Insurance Industry · Source: Annual report 2012-2013 IRDA • The life insurance segment...
Transcript of Insurance Industry · Source: Annual report 2012-2013 IRDA • The life insurance segment...
Insurance Industry
Risk and Compliance
Hyderabad, 26th April, 2014
CA P R RAMESH
Agenda
1. Introduction
2. Overview of the Insurance Sector in India
3. Key Risks for the Insurance Sector
4. Importance of Compliance
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2
Introduction
3
4
What does it entail
Agreeing to the terms of an
insurance policy creates a contract
between the insured and the
insurer. In exchange for payments
from the insured (called premiums),
the insurer agrees to pay the
policy holder a sum of money
upon the occurrence of a specific
event.
Definition
A promise of compensation
for specific potential future
Risk in exchange for a
periodic payment, known as
premium
Types
Life Insurance: e.g. .Term,
Money back, endowment
etc.
General insurance: e.g..
Motor, Home, Medical etc
Role of Insurance
The insurance sector acts as a
mobilizer of savings, a financial
intermediary, a player along with
Bank & AMCs in investment
activities, a stabilizer of financial
markets and a risk manager
Insurance
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Overview of the Insurance Sector in India
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6
Overview of Insurance Sector in India (1/2)
Insurance in
India
Life Insurance
Non-Life
Insurance
Reinsurance
• 24 Life insurance companies
‒ LIC is the sole state owned insurance
company which recorded 2.9% growth
in FY 2012-13
• 29 Non-Life Insurance companies
‒ Both public sector insurers registered
growth of 14.6% while private sector
registered growth of 25.6%
• General Insurance Corporation (GIC) is the
sole national reinsurer
• There are 53 insurance companies of which 24 are in the life insurance business and 29
are non-life insurers. In addition to them there is one reinsurer
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Overview of Insurance Sector in India (2/2)
Source: Annual report 2012-2013 IRDA
• The life insurance segment contributes about 4 per cent to India’s gross domestic
product (GDP) in terms of total premiums underwritten annually
• It is grew at a healthy rate of 16.82% in 2012-13
• According to the IRDA annual report 2012-13, in the life insurance business India is
ranked 10th among 88 countries, for which data are published by Swiss Re
• The non-life insurance sector witnessed a 10.25% growth in 2012-13
• Services sector has the largest share in the GDP of the Indian economy (Economic
Survey). The Insurance sector contributes 17 per cent to the service sector
Snapshot
8
Market Segments in the Insurance Industry
Comparison
Source: Annual report 2012-2013 IRDA
• Share of Life insurance has declined from year 2008-09 by almost 8%
• Though life insurance still accounts for about 80% of the market, demand for non-life products is also
growing due to
- Increasing demand for insurance of both residential and commercial assets
- Rising healthcare cost
- Increasing prevalence of chronic diseases
Key Observations
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9
Pure
Pla
yer
• Insurance company without a partner
•Products are distributed via direct or intermediate channels only
•Advantages
•Highly skilled and dedicated employees / agents providing in-depth advice
• Independence
•Brand recognition
•Variety of products / Funds
•Agency network dominant channel
•Disadvantages
•No natural opportunities for cross selling insurance products
•More limited insight into financial situation of the customer
•Examples
•LIC and other Govt. Subsidiaries
•Reliance and Sahara
Non
-Bank J
V M
odel
•The insurance company distributes its products partly, through multi-banking channel under distribution agreements. JV Partner is a non-bank.
•Advantages
• Insurance Co. to have full role in production and a relatively smaller role in distribution
•Non-functional local presence may assist in distribution
•Leverage local brand
•Disadvantages
•Cultural differences
•Lack of best distribution practices
•Lack of control over quality of customer base
•Examples
•Bajaj Allianz, Birla Sunlife, Max-New York, Tata AIG, Chola-MS, Future Generali, etc.
