Market Conduct Market Conduct examination - A Case examination - A Case

Study onStudy onKey Man Insurance PoliciesKey Man Insurance Policies

Conference onConference on

Regulatory Issues for Sr Officers of Regulatory Issues for Sr Officers of Insurance Regulatory Agencies, Insurance Regulatory Agencies,

Hyderabad.Hyderabad.

1515thth November, 2005 November, 2005

Market ConductExams

Policy Services,Claims Settlement

Underwriting Standards

DistributionChannels

File & UseAdherence

Grievance Redressal

Market ConductMarket Conduct

Off site MonitoringOff site Monitoring

On site ExaminationOn site Examination

(Target Exam)(Target Exam)

Off Site Monitoring – Key Man Off Site Monitoring – Key Man Insurance Policies Insurance Policies

New Business AnalysisNew Business Analysis Analysis of Premium IncomeAnalysis of Premium Income Spurt in the Premium IncomeSpurt in the Premium Income Higher Average Premium IncomeHigher Average Premium Income

Market IntelligenceMarket Intelligence Feedback from industryFeedback from industry Media reportsMedia reports

Off site monitoringOff site monitoring

Noticing the Aberrations Noticing the Aberrations Detailed Target ExamsDetailed Target Exams Self Regulatory measureSelf Regulatory measure

Deliberations in Life CouncilDeliberations in Life Council Recommendations to IRDARecommendations to IRDA Restrictions on type of Key Man PoliciesRestrictions on type of Key Man Policies

What is Key Man Insurance?What is Key Man Insurance?

Meets the business needs of a Meets the business needs of a business concern.business concern.

Definition of Key Man:Definition of Key Man: Key man is an employee who Key man is an employee who

contributes significantly to the business contributes significantly to the business of the firm.of the firm.

Objectives – Key Man Objectives – Key Man InsuranceInsurance

Indemnify the loss of business Indemnify the loss of business earningsearnings

Meet the costs of replacementsMeet the costs of replacements Time to fill the vacuum – cover Time to fill the vacuum – cover

the monitory lossesthe monitory losses Premiums paid allowable business Premiums paid allowable business

expenses U/S 37 (1) of I T Act.expenses U/S 37 (1) of I T Act.

Tax ImplicationsTax Implications

Insurance Premiums are allowed Insurance Premiums are allowed Business ExpendituresBusiness Expenditures

Proceeds received by the employer Proceeds received by the employer taxed as business profitstaxed as business profits

If assigned to key man proceeds If assigned to key man proceeds considered as Income in his hands.considered as Income in his hands.

Onsite Examination - Onsite Examination - MethodologyMethodology

ExamineExamine• List of High worth Policies IssuedList of High worth Policies Issued• List of Single Premium PoliciesList of Single Premium Policies• List of Key Man Insurance PoliciesList of Key Man Insurance Policies• Details of Assignment RegisterDetails of Assignment Register

ContdContd....

MethodologyMethodology

ExamineExamine List of Policy WithdrawalsList of Policy Withdrawals List of Policy LoansList of Policy Loans List of Policy SurrendersList of Policy Surrenders Source of First Premium Source of First Premium

depositeddeposited

Onsite Examination - Onsite Examination - ObservationsObservations

Higher proportion of Key Man Higher proportion of Key Man Policies amongst Single PremiumsPolicies amongst Single Premiums

Major % of Premium in the last Major % of Premium in the last quarterquarter

More Plans of Flexible NatureMore Plans of Flexible Nature

Assignment - Assignment - ObservationsObservations

Simultaneous assignment in favour of Life Simultaneous assignment in favour of Life AssuredAssured Alternate way of Deferred Compensation Alternate way of Deferred Compensation

(?)(?) Assignment in favour of BanksAssignment in favour of Banks

A lead to verify the source of FinanceA lead to verify the source of Finance In consideration of the Corporate LoanIn consideration of the Corporate Loan Policy as Security where Surrender Value is Policy as Security where Surrender Value is

zerozero Assignments defeating the Objective Assignments defeating the Objective

Other ObservationsOther Observations

No evidence of Direct Finance by BankNo evidence of Direct Finance by Bank

Withdrawal option exercised by Banks Withdrawal option exercised by Banks being absolute assigneesbeing absolute assignees

Endorsement on Policies for Endorsement on Policies for surrendering by employer or assigning surrendering by employer or assigning to Key Man in case of Key man's exit to Key Man in case of Key man's exit from the companyfrom the company

Concomitant Concomitant ObservationsObservations

Deviations from the File & Use NormsDeviations from the File & Use Norms

Higher allocations tantamount to Higher allocations tantamount to rebating under ULIPsrebating under ULIPs

Errors in levying the charges under Errors in levying the charges under ULIPsULIPs

Thank youThank you

D V S RameshD V S RameshAssistant DirectorAssistant Director

IRDAIRDAHyderabadHyderabad