Guidelines on Variable Insurance Products

IRDA has, vide circular dated November 23, 2010, issued guidelines on Universal life insurance policies/products. The salient features of the guidelines are as follows:

I. All universal life products are required to be termed as Variable Insurance Products (“VIPs”). VIP has been defined as a non- linked life insurance product which provides (i) a death benefit equal to the guaranteed sum assured plus the balance in the policy document and (ii) a maturity benefit equal to the balance in the policy account together with a terminal bonus as applicable.

II. VIPs are required to be offered only under non-unit linked platform.

III. Every policy is required to have a corresponding policy account whose balance shall depict the accrual to the policyholder. The policy amount will be credited with premium net of all charges.

IV. VIP is required to provide only mortality cover. Under a VIP, the sum assured should be at least ten times of the annual premium.

V. VIP is required to provide to the policyholder the flexibility of changing the sum assured during the currency of the contract subject to minimum sum assured.

VI. VIPs are not permitted to be issued as a group contract.

VII. VIPs are required to provide only for level regular premiums. Single premium or limited premium structures would not be allowed.

VIII. The minimum policy and premium payment term of a VIP is required to be five years with a lock- in period of atleast three years.

IX. All the VIPs are required to prescribe a surrender value which shall not be more than as prescribed in the Circular.

X. Top –up premium is allowed through out the term of the policy, however at any point in time, the total top-up premium should not exceed the total sum of the regular premiums paid at that particular point of time.

XI. Partial withdrawal is allowed under VIP.

XII. VIP is required to be offered as traditional products either as participating or non- participating, as per the current practice.

XIII. The insurer is required to keep a separate account of all receipts and payments in respect of VIPs.

XIV. The maximum expenses (including commission) that can be charged to the premium paid by the policyholder in the first year has been capped at 27.5% of the first-year premium. For the second and third-year, the cap has been fixed at 7.5% of the second and third year premium and a cap of 5% has been prescribed on the premium for fourth year and thereafter. In case of top-up premiums a 3% cap has been prescribed.

XV. In case the premiums are not paid within the grace period, the policy will become a paid – up policy.

XVI. The promotional material and the key features document is required to mandatorily disclose the following:

a) Guaranteed minimum floor rate.

b) Sum assured.

c) Premium paying term.

d) Break-up of premium showing all the components separately.

e) Lock-in period and treatment of monies during lock in period in the event of surrender.

f) Interest rate on loan, if applicable.

g) A declaration that this is a non linked insurance product.

XVII. All existing individual products which have separate and indentified savings component are required to be refilled with the IRDA in accordance with these guidelines.

Guidelines on Sharing of Information by IRDA

Faced with requests from various quarters seeking information about the insurance companies and other entities regulated by the IRDA, IRDA has, vide its circular dated December 8, 2010, published detailed guidelines on how it would be sharing information.

IRDA has categorized the information sought from it into three categories:

a) Information available in the public domain- such as returns and information filed with the IRDA under the disclosure guidelines prescribed by the IRDA, or information made available on the websites of the entities regulated by the IRDA.

b) Information not available in the public domain, which may include, (i) information which is considered confidential by the IRDA, or (ii) information which could impinge on the proprietary rights for commercial or other reasons.

c) Any other information.

Information in public domain

For information available in the public domain, the IRDA may either disclose the information or direct the person concerned to the website/ other source where the information is available.

Information not in public domain

The guidelines on sharing of such information is as follows:

a) Where information has been sought under Section 20 of the Insurance Act, the request should be examined to ensure that no information that can affect competition or stability of the company or the industry as a whole is shared. It may, however, be noted under Section 20 of the Insurance Act, the policyholder and the shareholders of an insurance company have the right to inspect and seek certified copies of the returns, statements, accounts, and memorandum and articles of association. Such details are normally available in public domain. The stipulation of the IRDA, therefore, should be read more as an statement made by way of abundant caution to prevent disclosure of proprietary information.

b) Where information is sought by domestic regulators (such as RBI, SEBI, PFRDA etc.), international supervisors and agencies, and public authorities, the IRDA will determine whether each request relates to a shareable information or not. The assessment on the shareability of the information not in public domain shall be made taking into account the following:

i. Reasons for the request.

ii. Nature of the information sought, and whether the information has proprietary value.

iii. Maintenance of confidentiality of the information sought.

iv. Reciprocity between the regulators and authorities making the request.

c) Where information has been sought by the public at large or under the Right to Information Act, 2005, the request shall be dealt with in accordance with the applicable legal framework. In accordance with the Right to Information Act, 2005 itself, access to commercial information that is confidential and may impinge on proprietary/ privacy rights may be denied.