Ba
nk J
V M
od
el •More or less balanced share-holding bet one or several banks and an insurance group
•Advantages
•Bank provides the brand, customers, and sales network
• Insurer provides the products, administration and customer service
•Possible use of shared service centers for back office activities
•Disadvantages
•Lack of control over the quality of the customer base/quality of sales effort (insurance manufacturer)
•Each shareholder must provide the appropriate support over the long term
•Cultural differences
•Examples
• ICICI, SBI, BoI, Canbank, Kotak Mahindra, IDBI, Universal, etc.
Captive M
odel
•Bank+ Insurance co.: An insurance company markets its products almost exclusively through the distribution channel of its own bank
•Advantages
• Increased control
•Alignment with business strategy
•Potential for full integration. May use shared service centers for back office activities
•Disadvantages
•Substantial investment
•May be exposed to inherent distribution weaknesses of the bank arm.
•Example
• ING Vysya
Prevalent Business Models
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10
Insurance density
Insurance Density in the Life and Non-Life insurance Segment
Source: Annual report 2012-13 IRDA
• During the first decade of liberalization a steady
increase in insurance density was observed
• It reached a maximum of USD 64.4 in the year
2009-10
• Over the last three years the insurance density
has registered a declining trend, partly due to
decline in sales of investment linked products
• During the year 2012-13 the insurance density
was USD 53.2
• Life insurance density has gone up from USD 9.1
in 2001 to 55.7 in 2009-10. But registered a
decline to 42.7 in 2012-13
• Non-life insurance density has shown a steady
increase from USD 2.4 in 2001 to 10.5 in 2012-13
Key Observations
• The measure of insurance density reflects the level of development of the insurance sector
• It is measured as the ratio of Insurance premium to population
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11
Insurance penetration
Insurance Penetration in the Life and Non-Life insurance Segment
Source: Annual report 2012-13 IRDA
• During the first decade of liberalization a steady
increase in insurance penetration was observed
• It reached a maximum of USD 5.2 in the year
2009-10
• Over the last three years the insurance
penetration has registered a declining trend
meaning the growth in Insurance premium is
lower than growth in GDP
• During the year 2012-13 the insurance density
was USD 3.9
• Life insurance density has gone up from USD 2.5
in 2001 to 4.6 in 2009-10. But registered a decline
to 3.17 in 2012-13
• Non-life insurance density has been around the
steady range of USD 0.5-0.7
Key Observations
• The measure of insurance penetration reflects the level of development of the insurance
sector
• It measured as the ratio of Insurance premium to GDP
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Growth in Life Insurance Premium
Life Insurance Premiums in Billion $
• Over FY03–FY12, life insurance premiums expanded at a compound annual growth rate (CAGR) of
20.1 per cent.
• The Life insurance industry recorded a premium of Rs. 2,87,202 Cr which was a 0.05% decline from
the previous year
• Private insurers posted a 6.87% decline from 2011-12 while LIC recoded a 2.92% growth
Source: Indian Brand Equity Foundation
13
• The life insurance segment contributes about 4
per cent to India’s gross domestic product (GDP)
• There are 23 private companies in the segment
• The state-owned Life Insurance Corporation
(LIC) dominates the field, with about 72.7 per
cent of the market share (IRDA) which was a
marginal increase from 70.68% seen in the
previous FY
• The market share of private investors has
declined from 29.2% in 2011-12 to 27.3% in
2012-13
Market Share of Life Insurance companies in India
Source: Indian Brand Equity Foundation
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Growth in Non-Life Insurance Premium
Non-Life Insurance Premiums in Billion $
Source: Indian Brand Equity Foundation
• Over FY03–FY12, non-life insurance premiums expanded at a compound annual growth
rate (CAGR) of 19.6 per cent.
• In FY 2012-13 the Non-Life insurance industry recorded growth of 19.10% in the total
underwritten premium
• Both the life and non-life insurers posted lower growth rates from year 2011-12
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15
• The Motor business continued to be the largest
non-life insurance segment with 47.05% share
exhibiting a 1.5% increase from 2011-12
• The health segment registered a growth of
18.66% from 2011-12
• The share of the health segment has declined
marginally from 22.27 in 2011-12 to 22.19% in
2012-13 from
• The premium collected from Fire and Marine
segments increased by 22.63% and 5.36%
respectively
Market Share of Non-Life Insurance companies in
India
Source: Annual Report 2012-13 IRDA
Market Share
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Key risks for the insurance sector
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Key Risks facing the insurance industry
17
1 2 3 5 4
7 8 6
9 10
Macro-Economic Trends
Reputational Risk
Cyber-risk and Data Security
Talent Recruiting Skills
Operational Risk
Availability and cost of Capital Others – New Product Risk,
Underwriting risk, etc.
