Volume I, No. 1irdaonline.org/irdacontent/journals/journal1202.pdf · 3 irda Jour Jour Jour nal,...

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Insurance,for the insurance customer

What the IRDA stands for

From Simple to SophisticatedShriram Mulgund on shifting to risk based solvency

Ensuring Quality of ServiceSri Ram Khanna wants “What if not?” to be specified

Seeking order...out of chaosWhere is the motor business going?

Volume I, No. 1

DECEMBER 2002

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irda Jour Jour Jour Jour Journal, December 2002nal, December 2002nal, December 2002nal, December 2002nal, December 20022

Editorial Board:N. RangacharyH.O. SonigS.V. MonyK.N. BhandariA.P. KurianNick TacketAshvin ParekhNimish ParekhHasmukh ShahA.K. Venkat SubramaniamProf. R.Vaidyanathan

Editor:K. Nitya Kalyani

Hindi Correspondent:Sanjeev Kumar Jain

Design concept & Production:Imageads Services Private Limited

Art Director : Shailesh IjmulwarProduction : Anand and Usha

Cover Photograph: Lenny Emanuel

Printed by P. Narendra andpublished by N. Rangachary on behalf ofInsurance Regulatory and Development Authority.

Editor: K. Nitya Kalyani

Printed at Pragati Offset Pvt. Ltd.17, Red Hills, Hyderabad 500 004and published fromParisrama Bhavanam, III Floor5-9-58/B, Basheer BaghHyderabad 500 004Phone: 5582 0964, 5578 9768Fax: 91-040-5582 3334e-mail: [email protected]

© 2002 Insurance Regulatory and Development Authority.Please reproduce with due permission.


From the Publisher

N. RANGACHARY

eople may be wondering, on the appearanceof this journal, the necessity of one more in a field whichis already populated by many. However, we in theAuthority thought that it was necessary for us tocommunicate our views on the various current regulatoryissues and to express our reaction to what is happeningaround us in the industry. We feel that this medium willbe one more step in the transparency we have adopted inregulating our industry.

We are at a most interesting stage in the developmentof the Indian insurance industry. A few months short oftwo years since throwing open the industry to privatesector competition, a few trends are emerging clearly.

The last financial year saw the Life InsuranceCorporation of India – for long a synonym of the word‘insurance’ in our society – sprinting far ahead of itselfwith a business growth of nearly 50 per cent in its firstyear premiums. The first half of the current financial yearhas shown that the new companies too have startedgathering speed, well on the way to doubling theirperformance in what was a startup year for many.

The last few months have seen significant changes inthe general insurance industry too with the public sectorcompanies being in the process of being delinked fromtheir holding company, the General InsuranceCorporation of India. The GIC has begun the process offinding its feet in its new role as the national reinsurerand reinventing itself to treat the general insuranceindustry, including the very companies it owned andpresided over for 30 years, as valuable customers! Privatesector companies have begun making their presence feltin the market as well introducing long overdue customerfriendly facilities like cashless settlement of healthpolicies and new policies in the area of personal covers.

The LIC found its computerisation programme andimproved marketing and customer servicing standardstranslating into better business. However, thenationalised general insurance industry – though it hasbeen increasing revenues – is being affected at thebottomline. Higher losses and lower quantum premiumshave contributed to this, prima facie arising out of itsown failure to seize fully the opportunity given in thelast few years to get ready for a changing market. Theinterest rate regime moving progressively south will affect

P it more than before – removing the cover of investmentincome that it had so far to offset its underwriting losses.There is therefore a pressure on it, more than before, tobecome efficient.

The Insurance Regulatory and Development Authority(IRDA), set up to oversee the industry and ensure it growsalong healthy lines so that the interests of thepolicyholders are protected, had gone through a first yearof setting up the rules of the game for the industry andfor itself too.

In the second year we found ourselves consolidatingwhat we did in the previous year and building on those byfine-tuning regulations and adding facilities the marketneeded, like more distribution channels, and professionaldevelopment and training initiatives. We believe thatthese will enable the smoother conduct of business, allthis while keeping in mind our ultimate aim, the protectionof the interests of the customer.

At the IRDA, consensus building has been the onlyacceptable approach to regulating the industry.Information interchange and an open-door policy havebeen the foundation stones of this successful strategy.

The philosophy behind this is that the very industrythe regulator oversees, is its customer. This is by virtueof its being the service provider to the regulator’s ultimatecustomer and master – the buyer of insurance.

An unfettered dissemination of information, free andfrank analyses and discussion of issues and airing ofconcerns are critical inputs to the healthy regulation anddevelopment of an industry that touches individuals andbusinesses in the most sensitive way possible.

In that effort we bring you a new forum. TheIRDA Journal will help the industry to keep in touchwith itself and with what’s going on around it. It is meantto serve as the eyes and ears, and the mouthpiece, of theindustry. It will be a place where the industry can thinkaloud, determine where it wants to go and what it shouldand should not do.

I offer these to you, all constituents of this powerfulindustry, and urge you to use the journal to air your viewsand share in its development. For it will be only with yourwholehearted participation that such an effort willfind success.


Contents

4Seeking

COVERSTORY

Let’s Get Talking 3

Vantage Point – Venkatesh Mysore 7

Insurance Training for CAs 9

The IIRM Vision 10

Building Broking 11

Ensuring Quality of Service – Prof. Sri Ram Khanna 12

Resting Assured – J. Balasubramanian 14

Make It Simple – R. Desikan 15

Annual Statistics – Life Insurance 16

Brass Tacks – R. Anand 20

From Simple to Sophisticated – Shriram Mulgund 21

Hindi Section 28

Annual Statistics – General Insurance 36

Arm’s Length and an Eagle Eye – G.V. Rao 40

News Briefs 42

Round Up 46

8

Insurance,for the

insurancecustomer

24To the head tableIndia and the IAIS

Motor troubles

order out ofchaos


LETTER FROM THE EDITOR

In today’s world where members of a family live in the same house but in their ownworlds, each listening to their own music, watching their own TVs and reaching out totheir circles with personal phones and their computers, it’s not surprising that there isvery little oneness of purpose and mutual support. It may feel good to be livingthe independent life, but as someone put it wisely and succinctly a long time ago, no manis an island.

Neither is business. Certainly not insurance companies, which actually share theirdeals, if not their very clients, with literally every other insurer and around the world.This of course is the very essence of the industry – spreading the risk and sharing premiumsso that they can also share claims payouts.

Sharing of a different kind is also critical to the industry – the sharing of information,plans, experiences and solutions. This is particularly so for an industry that is reinventingitself, as insurance is today in our economy, and rediscovering the customer all over again.

It is at this stage that putting our heads together will be most useful for the future. Fornow is the time for us to build the industry and its support services. With co-operation wecan build them just right and more efficiently and economically.

If planning together for the future is important, so is learning from the past. More thanother businesses, insurance works in a continuum. This is not only of past claims experience,consumer behaviour and expectations setting the tone for future products, pricing and,hopefully, profits, but also in terms of itself doing what it indirectly urges its customers todo – to put away money that will multiply and come in handy on a rainy day.

It is this sharing and learning from each other and the past, including that of others indifferent markets, that the IRDA Journal is here to enable. It is meant for the industryto talk to itself and hear itself talk – through its many voices from multiple directions.From the side of the regulator on happenings and plans, and from the side of the industryon just about anything – concerns, issues, concepts, challenges and opportunities.

From the side of the consumers, all their expectations and feedback will be valuableinput for the industry and the regulator for charting out the future. Customers the worldover behave in similar ways – picking out their own interests unfailingly and rewardingbusinesses that answer their needs most efficiently. Here is a medium for them to articulateit and participate in shaping the industry and regulations the way they want them to be.

In the first issue, which you have in your hands, we have tried to bring you a variety oftopics. There are sections on current happenings (In the air), issues of concern (Mindshare)and experts putting forth differing individual opinions (Forum) or exploring new conceptsand seeing how they could fit the Indian market (Thinking Cap). Vantage Point will presentexperiences of industry members who have a unique picture of things given their set ofexperiences and position. News and events of course form part of the offering.

Then there is the pulse reading of the industry, performance statistics. Each numbershows the path of the development of the industry, throws light on where we are goingand sparks off thoughts on what we should be doing.

There will be more and varied columns appearing in future issues, and the one thingthat will enrich this medium of communication is your participation. Tell us what youthink and what you want. And of course write for the Journal about anything that is onyour mind. With our joint efforts we should be able to make this publication extremelyuseful and user-friendly.

A publication mirrors society while a regulator has to get ahead of it to prepare for, andsafeguard against, what could happen tomorrow. The IRDA Journal aims at reflectingboth these positions and evolving into something unique that will help us not only get aclear fix on where we are, but where we should be going and how. This will be our endeavour.

K. Nitya Kalyani

et’s get talking ...L


MIND SHARE

seeking order...Capped prices, unlimited costs and

an obligation under the law of the landto do the business. If it sounds like arecipe for disaster, that’s because it is.

The business is motor insurance,and what makes it irresistible in spiteof all this is that part of it is obligatedby law, and anyway it accounts foralmost 40 % of the income of the generalinsurance industry in India. That isalmost Rs. 5,000 crores of the grossdomestic premium (GDP) of overRs. 12,000 crores in 2001-2002.

The reasons for major heartacheover this class of business are obvious.Third party liability insurance ismandatory under the Motor VehiclesAct, 1938 (hence also called Act onlyinsurance), and no insurer can refuseto sell this cover for a vehicle that has afitness certificate.

Own Damage cover – which isoptional – used to be profitable. But notso anymore with a new generation ofcar-makers pushing replacement ofdamaged parts instead of the more cost-effective repairs route in their own questto restore profits squeezed to nearnothing when they sell the cars thesedays. Even a bumper costs upwards ofRs. 10,000 for these cars where anAmbassador or Premier Padmini wouldhave meant hardly a few hundredRupees!

The TP cover takes care of theliability of the owner of the vehicle toany third party whose property isdamaged, or who is injured or killed dueto an accident during the course of useof the vehicle. This liability is limitedto Rs.7.5 lakhs in the case of propertydamage and graded by the extent in caseof injury. In cases of death there is atable of structured compensation basedon the age and income of the victimthat the courts do use to computecompensation, but there is no cap onthe liability.

And that’s what is giving insurerssleepless nights. Losses from suchclaims have been wiping out premiums

from not only Own Damage covers buteven from other classes of business,leading to underwriting losses in manygeneral insurance companies in the lastfew years.

The largest quantum of TP claimscome from commercial vehicles,specially goods carrying vehicles andmass transport vehicles like buses.Rampant bad practices like overloading,overspeeding, poor maintenance ofvehicles and rash and negligent driving,not to mention the condition of theroads, have translated into a high rateof accidents.

To make matters worse, MotorAccident Claims Tribunals – specialcourts to hear TP cases – have tendedto award generous compensations onthe grounds that insurance companiescan afford to pay up while the familiesof individual victims need all the helpthey can get. In fact there was a recent

case emanating from Rajasthan whereUnited India Insurance Company wasthe insurer, and the Supreme Courtawarded over Rs. 12 crores for the deathof an NRI.

If costs are high in this class ofbusiness, the pricing is a completemismatch. At the root of this isunlimited liability on one side andtightly capped premiums on the other.The TP liability premium for a 9 tonnetruck, for instance, is just around Rs.3500 a year.

Premiums are set down by the TariffAdvisory Committee (TAC) which setsthe prices for most non-life insurancein the country and whose tariffs theindustry is obliged to follow.

Following severe losses in this classof business a substantial hike of thetariff took place after a gap of eightyears in January 1998, set to beachieved in three parts. Due to thesevere reaction from customers,specially truck operators, parts 2 and 3of the revision were held back. A revisedtariff was introduced effective July,2002, after a vetting by a specially

out of chaosK. Nitya KalyaniK. Nitya KalyaniK. Nitya KalyaniK. Nitya KalyaniK. Nitya Kalyani


MIND SHARE

formed committee for therationalisation of the India Motor Tariff,headed by Mr H. Ansari, the thenMember (non-life) of the IRDA. TheAuthority toned down the severity ofsome of the recommendations.

Some connected developments in themarketplace are worth noticing. Truckoperators in particular were facing twotypes of reactions from insurancecompanies. One was that companieswere loading the premiums far in excessof what the new tariff allowed and inviolation of the terms on which theycould do it. The tariff said that aninsurer could load the old premium forthe third party liability alone by up to100 % if the claims experience had beenadverse during the previous year.Another year of adverse claimsexperience meant that the loading couldbe up to another 100 %.

But, said transporters, insurerswere loading premiums in one shot notby 100 % but even by 300 or 400 %. Nocompany, except New India Assurance,seemed to have defined and quantifiedwhat constituted ‘adverse claimsexperience,’ and what followed waschaos.

What was worse was that loadingwas being done even in cases wherethere had been no claims in the previousyear, and some of these cases involvedtwo wheelers even! What took the cakewas the loading was done also on theOwn Damage premium which figurednowhere in this whole debate.

The second issue, and more serious,was that Third Party liability cover wasbeing denied to customers bycompanies. Since no motor vehicle canbe operated without this insurancepolicy under the law, this denial of coveramounted to restricting vehicle ownersfrom using the vehicle.

All these issues were brought to theattention of the TAC and the IRDA bythe transporters through their variousassociations and through the Ministryof Surface Transport as well.

The motor premiums hike was citedas one of the reasons for varioustransporters’ strikes announced in thelast few months.

Cases were filed in the CalcuttaHigh Court challenging the revisedmotor tariff, and issues like denial ofcover and over-charging of premiumwere also raised - some of them by somevery persons who were members of theorganisations who had signed thereport.

The Court did not interfere with thetariff revision keeping in view the rulingof the Supreme Court in the BALCOcase to the effect that the courts shouldnot interfere in economic and policymatters.

It also held that the tariff had to befollowed and that companies could notrefuse TP cover. Other cases are

pending at the Madras and Kerala HighCourts. The TAC called for a meeting ofthe transporters’ representative bodiesand the chief executives of generalinsurers on October 28 to consider thedifficulties faced by the customers in theirrational application of the tariff.

After hearing what both sides hadto say, the Chairman clearly reiteratedthat the tariff was binding and shouldbe followed by all the insurers whetherin the public or private sector. That theyhad problems with the tariff itself wasa different matter and they should takeup those issues separately with theTAC.

The TAC issued orders to generalinsurance companies that they werebound to underwrite the business andwithin the framework of the tariff. TheIRDA constituted a Committee underthe Chairmanship of Mr. JusticeT.N.C. Rangarajan, a retired judge ofthe Andhra Pradesh High Court, for

suggesting a plan for de-tariffingthe non-statutory part of the motorbusiness.

The brief of the Committee is also todevise a way by which all motor thirdparty liability premiums are placed ina common pool so that all insurers willbear a part of the profits or losses. (Seebox item for details on the Committee)

What also emerged in the October28 meeting was that both parties - thetransporters and the general insurancecompanies - were both victims andoffenders.

General insurance company chiefs,who made their case repeatedly about‘bleeding from every part of our bodies’due to motor TP losses are indeedworking against odds in this matter. Thenew private sector players have less ofthe same problem since they are yet newin this game. But even there, BajajAllianz’ Mr. Sam Ghosh said that 60%of his company’s premium was frommotor insurance and the claimsexperience was 100%.

They clearly wanted a revision of thetariff, but did not have the statistics toestablish the justification for the kindof hike that they wanted and needed.

This lack of data, or lack of data inusable form, has been the bugbear of theindustry, and publicly so, since the midto late nineties when the first of therecent tariff revisions was proposed. TheAnsari Committee too has noted this inits report. It said, “In the absence of longterm reliable statistics from theinsurance industry, the TAC Board inits wisdom decided to constitute a broadbased committee to carry out a detailedexamination of the Motor Tariff byconsidering the views of the user groupsand other interested parties...”

One external factor that could go along way in easing their situation is tohave a limit on the liability in deathcases. An amendment to the MotorVehicles Act will be necessary for this ,and the Secretary, Ministry of SurfaceTransport, has to be approached to havethis done.

One factor that couldgo a long way in easing

the situation of insurancecompanies is to have

a limit on the liabilityin death cases.


MIND SHARE

Another relief would be theimposition of a statute of limitations(which was removed a few years ago)for filing cases with the MACT. Generalinsurers are now never sure when a longpast accident will emerge as a claimand, moreover, they could well becontinuing to offer insurance to thesame party, on old terms, on whosepolicy the claim has arisen.

There are other measures companiescould be taking to make things betterfor themselves though.

Better management of claims itselfis one such.

In many cases what adds to thequantum of claims, as even thetransporters pointed out in the October28 meeting, is the delay in settlingcases. The solution is to finalise themout of court, through compromise ifnecessary. The Lok Adalat system couldbe used effectively and it could be apermanent arrangement like theOmbudsmen to arrive at negotiatedsettlements of motor claims cases beforethey hit the courts, or for out of courtsettlement after they do.

But then what would deter the quickdisposal of at least death cases wouldbe unlimited liability. And lawyers, whostand to benefit the most from suchcases, would always dangle that carrotin front of the families of victims.

An insurance company staff-lawyer-police nexus is another thing that thetransporters referred to and blamed fordelays and higher costs. In many cases,they pointed out, lawyers’ fees exceededthe claimed compensation and yet thecases dragged on, increasing costs toboth parties.

There are operational and otherproblems created from the side of thetransporters too.

Considering they anyway pass onincreases in costs to their customers,and that they do not take to the streetswhen the prices of, say, diesel or tyresare hiked, their outrage at increases ininsurance premiums is illogical. Bytheir vociferousness they haveprevented normal price hikes to anindustry that requires it badly and, byextension, have denied themselves andother motor insurance customers

What do you suggest for ahealthy motor portfolio?Write to us.