Other information

The IRDA will consider each request on its merit, and may deny access to information when the information may impact the stability of its regulated entities, or when it may be mis-used by the competitors.

A. IRDA’s advisory on compliance with the orders of Insurance Ombudsman

Taking note of an order passed by the Delhi High Court, the IRDA has advised the insurance companies to take note of the observations made by the High Court to the following effect:

a) It is not open for the insurer to challenge the awards of insurance ombudsman.

b) The mechanism of adjudication by the insurance ombudsman is an alternate dispute redressal mechanism devised by insurers themselves, and the insurers have bound themselves unconditionally to honour such awards.

The IRDA has advised the insurance companies to review all the cases filed by them against the orders of Insurance Ombudsman in light of the High Court’s observation. IRDA has further asked the insurance companies to inform the IRDA of the final status of the cases filed against the orders of Insurance Ombudsman.

It may be noted that the above observations were made by the High Court of Delhi in the case of Vinay Kumar Aneja v. NIA (Order dated 09.09.2010 in W.P. No. 10638/06). The case related to non-renewal of a mediclaim policy by New India Assurance Company Limited after the assured had made multiple claims during the claim period on account of cancer treatment. In a complaint filed by the assured, the Insurance Ombudsman asked the insurance company to renew the mediclaim policy of the assured. The insurer renewed the policy but from a date subsequent to the order of the Ombudsman. Upon a clarification sought by the petitioner, the Insurance Ombudsman directed the insurer to collect the premium for the period starting from the date the policy lapsed and renew the policy from that date.

Before the High Court the insurer claimed primarily two defences, namely:

a) Under Section 64VB of the Insurance Act, 1938, ‘no risk can be assumed unless the premium is received in advance’.

b) Insurance Ombudsman could not have entertained claims in respect of non-renewal of mediclaim policies as they do not fall under any of the five categories of complaints that can be entertained by insurance ombudsman under the Redressal of Public Grievance Rules, 1998. The Ombudsman rejected the contentions of the insurance company and

The High Court rejected the contention of the insurer on the ground that it was too late for the insurer to have claimed those defences. Objections to the awards passed by the Insurance Ombudsman cannot be admitted when the award has been accepted by the insurer in the first place. Also, since the mechanism of the insurance ombudsman has been devised by the insurance companies, themselves, they should bind themselves to unconditionally honor the awards of the insurance ombudsman.

Interpretation of ‘First Ten Years of Business’ u/s 40 A of the Insurance Act, 1938

The Insurance Regulatory and Development Authority (“IRDA”) has, vide its circular dated November 18, 2010, clarified the concept of ‘first ten years of business’ in context of Section 40 A of the Insurance Act, 1938 (“Act”). Section 40A of the Act deals with the limits on payment of commission or other remuneration to the insurance agents. Section 40A also provides certain relaxations from complying with the prescribed limits during first ten years of the business of the insurer.

In the above circular, IRDA has clarified that for the purpose of computing first ten years of business of the insurer the relevant date would be date on which the insurer is granted the certificate of registration.

SEBI amends guidelines on Interval Mutual Fund Schemes

Interval Schemes are those schemes in which subscription can be made during a specific period (known as transaction period) and repurchase of units is permissible on all business days subject to applicable loads (except for redemption during specified transaction period when no load is charged).

Given that there is no restriction on tenure of the securities in which the interval scheme can invest, this coupled with the daily redemption option may result in asset liability mismatch. Accordingly, the Securities and Exchange Board of India (“SEBI”) has vide its circular dated November 26, 2010 (“Circular”) has prescribed the following in relation to the intervals schemes:

a) The units of the schemes are required to be mandatory listed.

b) The redemptions in interval funds will only be allowed during specified transaction period which is required to be minimum two working days.

c) The minimum duration of an interval period in an interval scheme/plan is required to be 15 days.

d) The investments by these schemes are required to be made only in those securities which mature on or before the opening of the immediately following specified transaction period.

e) In case of securities with put and call option, the residual time for exercising the put option of the securities it will not be beyond the opening of the immediately following transaction period.

f) The Asset Management Companies (“AMC”) are required to ensure compliance with these guidelines from the date of next specified transaction period or April 1, 2011 whichever is later.