Distribution and New
Product Risk
Corporate Governance
Failures
Regulation
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Macro-Economic Trends
18
• Environmental uncertainties will continue to
challenge firms
• Ongoing uncertainty in the macroeconomic
environment, as well as future regulatory changes,
will continue to challenge firms’ risk management.
• Low interest rates and volatile equity markets are
challenging for many insurers, who have to balance
maintaining adequate solvency levels with giving
their consumers a fair deal
• Annuity providers typically use corporate bonds to
match their liabilities and so are particularly exposed
to renewed widening of credit spreads on those
bonds which would cause asset values to fall by
more than liability values
• Opportunities for returns on investments are likely to
remain limited until 2015, which will pressure
insurers to improve their underwriting margins
• Another popular measure is to expand or buy into
new markets, or develop products that either cover
insurable risk or improve current offerings
Macro-Economic
Trends
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Regulation
19
• While Solvency II was intended to standardize the
European insurance market by aligning
regulations across national boundaries of EU
Member States, the effect of the regime has been
far reaching
• It today aims to provide greater coordination of
insurance regulation on a global scale, but at the
same time also presents a potentially difficult
transition period as companies implement the
substantial changes necessary to meet new
regulatory requirements
• IRDA has been considering migrating from a factor
based solvency regime to a risk based solvency
regime. While this has not been implemented yet,
its only a matter of time, when insurers would be
required to develop models and assess risk
internally
• While non-compliance would result in penalties
and censures, usage of statistical models would
open the insurers to other risks such as model risk
Regulation
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Reputational Risk
20
• With increased regulation comes a greater
chance of failing to comply with aspects of each
new requirement
• This may lead not only to fines and other
sanctions, but also to the perception of failing to
adhere to a crucial ethical corporate standard
• For an insurance company, the consequence
can be severe: a loss of trust among its
customers
• Many damaged reputations have been directly
linked to specific instances of unpopular
corporate practices or management failure.
• Furthermore, there is the reputational impact of
potential job losses and their effect on
corporate image in terms of reliability, solvency
and empathy among customers
• With the growing role of internet usage and
social media in the day to day life, one bad
tweet can dramatically affect the perception of
the insurer
Reputational Risk
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Corporate Governance Failures
21
• The fallout from the financial crisis has led to a rise
in shareholder activism and increased emphasis on
executive compensation and the role of the board
• The role of the Board has changed from ‘acting
primarily as a source of outside advice to senior
management in developing and implementing
corporate strategy’ to the Board ‘becoming an
important check on the aspirations and expectations
of senior management — intended to ensure that
the shareholders’ interests are paramount’
• The regulator sets out the broad guidelines and
frameworks for corporate governance including the
minimum requirements of committees and roles of
independent / non-executive directors
• Combined with greater transparency requirements,
this can limit the chances of failure in corporate
governance and oversight.
• This is particularly important for an industry that
relies heavily on cultivating and retaining the trust of
its customers.
Corporate
Governance
Failures
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Cyber-risk and Data Security
22
• The availability of sophisticated hacking tools on the
internet has greatly expanded the pool of people
capable of seriously breaching corporate security
• With a deepening focus on customer experience,
cyber-risk is complicated by the multitude of online
interactions with customers and the need to protect,
as well as analyze, the personal nature of data
collected digitally.
• With many firms becoming leaner and opting to use
cloud computing, off shoring data and processes to
third party firms exposing them to greater technology
risk like cyber attacks
• A cloud service provider concentration could become
a second order risk if such providers were subject to
multiple cyber-attacks causing a failure of services.