SHARE A SOLUTION!

• Mr R.S. Lodha, Member, Tariff AdvisoryCommittee

• Mr G.K. Raman, Chairman, Royal SundaramAlliance Insurance Company Ltd.

• Mr H.S. Wadhwa, CMD, National InsuranceCompany Ltd.

• Mr R. Beri, CMD, New India AssuranceCompany Ltd.

• Mr Ajit Narain, CEO, IFFCO-Tokio GeneralInsurance Co Ltd.

• A representative from the Ministry of SurfaceTransport.

• Two representatives from the Society of IndianAutomobile Manufacturers with one from anew generation car manufacturer and theother from a two wheeler manufacturer.

• Two nominees of the Federation of AutomobileAssociations of India to represent private carsand two wheeler users.

The committee appointed to suggest ways of detariffing the motor OD business is to be headed byMr Justice T.N.C. Rangarajan, a retired judge of the Andhra Pradesh High Court.

Among its members are:

The motor OD detariffing committee

increased product features andimproved customer service.

One of the strange points put forthby a transporter was that fake drivinglicenses were common and that theycould just not verify the genuineness ofthe licenses of their employees!

Apart from a motor pool which wasproposed by the general insurers, oneof the constructive suggestions thatcame from the transporters’ side wasfrom the All India Motor TransportCongress’ Mr G.N. Saxena, and that wasthat they would like to form co-operatives and underwrite their ownmotor insurances and wanted a waiverof the Rs. 100 crores entry capital foran insurance company in this case.

“If insurers are suffering due to TPclaims we will take it out,” he said.

The Chairman, IRDA, welcomed themove and suggested that thetransporters put together the proposalfor IRDA’s consideration for licensing.

Transporters, the most vocal of thecustomers who have complained are,ironically, the class of customers who

cause the highest claimsfor insurers in the motorinsurance business. Moreso because their so-calledhigh insurance costs arereally being subsidised byowners of other classes ofvehicles!

With the AnsariCommittee’s objectives ofgetting the motor tariff toreward good drivers andgrade the quality ofvehicles by developing finerates, what de-tariffingpromises is to slot themaccording to their riskprofile. Which, in thisprotracted battle, shouldfinally put the shoe on theother foot!

• Four nominees of commercial vehiclesassociations with one each being from❖ All India Motor Transport Congress❖ Federation of Bus Operators

Associations of Tamil Nadu❖ Maharashtra Rajya Truck, Tempo,

Tanker, Bus Vahatuk Mahasangh and❖ All India Confederation of Goods Vehicle

Owners• Mr Vimal Parekh, a registered surveyor• Mr D. Varadarajan, Advocate, New Delhi and

Member of the Insurance Advisory Committee• A representative of the CERC, Ahmedabad,

representing consumer interests and• A representative of the Joint Council of Bus

Syndicates, West BengalThe Secretary, TAC, will act as the Secretary andConvenor of the Committee.


VANTAGE POINT

Subsequent to the opening of the insurance sector, there has been a lot of interest on the part ofvarious people to understand the changes that are likely to come about. The standard questions arerelated to whether prices will come down, whether there will be new products, new features, betterservice, better technology, etc.

My general response is yes to all these questions, however the biggest difference will be seen inthe way insurance companies distribute. Distribution will be the differentiator.

Therefore, the focus will be on sales practices and market conduct. Disclosure and suitabilityissues will come under a lot of scrutiny. Customers will and should become increasingly aware ofessentially three points: (a) Do I need life insurance? (b) If so, how much? and (c) What’s the bestsolution and does it meet my specific need and my pocket?

All companies will be working aggressively on building their distribution by increasing the number of agents, as this isthe obvious way of increasing new premiums. As this happens, it is also inevitable that there will be agent turnover. Withthis come challenges related to replacement. Consider this… over the years prior to the opening of the insurance sector, therehave been many agents who have left the business. In effect they left the industry. The business they had generated waslargely left alone, albeit unserviced. However, in the new environment, the agents who leave will tend to stay in the industryby approaching other companies. Generally the first things these agents tend to do is to go back to their customers andrecommend a new policy by inducing them to discontinue the policy they themselves sold earlier! The gullible customer, whohad bought from this agent on the basis of a relationship falls prey, once again! This is unethical and undesirable.

The regulator and the companies should do everything within their power to prevent this. Replacements are generallynever in the interest of the customer. The problem assumes alarming proportions when agents start using replacement as amethod of selling. The onus is on the companies to make sure that they constantly work on professionalising the sales force,training and supervision. The sooner the industry as a whole recognises the importance of this and institutionalises proceduresand processes to avoid it, the better off it will be. One needs to only look at the experience of various companies globally tounderstand the importance of the issue.

I am confident that the companies will work with the regulator in a spirit of co-operation to ensure that this aspect isappropriately addressed. I am pleased to share below the details of the policies and procedures instituted by MetLife for theirfinancial advisors in addressing this issue.

Replacements – Handle with care !

The objectives:For every transaction, MetLife’s goal is to ensure that:■ Fair and accurate disclosure has been given to the

customer and the company■ The customer has a full understanding of the sale;

if a replacement is involved, the impact of thereplacement, including the advantages anddisadvantages

■ The transaction is to the customer’s advantage■ Complete documentation can be produced to verify

the suitability of the transaction and■ Company policy is strictly followed MetLife prohibits

replacement as a method of sale, and prohibits thesolicitation of any replacement sale that is notsuitable in light of the customer’s financial situation,needs and objectives. Failure to follow the requiredprocedures and/or regulations can lead to customersbeing disadvantaged, disciplinary action, regulatorypenalties, if applicable, and termination ofemployment.

The issues:When replacing an existing policy or contract, there areseveral issues that you must review with your customer.They include:■ Premium increases and coverage issues.■ Long-term affordability issues.■ New start-up costs and loss of return.■ Incontestability clause.■ Incurring of new withdrawal or surrender charges.

The questions:What factors must be reviewed with the customers todetermine if the proposed replacement is in their bestinterest?Keeping in mind the primary concerns with replacementdiscussed above, you must review the following questionswith your customer before recommending a replacementtransaction:■ Why would the new policy or contract be more

advantageous than the original policy or contract?■ Can the existing policy or contract be altered in a

way that the customer’s needs or goals are met?■ Was there a comparison of illustrations between the

existing and proposed policy and contract?■ What are the costs associated with the transaction?Before proposing a replacement transaction, you mustcarefully evaluate the transaction and disclose allinformation that your customer needs to make aninformed decision about a policy or contract.Remember that an unsuitable transaction may resultin customer dissatisfaction, disciplinary action,regulatory penalties, if applicable, or termination ofemployment.

The requirements:What does MetLife require of its financial advisors inpossible replacement transactions?You are required to comply with all company rules and/or country replacement laws and regulations.■ Accurate and complete paperwork is required.

■ If your customer does replace their existinginsurance, it is important that they do not canceltheir existing policy until the new policy has beenissued.

To assist you in meeting the replacement requirements,MetLife has developed the Client Information Form.MetLife’s internal forms are not a substitute for country-required replacement forms. If applicable, all countryregulations must be followed and all required noticesprovided.It is important for each financial advisor to ensure thatcustomer needs and financial objectives are determinedbefore any product is sold and that each product meetsthe client’s needs and objectives. The financial advisoralso must have a thorough knowledge of all productsoffered for sale. The matching of client to productincludes making all relevant disclosures to a client.Always focus on whether the transaction is in yourcustomer’s interests. Explain the pros and cons of thetransaction and go over possible advantages anddisadvantages in detail. This will result in better salesand more satisfied long-term customers. If there is anydoubt regarding a proposed replacement, actconservatively – do not replace the existing policy orcontract.

The author is Managing Director,MetLife India Insurance Company

What are your views on this topic?Write to us.

VVVVVenkatesh S. Mysoreenkatesh S. Mysoreenkatesh S. Mysoreenkatesh S. Mysoreenkatesh S. Mysore


IN THE AIR

India has become a member of theExecutive Committee (EC) of theInternational Association of InsuranceSupervisors (IAIS) at its ninth annualconference at Santiago de Chile heldfrom October 9 to 11, 2002. The EC isnow expanded to 15 members and thenew member, India, is the third fromAsia after Japan and Singapore. Mr.Manuel Aguilera-Verduzco, Chairman,Comision Nacional de Seguros yFianzas, Mexico, was re-electedChairman of the IAIS ExecutiveCommittee.

The IAIS has also agreed to sponsorthe Third International Conference onEmerging Markets to be held in Delhiin January 2003.

The IAIS develops principles andstandards on insurance supervisionand, through that, helps establish andmaintain fair and efficient insurancemarkets for the benefit and protectionof policyholders.

The membership of the IAIScomprises insurance regulators fromover 100 countries (called jurisdictionsin IAIS terminology), and over 70organisations and individuals areobservers. They include professionalassociations, insurance and reinsurancecompanies, international financialinstitutions, consultants and otherprofessionals.

It is the EC that is responsible forthe overall operation of the IAIS, settingthe broad direction of the Associationon advice of its members and observersand overseeing its function.

The IAIS collaborates closely withother international regulatoryorganisations. A significant focusrelates to its being a member of theFinancial Stability Forum (FSF) andcontributing to the InternationalAccounting Standards Board’s work inestablishing standards for insuranceaccounting.

One of the main topics that theSantiago conference deliberated on wasthe valuation of assets and matching ofassets, a topic of current concern in theinsurance industry given the dullmarkets for investments and recentcatastrophic claims.

Key priorities of the IAIS, namelycapital adequacy/solvency, reinsurance,accounting standards and electroniccommerce were also borne out by thework of the Technical Committee.

Regulating reinsurersA significant beginning in the IAIS

this year was the move to bringreinsurers under regulation. TheReinsurance Subcommittee, of whichalso India is a member, has set outprinciples on areas in which theinsurance supervisor should haveauthority or control over reinsurancecompanies.

The hitherto unregulated industryplays a critical role in the stability ofthe insurance markets worldwide andif it is not regulated then its effect onthe financial stability of direct insurerscannot be monitored or controlled.A principles paper, MinimumRequirements for the Supervision ofReinsurers was tabled at the Santiago

meeting and ac-cepted. (see boxitem for mainprinciples).

This wouldlead to the for-mulation of suitableprinciples andstandards.

The Solvency Subcommitteeprepared a discussion paperQuantifying and Assessing InsuranceLiabilities, and two other papers TheUse of Actuaries as Part of a SupervisoryModel and Solvency Control Levels.

The e-commerce/Internet WorkingGroup prepared an issues paper, Risksto Insurers posed by ElectronicCommerce, seeking to identify andconsider in greater depth the risksassociated with Internet operations. Itsnext step will be to draft a paper on howto manage these risks.

Uniform accounting norms forinsurance companies has been receivingmuch attention at the IAIS and newnorms are to be effective from theaccounting year 2004-05.

But the going has been slow even atthe formulation stage with a seriousdifference of opinion on the accountingregulations to be adopted between twogroups of members belonging to the USand Europe. European membersexpressed openly the feeling that theirconcerns were not being heard. Theeffect of this is that the approach paperis likely to be delayed.Insurance Fraud

Combatting money laundering andterrorist financing has been added

To the head table !

The paper sets out principles on minimum requirements for supervision of pure reinsurers. It identifies elements of the supervisoryframework that should be common for primary insurers and reinsurers and those elements that need to be adapted to reflect theunique risks faced by reinsurers. This paper is seen as an essential building block in the development of more detailed standards forthe supervision of reinsurers.

Principle 1: Regulation and supervision of reinsurers’technical provisions, investments and liquidity, capital requirements, andpolicies and procedures to ensure effective corporate governance should reflect the characteristics of reinsurance business and besupplemented by systems for exchanging information among supervisors.

Principle 2: Except as stated in Principe 1, regulation and supervision of the legal forms, licensing and the possibility ofwithdrawing the licence, fit and proper testing, changes in control, group relations, supervision of the entire business, on-siteinspections, sanctions, internal controls and audit, and accounting rules applicable to reinsurers should be the same as that ofprimary insurers.

Requirements for Reinsurance Supervision


IN THE AIR

The insuranceindustry iscatching people’simagination post-liberalisation, andnot all of it has to

do with getting newproducts and better

service. New career and professionalopportunities are part of it!

Training in insurance has caught onand the Institute of CharteredAccountants of India (ICAI) has justformalised its plans in this area.

The institute is introducing a PostQualification Course in Insurance andRisk Management and a ModularTraining Course for Surveyors and LossAssessors.

The Department of CompanyAffairs has approved the course and thesyllabus has received the concurrenceof the IRDA.

The institute also plans to conductseminars on insurance and location ofnewer professional avenues for itsmembers. The first of these is expected

to the priority list of the IAIS andguidance notes on the former wereadopted in January this year with thecaveat that they are likely to changefollowing the Financial Action TaskForce’s review of its 40recommendations to which the IAISwill also contribute.

The Insurance Fraud Sub-committee assisted the InternationalMonetary Fund (IMF) and the WorldBank in the development of a jointMethodology for Assessing Legal,Institutional and Supervisory Aspectsof Anti-Money Laundering andCombatting the Financing ofTerrorism.

In addition to anti-moneylaundering work, has focused on issuesrelated to the tracing and seizingfraudulently gained assets. Itcirculated a questionnaire to IAISmembers requesting details of actual

cases, including types of risks facedand how the cases were handled.

The sub-committee has beeninvestigating pyramid schemes whichseem to be growing and areparticularly misused and abused inemerging markets. The main aim of a

pyramid operation is to turn all policypurchasers into agents.

The next annual conference ofthe association is to be held fromOctober 1 to 3, 2003, at Singapore,hosted by the Singapore MonetaryAuthority.

New Secretary General

Mr. Yoshihiro Kawai, 42, has been chosen to succeed Mr. Knut Hohlfeld asthe Secretary General of IAIS effective 1 June 2003. Mr Hohlfeld, 64, whoestablished the IAIS Secretariat in Basel, Switzerland, will retire.

Mr Kawai, a Japanese native, has been the IAIS Deputy Secretary Generalsince 1998 where he has been active, particularly in developing and promotingthe implementation of standards for insurance supervisors. He has extensiveexperience advising developing countries on the legislative frameworks forinsurance companies and supervisory authorities.

He served as an advisor to the Polish Government and worked in theSecretariat of the OECD’s Insurance Committee. Before leaving Japan in 1990,Mr Kawai worked for Tokio Marine and Fire Insurance Company.

to be held in Mumbai and subsequentones at Hyderabad and New Delhi.

All members are eligible to beadmitted to the risk managementcourse which will have trainingschemes, technical examination and anorientation course of seven days.Candidates who complete the coursesuccessfully will be awarded acertificate and be entitled to use theletters DIRM (ICAI) after their names.

The course has four papers coveringfour modules. The first module isPrinciples and Practice of Insuranceand covers technical basics, regulationson insurance investments, laws onaccounting and management, assetliability management, principles ofinsurance finance and costing andpricing of insurance products.

The second is Technical Aspects ofInsurance which covers specific areasin general and life insurance as wellas principles of actuarial valuation.

Risk Management and Reinsuranceis the third module covering theeconomics of insurance, managerial

aspects of risk management,reinsurance and its legal principles,methods, markets and financial aspects.

The fourth paper is BusinessStrategic Planning and InformationTechnology. This covers managementof insurance companies, businessprocess re-engineering, outsourcing,exchange control regulations andtaxation, information technology andits management in insurance, designof information systems, businessstrategies in product formulation,information marketing and advisory,distribution, reinsurance and servicing.

The Modular Training Course forSurveyors and Loss Assessors is a 200hour professional study course withpractical training on at least foursurveys.

The examination will have fivemodules : Elements of Insurance, FireInsurance, Marine Cargo Insurance,Loss of Profits Insurance andMiscellaneous Insurance.

Professional opportunities exist forqualified Chartered Accountants whocomplete this course to work assurveyors in specialised finance areaslike financial loss assessments underloss of profits covers.

Insurance training for CAs



IN THE AIR

The new-born Institute of Insuranceand Risk Management (IIRM) has itshands full already.

The star plans of the institute arethe International Graduate Diplomaand the MBA in financial services.

A conference in early 2003 atHyderabad on Bancassurance is comingup and the IIRM is preparing for aconference on Emerging Markets inJanuary in Delhi and also for the launchof its Emerging Markets Centre atHyderabad. A January 2003 seminar onmoney-laundering in Delhi, sponsoredby the IAIS, is also being worked out.

The Institute will move into atemporary facility and start conductingits programmes from there shortly.

Apart from this the IIRM has animpressive list of plans includingadvanced/specialist technical courses,regulators training courses,management development programmes,leadership development programmesfor CEOs, trainer developmentprogrammes, public lectures andpublications with AM Best.

IIRM is jointly promoted by theInsurance Regulatory and DevelopmentAuthority and the Government ofAndhra Pradesh.

Incorporated in the last week of July2002 and with Mr N. Rangachary,Chairman of IRDA as its Chairman, theinstitute started its operations byconducting its maiden course ‘IAIS CorePrinciples’ with faculty drawn fromEurope, the US and Asia.

The idea behind the Andhra PradeshGovernment’s promotion of the IIRM isthat it will form part of the financialdistrict and add to other recentlystarted specialised institutions like theInternational School of Business andthe Indian Institute of InformationTechnology. The IIRM provide anopportunity for the insurance sector toaccess high quality human resourcesand derive gains from applied research,which are vital necessities for thesuccess of the insurance sector.

The land allocated for the financialdistrict is 100 acres and is adjacent tothe Hi-tech City, Indian School ofBusiness, International Golf Course,International Convention Centre andJawaharlal Nehru Institute of RuralBanking.

