Issues facing Insurance Regulatory Agencies

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

2. Issues • Economic Reforms Process • Evolution of Insurance in India • Registration Process • Control & Regulation of Rates, Terms & Conditions • Financial Monitoring of Insurance Companies • Insurance Intermediaries • Monitoring of Obligations to Rural & Social Sector • Protection of Policyholder’s Interests • Development Issues • Upcoming Issues

3. Economic Reforms Process (1)

4. Evolution of Insurance in India (2-a) • Life Insurance Companies Act of 1912 • Provident Fund Act of 1912 • Insurance Act of 1938 and amendments • Life Insurance Act of 1956 • General Insurance Business Nationalization Act of 1972 • Insurance Regulatory and Development Act of 1999

5. Need for Regulatory Intervention (2-b) -Level playing field -Consumer Protection -Public Private Partnership Plagued by Fraud IRDA Act, 1999 Insurance Act, 1938 -contribution to development of market -untapped market potential -absence of consumer choice - Urban centric - bankruptcies LIC Act, 1956 GIBNA, 1972

6. -Pvt. co.s with min. paid up cap. of Rs. 1 bn. • Allow foreign co.s in collaboration with dom. co.s InsuranceReforms (2-c) • Setting up • an interim • insurance • regulatory • body ahead • of reforms -Pension Regulator -Law Commission -Umbrella Legislation - Flexibility for better response - Scope for continuous review Malohtra Committee -IRDA Act -Insurance Act Legal Reforms -Modern supervisor -based on IAIS Core Principles

7. Registration of Insurance Companies (3-a) • Legal form of insurance company. • Capital and Deposit requirements • Business plan • Projected Balance Sheet for 5 years • Suitability of Owners and Sr. Management • ‘Fit and proper” test for Key Management appointments • Assurance to infuse additional capital as and when required

8. Legal Form of New Company (3-b) • Only permitted legal form is a joint stock company or cooperative societies • No insurer other than an Indian insurance company, shall carry on any class of insurance business • Separate companies for life and non-life business • Foreign companies permitted to enter into a joint venture arrangement with an Indian company with a share holding not exceeding 26%. • Holding of the foreign partners in the Indian promoter companies is considered while deciding on this limitation of 26%. • No promoter to have more than 26% share and where it is in excess, it should be divested in phased manner. • Preference for registration to those who underwrite Health insurance. • Rationale • Regulatory Comfort • More Transparent • Better Corporate Governance

9. Minimum Capital Requirement (3-c) • No insurer carrying on the business of life or general insurance or reinsurance in India shall be registered unless: • a paid-up equity capital of rupees one hundred crore (US $ 25 mn) in case of a person carrying on life insurance or general insurance or • a paid-up equity capital of rupees two hundred crore (US $ 50 mn) in case of a person carrying on exclusively the business of reinsurance. • Rationale • Financially strong players capable to meet the liabilities of the policyholders are in the market. • Entry barrier for small and marginal applicants.

10. DepositRequirement (3-d) • Amount to be deposited with the Reserve Bank of India is: • In the case of life insurance business, a sum equivalent to one percent of its total gross premium written in India in a financial year not exceeding rupees 10 crores. (US$ 2.5mn) • In the case of general insurance business, a sum equivalent to three percent of the total gross premium written in India in a financial year not exceeding rupees 10 crores. (US$ 2.5mn) • In the case of reinsurance business, a sum of rupees 20 crores (US$ 5mn) • Rationale • Additional financial cushion for protection of policyholders liabilities.

11. Business Plan(3-e) • Application form requires a five-year business plan: • Premium Income/ Amount of sales • Size of sales force/ sales support/ administrative staff • Investment income • Commission and other related expenses/ Expenses of management • Statutory reserves/ Required solvency margin • Profit and Loss Accounts and balance sheets • Break-even periods and return on capital • Geographical spread of business • Market Segmentation • Rationale • Long term commitment • Increased insurance penetration in the country

12. Suitability of Owners (3-f) • IRDA needs to be satisfied that • the financial condition and the general character of management of the applicant are sound • the interests of the general public will be served if the certificate of registration is granted to the applicant • Due diligence regarding the background • Regulatory clearances from Indian regulators like RBI, SEBI, Income Tax clearances in case of Indian promoter • Foreign promoters track record from home country regulator • Rationale • Comfort for the insured and the regulator

13. Suitability of Directors & Sr. Mgmt (3-g) • Application details include: • Name, address and the occupation of the directors, the proprietors, manager in India and key persons • Detailed information required is spread over • academic and professional qualifications • working experience over 15 years • reputation and character • association with a company which was wound up or under receivership during the period of their association • Key persons are defined as chief executive, chief marketing officer, appointed actuary, chief investment officer, chief internal audit and chief financial officer • Rationale • Professionally qualified persons are appointed to handle the affairs of the company • Ensure that good people with reputable background act as trustees

14. Control and regulation of premium rates, terms & conditions (4) • File & Use • Life insurance • Minimum sum assured • Premium/ benefits • Expenses/ exit conditions • Actuarial assumptions • Reasonableness of illustrations • Non life insurance • Tariff products (Fire, Motor, Engineering) regulated by TAC • Non tariff products – to be filed with IRDA • Rationale • Protect the interests of the policyholder • Encourage product innovation

15. Financial Monitoring of Insurance Companies (5) • Actuarial valuation of liabilities and other matters • Scrutiny Of Financial Statements • Investments • Reinsurance