Cyber-risk and
data security
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Talent Recruiting Skills
23
• Dual challenge - Acquisition of new skills
(example: for tacking cyber-security) and
Retaining existing expertise.
• New levels of transparency that are central to
emerging regulatory regimes also apply to
compensation and bonuses, making senior
executives potential targets of unwelcome
shareholder scrutiny and thereby a tougher
attitude towards them leading to a greater
exodus from the C-suite
• Outside the C-suite, there is a need for the
insurance industry to look at retention strategies
for skilled and experienced professionals.
• At the specialist level, the need for mathematics
and software experts to maximize advances in
sophisticated modeling is creating a seller’s
market for those with the requisite skills.
• Additionally, the shortage of actuaries is also
expected to be a source of great concern
Talent recruiting
skills
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Distribution and New Product Risk
24
• The distribution channels used for marketing and
sale of insurance policies could lead to varied types
of risks for the insurer such as:
• Failure to maintain strong distribution
relationships
• Failure to diversify distribution
• Lack of controls over distribution channels
leading to mis-selling
• Even IRDA has issued several guidelines on
distribution channels to prevent frauds /mis-selling
• New types of product pose additional risks to firms
and consumers
• Due to high competition firms may consider moving
into new, higher margin products such as variable
annuities which can be costly to provide and often
require long-term active management of hedging
programmes to deliver the guarantees and prevent
erosion of the provider’s capital.
• Could give rise to increased compliance and
operational risks
Distribution and
New Product Risk
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Operational Risk
25
• Operational risk may arise from the following sub-
categories:
• Fraud: Any act or omission, by any person, made
with dishonest or potentially illegal intent, to obtain
a benefit or advantage, for one’s self or any other
person.
• Project & Change Management: Failure to deliver
the expected benefit of an initiative, or inadequate
implementation of a project initiative.
• Process Management: Human or system failure to
deliver intended objectives.
• Business Continuity Management: Any event that
disrupts the insurer’s business operations and/or
performance.
• System Integrity / Security & Information
Management: Inadequate system design or
capabilities to maintain business functionality,
information security or information management.
Operational risk
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Availability and Cost of Capital
26
• The industry’s enforced shift away from asset-
based income streams has had a considerable
impact on attracting investors
• While IRDA has issued draft guidelines for
Solvency II in February 2013, in March 2014 it
has stated that insurers in India are not ready
for the risk based solvency regime – the
uncertainty over the implementation date
continues
• It is not clear what capital requirements will be
in uncertain financial conditions, which makes it
difficult to determine how much capital a
company will need to access
• An additional aspect of the renewed emphasis
on capital requirements is the amount of time
and effort that is spent by insurers to convince
regulators and communicate to investors that
they have sufficient capital for both now and the
future
Availability and
Cost of Capital
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Other Risks
27
Investment
Risk;
Underwriting
Risk;
New Product
Risk; Strategic
Risk; etc.
• Underwriting risk is the risk that the premiums
and investments collected will not be enough to
cover the expenses from paying for claims on the
policy
• For companies, understanding the underwriting
process and the requirements at each stage of
the process will allow a company to prepare and
present itself accordingly.
• Strategic risk may arise from flawed strategy or
the failure to meet strategic initiatives; poor
business decisions or business environment
changes
• New types of product could give rise to increased
compliance and operational risks
• There is also a potential risk of poor returns for
consumers if, for instance, product pricing (which
includes the cost of guarantees) leads to charges
exceeding potential investment returns.
• Other risks such as investment risk, liquidity risk,
etc.
Other Risks
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Importance of Compliance
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Need for Regulations
29
Trustees of Policyholders Insurance companies act as Trustees to the whole
body of Policyholders. Large payouts are guaranteed
in relation to the premium paid, hence there is
incentive for fraudulent elements to indulge in misuse.