In relation to cut-off timings for applicability of Net Asset Value (NAV) of mutual fund scheme, the SEBI has, vide the Circular, amended certain provisions of its circular dated October 11, 2006 in the following manner:

a) The following cut-off timings are required to be observed by a mutual fund in respect of the purchase of units in liquid fund schemes and their plans, and the following NAVs are required to be applied for such purchases:

i. in cases where the application is received up to 2 pm on a day and funds are available for utilisation before the cut-off time without availing any credit facility - the closing NAV of the day immediately preceding the day of application.

ii. in case applications received after 2 pm on a day and funds are available for utilization on the same day without availing any credit facility - the closing NAV of the day immediately preceding the next business day.

iii. irrespective of the time of receipt of application, if funds are not available for utilization before cut-off time - the closing NAV of the day preceding the day on which the funds are available for utilisation.

b) For the allotment of units in respect to purchase in liquid schemes, it is required to be ensured that:

i. the application is received before the applicable cut - off time;

ii. the funds for the entire amount of subscription/purchase as per the application are credited to the bank account of the respective liquid schemes before the cut-off time;

iii. that the funds are available for utilization before the cut-off time without availing any credit facility whether intra-day or otherwise, by the respective liquid schemes.

c) For the allotment of units in respect of switch-in to liquid schemes from other schemes, it is required to be ensured that:

i. the application for switch-in is received before the applicable cut-off time;

ii. funds for the entire amount of subscription/purchase as per the switch-in request are credited to the bank account of the respective switch-in liquid schemes before the cut-off time;

iii. the funds are available for utilization before the cut-off time without availing any credit facility whether intra-day or otherwise, by the respective switch-in schemes.

The Circular has also clarified the provisions of Clause 6 (2A) of the circular dated October 24, 2008 in the following manner:

a) For the allotment of units in respect of purchase in income/debt oriented mutual fund schemes/plans other than liquid schemes, it is required to be ensured that:

i. the application is received before the applicable cut-off time;

ii. the funds for the entire amount of subscription/ purchase as per the application are credited to the bank account of the respective scheme before the cut- off time;

iii. the funds available for utilization before the cut-off time without availing any credit facility whether intra-day or otherwise, by the respective scheme.

b) For the allotment of units in respect of switch-in to income/debt oriented mutual fund schemes/plan other than liquid schemes for other schemes, it is required to be ensured that:

i. the application for switch-in is received before the applicable cut-off time;

ii. the funds for the entire amount of subscription /purchase as per the switch-in request are credited to the bank account of the respective switch-in income/debt oriented mutual fund schemes/plans before the cut-off time;

iii. the funds are available for utilization before the cut-off time without availing any credit facility whether intra-day or otherwise, by the respective switch-in income/debt oriented mutual fund schemes/plans.

The SEBI has also advised the AMCs to not acquire any the assets out of the scheme property which involves the assumption of any unlimited liability or which may result in encumbrance of the scheme property in any way.

Revision/Reopening of annual accounts

Section 220 of the Companies Act, 1956 provides for the manner in which the annual accounts of a company are laid before annual general meeting for adoption by shareholders and filed with the Registrar. The MCA vide its circular dated 13^th January, 2003, had directed the grounds and manner in which the accounts can be reopened/revised by companies. The same circular also clarified that a company cannot lay more than one set of the annual accounts contrary to circular dated 13^th January, 2003.

However, it has been observed by the MCA that a few companies are violating the rules as set out in the circular. Thus, the MCA vide its circular dated 22^nd November, 2010[1] directed the Registrar of Companies to keep a check on such defaulting companies and not accept such accounts except in accordance with provision of Section 220 of the Companies Act read with the 2003 circular. Earlier in the extraordinary general meeting or in the subsequent annual general meeting of a company, a company could reopen and revise its accounts even after their adoption in the annual general meeting and filing with the Registrar of Companies in order to comply with technical requirements of any other law to achieve the object of exhibiting true and fair view.