The Insurance RegulatoryDevelopment Authority (IRDA) hasbeen allocated 5 acres of land in thefinancial district and has been invitedto locate its office there. The district, itis hoped, will house insurancecompanies, international banks, assetmanagement companies, stock &commodity exchanges and the IIRM.

It will have superior class roomfacilities, an administrative block,computer labs, conference facilities,dorms, sport complex and residentialfacilities for the faculty.

The total investment in the projectis going to be close to $ 4.15 million withrevenue flow of $ 1.2 million in the first

year growing up to $ 10.8million in the year 6 with aprojected IRR of 32%.

The State Government hascommitted to provide all thesupport for enhancing the valueof the research to be carried outat the centre by providingstrategic support in keyareas such as agriculture,healthcare, transportation,infrastructure, demographicdata and public policy.

The IIRM proposes to build humanresources capability and research focusin the following areas:

■ Actuarial science.■ Underwriting & surveying.■ Risk management and portfolio

analysis.■ Financial & investment decision-

making.■ Back office maintenance.■ Business & investment analysis.■ Management areas such as

marketing, organisational aspects,accounting, strategy planning &implementation.

■ Information technology leveragingand related areas.

The objectives of the institute are toexpand the pool of qualified insurancepersonnel through courses andexaminations leading to professionalinsurance & risk managementqualifications and to upgrade theirknowledge, skills and professionalism.

It will also provide a forum forinsurance practitioners to network andexchange experiences throughseminars, workshops and conferencesand to build relationships with theIndian insurance industry.

It aims to build up an insuranceresearch centre of excellence throughlinkages with established researchinstitutions, to advance researchon insurance and other issues ofinterest to the insurance industry andto increase public awareness ofinsurance.

Tell us, and we will tell the world!

What is your institute doing for insuranceeducation or research?

We would like to feature training, educationand professional development initiatives.

Write to:Editor

IRDA JournalInsurance Regulatory and Development Authority

Parisrama Bhavanam, III Floor5-9-58/B, Basheer Bagh

Hyderabad 500 004or e-mail us at [email protected]

The vision★ ★

MR

Mr. M.V.S. Prasad, Vice Chairman & Managing Director,Andhra Pradesh Industrial Infrastructure Corporation (APIIC)and Mr. N. Rangachary, Chairman, IRDA, sign theMemorandum of Understanding for promoting IIRM.

INSTITUTE OF INSURANCE AND RISK MANAGEMENT



IN THE AIR

NIS Sparta,M-14, S.E. Part II,New Delhi 110 049.Tel: 011-864 0767E-mail: [email protected] College of Insurance,W-120, Greater Kailash II,New Delhi 110 048.Tel: 011-6447606Fax: 011-6168478.Schoolnet India Ltd.,#19, Unique Industrial Estate,Twin Tower Lane,Bombay Dyeing Compound,Prabhadevi,Mumbai 400 025.Tel: 022-433 0360/433 0365

New India Insurance Co. Ltd.,Corporate Training College,34, C.D. Barfiwala Marg,Andheri (E), Mumbai 400 058.Tel: 022-621 2156United India Insurance Co. Ltd.,Nungambakkam,High Road, IV Lane,Chennai 600 001.National Insurance Co. Ltd.,National Centre for InsuranceLearning,79, Netaji Subhas Road,Narendrapur,Kolkata 700 013.Tel: (Board) (033) 4771492/4772727Fax: (033) 4772726

The IRDA has approved the following institutions to provide training to the candidates whowant to appear for the examination to become insurance brokers.

Oriental Insurance Co. Ltd.,Staff Training College,Bata More, Sector II,Mathura Road,Faridabad 121 006.National Insurance Academy,Balewadi, Baner Road, NIA PO.,Pune 411 045Phone: 020-7292382-83Fax: 020-729 2396E-mail: [email protected] Institute of India,Universal Insurance Building,VI Floor, Sir P.M. Road, Fort,Mumbai 400 001.Tel: 022-287 2923/287 4722Fax: 022-287 3491E-mail: [email protected]

Broker training institutes

The much awaited permission forbrokers to set up shop in the Indianinsurance market came last month withthe notification of The InsuranceRegulatory And Development Authority(Insurance Brokers) Regulations, 2002.

Insurance broking is a recognisedintermediation activity worldwide,specially for reinsurance. Brokersrepresent, and work closely with, theinsured, negotiating coverage, termsand premiums with insurers andchoosing the best deal for their clients.

In fact brokers are so specialisedthat they often know more aboutinsurance and terms than insurersthemselves.

India did not have brokers in the lastfew decades except for reinsurance andit is true that they would have hadlimited roles to play in a largely tariffmarket like India.

But with liberalisation in theinsurance sector the idea of brokers wasmooted again, also following theindications of the Malhotra CommitteeReport that they should be permittedand regulated.

Building brokingThe introduction of brokers into the

market – which was in fact to precedethe licensing of new insurancecompanies – was held up due to anoverlooked amendment to the InsuranceAct that earlier permittedintermediation fees to be paid onlyto ‘agents.’

But late as it has come, almost twoyears after the opening up of the sector,the entry of brokers is expected to bringin competition and better terms andnegotiating powers to insureds.

Brokers are expected to work morein industrial insurances but applicantsalso seem to be targeting personal linesand/or life insurance by aggregatingpersonal finance customers in themanner of mutual funds or retail andpersonal banking customers in therecent years.

The advantage of a broker is that hecan present a menu of products fromvarious insurers and help the insuredpick the best one for his needs.

How the community evolves willbe seen shortly, but the enormousinterest in the advent of the regulationsseems to point to attractiveopportunities ahead.

Three types of brokers arerecognised by the regulations, namelydirect, reinsurance and compositebrokers, and training and qualificationrequirements for their principal officershave been specified in the regulations,with the National Insurance Academy,Pune being the examining body.

Brokers have also to fulfill theminimum entry capital requirementsnamely: Rs. 50 lakhs for a direct broker,Rs. 2 crores for a reinsurance broker andRs. 2.5 crores for a composite broker.The company should be set up to carryon the insurance broking businessexclusively. Foreign participation in thecapital is restricted to 26 per cent justas in the case of insurers.

Remuneration ceilings for brokershave been specifed in detail for differentclasses of business in life & non life asfar as direct business an concerned. Forreinsurance the brokerage has been leftto market forces.

The advantage that brokers areexpected to bring into the market is thatthey represent the customers’ interestsand work to fashion products and advisethe insured. For the insurer, having awell informed intermediary brings thecustomer closer and so he canunderstand and provide for thecustomer’s needs better.



The IRDA’sprotection ofpolicyholders’i n t e r e s t sr e g u l a t i o n sprovides awelcome set ofmeasures toensure that

insurance companies treat the customerwell. Its provisions in important areaslike truth in disclosure of informationat point of sale and in proposal forms,grievance redressal procedures,material particulars to be stated ininsurance policy documents, claimsprocedures and customer servicing seemto be adequate.

Over 99 percent of Indians who havea life insurance policy are customers ofthe Life Insurance Corporation of India(LIC). The same is true for generalinsurance where the bulk of the policiesare with public sector companies.Therefore, IRDA’s consumer protectionregulations today are really about publicsector service providers and theirpolicyholders, especially of the LIC. Oneof the major weaknesses in thisregulation is that there is no in-builtmechanism to ensure compliance byinsurers.

This is illustrated by means ofRegulation 10 (1) which calls upon theinsurer to respond to the insuredwithin a time norm of 10 days of thereceipt of any communication from thelatter in all policy servicing matterssuch as:

■ Recording change of address■ Noting a new nomination or change

of nomination under a policy■ Noting an assignment on the policy■ Providing information on the current

status of a policy, including matterssuch as accrued bonus, surrendervalue and entitlement to loans

■ Processing papers and disbursal ofloans on security of policy

■ Issuance of duplicate policy

■ Issuance of an endorsement underthe policy; noting a change ofinterest or sum assured or perilsinsured, financial interest of abank and other interests and

■ Guidance on the procedure forregistering a claim and its earlysettlement.

The most commendable achievement ofthe LIC is that it has ensured timelypayment of maturity or death claims innearly 99% of its policies. This has beenachieved by a clear management systemthat ensures that each LIC branch willpay, without being asked, about 9%interest on delays on its own accounton claims. This however, does not meanthat the customer is happy. By beingprompt once at the end of the policy,after 15 or 20 years, does not mean thatyou can treat the customer withcarelessness during his 15 or 20 yearsof relationship with the company.

A customer contacts an LIC branchfor a variety of reasons during the lifeof his policy. The LIC has 27 well-defined time norms (number of dayswithin which to complete each task) tomeet his requirements. Some of theseare:

Dispatch of policy document 5Refund cheque after issue of policy 3Sending revival quotations 1Quoting terms of alteration 1Quotation for surrender value 1Sending loan quotation 2Change of address 1Change of nomination 3Registration of assignment 3Dishonoured cheque advice 1Dispatch of loan cheque 3Transfer-in policy 3

It will be observed that the LIC’stime norms are even better than IRDA’snorms. But do they work? There is noenabling system to ensure that eachcustomer will actually have his requestcomplied with within the time norm laiddown by the management. Whathappens if these norms are not kept?

IRDA regulations too are toothlessbecause they do not specify “What ifnot?” Regulation 10 (4) empowers theIRDA to take action for violation of theseregulations. Is there a system to findout if the norms have been compliedwith? Can the IRDA act on individualinstances of violation of time norms?

No relief is provided for consumerswho are victims of violations and so, whyshould a consumer complain if he is notgoing to be benefitted ? Unless there isa consequence for a company for non-compliance why should it work hard toensure such compliance? Is the IRDAexpecting insurers to voluntarily informthe Regulator of not being able to adhereto these norms? This is one of thedeficiencies in the IRDA’s consumerprotection regulations. They are soft onthe companies and hard on theconsumer.

So, what can be done? How is LICable to settle 99% of claims in time?

The answer is: because enablingback end systems have been created toensure this, or else the branch losesmoney in the form of interest for thedelay period. Similar systems need tobe set up in LIC, and in other insurancecompanies.

Similarly, why should the IRDA notspecify a “ What if not? “ provision in itscustomer service regulations? What isthe consequence of the violation of the10-day norm and what can the customerdo when he is at the receiving end?

END USER

Ensuring Quality of ServiceProfProfProfProfProf. Sri R. Sri R. Sri R. Sri R. Sri Ram Khannaam Khannaam Khannaam Khannaam Khanna& Consumer – voice.org& Consumer – voice.org& Consumer – voice.org& Consumer – voice.org& Consumer – voice.org



END USER

The same question can be asked ofall other provisions enshrined in theregulations. Why not pay voluntarycompensation if regulation norms areviolated?

A policyholder will get the fruits ofthe norms enshrined in the regulationsonly if they are implemented seriously.Insurance company staff will believe inthe seriousness of this issue only if theycan see its consequences in theircompanies’ profitability. If the LICboard, which is seized of this matter, isunable to decide in favour ofpolicyholders, IRDA regulations willneed to be amended to provide suchrelief to policyholders.

A long list of reasons as to why theLIC may be unable to provide for tokencompensation to policyholders for non-adherence to time norms includes twooft-quoted reasons, the first beingpossible resistance by LIC’s tradeunions and the second, legalimpediments.

The LIC’s trade unions areresponsible and wise. They have seenthe changes in a competitive scenario.Slowly private insurance companies arespreading their networks. I am surethey can see market shares of privateinsurers going up day by day,particularly in first premium income. IfLIC unions want to retain existingcustomers it is in the interest of eachemployee to contribute to providingexcellent, fault-free and promptcustomer service.

One argument against the paymentof compensation is the question of whowill bear the burden of these payments.Consumer-voice.org has proposed thatideally there must be a system to fixresponsibility on individuals forviolations of time norms. It has beenargued that this is not possible insidethe LIC of today as public sector ethosis not conducive to developing suchaccountability. If it is not possible today,what prevents us from setting this asan ideal and moving towards it in thefuture?

Till such a system is in place, analternative proposal for the present isto debit all payments made on thisaccount to annual productivity linked

payments made to staff at the zonal,divisional or branch levels.

This is an issue that requires adialogue with LIC’s trade unions. Myimpression is that LIC’s unions have acommittment to customer service. LIC’smanagement has the ability,competence and human resources tocreate a consensus among unions andits management for setting up a systemthat can provide excellent, measurable,customer service to millions of LICpolicyholders.

A second argument made againstsuch payments is that it may cause aspate of ‘deficiency in service’ cases inconsumer courts across the countryagainst the LIC. My answer to thisargument is: how is the Hyderabad

Metropolitan Water Supply andSewerage Board (HMWSSB) able tomake “What if not?” payments?

Under its Citizens’ Charter theHMWSSB has committed to providecitizens with a new water connectionsanction or a rejection within 30 daysof application. If it is unable to do eitherof the two it “ will pay an amount of Rs20 as a token of its committment to thecustomer”.

The HMWSSB has not beeninundated with litigation. Its customerservice has improved and hardly a fewcustomers have asked for suchpayments. The employees of this publicservice body have become more carefuland care is taken to dispose of casesin time.

The financial impact of such acustomer measure is marginal. Itslarger impact is on the managementsystem and staff psychology. It createsa chain of concern and accountability in

an organisational environment whichhas been used to a government officework culture.

Such payments can be defined andtailored to ensure that unnecessarylitigation is avoided. Once policydecisions favouring such a system aretaken, the legal managers can designthe shape of the scheme to make it workfor policyholders.

Wage revision agreements betweenthe LIC and its employees are up fornegotiations later this year. So far theProductivity Linked Incentives / Bonus(PLI) paid to LIC staff is based onperformance parameters like firstpremium income, total premium incomeand number of lives insured. These aremainly financial parameters of growth.Why not add customer service to this?

This proposal is based on the factthat while it costs LIC about Rs 600 torope in a new customer (it may cost theprivate insurer about ten times that), itcosts only about Rs 100 to service anexisting customer. It makes sense toretain millions of existing customers.

Customer service is a key parameterof productivity of LIC employees andmanagers. Why can’t we measure it andreward employees for better customerservice?

If LIC unions and managementadopt customer service as a major themefor its future growth, private insurancecompanies will find the going extremelytough.

Should the LIC choose to ignorecustomer service it will be the duty ofthe IRDA to step in to give new teeth toits consumer protection regulations byproviding for “What if not?” paymentmechanisms.

Why can’t wereward employees for

better customerservice ?

The author is Managing Trustee ofconsumer-voice.org and a Professor andHead of Department of Commerce, DelhiSchool of Economics at the Universityof Delhi. He is also a member of theBoard of Directors of LIC of India andConsumers International (UK). Furtherdetails on consumer affairs are availableat website: consumer-voice.org. He canbe contacted at [email protected]



Some timeago, I accom-panied mybrother-in-law,who was holdingtwo credit cards,one from VijayaBank and theother fromAndhra Bank, toSecunderabad

Rail Nilayam. We had parked the carin front of the Rail Nilayam after he leftin it his leather pouch containing somecash and his driving license apart fromthe credit cards.

After about twenty minutes wereturned to the car and, to our utterdismay, found that the pouch wasmissing. Apparently some miscreanthad managed to open the door and makeoff with the pouch.

According to the conditions imposedby the banks which had issued thecredit cards, the holder is supposed togive a written complaint to the nearestpolice station about such a loss.

So we, without loss of time, went tothe Secunderabad Police Station andlodged a written complaint about thetheft of the credit cards. Immediatelyafter that we came to my house andprepared a letter addressed to both the

Resting assuredbanks, namely Vijaya Bank and AndhraBank, advising them about the loss ofthe credit cards issued to my brother-in-law and requested them to hot-listthem immediately to prevent anypossible misuse.

These letters were faxed to the headoffices of the respective banks and alsotheir branches who had originallyissued these cards. We were under thegenuine impression that the bankswould have promptly acted on thecomplaint and hot-listed the creditcards to prevent their possible misuseby the finders.

After a month my brother-in-lawgot the shock of his life when he receivedstatements from the banks calling uponhim to pay up Rs.42,000 and Rs.39,000respectively. The miscreant hadobviously used these cards and madepurchases, like a bride-groom, from aRaymonds showroom, a jewellery shop,a footwear shop, a Titan showroom, astationery shop and so on.

We immediately wrote tworegistered letters to the abovesaid twobanks holding them responsible for themisuse of the cards and denied anyliability as claimed by them because itwas they who had failed and neglectedto hot-list the cards, which had resultedin the avoidable liability despite the fact

that they were alerted immediatelyafter the theft.

But the bankers extended theirsilence and did not respond to theregistered letters causing anxiety andanguish in our minds.

In the meantime my brother-in-lawwas blessed with the next monthlystatement reminding him to settle theearlier dues. Thank God, there was noadditional claim on the cards. This timewe went in person and called on theofficials of the bank to deny his liabilityon the cards.

The bankers without any anxiety orembarrassment advised us not to worryabout this matter. They requested us to,if possible, get an FIR from the policestation and a letter from them that theculprits were not and could not beidentified by them. We were told thatthe above documents were required asa piece of evidence to prefer their claimswith the insurance company. They weresure of getting the compensation!

Of course, our blood pressure camedown, but it set us thinking that if thiswas the attitude of the banks, whatwould be the fate of our insurancecompanies processing such claims?

END USER

The author is a practising CharteredAccountant.

consumer experiences. Tell us about the good andthe bad you have gone through and your suggestions.

Your insights are valuable to the industry.Help us see where we are going.

Send your articles to:

EditorIRDA JournalInsurance Regulatory and Development AuthorityParisrama Bhavanam, III Floor5-9-58/B, Basheer BaghHyderabad 500 004or e-mail us at [email protected]

We welcome...