16. Actuarial Matters (5-a) • Life Insurer must have an appointed actuary • Rendering actuarial advice to the management of the insurer • product design and pricing; insurance contract wording; Investments; and reinsurance • Monitoring the solvency of the insurers • Valuation of the policy liabilities • Distribution of surplus • Peer Review • In the case general insurance business to ensure • fairness of rates for in-house tariff • determination of liabilities for outstanding claims (IBNR) • Rationale • Appointed Actuary acts as the eyes and ears of the Authority in the company • Matching of Assets and Liabilities • Adequate provisions for outstanding claims • Solvency Margin of atleast 150% to be ensured at all times

17. Scrutiny Of Financial Statements (5-b) • Part of off-site inspection of the company • Profitability of operations • Compliance with accounting standards • Capital increase to cover deficit in results • Control on expenses • Healthy business growth • Satisfactory investment return • Adequacy of the internal controls and processes • Satisfactory risk management strategy • Rationale • To assess the financial health of the insurer • To ensure that the accounts of the company are prepared as the IRDA’s accounting regulations

18. Investment of Funds (5-c) • No insurer shall directly or indirectly invest outside India the funds of the policy holders • Mandatory investment of funds in infrastructure & social sectors • Investments only in graded securities with minimum rating of AA of Standard & Poor or its equivalent • Every insurer to have an Investment Committee consisting of CEO, 2 non executive directors, Chiefs of Finance & Investment and A.A. • Exposure Limits set for i) Investee Company; ii) Investee Group; iii) Industry Sector; iv) Promoter’s Group • Rationale • Pattern of Investments designed to control risk • Ensure adequate spread of investments and diversification • Maximise return on investments and have adequate safety of securities

19. Reinsurance (5-d) • Obligatory cession of 20% to Indian reinsurer • Filing of Reinsurance Programme and copies of Treaty slips • Placement of reinsurance with at least BBB rated companies • Not more than 10% of the total reinsurance premium ceded outside India can be placed with one reinsurer. • Rationale • Maximising retention within the country • Securing the best possible protection for the reinsurance costs incurred • Develop local capacity to retain risks within the country • Spread of risks through placements with different reinsurers

20. Insurance Intermediaries (6) • Agents/ Brokers/ Third Party Administrators/ Surveyors and Loss Assessors • Licensing of Insurance intermediaries • Compulsory training requirements • Passing of examinations • Code of Conduct • Rationale • Only qualified and trained intermediaries to service the insurance customers are in the insurance market • Strict deterrence for any wrong doing

21. Monitoring of Rural& Social Sector Obligations (7) • Rural Sector • Life Insurer • 7% (1st F.Y.)/ 9% (2nd F.Y.)/ 12% (3rd F.Y.)/ 14% (4th F.Y.)/ 16% (5th F.Y.) of total policies written direct in that year • General Insurer • 2% (1st F.Y.)/ 3% (2nd F.Y.)/ 5% (thereafter) of total gross premium income written direct in that year • Social Sector – Life and General Insurer • 5,000 (1st F.Y.)/ 7,500 (2nd F.Y.)/ 10,000 (3rd F.Y.)/ 15,000 (4th F.Y.)/ 20,000 (5th F.Y.) lives • Rationale • To carry out the mandate of the Parliament so that benefits of insurance reforms reach the poor and socially weaker classes.

22. Protection of Policyholders’s Interest (8) • Prospectus of any product shall clearly state the scope of the benefits, extent of cover, warranties, exceptions and conditions of the cover. • Provide all material information to the prospect to enable him to decide on buying the product. • Insurers, agents and intermediaries to abide by the code of conduct. • Proposal shall be processed within 15 days. • Proper grievance handling system, information on ombudsman. • Surveyor should reach site of accident within 72 hrs. • After receipt of report settlement within 30 days. • Penal interest @ 2% above bank rate for delay in payment of claim • Rationale • Mission of the Authority • Protect interests of policyholder in its dealing with the insurers • Empower policyholder to demand minimum levels of service

23. Development Issues (9) -Brokers, Agents, Referrals -Pre Licensing Trg. & Exam -Code of conduct • Wkg. Gp. • Database • Protocols • TPAs -Life and Gen Ins Councils -Act. Soc of India -Surveyors Inst. -IBAI -Role of coops and NGOs -Referrals -Risk carrier? -No listed Ins co. -Mgt. practice -Cross subsidy? -Market based pricing -Risk sensitive prem rate -Aligning data base with rating factors -Regulatory Obligation -Rural Agent - New channels

24. Upcoming Issues (10) • Health insurance • Recommendation made to the Government to reduce capital requirements • Creation of centralized health database, training in ICD-10 coding, new product innovation and design undertaken. • Unit Linked business • Guidelines framed to prevent regulatory arbitrage between life insurance industry and mutual fund industry. More disclosure requirements kept. • Detariffing • General insurance companies asked to show to the Authority that they have basic infrastructure such as i) upgrading underwriting skills of the underwriters; ii) IT systems to retrieve and analyse data; iii) ways and means to protect the policyholders; iv) scientific and adequate pricing of covers, etc. in place. • Market conduct • Mis-selling/ Rebating/ Payouts • Advising and counseling insurance companies/ Establishment of Self Regulatory Organizations (SRO’s)/ Target Examinations

25. Thank You