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Setting PAN limits in insurance, MF investments
June, 05th 2008

Ahead of this years budget, insurance regulator Irdas views were sought on a proposal to make permanent account number (PAN) mandatory for insurance investments.

Besides oversight, financial regulators are mandated to develop the market. Irda seemed to have taken that mandate seriously: It didnt favour the PAN move. The rationale was, this would dampen the enthusiasm of insurance distributors mainly agents on whom the industry leans heavily. Irda worried that a diktat on PAN could put off potential investors.

Indeed, insurance penetration in India is low. Measured in terms of premium collections, the penetration is close to 4.1% of GDP in life and 0.6% of the GDP in non-life. This is way below the figures in the UK and Japan.

According to the industry , distributors already comply with rigorous norms. The insurance industry is apprehensive about getting bogged down in more paperwork if PAN is made mandatory.

Irda also felt that insurers were obtaining PAN from clients whenever the premiums paid or sum assured breached a certain threshold. These are internal benchmarks set by insurers who conduct a due diligence. The aim is to find if a policyholder has the ability to pay his premium.

Indian insurers, eyeing huge rural opportunities , argue that compulsory PAN could dampen rural sales. Getting farmers to buy policies could be a challenge as many of them may not have a PAN card.

Perhaps Irdas case was not strong enough. The government went ahead and announced in the budget that PAN would be mandatory for all financial market transactions, subject to certain thresholds. The limits will be imposed in consultation with Irda.

The mutual fund industry too, raised a hue and cry over the move to make PAN mandatory for MF investments. Fund houses argued that it could impact investments in MFs, and instead, money may be go to unit-linked insurance plans (Ulips) offered by insurance companies.

But the government did not budge and made PAN mandatory for investments in MFs. No threshold was set for MFs. Similarly, transactions in the securities market are also covered.

Over the past few few years, PAN has evolved from being just an identification number of income tax purposes. It has virtually become a citizens identification number, though the last word on this is not out yet. Besides an individual, banks, credit card companies and other agencies are now required to quote PAN of their clients in select financial transactions. The data is then matched with the tax-returns of the individual to see if he is short-paying or evading taxes. In short, PAN is handy to establish an audit trail in financial transactions.

So, there is no case for excluding investors buying Ulips from quoting PAN. Ulips are popular savings instruments as they offer protection in terms of life cover and flexibility in investments to the policyholder. The investments are similar to a mutual fund, though insurers say that a one-to-one comparison may not be correct.

A threshold if at all may be justified for insurance products other than Ulips mainly pure life cover. But the bulk of the products being peddled by the industry are Ulips and firms here say that they are no different from other markets. So, if at all a threshold is justified, what ought to be the threshold for other insurance products?

Perhaps a good benchmark could be the limit set for insurance companies reporting transactions under the anti-money laundering legislation.

Here, micro insurance policies with an aggregate annual premium of up to Rs 10,000 (from all policies) are exempt. The limits could be reviewed periodically when with rising incomes the ceiling could be raised.

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