Assurance Due to the trust inherent in the insurance industry, it is
important to provide assurance to not only
policyholders but to the shareholders and other
stakeholders
Promotion of Transparency It is imperative to promote fairness, transparency and
orderly conduct in financial markets dealing with
insurance and build a reliable MIS to enforce high
standards of financial soundness
Prevention of Fraud / Misuse Insurance Company is a Financial Institution and
dealing in Financial Assets thus is Susceptible to
Fraud & Misuse
Standardization In order to create a level-playing field for all insurers, it
is important to have a standardized set of rules and
regulations in the industry
Need for
Regulations
Prevention of
Fraud / Misuse Assurance
Promotion of
Transparency
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Importance of Compliance
30
An effective
Compliance function is
the key to identifying
and mitigating risks
and protecting the
business from
regulatory censure and
protecting brand and
reputation
Customer Confidence Brand Perception
Regulatory
Comfort
Preferential
Treatment in
expansion,
product
approvals
Reduction in Risk Increase in
Market Share
Can drive new
regulations or
ability to
Influence
Regulations
Lower cost of
operations
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Cost of Non-Compliance
31
Could range from
reprimanding the firm to
demanding changes in
Board and governance to
public censuring of the
firm
Regulatory
Action
IRDA has issued warnings and imposed
severe monetary penalties in the past to
deter insurers from straying from their
responsibilities
Penalties
Loss of
Brand Image
Any adverse action
by the regulator
results in dilution of
brand equity of the
insurance firm
Closure of
Business In an extreme case of non-
compliance IRDA may
require the insurer to change
their business model, stop a
product or close their
business altogether
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Compliance Mechanism in Insurance Industry
32 ©2014 Deloitte Touche Tohmatsu India Pvt. Ltd. All rights reserved.
M A N A G I N G I N S U R A N C E A S S E T S – I R DA & I C A I - E F F O R T
Inv. Reg
Transactions
Systems
HW, SW
&
Interfaces
Inv Risk Mgmt Guidelines
Technical
Guide for
Certification
Internal /
Concurrent
Audit
Technical
Guide for
Trans Audit
CA Certificate +
Audit Report (Checklist )
CA Certificate +
Exception Report
FORM 4 certified by CEO / CIO/
CFO
IRDA Issues of Non Compliance
Certified by Mgmt
ICAI
1
2
-ve Feedback on Policy / Reg. issues
ICAI
IRDA
SO
P
STAGE - 1
STAGE - 2
SCAI
A B
.
Board
Audit Committee
Investment Committee
CEO / CIO / CFO
Inv Dept (FO / MO/ BO)
Custodian
Int. / Concurrent Auditor
IRDA Board
Ins Advisory Comm.
Regulations
Circulars, Guidelines
Working Group
COBIP & IT Committee,
ASB , AASB, FRRB
Tech Guide on RM Systems
Tech Guide on I/C Audit
Br.
Front End Sys
Bank
Pre. A/c
A/c Dept
HQ
Proposal
Deposit Rcpt
Deposit /
Policy
Details
Accounting
System
Under
Writing
Trd. Policy
(Life, Pen)
ULIP
(Less Chg)
Investment
Addl. Inv made
as per Res. Req
(Trd & Non
Unit Res.)
