IRDA Regulatory Framework Related to Desirable Services and Protection of Customer Interest

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1 IRDA Regulatory Framework Related to Desirable Services and Protection of Customer Interest Vishal Vinayak Research Scholar, IKG Punjab Technical University, Kapurthala, India Dr. Aneet Director, Gian Jyoti Institute of Management & Technology, Mohali, India Abstract Indian insurance sector is a huge one and is growing at a speedy rate of 15-20%. Together with banking services, insurance adds about 7% to the country s GDP. But even after 50 years of nationalization, only 25% of the insurable population was covered under life insurance. Insurance Regulatory and Development Authority of India is an autonomous statutory body established by the Government of India, in April Lokhande M. A. (2006) there should be better co-ordination and co-operation between Grahak Panchayats, Consumer Redressal Forums and the government agencies in safeguarding the interests of consumers. IRDA is engaged is bringing reforms in the different parts of the Insurance sector in India by way of regular monitoring, directing and controlling over different activities of the Insurance sector at the different places across the country, which can be directly observed by comparing in the previous scenario of the Indian Insurance sector to the present scenario. The key objective behind setting up of IRDA includes regular monitoring, directing and controlling over different activities of the insurance sector in the country. An analysis of the IRDA regulations related to customers interest from the Year 2000 to 2016 is done in this paper. For this purpose the Annual reports of IRDA from the Year has been studied. A static and Dynamic analysis of the regulations is done in this paper. Key words: IRDA, Regulator, Life Insurance Sector, Static and Dynamic Analysis INTRODUCTION IRDA is a statutory body that regulates the insurance sector in India, to protect the interests of policyholders, while ensuring growth of the insurance industry along with India s economy. Insurance Regulatory and Development Authority (IRDA) has been renamed as Insurance Regulatory and Development Authority of India. Chapter IV of the Ordinance contains certain amendments to The Insurance Regulation and Development Act, 1999 (41 of 1999). Section 105 of the Ordinance amends section 2 (1) (b) of the IRDA Act by inserting the words of India after Development Authority. A statutory authority as an autonomous body was established under the provision of IRDA by the Government of India with the objective of regulating, directing and controlling the Insurance sector for ensuring its smooth functioning. This authority named Insurance Regulatory and Development Authority came into existence with effect from 1st April The IRDA being a National agency of the Government of India, there are numerous arrangements for taking corrective steps as to incorporate the emerging requirements of the Insurance sector in India. Literature Review K Somesh Mathur (2001), in his paper titled Insurance Regulations Some Issues revealed that the role of IRDA is challenging because of lack of prior experience and there is a need of a strong and credible regulator that can ensure new entrants in the presence of LIC. Ram Prakash at el. (2013), in their Research Paper titled Unethical Practices and Control Of IRDA in Indian Insurance Market indicates that IRDA have proper vigilance over activities of Life Insurance Companies. It reviews the regulations and guidelines as the need emerges. If any Life insurer fails to compile with the guidelines they have to suffer penalties in terms of monetary value. 247 Vishal Vinayak, Dr. Aneet

2 Bhawana Rewidikar and Sumit Soni (2013), in their Paper titled The impact of Insurance Regulatory and Development Authority. The creation of IRDA has brought revolutionary changes in the Insurance Sector in India.P Magayarkarasi (2015), in his paper titled A Study Of Performance of Private Sector Of Life Insurance in India. The Indian government liberalized the insurance sector by passing the Insurance Regulatory and Development Authority (IRDA) Act in the year P.J Prakash (2015), in his paper titled Role of IRDA in Indian Insurance Sector A Study. The growth Performance of the insurance industry has been increased tremendously since the establishment of IRDA in India, which supervise and controlled the entire insurance industry.dr. Pramod Deo (2016), in his paper titled IRDA: Regulator of Insurance Sector in India. Establishment of IRDA has brought about revolutionary changes in Insurance sector.dr. H H Bharadi (2016), in his paper titled Role of IRDA in Indian Insurance Sector. The growth of Insurance sector has increased tremendously since the inception of IRDA. Scope of study In this study the IRDA Annual Reports from the Year 2000 to Year 2016 are studied. An effort is made to understand the Regulations related to desirable