Issues facing Insurance Regulatory Agencies

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Issues facing Insurance Regulatory Agencies C.S. Rao, Chairman, IRDA 14 th November, 2005

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Issues facing Insurance Regulatory Agencies. C.S. Rao, Chairman, IRDA 14 th November, 2005. Issues. Economic Reforms Process Evolution of Insurance in India Registration Process Control & Regulation of Rates, Terms & Conditions Financial Monitoring of Insurance Companies - PowerPoint PPT Presentation

Transcript of Issues facing Insurance Regulatory Agencies

Page 1: Issues facing Insurance Regulatory Agencies

Issues facing Insurance Regulatory Agencies

C.S. Rao, Chairman, IRDA

14th November, 2005

Page 2: Issues facing Insurance Regulatory Agencies

Issues

1. Economic Reforms Process

2. Evolution of Insurance in India

3. Registration Process

4. Control & Regulation of Rates, Terms & Conditions

5. Financial Monitoring of Insurance Companies

6. Insurance Intermediaries

7. Monitoring of Obligations to Rural & Social Sector

8. Protection of Policyholder’s Interests

9. Development Issues

10. Upcoming Issues

Page 3: Issues facing Insurance Regulatory Agencies

Economic Reforms Process (1)

Economic Reforms

Financial Sector Reforms

Insurance Reforms

Page 4: Issues facing Insurance Regulatory Agencies

Evolution of Insurance in India (2-a)

• Life Insurance Companies Act of 1912

• Provident Fund Act of 1912

• Insurance Act of 1938 and amendments

• Life Insurance Act of 1956

• General Insurance Business Nationalization Act of 1972

• Insurance Regulatory and Development Act of 1999

Page 5: Issues facing Insurance Regulatory Agencies

Need for Regulatory Intervention (2-b)

Nationalised Market

Regulated Market

Free Market

Regulated Market

Insurance Act, 1938

LIC Act, 1956GIBNA, 1972

IRDA Act, 1999

Plagued byFraud

- Urban centric- bankruptcies

-contribution to development of market-untapped market potential-absence of consumer choice

-Level playing field-Consumer Protection-Public PrivatePartnership

Page 6: Issues facing Insurance Regulatory Agencies

InsuranceReforms (2-c)

Malohtra Committee

-IRDA Act-Insurance Act

Legal Reforms

-Pvt. co.s with min. paid up cap. of Rs. 1 bn.-Allow foreign co.s in collaboration with dom. co.s

-Setting up an interim insurance regulatory body aheadof reforms

-Modern supervisor-based on IAIS Core Principles

-Pension Regulator

-Law Commission -Umbrella

Legislation- Flexibility for

better response

- Scope for continuous review

Page 7: Issues facing Insurance Regulatory Agencies

Registration of Insurance Companies (3-a)

• Legal form of insurance company.

• Capital and Deposit requirements

• Business plan

• Projected Balance Sheet for 5 years

• Suitability of Owners and Sr. Management

• ‘Fit and proper” test for Key Management appointments

• Assurance to infuse additional capital as and when required

Page 8: Issues facing Insurance Regulatory Agencies

Legal Form of New Company (3-b)• Only permitted legal form is a joint stock company or cooperative

societies• No insurer other than an Indian insurance company, shall carry on any

class of insurance business• Separate companies for life and non-life business• Foreign companies permitted to enter into a joint venture arrangement

with an Indian company with a share holding not exceeding 26%.• Holding of the foreign partners in the Indian promoter companies is

considered while deciding on this limitation of 26%.• No promoter to have more than 26% share and where it is in excess, it

should be divested in phased manner. • Preference for registration to those who underwrite Health insurance.• Rationale

– Regulatory Comfort – More Transparent– Better Corporate Governance

Page 9: Issues facing Insurance Regulatory Agencies

Minimum Capital Requirement (3-c)

• No insurer carrying on the business of life or general insurance or reinsurance in India shall be registered unless:– a paid-up equity capital of rupees one hundred crore (US $ 25 mn) in

case of a person carrying on life insurance or general insurance or

– a paid-up equity capital of rupees two hundred crore (US $ 50 mn) in case of a person carrying on exclusively the business of reinsurance.

• Rationale

– Financially strong players capable to meet the liabilities of the policyholders are in the market.

– Entry barrier for small and marginal applicants.

