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Issues facing Insurance
Regulatory Agencies
C.S. Rao, Chairman, IRDA
14th November, 2005
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
Economic Reforms Process (1)
Financial Sector
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
• Insurance Regulatory and Development Act of 1999
Need for Regulatory Intervention (2-b)
-Level playing field
-Consumer Protection
-Public Private
Plagued by
IRDA Act, 1999
-contribution to
development of market
-untapped market
LIC Act, 1956
-absence of consumer
GIBNA, 1972
Insurance Act, 1938
- Urban centric
- bankruptcies
Reforms (2-c)
-Law Commission
- Flexibility for
- Scope for
-Pvt. co.s with min.
paid up cap. of Rs. 1
-Allow foreign co.s in
collaboration with
dom. co.s
-Setting up
an interim
body ahead
of reforms
Legal -IRDA Act
Reforms -Insurance
-Modern supervisor
-based on IAIS Core Principles
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
Legal Form of New Company (3-b)
• Only permitted legal form is a joint stock company or cooperative
• 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
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.
– Financially strong players capable to meet the liabilities of the
policyholders are in the market.
– Entry barrier for small and marginal applicants.
Deposit Requirement (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.
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
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
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
– Ensure that good people with reputable background act as trustees
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
Financial Monitoring of Insurance
Companies (5)
Actuarial valuation of liabilities and other matters
Scrutiny Of Financial Statements
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
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
– To assess the financial health of the insurer
– To ensure that the accounts of the company are prepared as the IRDA’s
accounting regulations
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
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
Insurance Intermediaries (6)
• Agents/ Brokers/ Third Party Administrators/ Surveyors and Loss
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
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.
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
Issues (9)
-Brokers, Agents, Referrals
-Pre Licensing Trg. & Exam
-Code of conduct
-Life and Gen Ins
-Act. Soc of India
-Surveyors Inst.
-No listed Ins
-Mgt. practice
-Cross subsidy?
-Market based pricing
-Risk sensitive prem rate
-Aligning data base with
rating factors
-Wkg. Gp.
-Role of coops
and NGOs
-Risk carrier?
-Rural Agent
- New channels
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
Thank You