services and protection of customers interest over the period of 17 Years starting from the Year Objective of the study The main objective of study is to understand the IRDA Regulations related to providing desirable services and protection of customers interest and come out with Need Analysis for further improvement of the Regulations specifically related to the topic undertaken in this study. METHODOLOGY This study lies under the category of Qualitative Research. A period of 17 Years is taken where the Annual Reports of IRDA from the year 2000 to Year 2016 are studied with special view point of Regulations related to desirable services and Protection of Customers interest. After going through the IRDA s Annual reports the Regulations, reviews the literature by identifying different articles, reports and research papers related to IRDA Regulations. The present research is based on secondary data. Sources of data collection are IRDA annual reports, online articles and other annual reports of non-banking financial institutions IRDA Regulatory Framework: Desirable Services and Protection of Customer Interest The evolution of the Regulations related to desirable services and Protection of customer s interest are discussed. The evolution of the Regulations over the period of 17 Years ( ) is discussed below. IRDA Regulations Year: All the insurance companies are required to have a consumers, representative on their board as member. 2. A consumer representative has been nominated on the insurance advisory committee. 3. In case of new products insurers are required to submit details of premium rating, policy conditions, proposal form, claim form, underwriting manual and the system in vogue to review the rates, terms and conditions in future. 4. All insurance intermediaries, before obtaining a license, or at the time of renewal of license, are required to undergo compulsory training to ensure that they can service the policyholders better by being well trained and informed. 5. Every general insurer is required to maintain a minimum solvency margin of Rs. 50 crores (Rs. 100 crores in the case of a reinsurer) or a sum equivalent to 20% of net premium income 6. The Reinsurance Programme of every Insurer, carrying on general insurance business to maximize retention within the country; to develop adequate capacity; to secure the best possible protection for the reinsurance costs incurred; and to simplify the administration of business. 7. IRDA has recently notified regulations for Licensing of Third Party Administrators (TPA)- Health Services in order to popularize health insurance. 8. Pensions or the grant of annuity is part of the life business as laid down by Insurance Act, All life companies are therefore eligible to issue pension policies. (IRDA Annual Report ) 248 Vishal Vinayak, Dr. Aneet

3 IRDA Regulations Year: It is obligatory on the part of the insurance companies to disclose clearly the benefits, terms and conditions under the policy.the advertisements issued by the insurers should not mislead the insuring public. 2. To serve better the interest of insured public in general and insurance industry in particular brokers have been introduced as intermediaries. 3. Pattern of investments specified by the authority life insurance: Govt. securities have 25%,or infrastructure and social sector not less than 15%. 4. The authority requires every insurer to fulfill the obligations pertaining to the rural or social sector or laid down in the IRDA regulations, Plan for compulsory annutisation at a certain threshold level withdrawal of accumulated corpus to be permitted for specified reasons. (IRDA Annual Report ) IRDA Regulations Year: The institution of Insurance Ombudsman has great importance and relevance for the protection of interests of policyholders, and also to build up their confidence in the system. 2. The Insurance Advisory Committee has been established under the IRDA Act, to advise the Authority on matters relating to formulation of the regulations and on such other matters as may be prescribed. All regulations notified by the Authority are final -ised in consultation with the Committee. 3. The basic idea behind introduction of the intermediary was to facilitate provision of cashless health services to the clients (policyholders) and create an intermediary which would provide back end services to the insurers. 4. The purpose of Consumer Advisory Committee is to serve as an informal vehicle for information sharing and discussion between the Authority and the policyholders on key issues of insurance servicing and market conduct by the insurers, agents and insurance intermediaries. 5. The regulations also provide for minimum educational qualifications for specified persons, and lay down practical training requirements and a code of conduct. In case of professionally qualified personnel, the training requirement has been relaxed. (IRDA Annual Report ) IRDA Regulations Year: Insurers are required to set up proper grievance redressal machinery at their head office and at their other offices; 2. Maintenance of the solvency margins by the insurers is an indication that they are in a position to meet their obligations towards policyholders with regard to payment of claims. 