CHANGE IN ADDITIONAL FEE TO BE LEVIED FOR DELAYS IN FILING FORMS

The Ministry of Corporate Affairs (“MCA”) vide its circular dated 22^nd November, 2010, has revised the additional fee to be levied for the delay in filing Forms other than Form 5. The existing fees are as follows:

Period of Delay	Fixed Rate of Additional Fee
Upto one month.	One time of normal filing fee.
More than one month and upto three months.	Two times of normal filing fee.
More than three months and upto six months.	Four times of normal filing fee.
More than six months and upto one year.	Six times of normal filing fee.
More than one year and upto two years	Eight times of normal filing fee.
More than two years.	Nine times of normal filing fee.

The revised fees applicable from 5^th December, 2010 are as follows:

Period of Delay	Fixed Rate of Additional Fee
Upto 30 days.	Two times of normal fee.
More than 30 days and upto 60 days.	Four times of normal fee.
More than 60 days and upto 90 days.	Six times of normal fee.
More than 90 days.	Nine times of normal fee.

IRDA penalizes insurance company for failing to report change in promoter

IRDA has by its orders dated August 26, 2010[1] penalized Bharti AXA Life Insurance Company Limited and Bharti AXA General Insurance Company for failing to report the change in the shareholding of the promoter entity of the insurance company. Bharti Ventures Limited holds 40% of the shareholding in both the companies. 99% of the shareholding in Bharti Ventures Limited was held by a partnership firm M/s Bharti Enterprises, which was converted into a company, namely Bharti Enterprises (Holdings) Private Limited with effect from January 8, 2010. This restructuring converted Bharti Ventures Limited into a subsidiary company of Bharti Enterprises (Holdings) Private Limited.

It may be noted that under Section 26 of the Insurance Act, 1938, every insurer is under an obligation to furnish to the IRDA the details of any alteration made in the particulars furnished at the time of seeking registration. In addition, under IRDA (Registration of Indian Insurance Companies) Regulations, 2000 (“Registration Regulations”), an Indian promoter company cannot be a subsidiary company of another company.

In its order, IRDA has found the company guilty on two accounts. Firstly, on account of non-compliance with the requirement to intimate the material change in the particulars submitted at the time of registration. Secondly, for breach of Regulation 2(g)(i) of the Registration Regulations, which mandates that the Indian promoter company cannot be a subsidiary company.

While IRDA may be right in imposing penalties on account of the failure of the companies to report in time the alternation in material information, it is time that the anomaly existing in Regulation 2(g)(i) is rectified. It appears highly illogical to allow the foreign promoter to invest through investment vehicles (which incidentally can be subsidiary companies), while insisting that the Indian promoter ought not be a subsidiary company. The definition of the ‘Indian promoter’ in Regulation 2(g)(i) of the Registration Regulations intended to prevent Indian promoter companies from being subsidiaries of foreign companies, the intention could never have been to put a blanket prohibition on investment by Indian promoters through subsidiaries. The inadvertent drafting error has now become the bane for a number of Indian promoters. It is high time that the Indian promoters make representations to the IRDA for amendment of Regulation 2(g)(i) of the Registration Regulations.

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[1] The orders may be found at http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo822 and http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo823

IRDA intervenes in the cashless medical insurance controversy

Finally intervening in the cashless medical insurance controversy, Insurance Regulatory and Development Authority (“IRDA”) has, vide a circular dated August 24, 2010, issued directions on the changes made insurance companies in Preferred Provider Network of hospitals (“PPN”). PPN of an insurance company is the list of hospitals where cashless medical insurance facility is available for the policyholders. In the above circular, IRDA has issued the following directions:

a) If insurance companies make any change in the PPN, they must inform the policyholder of the nearest alternative hospital in the PPN where the cashless facility is available and the conditions on which the facility is available.

b) Where a policyholder has been issued a pre-authorisation for the conduct of a given procedure in a given hospital, or if the policyholder is already undergoing such treatment at a hospital, and such hospital is proposed to be removed from the PPN list, then the insurance company should continue to provide the cashless facility to such person, as if the hospital is still on the PPN list.