Page 10: Issues facing Insurance Regulatory Agencies

Deposit Requirement (3-d)• Amount to be deposited with the Reserve Bank of India is:

– In the case of life insurance business, a sum equivalent to one percent of its total gross premium written in India in a financial year not exceeding rupees 10 crores. (US$ 2.5mn)

– In the case of general insurance business, a sum equivalent to three percent of the total gross premium written in India in a financial year not exceeding rupees 10 crores. (US$ 2.5mn)

– In the case of reinsurance business, a sum of rupees 20 crores (US$ 5mn)

• Rationale– Additional financial cushion for protection of policyholders liabilities.

Page 11: Issues facing Insurance Regulatory Agencies

Business Plan (3-e)• Application form requires a five-year business plan:

– Premium Income/ Amount of sales

– Size of sales force/ sales support/ administrative staff

– Investment income

– Commission and other related expenses/ Expenses of management

– Statutory reserves/ Required solvency margin

– Profit and Loss Accounts and balance sheets

– Break-even periods and return on capital

– Geographical spread of business

– Market Segmentation

• Rationale – Long term commitment

– Increased insurance penetration in the country

Page 12: Issues facing Insurance Regulatory Agencies

Suitability of Owners (3-f)

• IRDA needs to be satisfied that– the financial condition and the general character of management of the

applicant are sound

– the interests of the general public will be served if the certificate of registration is granted to the applicant

• Due diligence regarding the background– Regulatory clearances from Indian regulators like RBI, SEBI, Income

Tax clearances in case of Indian promoter

– Foreign promoters track record from home country regulator

• Rationale– Comfort for the insured and the regulator

Page 13: Issues facing Insurance Regulatory Agencies

Suitability of Directors & Sr. Mgmt (3-g)

• Application details include:– Name, address and the occupation of the directors, the proprietors,

manager in India and key persons– Detailed information required is spread over

• academic and professional qualifications• working experience over 15 years• reputation and character• association with a company which was wound up or under

receivership during the period of their association– Key persons are defined as chief executive, chief marketing officer,

appointed actuary, chief investment officer, chief internal audit and chief financial officer

• Rationale – Professionally qualified persons are appointed to handle the affairs of the

company– Ensure that good people with reputable background act as trustees

Page 14: Issues facing Insurance Regulatory Agencies

Control and regulation of premium rates, terms & conditions (4)

• File & Use– Life insurance

• Minimum sum assured

• Premium/ benefits

• Expenses/ exit conditions

• Actuarial assumptions

• Reasonableness of illustrations

– Non life insurance• Tariff products (Fire, Motor, Engineering) regulated by TAC

• Non tariff products – to be filed with IRDA

• Rationale– Protect the interests of the policyholder

– Encourage product innovation

Page 15: Issues facing Insurance Regulatory Agencies

Financial Monitoring of Insurance Companies (5)

• Actuarial valuation of liabilities and other matters• Scrutiny Of Financial Statements • Investments• Reinsurance

Page 16: Issues facing Insurance Regulatory Agencies

Actuarial Matters (5-a)• Life Insurer must have an appointed actuary• Rendering actuarial advice to the management of the insurer

– product design and pricing; insurance contract wording; Investments; and reinsurance

• Monitoring the solvency of the insurers• Valuation of the policy liabilities• Distribution of surplus• Peer Review• In the case general insurance business to ensure

– fairness of rates for in-house tariff– determination of liabilities for outstanding claims (IBNR)

• Rationale– Appointed Actuary acts as the eyes and ears of the Authority in the company– Matching of Assets and Liabilities– Adequate provisions for outstanding claims– Solvency Margin of atleast 150% to be ensured at all times

Page 17: Issues facing Insurance Regulatory Agencies

Scrutiny Of Financial Statements (5-b)• Part of off-site inspection of the company

– Profitability of operations

– Compliance with accounting standards

– Capital increase to cover deficit in results

– Control on expenses

– Healthy business growth

– Satisfactory investment return

– Adequacy of the internal controls and processes

– Satisfactory risk management strategy

• Rationale– To assess the financial health of the insurer

– To ensure that the accounts of the company are prepared as the IRDA’s accounting regulations

Page 18: Issues facing Insurance Regulatory Agencies

Investment of Funds (5-c)• No insurer shall directly or indirectly invest outside India the funds of

the policy holders• Mandatory investment of funds in infrastructure & social sectors• Investments only in graded securities with minimum rating of AA of

Standard & Poor or its equivalent• Every insurer to have an Investment Committee consisting of CEO, 2

non executive directors, Chiefs of Finance & Investment and A.A.• Exposure Limits set for i) Investee Company; ii) Investee Group; iii)

Industry Sector; iv) Promoter’s Group• Rationale

– Pattern of Investments designed to control risk– Ensure adequate spread of investments and diversification– Maximise return on investments and have adequate safety of securities

Page 19: Issues facing Insurance Regulatory Agencies

Reinsurance (5-d)

• Obligatory cession of 20% to Indian reinsurer

• Filing of Reinsurance Programme and copies of Treaty slips

• Placement of reinsurance with at least BBB rated companies

• Not more than 10% of the total reinsurance premium ceded outside India can be placed with one reinsurer.