3. During , the Authority, while interpreting the provisions of Section 49 of the Insurance Act, 1938, issued directions to all life insurers stipulating stringent conditions under which insurers could declare bonus in the absence of actuarial surplus. 4. The regulatory framework for reinsurance, the Authority has laid stress on insurers maintaining maximum possible retention commensurate with their financial strength and volume of business. 5. For the year , the cost of excess of loss protection was allocated between the participants according to their share in the total pool. (IRDA Annual Report ) 249 Vishal Vinayak, Dr. Aneet

4 IRDA Regulations Year: It is obligatory to the life insurer to provide premium rates with premium calculator on website for information of public. 2 Life insurance companies have obligations for reveal the benefits and terms and conditions for policy documents. 3 Ombudsman scheme put for redressal of the complaints of individual policy holders. 4 Introducing third party administrators in the health sector to supply improved health services. 5 Licensing brokers as intermediaries to serve the interest of insured public. 6 Insurers maintain prescribed solvency margin for the protection of interest of the customers. 7 Expedite the process of claims settlement by simplifying the claims process of victims of tsunami. 8 Every insurer is required to maximize retention within the country while drawing up their reinsurance programme. 9 The Maximum cession limit fire statutory is raised from 50crore to 100crore set by reinsurance advisory committee. 10 For the development and promotion of health insurance company IRDA set up committees for solving issues, committee on health insurance, data tariff advisory committee and TPA,s. (IRDA Annual Report ) IRDA Regulations Year: Authority had set up a grievance cell to facilitate resolution of complaints of policy holder. 2 Every insurer is required to develop adequate re-insurance capacity and secure the best possible protection for the re-insurance cost incurred. 3 Every insurer is required to have an investment committee that would be responsible for implementation of board laid investment policies. 4 License of one TPA Company was not renewed as the company was found wanting in fulfilling their duties and lacking in professionalism in conducting their affairs. 5 All the insurance companies must be audited annually by auditors under sec. 12, Regulatory framework provides for registration of insurance companies maintenance of solvency margin in respect of investment and financial periodic reporting position of the company. 7 The initiation of the process of grant of registration to the new insurers, there was also a felt need to put in place the supervisory systems for regulatory oversight to ensure that the regulated entities maintain robust financial health and serve the interests of the policyholders. 8 Government of India notified the Actuaries Act in the official gazette on As a result, the actuarial profession would get a fillip with the grant of statutory status. As per provisions of the Act, in place of existing Actuarial Society of India Institute of Actuaries of India. 9 In exercise of the powers under Section 64 UM (2) of the Insurance Act, 1938, the Authority raised the limit of losses required to be surveyed by Licensed surveyor and loss assessor for settlement of claims, from Rs. 20,000/- to 50,000/- for the flash floods in Surat, Gujarat as a special case for a period of two months from the date of issue of the order. 10 The provisions of the Right to Information Act, 2005 effective 12 October, 2005, provide for simple, clear and regular procedure for accessing information easily by the citizens. The Right to Information is fundamental to the realizations of Economic and Social Rights as well as Civil and Political Rights. (IRDA Annual Report ) 250 Vishal Vinayak, Dr. Aneet

5 IRDA Regulations Year: Authority has set up two grievance cells separately for life and non-life. The grievance cell adopts a proactive approach in identifying the complaints made against the insurers. Based on the nature of complaints if necessary, the Authority conducts targeted inspections. The Authority further instructs the insurers to put in place easy access facilities and prompt servicing mechanism. 