Why insurance regulation may fail

By: Dhirendra Kumar

Some years ago, during the course of a cricket test match, a commentator made a scathing remark about the England cricket captain Nasser Hussain: 'His idea of good captaincy is to put a fielder wherever the batsman hit the last shot.'

The attempt by Indian financial regulators to stamp out anti-customer tactics of insurers, banks and mutual funds closely resembles this phenomenon. One such regulation is currently in the process of being enacted. The insurance amendment bill, which will probably be promulgated as an ordinance first, has a measure that forbids insurance companies from rejecting a policy on any grounds, even deliberate fraud, if it is three years old. Earlier, this period was two years, but fraud was an exception. An insurer could reject a policy even after decades, generally when faced with a death claim, by saying that concealment of some information counted as fraud.
In recent years, with the rise of policies that require 'no medical check', especially the cheap online ones, this type of rejection has increased a lot. The new measure being introduced in the insurance bill will solve this problem because after three years a policy cannot be rejected on any grounds. Right? Not really. Here's what I predict will happen. Insurance companies will become even more aggressive in selling the policies whose selling conditions will be such that fraud can be claimed relatively easily. As far as possible, these policies are also likely to be structured to extract as much premium as possible during the first three years. After this, instead of claiming fraud at the time of the insured person's death, they will start doing so towards the end of the third year.

It may be possible to change the behaviour of India's financial services providers, but plugging the last scam in a way that it points to the next one is certainly not the way to go about it. If a captain is interested in winning the match, he has to anticipate the next shot that the batsman will play. This is probably what needs to be emulated to ensure that the regulations have the desired impact.

(The writer is the CEO, Value Research)