• Rationale– Maximising retention within the country

– Securing the best possible protection for the reinsurance costs incurred

– Develop local capacity to retain risks within the country

– Spread of risks through placements with different reinsurers

Page 20: Issues facing Insurance Regulatory Agencies

Insurance Intermediaries (6)

• Agents/ Brokers/ Third Party Administrators/ Surveyors and Loss Assessors– Licensing of Insurance intermediaries

– Compulsory training requirements

– Passing of examinations

– Code of Conduct

• Rationale– Only qualified and trained intermediaries to service the insurance

customers are in the insurance market

– Strict deterrence for any wrong doing

Page 21: Issues facing Insurance Regulatory Agencies

Monitoring of Rural& Social Sector Obligations (7)

• Rural Sector– Life Insurer

• 7% (1st F.Y.)/ 9% (2nd F.Y.)/ 12% (3rd F.Y.)/ 14% (4th F.Y.)/ 16% (5th F.Y.) of total policies written direct in that year

– General Insurer• 2% (1st F.Y.)/ 3% (2nd F.Y.)/ 5% (thereafter) of total gross premium income

written direct in that year

• Social Sector – Life and General Insurer– 5,000 (1st F.Y.)/ 7,500 (2nd F.Y.)/ 10,000 (3rd F.Y.)/ 15,000 (4th F.Y.)/ 20,000 (5th

F.Y.) lives

• Rationale– To carry out the mandate of the Parliament so that benefits of insurance reforms

reach the poor and socially weaker classes.

Page 22: Issues facing Insurance Regulatory Agencies

Protection of Policyholders’s Interest (8)

• Prospectus of any product shall clearly state the scope of the benefits, extent of cover, warranties, exceptions and conditions of the cover.

• Provide all material information to the prospect to enable him to decide on buying the product.

• Insurers, agents and intermediaries to abide by the code of conduct.• Proposal shall be processed within 15 days.• Proper grievance handling system, information on ombudsman.• Surveyor should reach site of accident within 72 hrs.• After receipt of report settlement within 30 days.• Penal interest @ 2% above bank rate for delay in payment of claim• Rationale

– Mission of the Authority– Protect interests of policyholder in its dealing with the insurers– Empower policyholder to demand minimum levels of service

Page 23: Issues facing Insurance Regulatory Agencies

Development Issues (9)

Self Regulation

CorporateGovernance

Detariffing in

Gen. ins

Rural and

Social

Micro insurance

HealthInsurance

Distribution

Development Role

-Brokers, Agents, Referrals-Pre Licensing Trg. & Exam-Code of conduct

-Wkg. Gp.-Database

-Protocols-TPAs

-Regulatory Obligation-Rural Agent- New channels

-Role of coopsand NGOs-Referrals

-Risk carrier?

-Life and Gen Ins Councils

-Act. Soc of India-Surveyors Inst.

-IBAI

-Cross subsidy?-Market based pricing-Risk sensitive prem rate-Aligning data base with rating factors

-No listed Ins co.-Mgt. practice

Page 24: Issues facing Insurance Regulatory Agencies

Upcoming Issues (10)• Health insurance

– Recommendation made to the Government to reduce capital requirements– Creation of centralized health database, training in ICD-10 coding, new product

innovation and design undertaken.

• Unit Linked business– Guidelines framed to prevent regulatory arbitrage between life insurance

industry and mutual fund industry. More disclosure requirements kept.

• Detariffing– General insurance companies asked to show to the Authority that they have

basic infrastructure such as i) upgrading underwriting skills of the underwriters; ii) IT systems to retrieve and analyse data; iii) ways and means to protect the policyholders; iv) scientific and adequate pricing of covers, etc. in place.

• Market conduct– Mis-selling/ Rebating/ Payouts– Advising and counseling insurance companies/ Establishment of Self

Regulatory Organizations (SRO’s)/ Target Examinations

Page 25: Issues facing Insurance Regulatory Agencies

Thank You