2. Re-insurance protection plays a very important role in safeguarding the insurer s financial position in the event of catastrophic losses or in providing insurance for large risks. The profit ceded on the placement outside India represents the price of protection. The position over the latest two years 3. Third Party Administrator (Health Services) have grown and are further consolidating their position. Two more companies have been granted License to act as TPAs. TPAs are on the steady path of growth by enlarging their network. People trained on ICD-10 coding have been positioned in TPA s to facilitate analysis of health insurance related data. 4. The Authority formalized the norms for income recognition, assets classification and provisioning and other related matters in respect of debt portfolio. The norms are effective financial year The format of reporting under the IRDA (Preparation of Financial Statements and Auditor s report of Insurance Companies) Regulations, 2002 has been modified to ensure transparency and consistency in the disclosures across the industry. 6. The Authority has made mandatory for all the brokers to insert the word Insurance Broker / Brokers / Broking in the name of their company. The Authority also issued guidelines vide Circular No.:011/IRDA/CIR/BRO/May07 dated 21 st May, 2007 on documentation and procedural requirements for seeking a broker s licence (IRDA Annual Report ) (IRDA Annual Report ) IRDA Regulations Year: Under the provisions of the Insurance Act, 1938, the General Insurance Corporation of India has been designated as the Indian re-insurer which entitles it to receive obligatory cessions of 10 per cent from all the direct general insurers in The limits have been laid down in consultation with the Re-insurance Advisory Committee. 2 The Re-insurance Advisory Committee at its last meeting held in February, 2007 recommended to the Authority that the obligatory cessions be reduced from existing 20 per cent to 15 per cent for the year and 10 per cent for the year The Data Standards group was constituted with the objective of suggesting mechanisms for streamlining and development of health insurance data repository and mechanisms for information exchange among stakeholders. 4 The Provider Standards group, pursuing its objective of suggesting mechanisms to achieve standards and transparency in treatment and billing, suggested that the industry could adopt standard definitions to enable effective and unambiguous interaction amongst all stakeholders. 5 During , IRDA has also established a separate Health section in the Authority with specialists and is also planning to augment the existing resources. 6 All insurers have been advised to file the quarterly financial statements with the IRDA. These statements include the Balance Sheet, Revenue A/c and the Profit & Loss A/c. 251 Vishal Vinayak, Dr. Aneet

6 IRDA Regulations Year: During financial year all insurers are enforced to file penal actions taken by various government authorities the said information must be duly certified. 2. Insurers are enforced to file a return on annual basis that gives the report of charted accountant firms which engaged in various capacities such as statutory auditors, tax auditors, internal auditors, concurrent auditors. 3. Investment in Real Estate permitted from funds representing Solvency Margin up to 5% under Life and Pension fund. 4. The obligations are stipulated in the IRDA (obligations towards social or rural sector) Investment in Real Estate permitted from funds representing Solvency Margin up to 5% under Life and Pension fund. 5. in respect of a non-life insurer: commencing from two per cent of total gross premium income written direct in the first financial year to seven per cent from the ninth financial year onwards 6. IRDA has initiated the process of development of Integrated Grievance Management System (IGMS) The proposed online IGMS will be capable of capturing all the complaints across the registered insurers, allowing policyholders to register and view the complaints made against the insurance entities. 7. Effective protection of policy holder s interest initiated the process development of Centralized Policyholders Grievances database at IRDA. (IRDA Annual Report ) IRDA Regulations Year: The IRDA, as mandated by the Government of India, has established the Indian Institute of Insurance Surveyors and Loss Assessors (IIISLA) to promote professionalism amongst surveyors as part of further reforms in the insurance sector. 2. For reorganization the process of working of surveyors and loss assessors the authority has purposed to further amendments in existing rules and regulations of IRDA that is mandatory training and examinations of surveyors for up gradation are conducted by IISLA. 3. All insurers were directed to put in place systems to ensure that they were compliant with the guidelines w.e.f.1 st April, The Authority decided to permit payments to all policyholders and beneficiaries through electronic payment methods such as Electronic Clearing Services (ECS), National Electronic Fund Transfer (NEFT) systems as approved by the Reserve Bank of India. 5. All insurers having assets Under Management (AUM) i.e., shareholders and policyholders funds taken together if the AUM are equal or more than 1,000 crore the insurers are required to have the Investment transactions parallel audited 6. the Authority on 15theOctober 2009, has constituted the Insurance Information Bureau in the form of an Advisory Board to obtain, process and disseminate the data of the insurers. (IRDA Annual Report ) 252 Vishal Vinayak, Dr. Aneet

