Insurance is nothing if not about keeping promises. An insurance contract is a promise to pay in case a contingency arises. Such a promise is bought by paying a small premium. By pooling a large number of uncorrelated risks an insurer can break even, meaning pay out the relatively few claims based on a wider collection of premia. Competition drives down premia and makes insurance cheaper, but also divides up the large pool. For efficient risk pooling, large is the pool of insurees per insurer, that is, fewer the number of insurers, lower will be the premia. But this may also lead to monopolistic tendency. Thus, one of the first and primary concerns of the regulator is to decide on an appropriate market structure: many or few players? The IRDA says that it will not limit any number, but would of course scrutinise every application before giving a license.

The second concern of the IRDA is ensuring ongoing solvency and financial soundness of all players who are licenced. This implies some norms of capital adequacy, solvency, investment portfolios, asset liability matching and so on. LIC the life insurer, in monopoly business for the last 44 years had a paid up capital of only five crores, when current norms ask for one hundred. Note that LIC already has investible funds to the tune of one lakh crores. But upon IRDA's insistence the LIC (or rather the government) relented and has agreed to recapitalise LIC. An early test of IRDA's regulatory teeth? Time will tell.

The third concern of IRDA, peculiar to the Indian setting is in the wording of the IRDA Act itself. It is the "development" brief given to the regulator. So the watchdog (or bloodhound) of the industry also has to nourish and nurture the industry. This actually creates some conflict with the next objective, the fourth one, namely protection of consumer interest. By this I mean that consumers are not duped and there is no "fine print mischief" on part of insurers. In a country with substantial illiteracy, and recent CRB type of episodes, this can be a daunting task. I don't know whether to call the UTI-Rajalakshmi case a case of "fine print mischief" or naive myopia of investors. But, in any case, for insurance, the IRDA must provide safeguards. This might mean initially limiting and standardising contracts, to minimise escape clauses. But standardisation is inherently in conflict with dynamic growth of the industry, since it tends to stifle product innovation and some creative freedom. The IRDA willhave to play by its ear on this one in balancing standardisation with innovation.

Actually, since the industry also does not have a sufficiently rich and time tested database to enable appropriate pricing of innovative products, some initial compulsory standardisation may not be a bad thing and might be welcomed by all players. There are many things that IRDA will need to do, like consumer education, training actuaries, developing accounting norms, developing databases to create industry benchmarks and so on. It will also need to plan on its own eventual dispensability. This sounds funny but is premised on al least two distinct phenomena observed in the OECD world. Firstly the move towards self-regulation by the industry, and secondly, the emerging view of a unified regulatory regime for all financial services, be they securities, banking or insurance. The UK is an example of the latter.

There are also other not so futuristic trends which the IRDA needs to be clued into now. Take bank-assuance - banks selling insurance policies. Banks have a pretty good idea of the profile of their customers and are best positioned to gauge risk profiles. Insurance companies providing banking facilities? We have heard of mutual funds providing chequebooks, but now with unit linked insurance plans, you will probably be able to write cheques against your policies. There is also a trend wherein loans and insurance are packaged and sold together by banks.This leads to overlap of regulatory turfs. Is this the RBI or the IRDA's headache?

The UK example mentioned above, is a move to resolve such sticky situations by a unified regulator. Finally a somewhat futuristic regulatory question: can companies deny insurance based on genes? Knowing whether someone is a smoker or a non-smoker helps in fine tuning premiums, but knowing too much might hurt the insuree. Should the IRDA allow this? Only time will tell.