A committee set up by the IRDAI has recommended that the regulator consider shifting to outcome based regulations that encourage behaviour in the direction of desired outcomes while leaving operational details (i.e. input parameters) to the discretion of insurers.
The panel says the IRDAI should put forth a roadmap for the industry to move towards outcome based regulations. The recommendations are set out in a report released last week on findings following a review by the committee of the existing framework for insurance products.
The committee says that the stage is now set for the industry to counter new challenges, such as evolving customer needs, changing demographics, emerging distribution landscape and the need for continuous innovation.
“To address these, it is imperative that the industry adapt and the regulatory landscape evolve to support these innovations without compromising the degree of protection offered to customers,” the report said.
In the context of product regulations, the committee sees the following advantages of moving to outcome based regulations:
- Reduce the overall infrastructure cost of multiple restructuring and aligning the product design for compliance
- Allow insurers to quickly adapt to the changing ecosystem and market factors
- Foster self regulation by enabling higher internal governance by the insurers themselves
- Increase the scope for innovation that deliver meaningful value to customers.
The Authority has already taken some steps in moving towards outcome based regulations which is reflected to some extent in product regulations issued in 2013. Some of the areas in the regulations that indicate an output based governance are:
- RIY (Reduction in Yield) for unit linked that ensures minimum level of benefit at various stages;
- Set up of internal With Profits Committee to oversee certain aspects of With Profits products.
From a regulatory perspective, additional safeguards of reporting and adequate disclosures can be mandated instead of input parameters, says the report. The mandate for compliance should be made stringent and any non-compliance dealt with severely.