Regulation & Supervision of the Insurance Sector in India

by

C. S. Rao, Chairman Insurance Regulatory and Development Authority Hyderabad, India

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INDIA PROFILE
GEOGRAPHIC/ DEMOGRAPHIC
Total Area: 3.28 million sq kms. Coastline: 7,517 kms States & Union Territories 29 & 6 respectively Population: 1.05 billion Share of world popn: 16.9% Urban : Rural popn: 28: 72 Life expectancy Male: 64.4 yrs, Female: 62.9 yrs

ECONOMIC REFORMS PROCESS

Reform process initiated in 1991. Abolition of Licensing, Permits and Quotas in Industrial Sector Financial Sector Reforms
Banking Sector Reforms
Freeing of interest rates by the Central Bank Rationalization of priority sector lendings & lowering of directed credit

Capital Market Sector Reforms

Abolition of Controller of Capital Issues and Establishment of Securities and Exchange Board of India in 1992 Issuance of regulations for mutual funds, portfolio managers, registrars, merchant bankers, depository and participants, etc

Insurance Sector Reforms

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INSURANCE SECTOR REFORMS

Committee on Reforms in Insurance sector 1994 Setting-up of Interim Insurance Regulatory Authority May 1996 IRDA Act Passed December 1999 Statutory Authority (IRDA) established 19th April 2000 First set of Regulations notified 19th July, 2000 First set of Certificate of Registration (Licenses) granted 23rd October 2000

NEED FOR REGULATORY INTERVENTION

-Level playing field -Consumer Protection -Public Private Partnership

Regulated Market

Free Market

- No Regulations - Plagued by fraud

IRDA Act, 1999

Insurance Act, 1938

-contribution to development of market -untapped market potential high -absence of consumer choice -poor customer service

Nationalised Market LIC Act, 1956 GIBNA, 1972

Regulated Market

- Urban centric -Planned Economy --Optimum utilization of resources

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Composition of Authority & Regulatory Framework

Composition:
Presently the Authority comprises of: Chairman Four full-time members Four part-time members

Regulatory Framework:
Insurance Act, 1938 IRDA Act, 1999 Notification of Regulations Issue of Circulars/ letters

Duties, Powers & Functions of IRDA

Registration of insurers & licensing of insurance intermediaries Financial & regulatory supervision Control & Regulation of premium rates Protection of Policyholders interests Specifying rural & social sector obligations

Registration of supervised entities

Insurance companies Intermediaries:
Agents & Corporate Agents Brokers Third Party Administrators Surveyors & Loss Assessors

Registration Requirements Insurance Companies

Joint Stock public limited Company Capital prescriptions

Contributions only through equity route Rs.1000 million for life and non-life companies Rs.2000 million for re-insurance companies

Foreign Direct Investment (FDI) 26% Foreign promoter clearance from home country regulator Indian promoter - regulatory clearances from Indian regulators like RBI; SEBI; Income Tax clearances Promoter & Senior Management Fit and proper status Sources of funding Long term commitment Business plan Projected Balance Sheet for 5 years Infusion of additional capital at periodic intervals
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Licensing of Insurance Agents/ Corporate Agents

Tied agents (one life insurer and general insurer) Delegated to designated persons in insurance companies Minimum educational qualification Stipulated training requirements (registration & Renewal) Clear examination Adherence to code of conduct Banks/ FIs/ NBFCs acting as Corporate Agents:
Promoter Banks/ FIs/ NBFCs of insurance companies Other banks Agent of one life and one non-life insurance company
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Insurance Brokers
Represent the client Not risk carriers Capital & deposit requirements Professional Indemnity policy Membership of Brokers Association Minimum qualifications & training requirements for CEO and at least two other persons Adherence to code of conduct Banks/ FIs/ NBFCs acting as Insurance Broker
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Third Party Administrators Health Insurance

Outsourcing agency for servicing of health insurance claims No marketing rights Introduced to promote cash less hospitalization Not risk carriers Working Capital requirements Minimum qualifications & training requirements for CEO/ CAO Adherence to code of conduct
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Surveyors & Loss Assessors

Mandatory for claims above specified limits Independent professionals Minimum educational qualifications & training Adherence to code of conduct Setting up of the independent Institute of surveyors & loss assessors

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Supervision of Insurance Companies

Structure: Approval of changes in ownership Appointment of CEO/ Appointed Actuary Operations & Monitoring of performance: Approval of Products Investments Reinsurance Financial & Actuarial returns On site inspection Protection of policyholders interests: Issues of market conduct Advertisements & Disclosures Grievance Redressal Mechanism

Developmental Issues Rural & Social Sector obligations Micro Insurance

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Product Approval
Insurers file proposed products for approval. Focus on
Transparency of the product Actuarial assessment Reasonableness of premium Benefits flowing to policyholders Fairness of contract terms

If no clarification sought, deemed approved within 30 days.