ULIP Units
Created
Through System E-tfr
Proposal Deposit & Collection Reconciliation Fund Info
BRS (thro’ Sys)
Reserves (Monthly)
Units
(Daily)
Surplus
Tfr
Reserves
(Monthly)
Inv. Reg
PREMIUM INFLOW & INVESTMENT
Act Reg
A/c Reg
End
2
1 3
Mkt Conduct
4
INVESTMENT & REPORTING
Underwriting
Charges Units
Fund Wise
Actuarial
Dept
Accounts
Dept
Investment
Dept
1
Non UL
& Trd
Fund
ULFund 1 ULFund 2 ULFund ‘n’
A. FORM 3A (Part A)
PH [Non UL Res]
& Trd Funds
C. FORM 3A (Part A)
PH - (Non-Par)
FORM 3A (Part B) for Pattern
2
(Non UL Res)
(Unit Fund (Non Par))
3 Net of Chgs. (Units) - Daily
Non-UL Res - Monthly
Tfr. of Surplus
Act Reg A/c Reg
Inv. Reg
Addl Res. for TRD
Policies TRD
Policies
REPORTING – INVESTMENT OPERATIONS
Front Office Mid Office Back Office
1. Fund Mgr (Debt / Equity)
2. Dealers
3. Placing Investments
1. Risk Management
2. Tracking of Limits
(Regulatory & Co level)
3. Review, Monitoring
1. Data input error checking
2. Settlement
3. NAV / Fund Accounting
4. Portfolio Valuation
5. Reconciliation
FO Manager MO Manager BO Manager
Chief Inv Officer Chief Financial Officer
Chief Executive Officer
COMPLIANCE CYCLE
Surplus
Premium
Exposure
Check
(FO)
Invested
As per
Regulations
(FO)
Investment
Accounting
(BO)
Risk
Management
(MO)
Internal /
Regulatory
Reporting
feedback
Compliance
Chk for
Pattern
Un-resolved
Observations
Compiled
INSURER
Inspection
Done
With
Contracted
CAs
Qtly. Comp
Concurrently
Audited by CAs
Compliance Certified by CEO / CIO / CFO
Form 4
Filed
Within
Insurance
Company
Within
IRDA
Thank You
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Annexure
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41
Regulatory Climate in India
41
41
Sector
Penetration
Customers
and
Channels
Business
Profile
• Insurance Regulator in India:
Insurance Regulatory and
Development Authority
• Statutory guidelines applicable:
• The Insurance Act – 1938
• The IRDA Act – 1999
• Changing regulatory guidelines and
IRDA regulations have had far
reaching impact on the growth of
the insurance industry
• Impacts of IRDA on insurance
sector beyond regulation:
• Policyholders interest protection
• Development of sector /
products / distribution channels
• Governance
• Customers education
• Technology / Workforce
• Others
Areas of regulatory impact
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42
Regulatory Climate in India
42
42
Business
Profile
• IRDA has issued Linked Insurance and Non-Linked Insurance Products
Regulations, 2013 stating new product guidelines. All the existing group
products have been withdrawn from October 1, 2013 and individual products
from January 1, 2014 which are not complying with the new regulations
• IRDA has laid down guidelines / framework on detection, classification,
monitoring, reporting and mitigation of frauds that mandate insurers to put in
place, as part of their corporate governance structure, fraud detection and
mitigation measures
• Insurers would need to develop fraud control and reporting system
• Applicability of service tax on services provided by IRDA to Insurance
Companies, TPA’s , brokers, agents, repositories, web aggregators, referral
entities and surveyors relating to grant of registration, licenses, renewals etc.
with effect from January 1, 2014.
• The premium on life insurance products is likely to go up because of this
Product
Profile
Corporate
Governance
Applicability
of Taxes
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43
Regulatory Climate in India
43
43
Sector
Penetration
• IRDA has issued draft guidelines proposing life cover for people living with
HIV/AIDS (PLHA), that were previously considered among common exclusions
by life insurers
• IRDA has released guidelines on the distribution of insurance policies (both life
and non-life) through the Common Service Centers (CSCs) which are planned
to be set-up across the country as a part of the national e-governance plan. The
main purpose of these guidelines is to enhance insurance penetration in rural
areas. This is as per an IRDA circular released in September 2013
Coverage
Insurance
Inclusion
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Regulatory Climate in India
44
Customers
and
Channels
• IRDA has released new draft micro insurance regulations that require all micro
insurance products to have a lock-in period of five years from the date of
inception of the policy. For the distribution of micro-insurance products, regional
rural banks, micro-finance institutions, district cooperative banks, non-
governmental organizations, self-help groups, urban cooperative banks, banking
correspondents, among others, could be allowed. This will need robust and
secure mobility based solutions for sales and servicing of such policies
• IRDA to accept KYC done by banks leading to need for tighter integration of
core PMS with banc assurance partners
• IRDA has published a paper to allow banks to sell policies of more than one
insurer. Insurance companies will need to build flexible and service enabled IT
solutions to enable seamless integration across partners
• The trend of using technology and mobile-based applications to make the sales
process more efficient continues.
• Various data mining tools and predictive models are also leveraged to increase
persistency rates
Distribution
Channels
KYC
Technology
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