J. Ba lasubramanianJ. Ba lasubramanianJ. Ba lasubramanianJ. Ba lasubramanianJ. Ba lasubramanian



END USER

Almost adecade ago, anenthusiasticgroup ofc o n s u m e ra c t i v i s t sdecided tobring intoIndia theconcept of

‘Plain English’ in insurance and otherdocuments.

The Plain Language movementstarted in the UK in the mid-70s inresponse to the needs of consumers fordocuments they could understand andthe recognition by government andbusiness that plain language bringsefficiency and economic benefits. MartinCutts, the founder of the movement, wasbehind the redrafting of British statutesin simple language that could beunderstood by the common man. Themovement caught on as part ofconsumer movements around the worldand governments and businessesadopted its intent and standards.

Plain Language is language that isclear, direct and straightforward. Andas such it can be the very basis ofexcellent customer service.

Back to our efforts at bringing themovement to India.

Persuading the British Council tomodify their plan of teaching Englishto universities and in English languageclasses, and turn their attention toapplied English for practical use in allbusiness activities was not an easy task.However with a bit of persuasion theBritish Council, agreed to invite Mr.Martin Cutts, Founder of the PlainLanguage Commission to visit Indiaand hold seminars and workshops.

Within two visits of Mr. MartinCutts to various Indian cities,tremendous awareness was built upthrough media coverage. From then on,we have been pushing and pushinginsurance companies to rewrite theirpolicy and other documents ‘PlainEnglish’.

Let me give you an example. Thefirst sentence in a life insurance policy

and many other policy documentscontain nearly 200 words. I am preparedto challenge anyone to read thesentence, not once, not twice, but fivetimes, and at the end of it say honestlywhether he or she understood it or not.Most likely not!

Legal writing has always astonishedme for its lack of clarity. When twopeople get into an agreement and wantto record their intentions they will, ifleft to themselves, probably write asimple document.

When they hand it over to a lawyerto draft, the outcome is gobbledygook.Should the document ever be taken tocourt and should that same lawyerappear, I am sure even he will not beable to make out the intention or themeaning of that document!

Insurance companies have masteredthis gobbledygook and turned theirdocuments into fine, unintelligiblepieces of writing. Therefore, when PlainEnglish was brought in and severalinsurance executives participated in theworkshop we held, the LIC was happyto appoint a committee to go into thelanguage of the document. In fact, theIndian Plain Language Commissionrewrote the document and submitted itfor their consideration. That was eightyears ago. We are still waiting for thedecision of the committee accepting,rejecting or wanting to discuss therevised document!

It is my perception that any lawyerwho desires to represent a common manand help him should be able to acceptthe Plain Language legal document. Isay this because it will simplify thelawyers’ roles and reduce the timewasted by judges and opposite partiesin establishing the meaning of the

intentionally inserted, complicatedphrase.

On the other hand, if the intentionof the document is indeed to prolonglitigation and reduce opportunities ofquick disposal of the case so as to reducethe agony of the litigant, the entiresystem has succeeded!

In today’s world of customerfriendliness and the interest ofcompanies to avoid prolonged and costlylitigation, Plain Language and itsapplication would come in handy. Legaldocumentation does not call forcomplicated unintelligible words andphrases. Even something simple as theuse of the word ‘shall’ instead of the mostoften used word ‘may’, will reduceambiguity.

As a consumer activist I often feelthat complicated legal phrasing isintentional – to make the meaning ‘asclear as mud’ as the song by HarryBelafonte goes. It is therefore, mycontention that the insurance industryshould be asked to write policydocuments and other contracts betweenthemselves and their customers insimple, understandable and plainlanguage.

Keeping aside the importance ofplain language usage from the legalpoint of view, if any insurance companywere to write its policies in simplelanguage it will corner larger numbersof clients and greater value policies.

Today, what an insurance documentreveals is very little. The more open andunderstandable the terms of thecontract become, the more businessinsurance companies will garner.Contrast this with the fact that todaymost insurance is taken with reluctanceby the insured to fulfill a legalobligation.

It is my fond hope that the insuranceindustry in India will turn to PlainLanguage as the British and AmericanCompanies have done, and to theirbenefit.

Make it Simple !

Plain Languagecan be the very basisof excellent customer

service.

The author is Trustee, The Concert Trustand the Consumers Association of Indiaand Member, Central ConsumerProtection Council, Government ofIndia.

R. DesikanR. DesikanR. DesikanR. DesikanR. Desikan



STATISTICS-LIFE INSURANCE

Business and investment performance figuresof the life insurance industry

No. Company First Year Premium Renewal Premium Single Premium Total

2000-01 2001-02 2000-01 2001-02 2000-01 2001-02 2000-01 2001-02

1 LIC 696321.85 1049272.25 2519107.36 3023313.69 273773.03 909605 3489202.24 4982190.942 ING Vysya 419.00 419.00

3 HDFC Std Life 0.21 2223.00 69.00 1054.00 0.21 3346.00

4 Birla Sun Life 32.00 1809.00 15.00 1002.00 32.00 2826.00

5 ICICI Pru. Life 325.00 5577.00 305.00 272.00 5756.00 597.00 11638.00

6 Om Kotak Life 561.00 197.00 758.00

7 Tata AIG Life 2113.00 1.00 2113.00

8 SBI Life 50.66 1417.93 1468.59

9 Allianz Bajaj Life 663.28 50.61 713.89

10 Max New York Life 15.85 3564.76 14.88 0.13 315.54 15.98 3895.18

11 MetLife 47.98 47.98

12 AMP Sanmar 27.73 27.73

Total 696694.91 1066328.66 2519107.36 3023717.57 274045.16 919398.08 3489848.40 5009444.31

Classwise Premium: Life Companies

No. Company Claim by death Maturity claims Annuities/ Other benefits TotalPension in Payment

2000-01 2001-02 2000-01 2001-02 2000-01 2001-02 2000-01 2001-02 2000-01 2001-02

1 LIC 191239.70 208436.87 976579.35 1208218.96 64701.55 101611.77 171163.89 229396.34 1403684.49 1747663.94

2 ING Vysya

3 HDFCStd Life 2.56 1.01 3.57

4 BirlaSun Life 7.62 22.58 30.20

5 ICICIPru Life 64.67 0.64 65.26

6 Om KotakLife

7 Tata AIG Life 122.69 122.69

8 SBI Life

9 AllianzBajaj Life

10 Max NewYork Life 66.60 66.60

11 Met Life

12 AMP Sanmar

Total 191239.70 208634.36 976579.35 1208285.56 64701.55 101611.77 171163.89 229420.57 1403684.49 1747952.26

Benefits Paid (Net): Life Companies

(Rs. in lakhs)

(Rs. in lakhs)




No. Company Name Cental State* Infra Social Approved Other than TotalGovt. Government Structure Sector Investments Approved Investments

Securities and Other Investments Investments InvestmentsGuaranteedSecurities

1 ING Vysya 42.98 47.98 14.99 17.44 80.412 HDFC Std Life 86.43 86.43 32.12 23.67 9.18 142.223 Birla Sun Life 42.48 61.57 15.18 32.72 5.26 114.724 ICICI Pru. Life 117.94 117.94 32.55 35.72 14.10 200.315 SBI Life 76.32 76.32 26.93 12.38 15.70 131.336 Om Kotak Life 59.82 73.71 23.57 45.83 12.64 143.117 MetLife 57.59 57.59 15.23 15.66 15.50 103.988 Allianz Bajaj Life 73.45 73.45 24.44 38.51 0.26 136.669 Max New York Life 42.19 106.93 27.17 27.67 7.00 168.7610 LIC 128,139.04 131,400.71 20,498.72 77,046.29 16,442.00 245,387.7211 Tata AIG Life 74.86 74.86 29.98 34.76 139.5912 AMP Sanmar 119.75 119.75

Total 128,813.10 132,177.48 20,740.87 77,450.38 16,521.65 246,868.56

* Including Central Government Securities

Note: In the case of LIC Rs.6793.59 Crores of Infrastructure and Social Sector Investments have been included in Other thanApproved Investments.

Investment Details: Life Companies (2001-2002)

Rural /Social Sector performance: Life Companies (2001-2002)

* Provisional Figures

No. Company Rural Social Sector Year of operation/Sector (% of policies) (No of lives) Commenced on

1. HDFC Std. Life 4.50 4959 Second 12.12.2000

2. ICICI Pru Life 7.04 7604 Second 19.12.2000

3. Max New York Life 8.67 7649 Second 26.03.2001

4. OM Kotak Life 7.51 6023 First 17.05.2001

5. Birla Sun Life 11.42 8174 Second 19.03.2001

6. TATA – AIG Life 11.00 7500 First 02.04.2001

7. SBI Life 4.00 First 15.06.2001

8. ING Vysya Life 7.40 3500 First 01.09.2001

9. MetLife India 7.90 First 04.01.2002

10. Allianz Bajaj Life 18.13 2528 First 28.09.2001

11. AMP Sanmar 7.50 First 03.01.2002

12. LIC 16.05 *754816

(Rs. in crores)




Underwriting Experience and Profits: Life CompaniesParticulars BSLI ICICI-Pru ING L.I.C. HDFC

Vysya

2001-02 2000-01 2001-02 2000-01 2001-02 2001-02 2000-01 2001-02

Premiums earned – net

(a) Premium 2826 32 11637 597 419 4982191 3489202 3346(b) Reinsurance ceded (146) (3) (2) (1676) (1530) (138)(c) Reinsurance accepted 0 79 59

Income from Investments

(a) Interest, Dividends &Rent – Gross 61 170 2286190 1877700 105(b) Profit on sale/redemption of investments 26 117 112377 104882 5(c) (Loss on sale/redemption ofinvestments) (1) (13618)(d) Transfer/Gain on revaluation/change in fair value 4406 988

Other Income (to be specified) 2 18 12464 6346 4460

TOTAL (A) 7174 1020 19399 597 417 7378007 5476659 7778

Commission 440 6 1447 108 135 451791 316939 662Operating Expenses related toInsurance Business 4816 995 8485 2061 2312 426040 370656 4126Provision for doubtful debts 17987 12409Bad debts written offProvision for Tax (965) 86817 70965Provisions (other than taxation)(a) For diminution in the value ofinvestments (Net) 8397(b) Others (to be specified) 1417 859 2041

TOTAL (B) 5256 1001 8967 2169 3864 991891 773010 4788

Benefits Paid (Net) 30 65 1747664 1403684 3Interim Bonuses Paid 19538

Change in valuation of liability inrespect of life policies(a) Gross** 1943 16 12825 494 354 3403227 2539251 3062(b) Amount ceded in Reinsurance (56) (1) (372)(c) Amount accepted in Reinsurance(D) Transfer to Linked Fund 725TOTAL (C) 1917 16 13615 494 353 5170429 3942935 2693

SURPLUS/ (DEFICIT)(D) =(A)-(B)-(C) 3 (10643) (2066) (3800) 1215687 760714 297

APPROPRIATIONS

Transfer to Shareholders’ Account (12417) (3800) 43325 28066 25Transfer to Other Reserves (to be specified)* 1774 (2066) 822144 722648Balance being Funds for FutureAppropriations 3 350218 10000 272

TOTAL (D) 3 (10643) (2066) (3800) 1215687 760714 297




(Rs. in lakhs)

Std Life Max AMP Allianz SBI-Life OM Kotak TATA-AIG MetLife TotalNew York Life Sanmar Bajaj

2000-01 2001-02 2000-01 2001-02 2001-02 2001-02 2001-02 2001-02 2001-0 2 2001-02 2000-01

0 3895 16 28 714 1468 758 2114 48 5009444 3489847(35) (11) (21) (6) (1) (2039) (1530)

79 59

1 77 21 2286624 1877701

112525 104882

(13619)

2400 631 7437 988

200 1 16945 6546

201 3938 16 28 3103 1489 737 2108 678 7417396 5478493

1186 5 7 235 19 181 576 16 456695 317058

54 8488 1793 1123 2511 1127 3698 4034 653 467413 37555917987 12409

85852 70965

83971 2277 2041

54 9674 1798 1130 2746 1146 3880 4610 669 1038621 778032

67 123 1747952 140368419538

99 2037 16 11 341 1435 347 451 9 3426042 2539876(16) (445)

72599 2088 16 11 341 1435 347 574 9 5193812 3943560

48 (7824) (1798) (1113) 16 (1092) (3490) (3076) 1184962 756901

(1798) (1092) (1146) (3076) 21819 26268

(7824) (1113) 814981 720582

48 16 (2344) 348162 10051

48 (7824) (1798) (1113) 16 (1092) (3490) (3076) 1184962 756901



BRASS TACKS

Over the yearsthe accountingtreatment of profiton sale of inves-tments has posedchallenges andinteresting issuesfor the corporatesector in general.

The issue hasgreater significance for the general insuranceindustry for which investment income is acrucial aspect of profit management.

History has seen several cases wherecompanies have been tempted to account forprofit on sale of investments directly toCapital Reserve instead of routing the samethrough the Profit & Loss Account. The mainobject of this exercise is to avoid paying taxon book profits pursuant to Sec 115J / 115JBof the Income Tax Act.

There were several debates at that pointof time as to whether this constitutes goodaccounting practice or not.

In the Indian context, any accountingpractice is dictated (unfortunately) by the taxlaws prevailing in the country. The momentan item is credited or debited to the Profit &Loss Account, the immediate question askedis whether that component of income isexposed to income tax or that item ofexpenditure is allowed as a businessdeduction. Hence the driver of the accountingdecision is the income tax law of the land.

Any attempt in the past to synchronisepublished accounts vis-à-vis tax accounts hasnot produced any tangible results. Theaccounting and disclosure relating to profiton sale of investments for general insurancecompanies poses the same problem from theview point of taxation.

In accordance with IRDA (Preparationof Financial Statements and Auditor’s Reportof Insurance Companies) Regulations, 2002,profit on sale of investments has to bedisclosed in the Revenue / Profit & LossAccount on the credit side. The format ofdisclosure is given in the table that follows.

Hence the disclosure as set out in theIRDA Regulations mandates the routing ofthis item through the Revenue / Profit & LossAccount.

The computation of profits for generalinsurance business is contained in Section

44 of the Income Tax Act. The details ofcomputation are laid down in accordancewith rules as contained in the first schedule.

As per the first schedule, profits & gainsof non-life business shall be computed takingthe base figure as profits disclosed in theannual accounts. This schedule permits acouple of adjustments from such profitsbeing:a) Any expenditure which is not allowable

in computing profit and gain frombusiness

b) Any reserve for unexpired risks.

No other adjustment can be made fromdisclosed profits to arrive at profits liable forIncome Tax. Interestingly there was anotheradjustment permitted in the first schedule,which was omitted by Finance Act 1988 witheffect from April 1, 1989. This proviso readsas under:

“any amount either written off orreserved in the accounts to meet depreciationof or loss on the realisation of investmentsshall be allowed as a deduction, and anysums taken credit for in the accounts ofappreciation of or gains on the realisation ofinvestments shall be treated as part of theprofits and gains:

Provided that the assessing officer issatisfied about the reasonableness of theamount written off or reserved in theaccounts, as the case may be, to meetdepreciation of or loss on the realisation ofinvestment”.

The adjustments relating to investmentsfrom profits was allowed upto April 1, 1989,but since then has been deleted. The crux of

the issue lies in understanding theimplication of the deletion of this proviso.

While removing this proviso in theFinance Act, 1988, the notes on clausesexplained the rationale of this deletion asunder:

“with a view to enable the GeneralInsurance Corporation and its subsidiariesto play a more active role in capital marketsfor the benefit of policy holders, it is proposedto provide for exemption of the profits earnedby them on the sale of investments. As acorollary, it is proposed to provide that thelosses incurred by the General InsuranceCorporation on the realisation of investmentshall not be allowed as deduction incomputing the profits chargeable to tax. Toachieve this objective, clause (b) of rule 5 ofthe first schedule to the Income Tax Act isproposed to be deleted”

Clearly the intention was to ensure thatprofit on sale of investment, if credited to theRevenue / P & L account, should not besubject to income tax.

Somehow this logic and rationale has notbeen properly carried out in the process ofdeletion and on a plain reading of the firstschedule it appears that disclosed profitswhich will be the basis for levy of income taxis subject to only the two adjustmentsmentioned above.

This is the appropriate time to ensurethat any accounting disclosure as laid downby IRDA regulations should have theblessings and acceptance of the taxauthorities. If the IRDA regulations mandatedisclosure of profit on sale of investments tothe credit of Revenue / Profit & Loss Account,the income tax law should be made clear thatsuch an item has to be eliminated whilearriving at the taxable profits.

The language of section 44 as it standsdoes not support this view directly and theintention of the legislature as expressed inthe deletion of clause b of rule 5 of the firstschedule to the Income Tax Act has not beencarried to its logical conclusion in theprovisions of law. It is in the interest of allconcerned that the Central Board of DirectTaxes (CBDT) clarifies the position to settlethe controversy once and for all.

The author is General Manager,Corporate Affairs, Sundaram FinanceLimited. The views expressed here arehis own.

Revenue Account for the year ended 31stMarch 20__ Policyholders’ Account(Technical Account)

This profit is not taxable!

Premiums earneda) Net Premiumb) Reinsurance cededc) Reinsurance accepted

Income from Investmentsa) Interest, Dividends & Rent-Grossb) Profit on sale/redemption of investmentc) (Loss on sale/redemption ofinvestments)d) Transfer/Gain on revaluation/change in

fair value *

Other Income (to be specified)

Total (A)

R. AnandR. AnandR. AnandR. AnandR. Anand



THINKING CAP

During theprocess of libera-lising the Indianinsurance ind-ustry, changeswere made in theinsurance legis-lation to providefor RequiredSolvency Mar-gins (RSM) to be

maintained by the insurers. At present,the RSM has two components. The firstis expressed as a percentage of thereserve and the second is expressed asa percentage of the net sum at risk. Thisis essentially based on the U.K. practice,to which the Indian actuarial professionwas largely exposed. Considerablediscussion is taking place on theinternational scene on the need to setup the RSM using the “risk based”approach, that is, reflecting the variousrisks to which the insurer is exposed.