IRDA announces measures to improve transparency in insurance advertisements

The Insurance Regulatory and Development Authority (“IRDA”) has, vide its circular dated August 16, 2010, notified certain measures to improve the content and presentation of life insurance advertisements, particularly the ULIPs. The new stipulations imposed by the IRDA are as follows:

i) Where any insurance advertisement highlights guaranteed benefits, the underlying conditions (including the cost of guarantee and other charges) for such guarantee need to be prominently mentioned in the advertisement. If the conditions are elaborate, the phrase ‘Conditions Apply’ must accompany the text on guarantee in a font that is at least 50% of the font used to highlight the guarantee. The conditions must be mentioned in a legible font beneath the advertisement, in a section that does not form part of other applicable disclosures.

ii) All insurance advertisements must state the availability of life insurance cover to clearly identify the product as an insurance product.

iii) The brand names of the insurance products should not use terms or phrases that convey a fabricated sense of security.

iv) In case of ULIPs, the actual asset mix of the underlying funds vis-à-vis the IRDA approved asset composition must be made available on the website of the insurance companies on half yearly basis.

IRDA passes order on requirement of engagement of in-house insurance surveyors and loss assessors

While disposing of the representations from the Indian Institute of Insurance Surveyors and Loss Assessors (“IIISLA”), the IRDA has passed an order dated August 5, 2010 on various aspects relating to the appointment of insurance surveyors and loss assessors (“SLA”). The order has been passed pursuant to an order of the Madurai bench of the Madras High Court, wherein the Hon’ble High Court had directed the IRDA to decide on the representations of the IIISLA on merits.

The salient aspects of the order are as follows:

a) Alleged violation of Section 64UM of the Insurance Act, 1938

IIISLA had alleged in its representation that the insurance companies are violating the mandate set out in Section 64UM(2) of the Insurance Act, 1938 (“Insurance Act”) by conducting loss assessment and surveys through in-house insurance surveyors and loss-assessors. IIISLA contended that under the Insurance Act, all claims in excess of Rs. 20,000 require assessment from an ‘independent’ SLA, as opposed to those who are employees of the insurance company.

Mr. J. Hari Narayan, Chairman IRDA rendering his order on behalf of the IRDA held that there is no bar on the insurance companies to engage in-house SLAs for assessing claims equal to or in excess of Rs. 20,000, as long as they are licensed as such by the IRDA. Insurance companies are free to engage non-licensed persons for assessing losses in case the claim is less than Rs. 20,000.

He also rejected the contention of IIISLA that the assessment of in-house SLA will be biased, and observed that the salary of an in-house SLA and the remuneration of an external SLA are both borne by the insurance company only. Since, there are sufficient safeguards in place, it is far-fetched to assume that the rights of the insured will be adversely affected by engagement of in-house SLAs.

b) Allegations on the insurance companies entering into contracts with unlicensed firms for outsourcing survey works

IIISLA had alleged that insurance companies have been engaging firms that are not licensed to carry on SLA activity. It was further alleged that these firms have, in turn, been engaging licensed SLAs. This practice, in IIISLA’s contention is not in compliance with the provisions of the Insurance Act.

Without passing any judgment on legality of actual instances, IRDA held that the loss assessment and surveys in claims of Rs. 20,000 and above should be done directly by licensed SLAs or firms that are licensed as SLA. Accordingly, insurance companies have been directed to deal directly with the licensed SLAs.

c) Removal of restrictions in the three departments and upgradation of the categories

It was contended by IIISLA that IRDA had in-principle agreed to, remove the restriction of three departments (fire, marine, engineering, motor etc.) for independent SLAs who were in practice prior to categorization, and to upgrade the limits assigned in relation to the maximum loss that can be assessed under a certain category.

The IRDA’s order acknowledges the need to provide for a mechanism for improving professional skills and qualifications by means of training and examination. In this regard, IRDA has suggested the introduction of three-tier membership to IIISLA, consisting of Licentiate, Associate and Fellow members. IRDA will be issuing suitable directions to the IIISLA to take steps in this regard.

d) Compulsory membership of IIISLA

IIISLA had sought introduction of the concept of compulsory membership to IIISLA for all SLA. IRDA will examine the feasibility of this suggestion and introduce suitable amendments in the regulations and memorandum and articles of association of the IIISLA.

