees as capital; (b) the high profile public sector corporation LIC, having just Rs.5 crore capital; and (c) the low profile departmental sector PLI, having no capital. When it is conceded that 100 roses can bloom, why not allow just three roses to blossom freely — the first under the IRDA, the second under the Ministry of Finance and the third as a part of the Postal Department? The government can lay down broad guidelines governing product development, valuation and solvency requirements under which the three sectors have to function. Such an experiment will be unique and may be highly beneficial to the insuring public.

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Printable version | Mar 26, 2020 9:53:05 PM |

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