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Investments
insurance Stipulations for life/non-life segments Pattern of Investments designed to control risk Mandated investment for Infrastructure/Social Sector Prudential norms Exposure Limits Outsourcing not permitted (other than computation of NAV)
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Reinsurance
Guided by objectives of:
maximizing retention within the country securing the best possible protection for the reinsurance costs incurred

Obligatory cession of 15% to Indian re-insurer Filing of Reinsurance Program and copies of Treaty slips Placement with atleast BBB rated companies

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Scrutiny Of Financial & Actuarial Returns

Assess financial health of companies:
Solvency margin requirements Profitability of operations Shareholders responsibility to fund deficit through capital infusion Control on expenses Healthy business growth Satisfactory investment return Adequacy of internal controls and processes Satisfactory risk management strategy

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On-site Inspections
Statutory powers Limited inspections:
Targeted Investments Market Conduct

Training of Staff
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Market Conduct
Dealing with the customer Disclosure of relevant information Licensed personnel authorized to sell Advertisement Regulations define unfair or misleading advertisements Regulations on protection of interests of policyholders Sales literature to highlight mandatory disclosures, benefits, exclusions Servicing Benchmarks, timeframe for settlement of claims, payment of penal interest in case of delay Procedure & mechanism to address grievances
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Grievances Handling Mechanism

The system & its effectiveness Analysis of complaints Arbitration and Conciliation options Insurance Ombudsman Grievance Redressal Cells at IRDA to facilitate resolution of dispute

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Obligations to Rural & Social Sectors

Introduced post opening up of the insurance sector Rural Sector obligations:
Life companies: Linked to per cent of no. of new policies issued during financial year Non life companies: Linked to per cent of gross premium direct underwritten during the year

Social Sector obligations:

Minimum no. of lives to be covered annually

Targets linked to the year of operations In respect of existing public sector insurers obligations linked to performance in 2001-02 The amendment regulations 2007 being notified shortly

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Micro Insurance
Objective Reach the bottom of the pyramid by making it accessible and affordable Channel Leveraging on the established entities already engaged in rural initiatives NGO/SHG/MFIs Innovation Enormous scope for innovative products Integration of Life/ General insurance products Cover life, health, livestock, dwellings, assets, crops Approach Insurers view it as a potential business opportunity and developing sustainable delivery channel

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Overview of Insurance Market

2000 2007 Total no. of Insurers (Public and Private) 16 12 3 1 32 Total number of insurers Life insurers General insurers Specialized Institutions National Reinsurer Total Public Sector 1 4 1* 1 6 Private# Sector 15 8 1@ 0 24 Public Sector 1 4 2 1 8

# 2 Life and 1 General insurer do not have Foreign Joint Venture partner. *ECGC (not registered in 2000) and Agricultural Ins Co. Ltd. established recently @Standalone Health insurance Company 2007-08, registration granted to one life, non-life and health insurance company each. Thus, as on date no. of entities registered increased to 35.
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Insurance Penetration
Year 1996 2000 2001 2002 2003 2004 2005 2006 Total Business 1.84 2.32 2.71 3.26 2.88 3.17 3.14 4.8 Life 1.29 1.77 2.15 2.59 2.26 2.53 2.53 4.1 Non Life 0.55 0.55 0.56 0.67 0.62 0.65 0.62 0.6
Premium as % of GDP
Source: Sigma/ Swiss Re 25

Insurance Density
Year 1996 2000 2001 2002 2003 2004 2005 2006 Total Business 7.00 9.90 11.50 14.70 16.40 19.70 22.70 38.4 Life 5.00 7.60 9.10 11.70 12.90 15.70 18.30 33.2 Non Life 2.00 2.30 2.40 3.00 3.50 4.00 4.40 5.2
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Premium per capita in USD

Source: Sigma/ Swiss Re

AGENDA FOR ACTION

Life and General Insurance
Increase in Foreign Direct Investment (FDI)

Health insurance
Need to reduce capital requirements for establishing health insurance companies Creation of centralized health database, training in ICD-10 coding, new product innovation and design undertaken.

Detariffing
Insurance companies to establish basic infrastructure such as i) strong underwriting teams; ii) IT systems to retrieve and analyse data; iii) ways and means to protect the policyholders; iv) scientific and adequate pricing of covers, etc.

Market conduct
Establishment of Self Regulatory Organizations (SROs) to monitor and control Mis-selling/ Rebating/ Payouts in life and general insurance 27

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