The present, two-factor, approach isable to reflect the various risks only ina very broad manner. If a risk-basedapproach is employed, the regulators,investors, policyholders and so on willbe in a much better position to assessthe financial condition of differentinsurers.

This article discusses thebackground to the risk-based capitalapproach for setting up the RSM andits application to the Indian insuranceindustry. It deals specifically with lifeinsurers. The approach for the generalinsurers will be on similar lines.

Life insurance is a contract betweenthe owner of the policy and the lifeinsurer. The owner agrees to payspecified premiums and the life insureragrees to pay specified benefits on thehappening of specified events. As theseevents could take place many years intothe future, the policy owner needs to beassured that the benefits will be paidas promised. Insurance legislation aimsto provide that assurance.

Policyholder protection is providedin three tiers. In doing so, a veryheavy responsibility is placed on theshoulders of the Appointed Actuary.

These tiers can be viewed as follows:a) Reserves that are computed on bases

that take into account the variousrisks at appropriate levels andinclude margins for adversedeviations.

b) RSM commensurate with the risksto which the insurer is exposed.

c) Policyholder protection fund that willprovide the coverage (upto specifiedlimits) if (a) and (b) are used up.

Use of source (c) should be consideredunder exceptional situations. Theregulators will strive to make sure thatthe first two sources will provide theneeded assurance. The third source willbe similar to the insurance provided tothe bank deposits upto specified limits.This possibly would be provided by aseparate guarantee fund set up and

managed by the regulators and fundedfrom the contributions by the insurersusing some equitable basis. The variousissues involved in setting up such a fundare not discussed here.

The thinking behind providingpolicyholder protection is to establishthe level of assets (called Target Level)needed to ensure that the benefitswould be paid even if the insurer wereto experience a fair degree of adversityin the future. The solvency margin canbe used to measure the resilience of theinsurer to withstand adverse

developments. In making thesecomputations, different confidencelevels can be used. This is discussedlater in the article. It should be notedthat the target level does not depend onhow the reserves are established.

Once the target level has beenestablished, a portion of it will beprovided through the reservesmaintained by the insurer. The balancewill then have to be provided throughthe RSM. This means that the RSMlevel cannot be determinedindependently of the level of reservesset up by the insurer. This points to thedanger of using the RSM factorsemployed in some other jurisdictionswithout making a comparison of therespective reserve levels. It is the total(Reserve + RSM) that is important andnot just the level of RSM.

Different practices may be followedby different jurisdictions in computingreserves. For example:■ The reserves could be on Net Level

Premium basis. With such highreserves, the RSM level can be low.

■ The reserves could be on a GrossPremium basis without anyminimum floor for cash surrendervalues (or they could be negative).With such low reserves, the RSMwould have to be higher than theywould be if some forms of minimumswere employed.

■ The levels of Margins for AdverseDeviations will affect the reservelevels.

The steps involved in computing thetarget level of assets can be describedbroadly on the following lines:■ Identify the risks to which the

insurer is likely to be subjected.■ Develop models to represent the

probability distribution of futurevariations for the differentparameters and quantify the effectof these variations. These modelscan be either based on available pastdata or using an empirical approach.

■ Establish the Target Asset level ata very high confidence level, say,99.95%.

From simple to sophisticated

If a risk-basedapproach is

employed, theregulators, investors,policyholders and soon will be in a much

better position toassess the financial

condition of differentinsurers.

Risk based solvency margins for the Indian life insurance industryShr i ram MulgundShr i ram MulgundShr i ram MulgundShr i ram MulgundShr i ram Mulgund


THINKING CAP

Once the RSM level has beendetermined, it can be expressed as apercentage of some measure, such asasset value, reserve level, annualpremiums, etc.

There will be some risk factorswhere the above approach cannot beused. Some such risks can be allowedfor by increasing the overall RSM levelby some additional margin.

There are a couple of considerationsthat have to be taken into account.Firstly, the risks pertaining to assetshave to be applied to the assetssupporting the surplus as well. Thiswould result in showing the true levelof surplus. Secondly, for participatingproducts, the insurer will be able topass on any losses to the policyholdersthrough a reduction in the bonus scales.Depending on the sensitivity of thebonus scales for reflecting the changingcircumstances, somewhat lower RSMfactors can be applied for participatingbusiness.

The following risks will primarilyhave to be taken into account:

❖ Risk of asset defaults.❖ Insurance risk.❖ Interest margin pricing risk.❖ Interest rate risk.❖ Segregated funds guarantee risk.❖ Business risk.

These are discussed below.

Asset Default RiskThis represents the risk of loss of

principal and interest due to defaultsunder fixed interest investments andloss of market values for equities andreal estate.

The RSM factors, to be applied tothe statement value of assets, can bedeveloped through cash flow modeling,using historical default rates forvarious bond categories, to reflectchanging economic conditions.

The RSM factors will vary with thedegree of risk of the underlying assets.Variations on the following lines can beconsidered:■ For investments such as cash, policy

loans, investment income due and

accrued, receivables, etc., the factorcan be zero.

■ A non-zero factor will have to beused for outstanding premiums toreflect the possibility that suchpremiums may never be received.

■ As regards bonds, the factor forgovernment bonds (both central andstate) can be zero. For other bonds,the factors will depend on the latestrating. Lower factors can be usedfor short-term bonds.

■ The factors for mortgages willdepend on whether they areresidential, commercial or onundeveloped land. Different factorswill be employed for mortgages ingood standing, with overduepayments, in the process offoreclosure, etc.

■ For equities, separate factors can beused for preferred shares (using ascale depending on their creditrating class) and common shares.

■ For real estate, the factors willdepend on whether the propertiesare occupied by the insurer, areincome producing, etc.

■ Additional factors will have to beemployed for impaired investmentsor restructured mortgages.

Insurance RiskThis represents the risk of

understating the liabilities in respectof business already written due towrong assumptions for mortality,morbidity and policy terminations. Thefactors represent the additional assetsneeded to provide for the excess claimsover expected, both from randomfluctuations and from inaccurateestimation of future levels, so as toprovide the required confidence level.

The various measures for exposureand the nature of factors can be set upon the following lines (all measures willbe considered net of reinsurance basis):■ For mortality, the measure can be

net sum at risk for life insuranceand the amount of reserve forannuities containing lifecontingencies. The factors candepend on the period of remaining

coverage. Mortality is an elementthat can be statistically measuredwith a reasonable degree ofprecision. This can be reflected inscaling down the mortalitycomponent of the RSM for largeinsurers.

■ For disability income, the measurecan be the amount of the annualpremiums for new claims and theamount of reserve for existingclaims.

■ No simple measure can be used forpolicy terminations. For thisreason, it may be necessary torecompute the reserves with higher(lower) policy termination rates soas to give higher reserves. Theexcess reserve will then be a part ofthe RSM.

Interest Margin Pricing RiskThis represents the risk associated

with inadequate pricing in respect ofthe present in-force business. Suchlosses can be occasioned bycommunication problems betweeninvestment and pricing personnel, bylack of sufficient volumes of new bondand mortgage opportunities, bychanges in interest spreadrelationships between differentinvestments, etc. This component willnot be required where there is norepricing risk (e.g. paid-ups).

The measure to be used will be theamount of reserve.

Interest Rate RiskThis represents the risk arising

from interest rate movements in thefuture. The losses arise due to the lackof synchronisation of the asset andliability cash flows. These losses canarise as follows:

■ The prepayment and extensionoptions present on the investmentsare sensitive to future interestrates. These create uncertaintiesin the future asset cash flows.

■ Increasing interest rates will causedepreciation of asset values, if thesehave to be sold to meet the shortfallin the asset cashflows to meet theinsurer’s committments.


THINKING CAP

■ For contracts with longer terminterest guarantees, withdecreasing interest rates, the futureexcess cashflows will have to beinvested at lower interest rateswhile the guarantees are based onhigher interest rates.The measure to be used will be theamount of reserveless policy loans,as such loans will reduce theinterest rate risk.

Segregated Funds Guarantee RiskThis represents the risk associated

with any interest or performancerelated guarantees on segregated fundcontracts. These guarantees relate tothe minimum amount of benefitspayable on maturity after a minimumperiod, or on death. In determiningthe amount of loss, the followingconsiderations have to be taken intoaccount:■ Time diversification, that is, the

spread out of the maturity dates.Such spreading out will tend tominimise the concentration onspecific dates.

■ The ratio of the (market value ofsegregated fund assets)/(guaranteed value) and the periodof time left in the future.

■ Level of management charges.■ Existence of margins included in

pricing to provide for suchguarantees.

Business RisksThere will be a number of risks in

running the business that may be verydifficult to quantify. Examples of thesewould be:■ Risks caused by failure of systems

employed by the insurer andinaccuracies of data on thesesystems.

■ Failure of management to followprudent practices.

■ Fraud.■ Litigation.■ Government action such as

limitations on sale of certainproducts or requirements to sellspecified products at specifiedprices, etc.

■ Sudden changes in the competitiveenvironment.

■ Unexpected changes in capitalmarkets.

In view of the quantificationdifficulties, some indirect allowancemay have to be made for such risks –for example, the minimum requirementcan be set at (100+k)% of the computedRSM. It may be possible to quantifythe effect of some of the risks throughthe use of Dynamic Capital AdequacyTesting.

Other RisksLife insurers will be holding various

derivative instruments in their effortto minimise future cash flow risks.Such instruments would involve risksif the counterparties default in theirpayments. Such risks will have to be

provided for. As new risks emerge,attention will need to be paid to them.

Once the RSM has been computed,it will be compared with the AvailableCapital and Surplus. In establishingthe available capital, some deductionsmay have to be done (for example,goodwill). In making these deductions,it should be borne in mind that theRSM will have a component pertainingto the assets held in the surplus (e.g.for asset defaults). Accordingly, nofurther deduction in respect of suchassets will be called for.

The ratio of the (Available Capitaland Surplus) to the (RSM) can betermed as the Surplus Ratio. Theregulators can require a ratio in excessof 100% (say, 125%) to reflect theinadequacies of the computations (e.g.inability to take into consideration allrisk factors). The life insurers can aimto maintain a higher ratio, say, 150%.This will provide additional capacity toabsorb losses beyond those provided bythe RSM.

The purpose of the article is todiscuss the various risks that have tobe taken into account in setting up theRSM, without suggesting any specificfactors. As discussed above, the RSMrequirements are interlinked with thereserve levels.

The IRDA can give consideration tosetting up a task force (drawn fromvarious disciplines) to consider thevarious issues and come up with theRSM requirements consistent with theRisk Based Capital approach.

A lot of work is being done on theinternational scene. This can provideuseful guidance. Special featuresapplicable to the Indian market placewill have to be taken into account, suchas

■ The statistical data needed for aproper analysis may not beavailable.

■ Data for asset defaults may not bereadily available.

■ Adequate supply of appropriateassets may not be available (e.g.long term bonds, various types ofderivatives, etc.).

This may be the right time to startthinking about moving from thepresent simplistic approach to a truerisk based approach. In the initialphase, a move to the fully risk basedapproach may not be feasible; but atleast a start can be made.

The author retired four years ago afterspending over 40 years in the lifeinsurance industry. He has been veryactive on the Indian insurance scene.

The RSM levelcannot be determinedindependently of thelevel of reserves setup by the insurer. It

is the total (Reserve +RSM) that is

important and notjust the level of RSM.


COVER STORY

The regulator – the Controller ofInsurance – was located in Simla, toofar away from the din and bustle ofeveryday business to appreciate therisks both to the industry and to itscustomers. And anyway he was notstaffed adequately to monitor adispersed industry or to enforceregulations.

Some companies were doingfamously well: making profits andserving their customers conscientiously.But there were others too, who were onthe verge of financial sickness.

In the late 50s the Government waspursuing public programmes thatneeded captive funding and saw the lifeinsurance industry, with its bank of lifefunds, as a good source.

Life Insurance Corporation of India,a monopoly life insurer wholly ownedby the Government of India was createdby an Act of Parliament, the LIC Act,1956, made up of 245 Indian and foreigninsurers and provident societiesnationalised on September 1, 1956.

Its policies were gold-platedimmediately, for they were allguaranteed by the Government, whichacquired a captive source of funds in theform of the life funds of the corporationthat grew by 1993 to Rs. 41,000 crores.Today they amount to Rs. 2,00,000crores.

The LIC spread its branch networkto rural centres too and almost half itsbusiness came from non-urban areas.

But the flip side of the developmentwas, for the customer, a gradual dropin the quality of service and dynamismof an industry that now worked on verydifferent lines from its commercialavatars of the past. Because withsecurity to the policyholders came joband pay security for employees and thedissociation of performance fromreward, including the reward ofretaining their jobs.

Policy proceeds were guaranteed,but service was not. Safety ofpolicyholders’ monies was ensured, butdynamism and innovation in going outand getting more policy holders and

and international private businessesthat waited over half a decade to beinvited in.

And equally important, competitionand growth of the insurance businessheld great promise to the society byoffering better plans and choice forenhanced financial security andplanning and long term investment ininfrastructure, lack of which wasproving to be one of the majorbottlenecks for Indian industrialgrowth.

Liberalisation also meant certainkinds of discomfort to the public sectorinsurance companies who were alreadyin the market, and who indeed were theonly ones in the market. But anindependent and strong regulatormeant that the new competitiveenvironment would ensure them a levelplaying field and guide them towardreinventing themselves for a new era.

The regulator had also to take intoaccount a disturbing historical fact. Theindustry had, one way or another, failedits customers twice before and thememories had never quite gone away.

In the 1950s things were verydifferent from the insurance industrywe have seen over the last few decadesuntil just a little while ago. Lifeinsurance as a business was over ahundred years old in the country. In1956, 154 Indian insurers, 16 non-Indian insurers and 75 providentsocieties were conducting life insurancebusiness. Though prudential normswere introduced in 1950 includingspecifying entry capital, shareholdingpatterns and investment controls, theindustry operated in a casuallyregulated environment and operated onvaried bases. It was not a case of a lackof regulations, but rather that they werelackadaisical.

Companies big and small, tariff andnon-tariff, life, non-life and manycomposites, standalone and part of bigbusiness houses, did pretty much asthey pleased. Financial reporting bycompanies – though defined andrequired by law – was quite lax andinternal administrative systems weak.

It’s good to have someoneable keeping an eye on your money, andon those who deal with and manage it.Gives you peace of mind!

The Insurance Regulatory andDevelopment Authority (IRDA) doesexactly that. By making sure that thosewho promise you financial security andsupport in times of need are in goodfinancial health themselves and canindeed keep their promises to you. Andthat they do so fairly and promptly.

This was the implicit promise of theUnion Government when it proposed astatutory regulator for the insuranceindustry that was going to facecompetitive forces. To make sure thatthe industry grew along healthy linesand that, finally, the customerbenefitted.

Thus was the IRDA formed by an Actof Parliament, The InsuranceRegulatory and Development AuthorityAct, 1999. Its writ was to licenseinsurers, to oversee the training andconduct of different classes ofintermediaries and service providers tothe industry, to promote and regulaterelated professional organisations,specify and regulate prudential normsand social obligations that insurersshould fulfill.

Most of all, the duty of the IRDA wasto protect the interest of policyholdersby itself and by discharging all of theabove duties.

When it was formed, the industrythat it was to regulate stood poised at avery critical juncture. One that wouldsoon see Indian and internationalprivate sector competitors entering along-standing Government monopolymarket. One that would directly servethe financial security needs of thesociety and industry and one that wasand is expected to be the most visiblearea of potential growth in the Indianeconomy.

Insurance held exciting businessprospects whether one wanted to be aninsurer, or one of the several kinds ofintermediaries serving the industry.This was very clearly demonstrated bythe sustained interest shown by Indian

nsurance, for the insurance customerIK. Nitya KalyaniK. Nitya KalyaniK. Nitya KalyaniK. Nitya KalyaniK. Nitya Kalyani


COVER STORY

keeping them happy became thecasualty. The necessity to act in theinterests of the market needs wasgradually lost. Insurance penetrationthat was at 10 % of the insurablepopulation in 1971, barely doubled by1992, but the underperforming LICmeanwhile became overstaffed,specially in supervisory rather thanoperational offices.

The advantages of nationalisationwere many. The LIC did take itsmessage, if not its products, across thecountry, even to rural belts wheremarkets were thinner. In fact LICclaimed that 45 % of its new businesscame from these areas by 1993. But ithardly stretched itself to do more thanwas comfortable and necessary. Mostlife insurance sold itself due to taxbenefits. The art of marketing wasplaced in a redundancy mode.

Over a decade later came thenationalisation of the generalinsurance business: for no morereason than that life insurancehad been nationalised. In fact lifeinsurance nationalisation had setthe trend and the Governmentadded to its revenue streams andasset base by nationalising big banksin 1969, and general insurance wasall set to go the same way. Onehundred and three companies weremelded into four, one for each region,and the General InsuranceCorporation of India was formed in 1972to hold the Government’s shares inthese companies and to oversee them.

Just prior to that, with someincipient sickness showing up in theindustry, general insurers had gone tothe Government asking for ‘socialcontrol’ in 1969, rather thannationalisation. That is when safetymeasures for the industry like advancecollection of premium (section 64 VB),and the imposition of tariff across allcompanies rather than by choice wereimplemented.

The Government anyway took overthe management of these companiessoon after.