7 IRDA Regulations Year: One of the recent initiatives of IRDA, to ensure that clear information regarding products is given to the prospect/ policyholder in a way he/she can understand is the proposal for introduction of Key Features Document in a simple language. 2. The Authority in order to promote Health insurance has provided a special dispensation to the extent that it will exercise forbearance for a period of six months 3. The Authority has framed regulations pertaining to reinsurance by both life and non-life insurers which lay down the ground rules for placing Re -insurance with the reinsurers. Under the provisions of the Insurance Act, The regulatory framework also provides for filing of the reinsurance program for the next financial year with the Authority at least 45 days before the commencement of the said year. 5. To redress grievances of non-availability of Motor Third Party Insurance, especially for commercial vehicles, the Authority in consultation with the Committee constituted under Section 110G of the Insurance Act,1938 issued direction under Section 34 of the Insurance Act. (IRDA Annual Report ) IRDA Regulations Year: The IRDA along with other stakeholders of the industry has a responsibility of improving financial literacy in the country as well as to impart consumer education in insurance. 2. The proposal of all financial regulators to have a common approach to improve financial literacy in the country will augment the efforts of the respective sectors - banking; capital markets; pensions and insurance in their respective areas. 3. During , IRDA has carried out awareness campaigns in English, Hindi and vernacular languages through print and electronic media. 4. Implementation of a Prospect Product Matrix by insurers, based on Needs Analysis is another initiative the IRDA is making as a step in curbing wrong advice and miss-selling. 5. The initiative of IRDA in implementing Integrated Grievance Management System (IGMS) has created a central repository of industry complaints, which lends itself to various types of analyses relating to conduct of business by insurers. The IGMS is not only a tool of IRDA to monitor disposal of complaints by insurance companies, but also a facilitator for meaningful analysis relating to market conduct, company-wise, geography-wise, etc. (IRDA Annual Report ) IRDA Regulations Year: The IRDA (Protection of Policyholders Interests) Regulations, 2002 define the obligations of insurers and intermediaries and lay down time frames for compliance of various policyholder servicing parameters covering the life cycle of the insurance product, from sale to servicing including claims servicing. 2. Another important element of policyholder protection is that insurers and intermediaries shall be non-coercive while selling and shall not miss-sell. 3. Cross Border Reinsurers These guidelines were effective from 1st April, The guidelines are applicable to those Cross Border Reinsurers who do not have any physical presence in India but carry on reinsurance business with Indian insurance companies. 4. The purpose of creating the Indian Motor Third Party Declined Risk Insurance Pool (DR Pool) for commercial vehicles is to ensure equitable and fair sharing by all insurers, there are no supply side constraints, administering is simple and also to bring claims management efficiency. (IRDA Annual Report ) 253 Vishal Vinayak, Dr. Aneet

8 IRDA Regulations Year: IRDA has launched Hindi version of its consumer education website and introduced a games section Young Corner targeting children to learn insurance in a playful manner. 2. A Special Institute called National Centre for Financial Education (NCFE) has been established under National Institute of Securities Market (NISM) to implement NSFE with representatives from all financial sector regulators. 3. The guidelines on standardization in health insurance provides standardization of several aspects in health insurance such as definitions for commonly used terms in health policies, nomenclature and procedure for critical illness, 4. Grievance Redressal Guidelines of IRDA mandate that all insurers should have a Board approved grievance redressal policy, designate a Grievance Redressal Officer at the senior management level at the Head Office/ Corporate Office/Principal Office and a Grievance Redressal Officer at every other office and constitute a policyholder protection committee as per the corporate governance guidelines for receiving and analyzing reports relating to grievances. 