IRDA notifies regulations for referral companies

The IRDA has, vide its notification dated July 01, 2010, notified the Insurance Regulatory and Development Authority (sharing of database for distribution of insurance products) Regulation, 2010 (“Database Regulations”). The Database Regulations regulates the arrangements between insurance companies and third parties for access of third party databases by the insurance companies.

The salient features of the Database Regulations are summerised as under:

a) Referral Arrangements and licensing of Referral Company

The Database Regulations have defined the referral arrangement as an arrangement between the referral company and the insurer, in terms of an agreement (“Referral Agreement”), for the purpose of sharing of database of the customers of the referral company. The definition categorically excludes solicitation or sale, directly or indirectly, of an insurance product. Referral companies have, therefore, been contemplated as a class distinct from the insurance agents or insurance intermediaries involved in sale or solicitation of insurance business.

Insurers are required to move an application for approval of referral companies, and appoint only such companies that are approved by the IRDA. IRDA’s approval to a referral company shall be valid for a period of three years from the date of grant.

b) Eligibility Criteria For A Referral Company

In order to be eligible to obtain approval as a referral company from IRDA, the insurer must ensure that the referral company fulfills, inter alia, the following conditions:

i) The referral company should be a company formed and registered under the Companies Act, 1956. However, IRDA may approve government organization/departments as a referral company, upon such terms as the IRDA may impose.

ii) The referral company should not be in any of the businesses relating to extension of loans and advances, accepting deposits, trading in securities on its own account or on the accounts of the customers. However, IRDA may permit such banks that are not eligible for grant of corporate agency license under the Reserve Bank of India’s guidelines as referral companies, upon such terms that it may impose.

iii) The referral company should have a minimum net worth of Rupees fifty lakhs (i.e. Rupees Five Million) and a minimum turnover of Rupees one crore (i.e. Rupees Ten Million) during the previous three consecutive years.

iv) The referral company should have a database of its customers acquired through its business, provided that a company whose business is acquisition and sale of data shall not be eligible to become a referral company.

v) The referral company’s business should have no linkage, direct or indirect, with the transaction or distribution of the business of insurance.

vi) The referral company should not have an existing referral arrangement with any other insurer carrying out the insurance business of same class.

vii) The referral company should not be bound by any confidentiality agreement in the matter of sharing the personal and financial databases of its customers.

c) Procedure For Registration Of a Referral Company

Upon the grant of approval to the referral company, the insurer shall register such referral company and shall enter into an agreement with the referral company that governs their relationship. The Referral Agreement is required to be electronically filed with the IRDA within fifteen days of its execution, and it should, inter alia, address the following issues:

i) agreed price of the database to be shared;

ii) terms of payment, including timeframe and mode;

iii) right of the insurer to inspect/ audit the company;

iv) onus to comply with the law on both the parties to the agreement; and

v) identifying the different data elements to be shared (such as the name of the customer and contact details).

Referral Agreement will be valid for a period of three years from the date of grant of approval to the referral company by the IRDA. However, the IRDA is empowered under the Regulations to direct the insurer to terminate the Referral Agreement, if the same is found to be not in public interest.

d) Restricted on the Business Activities

The Database Regulations imposes, inter alia, the following restrictions on the business activities of an IRDA approved referral company:

i) The referral company shall not carry out the sale of insurance products in its premises or elsewhere, at all times

ii) The referral company shall not undertake any insurance related activity, except activities in the nature of sharing of the database of its customers for the sale or distribution of insurance products.

iii) The referral company shall not create a database of its customer groups by specifically soliciting or scouting prospective policyholders, for the sale or distribution of the insurance products.

iv) The referral company shall not provide details of its customers without the prior consent of its customer, or provide details of any person/firm/company with whom they have not had any recorded business transaction.

v) The referral company shall not receive any payment from the insurer for providing the database of its customers, over and above the remuneration as prescribed in the Database Regulations.

vi) The referral company is also restricted from receiving any payment for providing the database of its customers from a person involved in insurance related activity, other than the insurer.

vii) The referral company should not be licensed/registered as an insurance agent, corporate agent, micro insurance agent or a broker.

viii) The referral company is also restricted from entering into a referral arrangement with more than one, life and/or general insurance company and /or standalone health insurance company.

ix) The referral company cannot earn more than 10% of its total income from the referral business, at any time, during the tenure of the referral arrangement.

e) Remuneration of referral company

An insurer is permitted to pay upto a maximum of 25% of the first year commission payable or actually paid, which ever is lower, of the first policy sold on the basis of the lead obtained from the referral company. In life insurance contracts, where premium is received in other than yearly mode, the commission is payable only for the first year premium. In long term general insurance policies too, commission is payable only in respect of the first year premium.