They dealt with industry and notentirely with individual customers likethe LIC, and they were organised asfour separate companies and a holdingcompany all registered under theCompanies Act, and not as a monolithicstatutory body like the LIC. Yet the GICand its subsidiary companies, NewIndia Assurance Company Ltd, UnitedIndia Insurance Company Ltd, TheOriental Insurance Company Ltd. andNational Insurance Company Ltd., fellquickly in line with the somnolent andbureaucratic ways of the elder sibling.They became virtually one entity withfour arms.

The idea behind forming fourcompanies – that they would operatecompetitively – was negated quickly asmarket agreements came into place andGovernment ownership and lack of an

alternativeplayed theirroles effectivelyas great levelers.

It was not only thecustomers who suffered anindifferent industry’s neglect. Sodid professional development. It hasbeen widely acknowledged that in the

decades of nationalised insurance therewere no underwriters to be had in India.There were only employees who weretrained to look up tables. Tariffsreplaced underwriting and riskassessment was merely a page numberon these voluminous tomes.

A case in point is the actuarialprofession. Post nationalisation only theLIC had to have actuaries, and after awhile it too did not need too many.Mortality tables went for decadeswithout review and revision and onlypartly because there were not enoughprofessionals to undertake the job, butmore importantly because thecustomers could not demand anythingbetter for want of choice though healthand life expectancy indicators wereshowing remarkable improvement. Theprofession suffered but not the entire

lot of trained personnel – they wentabroad with their professional

skills and thrived!



COVER STORY

Employees thrived. In a secure andundemanding environment. Ageneration of insurance employees –along with their elder siblings in thenationalised banking industry – provedthe power of job security and assuredwage revisions and added to the housingand savings stock of the country.

Management suffered due to thepractice of the traditional culture ofpublic sector undertakings taking over;commercial decisions were forgotten.

This was the second time the societywas robbed of the benefits of a dynamicindustry.

With the dawn of the nineties, andthe slow awakening of the Indian

economy to what was happening aroundthe world, came the idea ofliberalisation and globalisation.Financial sector reforms were identifiedas the backbone of economic reformsand its primary pilot - the then FinanceMinister Mr Manmohan Singh, set upcommittees to explore what was rightand wrong with various parts of thesector and suggest roadmaps to reform.

One such was the Committee onReforms in the Insurance Sector headedby Mr R.N. Malhotra, a formerGovernor of the Reserve Bank of India.Similar committees were set up for thebanking industry headed byanother former RBI Governor,

Here are some of the consumerprotection measures that the IRDA hasbeen implementing

■ Requiring insurance companies tohave a consumers’ representative ontheir Board as members

■ Requiring insurers to maintainsolvency margins so that they are ina position to meet their obligationstowards policyholders with regard topayment of claims

■ Requiring insurers to file details oftheir non-tariff products with theAuthority before launching them inthe market so that it can be checkedthat the interests of thepolicyholders are taken care of

■ Requiring insurers to discloseclearly the benefits, terms andconditions under each policy

■ Delineating norms foradvertisements issued by insurers sothat they are not misleading to thepublic

■ Requiring all insurers to set upproper grievance redressalmachinery in their head offices andat their other offices

■ Drafting consumer representativeson to the Insurance AdvisoryCommittee, a broadbased body thatadvises the Authority on framing

regulations and taking otherregulatory and developmentmeasures for the industry. Allregulations notified by the Authorityare finalised in consultation withthis Committee

■ Constituting a Consumer AdvisoryCommittee consisting ofrepresentatives from variousconsumer organisations and ofvarious life and non-life insurers

■ Implementing the InsuranceOmbudsman scheme.

Ombudsmen operating fromdifferent state capitals have beenentrusted with the responsibilitiesof conciliation and giving awards,and can be approached by customersof personal insurances withgrievances about deficiencies ofservice.

These can include the fairnessof the premium charged, delay insettling of claims or repudiation ofclaims, legal matters relating towordings in their policies and non-issuance of any insurance documentafter payment of claims.Ombudsmen’s awards are legallybinding on the insurer but theconsumer has the right to pursue thematter at other forums.

The Ombudsman’s role iscomplementary to that of theAuthority in protecting the interestsof the policyholders.

■ Receiving complaints frompolicyholders directly too regardingcustomer service and following themup with the respective insurancecompanies

■ Making regulations for theprotection of policyholders’ interestswhich delineate benchmarks forcustomer service. It also introducedto the Indian market concepts likea 15 day free look period duringwhich policyholders can cancelpolicies if they are not satisfied withthe terms, and get a refund of thepremium, and payment of intereston delayed settlement of claims

■ Introducing a Code of Conduct foragents so that they do not missellproducts to customers or conceal ormisrepresent any policy terms andconditions including theresponsibilities and rights of theircustomers

These measures have brought in anelement of transparency to theinsurance market which, by nature ofthe business, is skewed in favour of theinsurer who has better information andthe ability to set prices and withholdpayment of claims.

The Authority is also always opento suggestions from various quartersthat will help it play its role as protectorof policyholders in a more effective way.

Mr R. Narasimham, and for the non-banking financial sector headed by DrA. C. Shah, a former CMD, Bank ofBaroda.

The Malhotra Committee recom-mended the advent of competition intothe moribund industry to present theconsumers with choice and the betterservice levels that would result fromcompetition.

And for this to work and grow in ahealthy manner the Committeerecommended that a “strong andeffective insurance regulatory authorityin the form of a statutory autonomousboard” should be established and that

In good hands


COVER STORY

it should be “a highly professional andcompact organisation” with an“independent source for financing itsestablishment and activities”.

The 1993 report translated into avoluntary body, the InsuranceRegulatory Authority, in 1996, which inNovember 1999 became a statutorybody renamed the Insurance Regulatoryand Development Authority (IRDA)formed through the passing of TheInsurance Regulatory and DevelopmentAuthority Act, 1999.

The writ of the Authority was toregister, and monitor according to welllaid out prudential norms, newcompanies wishing to enter theinsurance business and those alreadyin it. Its responsibility is also to nurturethe industry through a period of changeand ensure its healthy growth for thelarger good of the society and theeconomy.

The first of the new insurancecompanies was registered in October2000 and today, there are 26 directinsurance companies (13 each in life andnon-life) doing business in the Indianmarket with the GIC being designatedas the national re-insurer.

The lineage of the new companiesrange from centuries old Indian andInternational bluechip businesses likethe Tatas, State Bank of India, Royal &SunAlliance of UK and MetLife of NewYork.

The IRDA has come out since with26 comprehensive regulations relating

to everything from accounting andinvestment norms for insurers to rulesof the game for various intermediariesand the various activities in this sector.

These regulations were developedthrough persistent and comprehensivedialogues with insurance aspirants andapplicants from all over the world tounderstand their business concerns aswell as perceptions of the market andits various complexities.

The process of consenus building haspaid off with a smooth opening up of thesector and subsequent development ofthe industry taking place at a stable andsustainable pace with no missteps andhardly any misreading of thecompulsions and requirements of sucha complicated exercise.

With choice comes theresponsibility of decision-making. Andso it is with the Indian insuranceconsumer today, whether he is lookingat a business decision for his companyor a personal financial decision for theprotection of his material assets and hisfamily’s well-being.

It would be natural at this point tobe overwhelmed by the sudden range ofchoices available in products andproviders, in prices and features and ofcourse in the service profile that eachinsurer presents. And assessing theopportunities and risks each optionpresents is just not easy.

It is here that regulations of theIRDA relating directly to policyholders’

■ To protect the interests of and securefair treatment to policyholders

■ To bring about speedy and orderlygrowth of the insurance industry(including annuity andsuperannuation payments), for thebenefit of the common man, and toprovide long term funds foraccelerating growth of the economy

■ To set, promote, monitor and enforcehigh standards of integrity, financialsoundness, fair dealing andcompetence of those it regulates

■ To ensure that insurance customersreceive precise, clear and correctinformation about products andservices and make them aware oftheir responsibilities and duties inthis regard

■ To ensure speedy settlement ofgenuine claims, to prevent insurancefrauds and other malpractices andput in place effective grievanceredressal machinery

■ To promote fairness, transparencyand orderly conduct in financial

markets dealing with insurance andbuild a reliable managementinformation system to enforce highstandards of financial soundnessamongst market players

■ To take action where such standardsare inadequate or ineffectivelyenforced

■ To bring about optimum amount ofself-regulation in day to day workingof the industry consistent with therequirements of prudentialregulation

Mission statement of the IRDA

interests play an important part. Twomain regulations in this regardillustrate the level of concern the IRDAhas and should have about consumers.They are the IRDA (Protection ofPolicyholders’ Interests) Regulations,2002, and IRDA (InsuranceAdvertisements and Disclosures)Regulations, 2000.

While these provide the blueprint forthe IRDA to directly look afterconsumers interests, in a larger senseall that the IRDA does – whether it ismonitoring entry capital norms orkeeping an eye on whether insurers’funds are safely invested and properlyreported - is towards this precise end.

This is also the reason why aregulator chose to begin publishing amonthly for and about the industry andits consumers. Because making aninformed choice requires information inthe first place!

The IRDA Journal is an attemptto provide the industry and itscustomers a medium for informationexchange. Information about the stateof the industry, where it is headed, whatconcerns stare us in the face and howwe are going to put our heads togetherand deal with them proactively. Thiswill help the constituents of the industryand more importantly its customersgauge what is going on and whether theindustry is growing along healthy lines.

For, in the end, the only insurancethat an insurance customer has is ahealthy and stable industry!


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loksZRre Hkkouk ykuk-

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lh LVZucxZeq[; dk;Zikyd vf/kdkjh]U;w;kdZ thou chek daiuh-

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ÁflÁŸÿÊ◊∑§

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hee@efuemeerOeejkeÀ efnle mebj#eCe mebMeesOeve



ÁflÁŸÿÊ◊∑§

Yeejle mejkeÀej ves 16 DekeÌìtyej 2002 keÀes SkeÀjepehe$e peejer keÀj yeercee #es$e ceW yeercee oueeueeWkeÀer GheefmLeefle keÀes mebYeJe yevee efo³ee nw~ Fme keÀe³e&kesÀ efue³es peejer efkeÀ³es ie³es efJeefve³ece keÀer cegK³eefJeMes<eleeSB DeÐeesefueefKele nw~efJeefve³ece ceW leerve ÒekeÀej kesÀ yeercee oueeueeW keÀeGuuesKe efkeÀ³ee ie³ee nw~ efpevnW Òel³e#e oueeue,hegveyeeacee oueeue leLee meb³egkeÌle oueeue kesÀ ªhe ceWpeevee pee³esiee~

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jKevee, pees ueeiet nes(æ[) efkeÀmeer ûeenkeÀ Üeje peejer efkeÀ³es peeves kesÀ efue³es

yeerceekeÀlee& / yeerceekeÀlee&DeeW mes Òeehle keÀesìsMeve ÒemleglekeÀjvee

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(pe) yeercee DeefOeefve³ece, 1938 (1938 keÀe 4) keÀerOeeje 64 Jeer yeer kesÀ DeOeerve ûeenkeÀeW keÀes Òeerefce³ecekesÀ meboe³e ceW mene³elee keÀjvee

(Pe) yeercee hejeceMe& Deewj peesefKece ÒeyebOeve mebyebOeer mesJeeSBGheueyOe keÀjevee

(_e) oeJeeW kesÀ mecePeewleeW keÀer yeele®eerle mes mene³elee keÀjvee(ì) oeJeeW kesÀ Gef®ele DeefYeuesKe jKevee~

hegveyeeacee oueeue kesÀ ke=Àl³e-efkeÀmeer hegveyeeacee oueeuekeÀe keÀe³e& efvecveefueefKele ceW mes keÀesF& SkeÀ ³ee DeefOekeÀneWies-

(keÀ) mJeb³e keÀes ûeenkeÀ kesÀ keÀejesyeej Deewj peesefKece OeejCeoMe&ve mes megheefjef®ele keÀjevee

(Ke) hegveyeeaceekeÀlee& (hegveyeeaceekeÀlee&DeeW) ³ee Dev³e J³eefkeÌle³eeWkeÀer mene³elee keÀjves kesÀ efue³es yeerceekeÀlee& kesÀ keÀejesyeejkesÀ mheä DeefYeuesKe jKevee

(ie) Debleje&äêr³e yeercee Deewj hegveyeeacee keÀJejeW keÀer lekeÀveerkeÀerDeebkeÀæ[eW hej DeeOeeefjle meueen osvee

(Ie) GheueyOe hegveyeeacee yeepeejeW keÀe SkeÀ [eìeyesme jKevee,efpemekesÀ Debleie&le J³eefkeÌle hegveyeeaceekeÀlee&DeeW keÀer MeesOeve#ecelee keÀe cetu³e efveOee&jCe Yeer nesiee

(æ[) hejeceMe& Deewj hegveyeeacee kesÀ efue³es peesefKece ÒeyebOevemesJeeSB osvee

(®e) efkeÀmeer hegveyeeaceekeÀlee& ³ee hegveyeeaceekeÀlee&DeeW kesÀ mecetnkeÀe ®e³eve keÀjvee Deewj GvekeÀer efmeHeÀeefjMe keÀjvee

(í) ûeenkeÀ keÀer Deesj mes efkeÀmeer hegveyeeaceekeÀlee& mes yeele®eerlekeÀjvee

(pe) GvekesÀ heeme jKeer ie³eer hegveyeeacee mebefJeoeDeeW kesÀmeejebMeerkeÀjCe kesÀ ceeceues ceW mene³elee keÀjvee

(Pe) efkeÀmeer ûeenkeÀ kesÀ DevegosMeeW hej legjble keÀej&JeeF& keÀjveeDeewj Gvns efueefKele heeJeefle³ee Deewj Òeieefle efjheesì&GheueyOe keÀjevee

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([) hegveyeeaceekeÀlee&DeeW Deewj Debleje&äêr³e yeercee oueeueeWkeÀe ®e³eve keÀjles mece³e GvekesÀ ÒeefleYetefle cetu³eebkeÀvekesÀ mebyebOe ceW mec³ekeÀ O³eeve osvee Deewj keÀce&"leeefoKeevee leLee GvekeÀer mesJeeDeeW keÀes efve³eesefpele keÀjlesmece³e GvekesÀ GÊejoeef³elJeeW keÀes mLeeefhele keÀjvee~

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meesmeeFìer keÀer oMee ceW hetBpeer meec³ee Mes³ejeW kesÀ ªheceW nesieer

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STATISTICS-GENERAL INSURANCE

Business and investment performance figuresof the general insurance industry (2001-2002)

No. Company Fire Miscellaneous Marine Total

2001-02 2000-01 2001-02 2000-01 2001-02 2000-01 2001-02 2000-01

1 National 367.60 365.51 1,312.71 1,289.92 132.81 149.12 1,813.12 1,804.55

2 New India 758.84 599.64 2,099.30 1,883.72 210.09 188.12 3,068.23 2,671.48

3 Oriental 392.22 393.43 1,287.17 1,210.21 139.11 121.71 1,818.50 1,725.35

4 United India 480.28 412.23 1,438.18 1,329.27 126.61 142.78 2,045.07 1,884.38

Sub-Total 1,998.94 1,770.81 6,137.36 5,713.12 608.62 601.73 8,744.92 8,085.76

5 Royal Sundaram 3.33 32.18 0.19 1.23 36.74 0.19

6 Reliance 0.76 1.32 0.27 2.35

7 Iffco-Tokio 2.07 0.10 9.52 0.14 1.53 13.12 0.25

8 Tata Aig 0.49 31.41 4.17 36.07

9 Icici Lombard 1.30 9.66 0.00 10.96

Sub-Total 7.95 0.10 84.09 0.33 7.20 99.24 0.44

Grand Total 2,006.89 1,770.91 6,221.45 5,713.45 615.82 601.73 8,844.16 8,086.20

NOTE: Figures of Bajaj Allianz General Insurance Company not included.

