Interface with life insurance companies on

1. Interface with life insurance companies on Relevant Issues of Insurance Laws (Amendment) Act, 2015 Its Implication & Role of Council. By V. Manickam Secretary, Life Insurance Council

2. About Life Insurance Council 2

3. About Life Insurance Council • Life Insurance Council is a Body constituted as per the Insurance Act 1938. • Govt. of India vide Gazette notification on 23rd March 2015 notified Insurance Laws (Amendment) Act, 2015. • In the said Act, u/s 64 there are set of provisions relating to Life Insurance Council and its functioning. • All registered life insurers are members of the council, which forum connects various stakeholders. • It is an active forum to assist and advise life insurance companies in maintaining high standards of conduct and service to policyholders. • Council periodically interacts with government and other bodies on policy matters. • Council actively participates in spreading insurance awareness. • The act envisages the council to have its separate Bye-Law. 3

4. Overview of Insurance Laws (Amendment) Act, 2015

5. THE INSURANCE LAWS (AMENDMENT) ACT, 2015 • The Insurance laws (Amendment) Act, 2015, assented by Hon. President of India on 20/03/2015. • The Insurance Laws (Amendment) Act, 2015 was notified in the official the Gazette of India on 23rd March 2015. • The new bill has many significant changes that impacts the Policyholders and insurers, notably • Protection of Interests of Policyholders – Section 45 of Insurance Act, • Protection of family members from Creditors. • Recognition of Partial assignments under life insurance policies. • Grievance Redressal • Increase in insurance penetration. • The Insurance Laws (Amendment) Act, 2015 has increased the limit of FDI from 26 % to 49 %. This significant change will not only benefit in increasing insurance penetration but will also enable channelling savings for long term funds for infrastructure development.

6. Role of the Life Insurance Council towards Insurance Law Amendment Bill

7. Role of the Council - Pre-Amendment Initiatives. • Parliamentary Standing committee on Finance sought views from Council on Insurance Laws (Amendment) Bill, 2008. • Council submitted the views of the industry to the Standing committee on Finance. • Standing committee on Finance prepared a consolidated report (41st report) on Insurance Laws (Amendment) Bill, 2008. • The said report was presented in the Parliament on 13/12/2011 and subsequently published it. • Council obtained the industry views on the above report and submitted the response to the Ministry in January 2012. • The Insurance Law (Amendment) issue was taken up in the Parliament on several occasions between 2012-14 by Government.

8. Role of the Council - Pre-Amendment Initiatives…Contd., • Then the new Govt formed in May 2014 activated the pending Insurance Amendment Bill. • In Aug 2014, proposed Amendments to Insurance Laws Bill, 2008 were published by Ministry. • In Sep 2014, Council prepared a detailed report of the industry and made a presentation to the select Committee of Rajya Sabha on Insurance Laws (Amendment) Bill, 2008 •  During the discussion on the presentation made by the Council, Hon. Members of the Select Committee of Rajya Sabha, advised the Council to provide some more data and key concerns of the industry to enable them to consider the submission of the Council. • On 1st Oct 2014, Council submitted the data and the key concerns of the industry to the Select Committee of Rajya Sabha and pleaded for favourable consideration. • Insurance Laws (Amendment) Ordinance was promulgated and notified on 26/12/2014.

9. Role of the Council - Post-Amendment Initiatives. • On 16th Feb 2015, Council made a representation to Dept of Financial Services (DFS) , MOF on issues arising out of Sec 45 of The Insurance Laws (Amendment) Act, 2015. • DFS sought from Council data on death claims, death claims repudiated on account of fraud in the last 5 years. • The data provided by the industry on death claims repudiation was not substantial and not comprehensive. • On 20/02/2015 Life Insurance Council made representation relating to Sec 45 and its impact on the life insurance industry, to Chairman IRDAI for taking up with GOI. • Council in consultation with industry sent representations to IRDAI seeking clarifications on various provisions as obtained in the Amendment Act. • Insurance Laws (Amendment) Act 2015 was passed by the Indian Parliament and notified in the Gazette on 23/03/2015.

10. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 10

11. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 • Protection of interests of Loyal Policyholders (Sec 45 of the Insurance Act) • THEN : • A policy claim can be repudiated at any time after 2 years if fraud on the part of the policy holder is established for obtaining the insurance policy on his/her life. • Within 2 years also, the policy can be repudiated, even if there was an unintentional misrepresentation of material facts in the proposal for obtaining the insurance. • NOW : • Sec 45 has been amended to protect the interest of policy holders, who have been loyal to the insurance companies. • Life Insurance companies are given a 3 year time period from the date of commencement /issuance/reinstatement etcafter which the insurance company loses the right to cancel the policy proceeds, even on the grounds of intentional / otherwise misrepresentation of material facts in the proposal form for insurance/reinstatement etc. 11

12. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 ……………..Contd Key take away points: Intention of Law makers :- The amended Section 45 gives weightage (presumption) in favour of the Policyholder, whose claims documents are registered by the nominee with insurer, after 3 years of risk commencement/reinstatement etc. This is on the premise that the Life Assured has outlived his/her ailment if any and therefore, even if there is a intentional misrepresentation of material facts in the proposal form for insurance, which resulted into a claim, it ceased to have any impact on health/mortality of the life assured and therefore the claim is payable. Word of caution for insurers on Fraudulent Claim: Amended Sec 45 has virtually tied the hands of the Insurance Companies to say “NO” to a claim under a life Insurance policy beyond 3 years, even on the grounds of fraud. A word of precaution here is that it also could give rise to fraudulent claims by unscrupulous nominee of substandard life assured (who die in, say, in the 1st year of taking the policy) who can now wait purposely for 3 years to complete, for submitting the death claim papers with the insurance company, with the sole intention of avoiding repudiation of claims on account of misrepresentation/concealment of material information/facts in the proposal form for insurance. Impact on Continuing Policyholders: It is pertinent to note that such fraudulent claims impact very much the continuing policy holders, as the amount which otherwise available for distribution as bonus to the continuing Participating policies will get reduced to the extent of such fraudulent i. 12

13. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 ……………..Contd Refund of Premium: The new Sec also mandates, where a claim is proposed to be repudiated on grounds other than fraud, the premium collected by the insurer under the policy till the date of repudiation shall be refunded to the nominee. Pre-reinstatement Benefits: IRDAI recently issued a clarifactory circular, which states that where a claim is proposed to be repudiated (on grounds other than fraud) within 3 years from the date of reinstatement (on the basis of declaration of good health at the time of reinstatement), the benefits paid if any to the policy holder before the date of reinstatement will not be impacted. However, the premiums paid after the date of reinstatement will be refunded subject to the deduction of any benefits paid after the date of reinstatement. Dead Person Insurance: Life insurance companies are subject to the risk of fraudulent claims. There are instances of life insurance policies being taken on the lives of “dead persons” by forging KYC documents and producing false death certificates. Such fraudsters now know for sure that life insurance companies cannot refuse claims after 3 years even on the grounds of fraud and as such it could encourage/embolden them to manipulate documents in such a way suiting to the requirement of insurer and submit death claim papers to the insurer after 3 years is over. Life insurance companies can still repudiate such fraudulent claims even after the 3 years on the ground that the subject matter of insurance never existed at the time of proposal form – policy contract “null and void”. However in view of the above, the tendency of those unscrupulous beneficiaries waiting for 3 years period to be over, to submit the death claim papers with the insurer could increase in future. 13

14. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 ……………..Contd Insurers to strengthen Underwriting and Risk Verification: The insurance companies will have to necessarily strengthen their underwriting processes always. Suspicious proposals will have to be referred for risk investigation and only after the receipt of satisfactory risk report, policy issuance should be considered. Prevention is better than cure. The risk verification could include physical verification of customers in high value sum assured cases. Frontline Sales Education: The marketing personnel associated in the process of new business have to be periodically sensitised about Sec 45. If the life insurers to avoid such claims by tightening their internal underwriting norms, undertaking risk verification, physical verification of high value sum assured cases, sharing the data of declined proposals as well as fraudulent proposals among the insurers and to have a exclusive data bank for the same. Increased Cost of Business: All these things will increase the cost of insurance operations very much. If the insurance company face higher incidence of claims on account of the above, there could be a possibility to increase the premiums for the future products. 14

15. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 • Protection of claim proceeds due to family members from other Legal heirs • THEN : • Any nominee under life insurance policy acted as a trustee and was accountable to the claim proceeds to all the legal heirs of the life assured. In other words legal heirs could claim their share of claim proceeds from the nominee. • In case of any dispute with nominee, the legal heirs need to obtain Legal Heir Certificate from court and then only claim there proceeds from nominee. • NOW : (u/s 39(7)) • The above section gives special protection to close family members, viz., parents, spouse and children (beneficial nominees) who are appointed as nominees under the life insurance policies. • The above beneficial nominees only, will be beneficially entitled to the policy proceeds and as such no other legal heirs namely brother, sister, etc. can claim the policy proceeds and dispute the claim made by the above beneficial nominees. 15

16. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 • Key take away points – Rights of Beneficial Nominees subject to rights of Creditors • The legal position of any person (brother / sister / friend / living partner ) other than the close family members appointed as a Nominee does not change i.e continue to act as a trustee accountable to other legal heirs. However, the right of any Nominee (Beneficial or otherwise) are subject to the rights of the creditors. • The beneficial nomination (appointing spouse, parents, children) will give protection only from other legal heirs and not from any creditors. Generally, creditors will continue to have right to attach any property of the debtor (husband – policy holder) including life insurance policy. • Therefore, the right of the beneficial nominee (spouse, parents, children) under a life insurance policy is subject to the rights of the creditors to claim the policy benefits through a legal process by seeking attachment of all properties of the policy holder (debtor – husband), which includes his life insurance policies. • However, if a policy on the life of the debtor (husband – policy holder) is taken specifically u/s 6 of the Married Women Property Act 1874, the law gives a special protection to such policies and the creditors of the husband (debtor – policy holder) cannot attach such a life insurance policy and the policy benefits will be payable only to the named wife and/or children. • However, parent of the debtor (husband – policy holder) who is appointed as the beneficial nominee does not carry any right under MWP Act. 16

17. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 • Recognition of Partial Assignments under Life Insurance Policies • THEN : • Earlier a life insurance policy cannot be partially assigned even if the policy holder indents to transfer only a part of rights. • For Eg. A policy holder has only 1 life insurance policy for a sum assured of Rs. 5 lakhs and intends to pledge his life insurance policy to the creditor (from whom he has borrowed Rs. 3 lakhs) as a collateral security, the borrower (policy holder/assignor) has to assign (transfer) the entire policy to the creditor (assignee). • NOW : • A partial assignment of policy interest only to the extent of the outstanding loan to the creditor is possible and the balance rights can vest with the policy holder. • For Eg. A policy holder has only 1 life insurance policy for a sum assured of Rs. 5 lakhs and suppose he has taken a loan of Rs. 3 lakhs from the creditor, now he can assign (transfer) the policy partly by assigning (transferring) his interest in the policy to the extent of Rs. 3 lakhs and retaining the balance interest Rs. 2 lakhs with him. 17

18. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 • Assignments do not impact Nomination in certain cases • THEN : • Assignment (transfer) of life insurance policy resulted in complete cancellation of nomination except where the policy was assigned to the life insurer for a policy loan. • NOW : • It has been provided that a transfer of policy by the debtor (policy holder) to the creditor (Assignee) as a collateral security for the loan taken (Private loan – Bank, NBFC etc.) will not cancel the nomination completely, but will affect the rights of the nominee to the extent of the outstanding loan. • For Eg. If the policy holder (debtor) totally assigns the policy having sum assured of say Rs. 5 lakhs, to an Assignee (Creditor) and upon death of the policy holder (debtor) let us say the outstanding loan was Rs. 4 lakhs, the Assignee will be entitled to be paid only Rs. 4 lakhs and only after payment to the Assignee, the balance of Rs. 1 lakh will be paid to the nominee later. • Key take away points : • Where the debtor (policy holder) repaid the loan to the creditor (Assignee) and the policy is eligible for reassignment, in such reassigned cases (transferred back from the Assignee to the policy holder) the nomination which was cancelled earlier will stand reinstated automatically. 18

19. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 Rights of a Nominee/Legal Heir after Maturity of an Insurance Policy THEN : • Earlier, a nominee had the right to collect the policy proceeds only upon death of the life assured during the term of the insurance policy. NOW : • U/s 39(11) where a policy holder survives the maturity of the policy but dies before getting the maturity proceeds from the insurance company, the nominee shall be entitled to receive the maturity benefits. Nominee need not submit any Legal Heir Certificate and can issue valid discharge to insurer for settlement of claim proceeds. THEN : • Earlier the legal heirs had the right to receive the maturity proceeds after maturity date (if policyholder dies before receiving the maturity proceeds) as the nominees had no role to play after the maturity of the policy. Nominee cannot give a valid discharge to insurer for settlement of claim proceeds. NOW : • However, now the nominees (including beneficial nominee) are entitled to receive maturity proceeds under circumstances where the Policyholder dies after date of maturity but before receipt of maturity proceeds. This obviates the necessity of obtaining legal heir certificate in such cases as nominee can give a valid discharge. 19

20. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 • Refusal to effect Assignment of a policy and Appeals thereof • THEN : • Insurance companies were bound to accept all requests for assignment of insurance policies. • The old provisions did not empower the insurer to reject assignment requests even with mala fide intentions and therefore insurers were compelled to register even such assignments • NOW : • U/s 38(2), a insurer is given the power to decline a request for assignment where there are sufficient reasons to believe that such assignment is not in the interests of Policyholders or public interest in general or if the assignment is for the purpose of trading in insurance policies. • Policyholders can appeal to IRDAI if they are aggrieved by the decision of the insurer to reject a request for assignment. • This provision enables that unhealthy practices using assignment of insurance policies is prohibited by giving powers to insurers to verify whether he proposed assignment is bona fide and whether the assignment is not against Policyholder interests or public interest in general 20

21. Policyholder-friendly measures in the Insurance Laws (Amendment) Act 2015 • Insurance Companies liable for the acts of Agents • In the Amendment Act, Section 42(5) states that insurers shall be responsible for all the acts and omissions of its agents including violation of code of conduct and liable to a penalty which may extend to Rs.1 crore of rupees. • This is intended to fix responsibility on insurers for the misdeeds of its agents – under the “Principal-Agent” relationship. • This is expected to make insurers put lot of compliance controls by increasing sales supervision and clamp down the efforts of mis-selling by the agents. • Further, Section 42A of the Bill also prohibits “Multi-level marketing” in insurance and states that IRDA may file a police complaint on such entities or persons involved in Multi-level marketing. 21

22. Thank You