No commission can be paid where the policy has been sold without relying on the data shared by the referral company.

No commission/ fee or remuneration can be paid to the referral company on any renewal premium or premium from the second or subsequent years, or for sale of a new policies to the existing customers of the insurer. Also, the insurers cannot make advance payments to the referral company.

An insurance company shall not be allowed to pay the referral company fees or remuneration, by whatever name called, towards the costs incidental to the referral activities, including maintenance of the database, infrastructure, training, entertainment, development, communication, advertisements, sales and promotion.

f) Other obligations of the Insurers

The Database Regulations imposes, inter alia, following obligations to be complied by an insurer in respect to the referral company registered with him:

i) The insurer shall ensure that the referral company complies with all the provisions of the applicable laws and shall also ensure that all the transactions in terms of the Referral Agreement are in compliance with the applicable laws.

ii) The insurer shall maintain the following records:

i) For every Referral Agreement, information such as the total business generated, total amount payable including all the payments made to the referral company etc.

ii) For each batch of referral data obtained from each referral company, the details of the policies sold out of the references, and the information regarding the payments made by the insurer.

iii) The insurer shall bring to the notice of the IRDA any change/ modification in the information or particulars, which was previously furnished at the time of application for approval, within 15 days of such change/modification. Further, the insurer shall upload such duly approved information/particulars on its website, within fifteen days from the date of grant of approval granted by IRDA.

iv) Every Referral Agreement, which is not in conformity with the Database Regulations shall be terminated by the insurers. However, such agreements shall be allowed to continue where suitable modification or amendment are made to them to bring them in conformity with the Database Regulations, within a period of six months from the date of notification of the Database Regulations and after obtaining the prior approval of the IRDA.

v) The insurer shall nominate one of its senior officials as compliance officer, who will be responsible for the verification and undertaking due diligence pertaining to all the referral companies of such insurer.

g) Liability for action in case of default by the insurer or the referral company

In case the insurer (i) fails to exercise due diligence, (ii) fails to furnish any information required under these Regulations or furnishes wrong information, (iii) fails to comply with any of the obligations specified under these Regulations, (iv) violates any of the conditions of registration or (v) fails to comply with any of the provisions of the applicable law; it will be liable for any action as deemed fit by the IRDA provided under the applicable laws.

Similarly, the approval granted to a referral company shall be liable to be cancelled or any other action under the provisions of the applicable laws can be initiated, in case the referral company fails to exercise due diligence or comply with any of the obligations imposed on it under Database Regulations and the applicable laws.

e) Further Clarifications

The Database Regulation stipulates that every insurer should terminate all the Referral Agreements entered by it prior to the notification of Database Regulation, which were not in accordance to the provisions of the Database Regulation. Database Regulations, further provides that referral arrangements may continue subject to them being suitably modified or amended to bring them in conformity with the Database Regulation within a period of six months from the date of notification after obtaining prior approval of the IRDA.

Vide its circular (“Circular”) dated 9^th August, 2010, IRDA has issued the following clarifications on the Database Regulations:

i) The existing Referral Agreements by entities that are not eligible to become referral companies under the Database Regulations should be terminated immediately. Such agreements shall not be allowed any extension of six months.

ii) Only entities eligible to become referral companies under the Database Regulations and which have existing referral arrangements can continue their referral arrangements for six months. The insurer can take prior approval of the IRDA for the modification of such agreements within a period of six months.

In addition, to facilitate transition of eligible entities from referral agency to corporate agency, by its circular dated August 10, 2010, IRDA has waived the requirement of having a corporate insurance executive with relevant qualifications. The waiver has been granted temporarily for a period of two months effective from August 12, 2010 until October 11, 2010. The waiver can be availed by only such entities that have valid IRDA approved referral agreements and which have applied for a corporate agency license.