Net Premium Income – Non-Life Companies

No. Company Fire Miscellaneous Marine Total

2001-02 2000-01 2001-02 2000-01 2001-02 2000-01 2001-02 2000-01

1 National 496.16 412.29 1,732.04 1,607.90 211.20 207.50 2,439.40 2,227.69

2 New India 1,106.70 779.40 2,728.64 2,380.62 362.73 333.04 4,198.07 3,493.06

3 Oriental 531.03 480.20 1,753.00 1,571.74 214.60 195.10 2,498.63 2,247.04

4 United India 636.99 527.22 1,889.28 1,717.20 255.21 279.56 2,781.48 2,523.98

Sub-Total 2,770.88 2,199.11 8,102.96 7,277.46 1,043.74 1,015.20 11,917.58 10,491.77

5 Royal Sundaram 17.90 50.44 0.24 2.78 71.12 0.24

6 Reliance 45.84 0.45 29.07 0.13 1.74 76.65 0.58

7 Iffco-Tokio 36.15 3.70 31.02 2.09 3.34 0.05 70.51 5.83

8 Tata Aig 19.36 49.91 9.18 78.45

9 Icici Lombard 10.98 16.12 27.10

Sub-Total 130.23 4.64 176.56 2.45 17.04 0.05 323.83 7.14

Grand Total 2,901.11 2,064.36 8,279.52 6,757.44 1,060.78 9,85.15 12,241.41 9,806.95


Gross Direct Premium Income in India: Non-Life Companies (Rs. in Crores )

(Rs. in Crores )




Par

ticu

lars

Nat

ion

alN

ew I

nd

iaO

rien

tal

Un

ited

In

dia

Tot

al

2001

-02

2000

-01

2001

-02

2000

-01

2001

-02

2000

-01

2001

-02

2000

-01

2001

-02

2000

-01

Net

Pre

miu

m18

13.1

218

04.5

530

68.2

326

71.4

818

18.5

017

25.3

520

45.0

718

84.3

887

44.9

280

85.7

6N

et I

ncur

red

Cla

ims

1724

.93

1461

.63

2554

.18

2279

.74

1827

.66

1502

.06

1780

.47

1776

.93

7887

.24

7020

.36

95.1

4%81

.00%

83.2

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Par

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Gen

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Com

pani

es(R

s. in

Cro

res)




No. Company Name Central State* Housing & Infra Social Approved Other than TotalGovernment Government Fire Structure Sector Investment Approved InvestmentSecurities and Other Fighting Investments Investments Invest

Guaranteed EquipmentSecurities

1 CHNHB Assn 1.34 1.34 0.30 0.78 5.14 1.80 9.362 ICICI Lombard 42.03 42.03 8.86 19.82 47.10 117.813 Tata AIG General 53.92 53.92 8.85 30.23 21.80 39.99 154.794 Iffco Tokio 50.63 50.63 8.39 16.46 26.15 101.645 Royal Sundaram 44.67 56.29 9.56 17.64 37.80 121.286 Reliance General 59.56 10.10 15.92 29.14 34.94 149.667 Oriental Insurance 809.09 1,053.29 274.65 410.36 1,528.32 420.23 3,686.858 United India 1,460.91 1,868.15 368.61 550.28 1,178.96 824.00 4,790.009 National Insurance 1,080.34 1,391.52 189.83 232.98 1,227.12 304.84 3,346.2910 New India 1,679.54 2,240.83 443..69 431.07 2,483.32 1,285.66 6,884.5711 GIC** 1,600.98 2,095.49 556.71 3,399.13 739.79 6,791.12

Total 6,823.45 8,913.04 1,879.56 5,124.67 7,324.63 2,911.47 26,153.37

Investment Details: Non-Life Companies (2001-2002)

NOTE: Figures of Bajaj Allianz General Insurance Company not included.* Including Central Government Securities** GIC figures are provisional

No. Company Rural Social Sector Year of operationSector (% of GDP) (No of lives) /Commenced on

1. Royal Sundaram 2.12 6064 Second 23.03.2001

2. Reliance General 2.00 Second 23.03.2001

3. IFFCO-Tokio 6.82 5879 Second 04.12.2000

4. TATA - AIG 3.98 Second 22.02.2001

5. ICICI Lombard 0.83 2902 First 31.08.2001

6. National 1.46 Not Available

7. Oriental 2.82 3427276

8. New India 3.35 16368522

9. United India 4.35 Not Available

Rural / Social Sector performance: Non-Life companies (2001-2002)


Figures pertaining to public sector non-life companies are provisional.

(Rs. in Crores )



FORUM

Arm’s length & an Eagle eye

T h eM a l h o t r aCommittee,in its reportin 1994 onreforms inthe insurances e c t o r ,stressed that

‘professional regulation in areasrelating to expenses, customer service,claims settlement, resolution ofdisputes, reasonableness of tariffs andprevention of restrictive trade practices’was urgently needed.

It proposed that capital adequacy,solvency margins, quality ofreinsurance and its performance,management expenses, adequatetechnical reserves, asset distribution,accounting and transparency offinancial statements and disputesresolution forums should engage theattention of the regulator to beappointed with full functional autonomyand operational flexibility. He wasexpected to publish an annual report onthe state of the industry for the publicto make an assessment of how fair andefficient he has been.

The IRDA has now been functioningwith statutory backing to regulate andbring about reforms in the market inthe best interests of all players. It isuniversally recognised that a wellfunctioning insurance market is a vitalnational asset that contributessignificantly to its economicdevelopment. Insurance, offersbusinesses and individuals economicopportunities to harness theirentrepreneurial initiatives for creatingwealth for the benefit of the society as awhole.

How does insurance serve thenational economy?

1. Insurance promotes financialstability by supporting risk-takingactivities of its entrepreneurial class

that creates jobs, provides revenuesto Government and maintains othersin business.

2. Insurance complementsGovernmental efforts for creatingsocial security programmes. Lifeinsurance, personal accidentinsurance and health insurance, forinstance, are all covers thatcomplement such efforts.

3. Insurance, particularly marineinsurance, facilitates trade andcommerce.

4. In addition insurers channel theirsavings as investors into acceptablesecurities. They create liquidity inthe market. Through their strictinvestment criteria, insurers qualifythe credit-worthiness of the partiesto whom they provide funds.

5. The investment income on technicalreserves could be passed on to thepolicyholders by way of reducedpremiums in a non-tariffenvironment

6. By pricing risks they encourage andstimulate better risk managementprocesses leading to better protectionof assets.

7. Insurers have detailed knowledge ofloss causing events, situations andactivities. By offering incentives tocontrol risk factors better, theyencourage loss mitigation efforts bythe insured.

Regulation aims at keeping themarket competitive, protectingconsumers, raising revenues to supportsocial objectives and ensuring itssmooth and orderly functioning.Competition enhances product valueand choice for the customer, encouragescorporate efficiency and continuousinnovation and improvement.

Insurance is a financial futuredelivery product, based on aninformational exchange between theparties to the contract, with utmost goodfaith.

In insurance there is usually aninformational imbalance between thetwo parties. While only the insured is

better aware of his risk factors, insurersare more knowledgeable about theircomplicated, technical business andtheir business / financial condition. Thebargaining power shifts from theinsured to insurer, once the insurancecover has been bought. The power todeliver on what has been promised isalmost entirely in the hands of theinsurer.

Insurance regulations normally dealmarket imperfections that are a part ofany free competitive market.Particularly those that cause harm toconsumers’ interests such as theavailability of insurance covers,reasonable prices, product innovation,spread of insurance awareness to ruralareas and claims settlement principlesthat are fair and equitable. Equally theregulator ensures that insurers arereliable and solvent at all times and thatcompetition in the market is fair andhealthy.

He monitors the functioning of themarket by collection of timely andadequate information concerning eachinsurer, through informal and formalconsultations with the officials ofinsurers to be able to spot potentiallyadverse developments and to interveneand suggest corrective actions. Suchmonitoring should be discreet andinformal to the extent possible. Theregulator’s primary job is to preventmarket imperfections from getting outof control and threatening the stabilityand well-being of the market.

Even as the regulator has to keephis eyes and ears close to the ground,he has to keep the regulated insurersat arm’s length to demonstrate hisimpartiality and efficiency in hisdealings with them.

It is the extent of intervention by theregulator to correct these marketimperfections that can cause majordifferences among the playersconcerned. Ideally, it should beminimally intrusive, and he shouldallow market forces to battle out thedifferences as far as consumer interestsdo not suffer and as far as it does not

G V RaoG V RaoG V RaoG V RaoG V Rao



FORUM

(A regulator’s) is not arole that can bring

popularity, but a job for atrendsetter who can raise

a hornet’s nest.

stifle the creative and innovativepractices that insurers require topromote to push their businessboundaries.

The regulator should insist uponand encourage self-regulation by theinsurers themselves to lessen the needfor his intervention. He should persuadethe insurers to adopt and practice a codethat he wants the market to adopt inmost matters concerning the interestsof the policyholders. He should beequally forceful in encouragingconsumer activism to grow and developso that market forces on either side areas strong and as well informed aspossible to lessen his need forintervention.

The regulator has a majorresponsibility towards keeping a watchon the efficacy of corporate governanceand accountability. Towards achievingthis objective, he should encourageinsurers to obtain ratings throughrecognised rating agencies, bothnational and international, not only onthe criteria that they normally followbut also on a criteria that he can imposefor his satisfaction.

His oversight can be supplementedalso by certifications from othersthrough internal auditand independentactuaries and accountants.

He should also ask for quarterly un-audited financial statements of eachinsurer for monitoring his comparativeperformance with those of the previousyear, and encourage insurers to publishthem in the newspapers for theinformation of the insuring public. Thetrends in the results will tell their ownstory and this will lead to bettermonitoring of the market. He would alsoappear less intrusive to insurers, shouldthe need arise for it, even whileprotecting the public good.

Should regulation be ex-post or ex-ante? Obviously it has to be ex-post toshow his intervention is not intrusivebut more intense and selective.Technical aspects concerning insurersthat need monitoring can be outsourcedto specialists with proper credentials sothat highly specialised skills can beobtained.

For an efficient, competitive andorderly market to emerge from whatwas a monopolistic one where thenation-alised industry regulated itself,takes time, patience, persuasion and awell thought-out strategy. And this doesnot happen overnight, howeverenergetic and efficient and well-meaning a regulator may be. But a timetable has to be drawn up to take thecritical measures, and the partiesshould be informed in advance of theshape of developments that will be putin place.

De-tariffing, removal of pricecontrols and controlling the staggeringoperating losses threatening thefinancial condition of insurers are majoritems of interest to all parties. Thepublic should know the steps, and thetimetable that are leading to it. Insurersexplain away their motor losses aswholly due to inadequacy of motor rates,as though the quality of theirmanagements and high managementcosts are not a part of such losses. Theregulator has an obligation to knowwhat the industry is actually doing tocounter such losses.

Socially oriented schemes, likehealth insurance, have to measure upto an impartial yardstick andconsumers have a right to know theyare not being misled or short-changedon their expectations. Training and

retraining of the existing marketingstaff of an insurer is an area where theregulator has to step in to prevent anill-equipped field force with half-bakedknowledge being unleashed onunsuspecting and ignorant consumers.

Insurers should announce andregularly publicise the claims codepracticed by them for the consumers toknow their systems. Proposal formsshould, without exception, form part ofthe policy document for parties not toclaim informational non-disclosure ormore importantly to discourage thepractice of insurers not collectingcompleted proposal forms. Internaldispute resolution mechanisms shouldbe trustworthy enough for consumersbelieve insurers are credible.Ombudsman intervention for personalinsurance disputes should be widelyadvertised and mentioned in the policydocument.

In a country like ours where theCitizenry looks up to the Governmentfor all initiatives to emerge, theregulator has a tough task on his hand.Not only the consumers but also theinsurers look up to the regulator forguidance, and perhaps even dictation.Now that the insurers in the publicsector are de-linked from the GIC, theiraccountability norms have got diluted.The Government department to whichthey are accountable does not have theexpertise to enforce proper discipline

Inevitably, it is the regulator whohas to step in as more than 90 % of themarket is with the public sectorcompanies whose bottom lines causesome concern, and whose marketpractices need a significantimprovement.

He has the delicate task of balancingvarious conflicting interests. It isdefinitely not a role that can bringpopularity for anyone filling in thatposition but a job for a trendsetterwho can raise a hornet’s nest. Goodluck to him!

G.V. Rao is retired Chairman andManaging Director, The OrientalInsurance Company Ltd.


NEWS BRIEFS

The International Civil Aviation Organisation and International Air TransportationAssociation have proposed to set up an exclusive insurance company for airlines, airports,leasing companies and support-service providers.

As it is supposed to function as a non-profit organisation and focus exclusively on thisindustry, establishment of the new company would bring down insurance costs of aviationcompanies, especially airlines.

At the same time, it would act as a trend-setter at a time when terrorism is forcingcorporates to scurry for exclusive cover.

Both IATA and ICAO and the Indian aviation companies are now pushing for the supportof the Indian Government for the proposal.

The new insurance company would benefit the Indian aviation industry as all key players— Indian Airlines, Air-India, Jet Airways and Air Sahara — have forked out huge sums forinsurance after 9/11 rocked the insurance and aviation industries.

Since one of the key problems faced by airlines after 9/11 was that reinsurers were notwilling to provide third-party war risk cover of more than $50m, ICAO and IATA have proposedthat the new company would not impose such limitations which hamper the industry.

While the proposed third-party war risk limit is $1.5bn for one incident, total liability forthe company would be capped at $15bn. The cover would not be revoked even if a majorincident dents reserves on account of huge claims.

ICAO member-nations are supposed to contribute to the corpus of the proposed insurancefirm. The services will be cheaper since state guarantees would also be involved. Thecontribution and liability of each country will be in proportion to the ICAO funding committedby the member-nation.

ICAO is trying to get states representing 51% of its funding to support the initiative.Once the required number of members send in their expression of interest, the proposalwould be processed further. In a bid to garner support, IATA has also urged its memberairlines to take up the issue with their respective governments.

Airborne risks

Life Insurance Corporation of India is all set to round up the rest of the world and has been drawing up and putting into motion plans toachieve this.

Apart from aiming at the US markets and tying up to sell policies to ethnic Indians there, it recently tied up, through its offshoresubsidiary in Bahrain, the Life Insurance Corporation (International) (LICI), with the newly formed Gulf Insurance Agencies Company.

Through this LIC products would be marketed in Oman from the beginning of the next calendar year exclusively for the over 3,00,000Indian expatriates in Oman. These policies can be transferred to India if the policyholder leaves Oman. However, an Indian resident, takingup jobs in Oman or in the Gulf cannot transfer the policy from India as there are restrictions imposed by the Reserve Bank of India

Abdul Aziz & Bros, Towell & Co, Mustafa Sultan Enterprises and Prem K. Mankad are the stakeholders of the new company.

LIC has operations in the UK, Fiji, Mauritius and the Gulf. (In the Gulf its investments have grown several fold to touch $100 millionin five years.) Last year it started a joint venture in Nepal - LIC Nepal - and a similar joint venture has been promoted in neighbouring SriLanka – LIC Lanka - along with Bartleet Group..

LIC is also eyeing Australia and New Zealand as well as planning a move into the West coast of Africa through a subsidiary registeredin Mauritius. The African west coast venture will be LIC’s second company in the continent after the Kenya-based Ken India, which was setup in collaboration with the General Insurance Corporation (GIC) and local partners

In the US, it has tied up with a local company, Nation Wide, for a corporate agency for selling the later’s product in three states, whichhave major chunk of Indians. The corporate agency will be converted into a full-fledged life insurance company with the partnership ofNation Wide after two years.

The IRDA is looking at whether thereshould be a change in the agency commissionstructure for life insurance.

A panel set up to suggest ways torestructure commissions not only to infuseinfuse professionalism in agents but also tolook into the possibility of giving gradedcommissions based on their productivity, metin Delhi on November 18.

Currently, the agency commissions areat 40 per cent of the first premium in thefirst year, 7.5 per cent in the following twoyears and five per cent thereafter. Furthera cap of 65 per cent is set on the commissionspayable over the first five years.

Companies want more flexibility toreward performing agents and also give themenough motivation to avoid rebating.

The committee, among others, hasrepresentatives from Life InsuranceCorporation of India, HDFC Standard Life,ICICI Prudential, AMP Sanmar, MetLife,and members of the Agents Associations’. Itwill submit a report on the issue by Decemberto the IRDA.

Life agentscommission to change

LIC LIC LIC LIC LIC out to conquer the worldout to conquer the worldout to conquer the worldout to conquer the worldout to conquer the world


NEWS BRIEFS

Universal health care in India is a fonddream but a study report by the CII-McKinsey combine says it is possible by theyear 2020.

What is required is mandated insurancein urban areas and high public subsidies inrural areas, says the report.

While private, social and communityinsurance could cover 60% of the population,public welfare and subsidised community-based schemes for medium income segmentsin the rural areas will take care of theremaining population.

The study has recommended that theGovernment should stimulate the growth ofprivate, social and community insurance toimprove health care affordability in thecountry. Though there is a vast potential forprivate health insurance cover to grow inIndia, the business is unattractive and hasa low penetration level at present because oflack of awareness, pre-existing conditions,lack of provider network, complicated claimsprocess, inadequate servicing among others.

The study has suggested that the capitalrequirement for health insurers to enter themarket should be reduced to Rs 30-50 crorefrom the present Rs 100 crore. A number ofplayers are reluctant to enter the market atpresent because of the high capitalrequirement and unattractive marketconditions, the study has pointed out.

With health insurance being the highestlevel of risk among different types ofinsurance, the report has urged theGovernment to introduce risk-based capitalmonitoring and product level norms toensure that insurers carry adequate capitaland include customers who need theinsurance cover the most.

Healthy India

Or through thin air for that matter! TheIRDA has allowed the receipt of insurancepremiums by insurers using variouspayment methods apart from the hithertoprevailing cash, cheque, bank guarantee andcash deposit.

You can now pay premiums using yourcredit or debit cards, through the Internet,by e-transfer or by direct credits throughstanding instructions to your banker or bybank transfers.

The Insurance Regulatory AndDevelopment Authority (Manner of Receiptof Premium) Regulations, 2002, alsorecognises postal money orders and any

Rating hospitalsCredit rating agency Icra has forayed

into rating of healthcare institutions(primary, secondary and tertiary healthcareproviders and teaching hospitals). Icra hasgranted its first such rating H-1 (indicatinghighest grading) to Vellore-based ChristianMedical College and Hospital.

The rating of healthcare institutionswill be different from the traditionalfinancial ratings and will focus on qualityof resources, processes and outcome ofhospitals.

Icra has put together a dedicated teamto undertake such ratings which includesmedical doctors, healthcare administratorsand business analysts.

Icra teams evaluate hospital infra-structure such as intensive care units,

rooms, quality of equipment and operationtheatres, processes, attitude towardspatients and the outcome – patient responseand satisfaction.

Icra will be rating a few more hospitalsand will also be working on creatingawareness through conferences andseminars for hospitals, doctors andpatients.

The system would be a good supportstructure to health insurance companieswho can use it to make decisions aboutaffiliating hospitals in their service providernetworks and while processing claims

On Icra’s scale H1is the highest ratingand H4 will be the lowest.

Premiums by plastic …recognised banking negotiable instrumentsuch as demand drafts, pay orders andbanker’s cheques drawn on any scheduledbank in India, and could approve other modesfrom time to time.

The terms of Section 64 VB of theInsurance Act will still apply across paymentby all instruments and methods – that is, theinsurer will not be on risk until the paymentis received by him.

Since some of these methods of paymentcarry collection charges – like the discountrate on credit card charges – sometimes borneby sellers, in the case of an insurer the optionto do so is left to his discretion.