5. The Authority had previously allowed a brokerage/agency commission up to 5% on terrorism premium for business procured through brokers/agents. The revised premium rates also include the cost incurred towards brokerage/ agency commission. (IRDA Annual Report ) IRDA Regulations Year: Previously TDS was deducted on accrual basis; now it is proposed to be deducted when interest is credited or actually paid. This amendment will take effect from 1st of June The authority has further issued guidelines on pilot launch of the insurance repository system for boosting the existing system. 3. Institute of insurance and risk management training for professional courses in insurance and related subjects. 4. Insurers are permitted to deal with financial derivatives only to the extent permitted to their guidelines. 5. Insurers were allowed to become proprietary of trading member SEBI approved stock exchanges for carrying out trades in debt of segments. (IRDA Annual Report ) IRDA Regulations Year: The Life Insurance Companies were directed to spread awareness among public about Spurious Phone Calls and Fictitious /Fraudulent Offers by carrying cautionary message in all advertisements 2. It shall be the duty of every Licensed Surveyor and Loss Assessor to investigate, manage, quantify, validate and deal with losses(whether insured or not) arising from any contingency and report thereon to the insurer or insured. 3. The Electronic Transaction Administration and Settlement System (ETASS) is a clearing house system that facilitates sharing of documents to be operational by 01st January 2017, to bring in all the LABs, and handle all coinsurances through the platform with mechanism for seamless transfer of net amounts. 4. At least 6 months prior to the vesting date, the Insurer shall send a communication to the Policyholder intimating the Annuity amount under various options available and the selected option. 5. The Authority had issued the International Financial Service Centre Guidelines, 2015 on 06th April,2015 that allows an Section 25 of the Companies Act, 1956.Membership of the institute is mandatory for grant of surveyor license. The institute works as self regulatory body. (IRDA Annual Report ) 254 Vishal Vinayak, Dr. Aneet

9 Analyzing Regulatory Framework: There is, however, scope to modify and improve upon the existing provisions in order to ensure that the prospects are guided properly to take informed decisions regarding insurance products. Generally, consumers do not have enough information to determine whether the product recommended to them is the ideal one. Need of utmost transparency While the Regulator has made continuous efforts to throw light on complex products by requiring insurers to follow certain guidelines relating to disclosures especially in respect of the new breed of products and carry out adequate safeguards while advertising about products etc, there is a need to constantly scale up the efforts to ensure that the required information is made available to prospects and policyholders and that the "information gap" between them and the insurers is reduced or removed. There is need of utmost transparency at the time of sale and promotion so that the policyholder is made to feel confident that he or she is being given complete information regarding the product. Scope of Future Improvement There is a scope to modify and improve upon the existing provisions in order to ensure that the prospects are guided properly to take informed decisions regarding insurance products. Protecting the interests of policyholders is the main mission of IRDA and the Authority's efforts have been constantly directed towards this end. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. Acknowledgement: The authors are highly thankful to the department of RIC, IKG Punjab Technical University, Kapurthala, Punjab, India for providing the opportunity to conduct the research work. BIBLIOGRAPHY Mathur Somesh, Insurance Regulation: Some Issues, The Geneva Papers on Risk and Insurance, VOLUME 26 No 1 (January 2001), pp Prakash Ram, Gupta Lalit, Unethical Practices and Control Of IRDA in Indian Insurance Market, Pacific Business Review. Volume 6, Issue 5. (Nov. 2013), pp Rewadikar Bhawana, Soni Sumit, The impact of Insurance Regulatory and Development Authority, International Journal of Advanced Research in Computer Science and Management Studies, ISSN: Vol. 1, Issue 3 (August 2013), pp Mangavarkarasi P, A Study on Performance of Private Sector of Life Insurance in India, International Journal of Management and Social Science Research Review, ISSN: Vol. 1 Issue 15,(Sept. 2015), pp Prakash P.J, Role of Insurance Regulatory and Development Authority in Indian Insurance Sector: A Study International Journal Of Academic Research, ISSN , Vol. 2 Issue - 2(3) (April June 2015), pp Mukadam Aslesha Parwat and Deo Pramod, IRDA: Regulator of Insurance Sector in India, Indian Journal of Research ISSN Volume 5 Issue 6, (June 2016), pp Bharadi HH, Role of IRDA in Indian Insurance Sector, International Journal in Multidisciplinary and Academic Research,ISSN Vol. 1 No. 4. pp Annual Reports of IRDA from the Year Vishal Vinayak, Dr. Aneet