ON-SITE INSPECTIONS OF INVESTMENT PORTFOLIO OF INSURERS A CASE STUDY OF IRDA

1. INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ON-SITE INSPECTIONS OF INVESTMENT PORTFOLIO OF INSURERSA CASE STUDY OF IRDA S N JAYASIMHAN & ARUP CHATTERJEE 15th NOV, 2005

2. INSURANCE ACT, 1938 Total Assets - Investment Asset - Non-Investment Asset Should be free fromEncumbrances, Lien & Charges IRDA (INV) REG. 2000 Compliance as to Pattern of Investment Exposure Norms PrudentialNorms REQUIREMENTS STATIC REPORTS DYNAMIC STATUS

3. INSURANCE ACT, 1938 Quarterly: Statement of Assets Assets are free from encumbrance Changes in Investments Annual: Investment of Assets IRDA (INV) REGULATIONS Quarterly: Downgraded Investments Total Assets Stmt. of Exceptional Investment Details of Non Performing Assets Annual: Investment & Inv. Income Certificate on Exposure Compliance. Details of Inv. Subject to Exposure PERIODICITY OF REQUIREMENTS

4. PERIODICAL RETURNS • Investment Regulations prescribe Quarterly / Annual Returns • Received within 21 days after the end of the Quarter. • Brings the Accretion position of Investment of Assets. • Filed based on provisional figures. • Annual returns are also submitted, within 21 days from the end of March, based on provisional figures. • Annual returns are resubmitted based on Audited figures. • Investments are grouped based on Category of Investments, as provided in Guidelines. Exhaustive Categories of Investments had been specified. • Total Investment is required to be linked to Balance Sheet on Balance Sheet date.

5. METHODOLOGY OF INFORMATION CONSOLIDATION AT IRDA

6. INVESTMENT MONITORING METHODOLOGY AT IRDA GENERAL INSURERS LIFE INSURERS Pvt.Gen.Insurer Pvt. Life Insurers LIC GIC New India National United Oriental Common Investment Systems - General Insurers A Common Investment Systems - Life Insurers Quarterly / Annual Returns FORM 1, FORM 2, FORM 3A / 3B (Part A & B) FORM 4A, FORM 5, FORM 5A, FORM 6, FORM 7 of IRDA Investment Regulations B Data thro’ Returns Regulate Input Data -done by Notification Regulate Input Data -done by Notification C MIS Application @ IRDA Directions to Insurers Directions to Insurers

7. OLD INSURERS EXISTING / REQUIRED SYSTEMS

8. OLD INSURERS – OPERATION & ACCOUNTING SYSTEM Operating / Branch Office (Ope. SW) Operating / Branch Office (Ope. SW) Operating / Branch Office (Ope. SW) Controlling / DO (Operating) Office [Ope. SW] Controlling / DO (Operating) Office [Ope. SW] Hi Value Cheques Hi Value Cheques Regional Office [Ope & Accounts SW] HO Accounts [Ope & Accounts SW] Thro Chq / Transfer Generate Trial Balance 1 Surplus Fund Transfer to Inv. Department Transfer to Operations A B

9. OLD INSURERS - INVESTMENT SYSTEM A Funds from HO (Operations) Stock Holding Statement Money Market Approved as per Matrix ? [Ref. Anx. 1] Check with Exposure Status Bank / RBI Yes Prepare Inv. Placement Note Inv. Accounting B No Generate Investment Regulatory Returns of IRDA / Exceptions / MIS Reports 2 Generate Trial Balance 1 Returns checked for Compliance Returns Filed with IRDA END NOTE: In the absence of proper systems all reports (Marked RED) are generated using Spreadsheets

11. DISCONNECT BETWEEN SPREADSHEET RETURNS & DATABASE Adj. Entries Data Base Text file Generated Multiple Spreadsheets Linked to Compile Investment Returns Manual Documents Manual Entry from Documents Filed with IRDA Electronic Spreadsheets Re-formatting Of Excel Data STAGE - 1 STAGE - 2 STAGE - 3 BLUE BOXES INDICATE, INFORMATION MAINTAINED IN SPREADSHEETS

12. OLD INSURERS CURRENT METHOD OF COMPILING INFORMATION FOR INVESTMENT RETURNS

13. QTLY. RETURNS – HOW PREPARED & FILED ? REGULATORY REQUIREMENT ACT’S REQUIREMENT Op. Bal as at Apr 03 Pur & Sales Apr 03 to Mar 04 FORM 5 Stmt Of Inv Recln FORM 3B Stmt Of Total Assets Total Assets as at Mar 04 Pur & Sales Apr 03 to Dec 03 Existing Investment & Accounting Software Pur & Sales Apr 03 to Sep 03 Pur & Sales Apr 03 to Jun 03 THROUGH SPREADSHEETS THROUGH SYSTEM

14. DRAWBACKS • Group & Industry Sector Exposure not tracked as required by Regulations. • No system to ‘monitor’ the Investments • Market Value of Investments not tracked. • Clear segregation of Front and Back Office Operations not possible in Spreadsheet environment. • Regulatory requirement, handled by Spreadsheets • Inv. Reconciliation, done after closing the Accounts, at the end of the year. • Purchase & Sale, reported Cumulatively, in Quarterly reporting on provisional basis, without linking to Balance Sheet. • Static Reports (Non-Inv. Assets) generated only at the end of the year. • Independent Trial Balance not available for Investment Operations.

15. TO MOVE FORWARD - WHAT IS REQUIRED • Long Range Planning for IT issues. • Creation of Investment IT Department to Maintain the System / Documentation of Changes. • Clear Work Scope of Internal / Concurrent Audit to cover the entire Investment Operations. • Standard Security Classification Procedure (To cover all Investments which are subject to Exposure Norms) • Risk Management Department to be created. • Segregation of Front / Mid / Back Office Operations. • A common ‘Time Target’ to all Insurers to migrate from Spreadsheetsto a an Integrated Information System. • Independent Trial Balance for Investment Operations. • Qtly. consolidation of Non-Investment Assets.

16. TO MOVE FORWARD - WHAT IS REQUIRED • Direct insurers to follow clearly documentedSystems & Procedures to cover ALL Investment Operations till filing of periodical Investment Returns with the Authority. • Conduct ANNUAL Systems Audit to confirm the existence of proper procedures in drawing up the periodical returns in ensuring Compliance. • IDENTIFY Insurers based on adherence to Systems, inComplying with Act and Regulations. • Based on the above, decide PERIODICITY of Compliance Audit to confirm that the Information submitted, corroborates with Books / Records maintained by the Insurer.

17. THANK YOU