The Administrative Staff College of India(ASCI), Hyderabad, has been approved bythe IRDA to impart practical training andconduct examinations for ChiefAdministrative Officers and Chief ExecutiveOfficers of Third Party Administrators(Health Services). This training will be onthe basis of the syllabus as per InsuranceRegulatory And Development Authority(Third Party Administrators – HealthServices) Regulations, 2001.

Web based training for TPAs – Health ServicesASCI and Med Varsity will conduct thistraining from December 1, 2002, to February3, 2003, through on line/ offline studyfollowed by a three day contact programmescheduled for February 13 to 15, 2003.

All TPAs and applicants for TPA licences canundergo this training. The syllabus for thetraining is split into core and electivecurricula. The core curriculum is made up ofthe following topics: 1. Legal and RegulatoryAspects of Health Insurance 2. Role of aThird Party Administrator – Health

Insurance and Future Expectations, 3.Underwriting and Claims ManagementAspects of Health Insurance, 4. ManagedCare and 5. Health Statistics. The Electivecurriculum consists of the following subjects:

1. Development of Health Insurance2. Management of Medical and Health

Services3. Accounting and financial management4. Role of Information Technology and5. Managing Customer Satisfaction


The US government will cover insurance claims of up to $ 90 million a year from future terrorist attacks. This federalbackstop facility, pushed through by President Bush in the House of Representatives after much time and effort, isexpected to spur the return of construction activity and hence, jobs. The bill is expected to be passed in the Senate too.

Terrorism insurance has become hard to come by following the September 11 attacks, and with it workmens’ compensation(WC) cover, without which construction activity is just not possible.

The government would pay 90 percent of damages exceeding $10 billion that result from a terrorist attack. For lesseramounts, during the first year of the three-year program, insurance companies would pay damages up to the equivalentof 7 percent of their premiums, with the government picking up the rest of the expense.

By the third year, the insurers’ share would rise to 15 percent of their premiums. In that year, the government wouldpay 90 percent of losses greater than $15 billion. Any losses paid by the government under $10 billion would be recoupedby imposing a surcharge of as much as 3 percent on premiums paid by businesses. But there is no provision for repayingthe government for larger losses.

The attacks on the twin towers resulted in WC and life insurance claims of almost $ 5 billion out of a total of $ 40 billionclaims. WC is also what construction workers and their families rely on as a safety net.

will step in for terrorism claims

The anonymous author of a book calledCorruptions in Our Health System, publishedlast month in Taiwan, says that doctorscommonly try to gain more money from thenational health insurance programme.

The Director of the Department of Healthof that country has reacted by saying thathe knew that such corruption cases havebeen around for a long time but that he isnot sure how prevalent they are. He has

Book on health insurance scam

China, which together with India hasbeen one of the most attractivedestinations for foreign capital ininsurance ventures, is continuing on itscourse of opening up the sector to foreignparticipation.

China’s Insurance RegulatoryCommission chairman Wu Dingfu hasgiven the green light to three more foreigncompanies to set up operations in thecountry. Licenses have been approved forthe U.S.’ Liberty Mutual, the U.K.’sStandard Life, and Japan based SompoJapan Insurance Inc.

Standard Life, Europe’s largest mutuallife insurance company, will establish a50-50 partnership (the maximum stakeallowed under Chinese law) with TianjinTEDA Investment Holdings Co. to becalled Heng-An Standard Life InsuranceCo in North China’s port city, Tianjin. It

will be China’s largest life insuranceventure with a registered capital of 1.302billion yuan( $ 158 million).

China’s insurance sector has beengrowing impressively in recent years,reporting a 32.2 per cent year-on-yearincrease in premium income in 2001 tomore than $ 25 billion.

For long a controlled industry, Chinaagreed to gradually allow foreigninsurance firms in for a WTOmembership.

China also agreed to allow lifeinsurers from abroad to hold up to 50 percent in joint ventures, while non-lifeinsurers can hold up to 51 per cent.

Insurance licenses are restricted tocertain provinces and cities now but allgeographical restrictions will be lifted inless than two years.

China admits 3 more foreign insurers

promised to look into the matter. Thepractices described in the book includefalsifying medical records, conductingunnecessary examinations or surgeries andinflating costs.

The book also noted the prevalence ofquacks and so-called doctors who obtainedtheir licenses illegally.

The book was published under afictitious name hit the limelight when it wasfeatured in a local Chinese language

Rating agency Standard and Poor’s saidthat Asia’s insurance sector is expected tosee more failures next year due to intensecompetition.

The agency’s report said that“Competition is so hot that in many markets,even if the number of players were to halve,it would remain a significant issue for thoseleft,”, adding that “the sector is challenging,unsettled, and rife with competition. Thereare no safe havens anywhere in the region.”

Weak equity markets, lacklustreproperty prices and credit problems arecontributing to the sector’s troubles, theinternational ratings agency said. Poormarket conditions have caused a “flight toquality” in some markets.

So, there are a number of players at thebottom end of the rating scale fighting tosurvive. But there are some bright spotsdespite the gloom pervading the sectoraccording to S & P. “Premium growth isgenerally good, at levels above that of grossdomestic product.”

Asian insurers shaky

newspaper and the President of the TaiwanMedical Association has said that aninvestigation had failed to reveal the author’sreal name or identity.

Doctors have been called upon to cleanup their fraternity by reporting illegalpractices and seeing that changes are madein medical education to include moralitylessons. A toll-free number has beenannounced for the public to report suchpractices too!

USNEWS BRIEFS


Lord Peter Levene of Portsoken wasunanimously, confirmed by the Council ofLloyds as the 61st Chairman of Lloyd’s, andthe first one from outside the London marketin its 314 year history.

He was selected last June to replace SaxRiley, who is retiring after two years on thejob, and will serve for a minimum of threeyears.

Speaking about his new role, LordLevene said that the global reputation of theworld famous insurance market was strong,and its brand envied everywhere.

“Today, the financial services industry isexperiencing difficult times, while Lloyd’s isbenefiting from the strongest tradingconditions in almost four decades,” he said.“One of my tasks is to sell the Lloyd’s messagearound the world.”

He said that he would, along with ChiefExecutive Nick Prettejohn, be drivingforward the implementation of the reformsprogramme and complete thetransformation of Lloyd’s. 2003 will be a yearof transition for Lloyd’s with the introductionof the new franchise concept and in the toour accounting system.

“By 2004, I expect to see a stronger, moredisciplined Lloyd’s which can be comparedfavourably with the insurance industryworldwide in terms of its transparency andits efficiency. Beyond that, the goal isprofitability that is sustainable in the longterm. It’s a goal I’m committed to achieve.”

In September Lloyd’s members approveda far reaching plan to transform the way thevenerable market does business, adopting afranchise system to replace the currentyearly reformation of syndicates. Othermeasures included implementing annualaccounting to replace the three year methodcurrently employed, and agreeing to limit thenumber of individual “Names” to thosecurrently participating in the Lloyd’s market.

Levene’s experience includes his role thehead of London’s Docklands Light Railwayand the city’s Canary Wharf propertydevelopment project and Chairman of thedefence contractor United ScientificHoldings.

Motor claims frauds is such abugbear for the Indian insuranceindustry that it is almost a relief toknow that insurers in other countriessuffer due to it too!

NTUC Income, the Singapore’slargest insurer, is cracking down onfraudulent and inflated third partymotor insurance claims across thecity state.

Over 50 million Chinese are nowcovered by health insurance policiesand going by the pace at which theChinese government is driving theactivity, this figure will go up by 60 percent this year.

As it is, 50 million represents 30 percent of the insurable population ofChina under medical programmes.

The reforms programme aimed aturban workers across the country aimsto ensure their needs for basic medicaltreatment and guarantee theimplementation of overall medical

Lord LeveneTakes Over as

Lloyd’s Chairman

Singaporeanswer to motorclaims frauds

To set an example, policyholders involved in an accident must now sendtheir vehicles to an Independent Damage Assessment Centre (IDAC) or havetheir insurance cancelled and their premiums refunded.

These IDACs were set up in August and, since then, NTUC Income hasfound that the average repair bill for a vehicle involved in an accident hasbeen about $2,000.

But third party claims which bypass the independent assessors have billsof about $3,300, or 65 percent more. That adds up to about $12 million a yearin inflated or fraudulent claims and some insurers stopped writing motorinsurance because of such losses.

To set an example for others and to urge the authorities to make suchassessment compulsory, NTUC is forcing all its own policyholders to go toIndependent Damage Assessment Centres.

Tan Kin Lian, CEO of NTUC Income, has said that there is a small segmentof policyholders who work with workshops to inflate their claims, deliberatelybypassing the IDAC, and even making up accidents.

“If we can eliminate this group by cancelling their policies. it will benefitthe remaining policyholders.”

And this benefit could translate into cheaper premiums of up to 10 percent, he said.

NTUC Income is also calling for other insurance companies to follow suit,saying this would be an effective way to deal with inflated claims, bring downrepair costs and hopefully save insurance premiums for motorists as well.

The Consumers Association of Singapore welcomed the move but it hasreminded insurers that they must stick to their end of the bargain and lowerpremiums when costs go down.

China reforms in health coverplanning in over 90 percent of theregions.

China has made outstandingachievements in medical insurancereform.

By the end of last June, of the 349areas that have adopted overall medicalplanning, 307 areas had launchedmedical insurance, accounting for 88percent of the whole country.

This covers a population of 50.26millionwhich is 30 percent of the totalinsurable population of China.

NEWS BRIEFS


L to R: Mr. P.A. Balasubramanian, Member (Actuary), IRDA, Mr N. Rangachary,Chairman, IRDA, and Mr. Rajendra Chitale, Managing Partner, M.P. Chitale& Co. at the Invest India Policy Roundtable on Design and Implementation ofPension Reforms in India held at Delhi from October 15 to 17.

The General Insurance Agents Association of India metwith the Chairman, IRDA, on October 23 in Mumbai.Regarding their concerns about brokers the IRDAChairman explained that there would be room for differentkinds of intermediaries to co-exist.

This was followed by a meeting with the Federation ofAutomobile Associations of India and the issue of high costof spares for new generation of cars and low Own Damagepremiums were discussed. The idea of rating cars accordingto safety and quality to enable insurers to quote finer rateswas mooted by Chairman, IRDA.

The Institute of Insurance and Risk Management heldits maiden programme, a national seminar on ‘InsuranceRegulations & IAIS (International Association of InsuranceSupervisors) Core Principles for Insurance Supervision inEmerging Markets’, on August 26 and 27 at Hyderabad.

The seminar, inaugurated by Mr N. Chandrababu Naidu,Andhra Pradesh Chief Minister, was attended over two dozenparticipants drawn from insurance regulators’ offices fromvarious Asian countries including Sri Lanka, Singapore andMalaysia.

IIRM’s debut!

L to R: Mr N. Rangachary, Chairman IRDA, Mr Nitin Dossa, PresidentFederation of Indian Automobile Associations and Mr K.K. Srinivasan,Secretary, Tariff Advisory Committee.

Mr N. Chandrababu Naidu, Chief Minister, Andhra Pradesh, andMr N. Rangachary, Chairman, IRDA, at the inaugural session of the seminaron IAIS Core Principles organised by the IIRM.

ROUND UP

Invest India’s Pension RoundtableInvest India Economic Foundation Private Ltd. held a Policy

Roundtable on Design and Implementation of Pension Reforms in Indiafrom October 15 to 17 at Delhi. The idea was to bring in greater clarityand consensus on pension system design and implementation in India.The Foundation is conducting a survey among key players and thinkersin the Indian pension sector on the issue and is also to publish a bookjointly with McGraw-Hill titled Rethinking Pension Provision for Indiawhich will carry the final versions of some of the papers presented atthe roundtable.

Send us a picture!Event?

GIAA & FAAI


ROUND UP

The Federation of Indian Commerce and Industry heldits Seventh International Conference on Insurance on thetopic “Emerging Competition in the Indian InsuranceIndustry: Opportunities and Challenges” on September 25and 26 at Delhi.

Organised in partnership with the European Union,European Commission and the International InsuranceCouncil, the US, the annual conference was aimed atdevelopment of a world class insurance industry in India.

The IIRM followed up its first conference on August 28with a national seminar on Pension Reforms inIndia Inaugurating the two-day seminar, AndhraPradesh Governor. Dr. C. Rangarajan, said that thereform, as far as civil servants pension scheme wasconcerned, must be towards creating some fundingarrangement.

The seminar was attended by a large number ofdelegates from life insurance companies and banks.

The first General Insurers’ Summit was organised by the nationalreinsurer, General Insurance Corporation of India (GIC) at Hyderabadon October 29. All twelve Indian general insurers – public and private– participated in the summit where GIC presented itself in its newrole as the national reinsurer meeting its customers.

The general insurers, at the invitation of the GIC, gavepresentations on their expectations from the latter as a reinsurer andtheir individual requirements in terms of reinsurance products,services, information and advice.

General insurers’ summit

Pensions seminar

Mr N. Rangachary, Chairman, IRDA, addresses the audience at the FICCI’sinsurance conference in Delhi

Mr N. Rangachary, Chairman, IRDA, Mr P.C. Ghosh, ChairmanGIC, and Mr. P.B. Ramanujam, MD, GIC, share an informalmoment during the first Indian General Insurers’ summit.

Send us a picture!Event?L to R: Mr L. Vijayaraghavan, Sathguru Management Consultants,Mr R.C. Sharma, Member (non-life), IRDA, Mr N.Rangachary, Chairman,IRDA, Dr. C. Rangarajan, Governor of Andhra Pradesh at the inaugurationof IIRM’s seminar on pension reforms.

FICCI’s meet


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“They all have sound background and highbrand equity... They might not be very ethicalin all respects, but they pose a big challengeto LIC."

“You cannot sell insurance to peopleassuming that they will live forever. Runninga profitable insurance company is aboutstructuring your products right. It is not aboutnot paying claims…..We know how to runan insurance business in an HIVenvironment.”

"With SBI's credibility with the masses, onceour branches start selling (insurance)products, sky is the limit".

"We owned WorldCom, we owned Enron,we owned Tyco...We have taken about$350 million in losses in bonds and we'vetaken about the same amount in the stockmarket….The good news is our earnings areso strong we will probably end this year withmore surplus than we began it,"

“(The terrorism insurance) legislation willput hard-hats back to work, createconstruction jobs, improve the legal process,and protect taxpayers. And passing thislegislation would create hundreds ofthousands of jobs, and billions of dollars innew investment, and help with economicsecurity. “

“ ”Jim Sutcliffe, Group Chief Executive of South Africa based OldMutual, the largest life insurer in a country withnearly four million HIV patients, talking about

joint venture, OM Kotak MahindraLife Insurance’s approach to

the Indian market.

White House Deputy Press Secretary, Scott McClellanon the US Bill providing a federal backstop

facility for terrorism cover.

Sy Sternberg, chief executive officer ofNew York Life Insurance Co.

A. K. Purwar, newly appointed ChairmanState Bank of India

LIC Chairman, Sunil B. Mathur, about privatesector rivals in life insurance.

“Today, the financial services industry isexperiencing difficult times, while Lloyd’s isbenefiting from the strongest tradingconditions in almost four decades. By 2004,I expect to see a stronger, more disciplinedLloyd’s which can be compared favourablywith the insurance industry worldwide interms of its transparency and its efficiency.”

Lord Peter Levene, newly selected Chairmanof Lloyd’s of London


EventsNovember 24, 2002

Venue: Indian Institute of Management, BangaloreIndian Institute of Management, Bangalore conductedan Executive Development Programme in Life insurance.

November 25-26, 2002Venue: PuneThe BODA MARSH Seminar on Cyber Liability conducted

by the National Insurance Academy, Pune, India. Topics coveredwill be Risk Assessment & Security Audits, Cyber Crimes, ElectronicContracts, Digital Evidence, International Legal Framework &Issues, Regulatory Issues and Insuring Cyber LiabilityThis is a seminar organised by National Insurance Academy inCollaboration with ISACA Pune Chapter.

November 27 and 28, 2002Venue: Hotel Taj Krishna, HyderabadThe Confederation of Indian Industry’s (CII) SeventhInsurance Summit 2002 on the theme: “Developing the Market– from 1.5 % to 5 % penetration in three years.

December 2-6, 2002Venue: FSA Offices, Canary Wharf, London.Financial Services Authority, UK, will be running the fourth of itsinternational seminars for overseas regulators. Mr Gert Hausler,Director of the International Capital Markets Department of the IMFgives the keynote speech on the opening day.

December 1-5, 2002Venue: DelhiIndian Institute of Bankers International Banking Summit on“Accelerating Growth” contains a technical session on December 3on Security and Regulatory issues.

December 9, 2002Venue: MumbaiMicrosoft Corporation (India) Pvt. Ltd. holds an insurance eventshowcasing Microsoft technology and its commitment towards theinsurance sector worldwide.

December 11, 2002Venue: ParisInternational Association of Insurance Supervisors, Sub-committeeon accounting meets.

December 11-13, 2002Venue: PuneIndian Centre for Telecom Management holds a Seminar on‘Regulators in deregulated markets?”Technical session on December 13 is on Insurance.

December 14, 2002Venue: HyderabadThe Federation of Andhra Pradesh Chambers of Commerce andIndustry in association with GVR Risk Management Associatesholds a Seminar on Insurance Intermediaries / Brokers and theirservices to customers and insurers.

January 3-5, 2003Venue: Vigyan Bhavan, New DelhiThe Institute of Chartered Accountants of India holds its 15th AllIndia Conference of Chartered Accountants. Technical session on“Taming the Giant – coming to grips with the Financial sector” onJanuary 4 involves the banking, insurance and financial sectors.

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