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.

IRDA notifies amendments to the Advertisement Regulations

The Insurance Regulatory and Development Authority (Insurance Advertisements and Disclosure) Regulations, 2000 (“Advertisement Regulations”) governs the advertising and promotion by insurance companies. IRDA has, vide its notification dated July 1, 2010, carried out the following amendments to the Advertisement Regulations:

1. The definition of ‘intermediary or insurance intermediary’ earlier provided under regulation 2(c) has been removed.

The definition of the ‘intermediary or insurance intermediary’ already exists under the Insurance Regulatory and Development Act, 1999. This has most likely been done to remove any confusion arising out of multiple definitions of the same term.

2. The second proviso to regulation 10(1)(vi) has been deleted. Second proviso to regulation 10(1)(vi) entitled a third party, group or association to collect compensation from an insurance company from the sale undertaken on the basis of the information provided by such group or association of its membership. This was the provision relied upon for most referral arrangements in the insurance industry.

This deletion seems to have been made in the light of Database Regulations. The Database Regulation is expected to take care of the matters relating to sharing of databases.

IRDA introduces new regulations on discontinued linked insurance policies

The IRDA has, vide its notification dated July 1, 2010, enacted the Insurance Regulatory and Development Authority (Treatment of Discontinued Linked Insurance Policies) Regulations, 2010 (“LP Regulations”). The LP Regulations, inter alia, provides for the manner in which a linked insurance policy can be discontinued by a policyholder.

The salient features of the LP Regulations are provided as under:

a) The grace period for payment of the premium for all types of linked insurance policies will be fifteen days where the policyholder pays the premium on a monthly basis, and thirty days in all other cases.

b) Upon the discontinuance of the policy, a policyholder will be entitled to either revive the policy or completely withdraw the policy that will deny the policyholder any risk cover.

c) Upon the discontinuation of the policy, the insurer shall send a notice, within a period of 15 days from the expiry of the grace period, to give an opportunity to the policyholder to revive the policy. The policyholder, accordingly, can revive the discontinued policy, upon which the risk cover along with investments made (less applicable charges) shall be continued.

d) If the policyholder decides to completely withdraw the policy, the proceeds of the discontinued policy (i.e. fund value less discontinuance charges) will be credited to the discontinued policy fund. Such fund will be refunded to the policyholder only after the completion of the lock-in period, i.e. 5 years. However, in case of pension and annuity linked products, the insurer shall not refund more than one-third of the proceeds of the discontinued policy while the remaining amount shall be used to purchase annuity.

e) In case of discontinuation of a policy, the insurer can impose discontinuation charges only to recover the expenses incurred towards procurement and administration of the policy. It is also the duty of the insurer to design the discontinuance charges in such a manner that it encourages the policyholder to continue with the contract for the full term. It is also the duty of the insurer to ensure that the charges levied on the date of discontinuance do not exceed the limits specified below:

Limits on Levy of the Discontinuance Charges

Where the policy is discontinued during the policy year	Maximum discontinuance charges for the policies having annualized premium up to Rs.25,000/-	Maximum discontinuance charges for the policies having annualized premium above Rs.25,000/-
1	Lower of 20% * (AP or FV) subject to a maximum of Rs. 3000	Lower of 6% * (AP or FV) subject to maximum of Rs. 6000/-
2	Lower of 15% * (AP or FV)subject to a maximum of Rs. 2000	Lower of 4% * (AP or FV) subject to maximum of RS. 5000/-
3	Lower of 10% * (AP or FV) subject to a maximum of Rs.1500	Lower of 3% * (AP or FV) subject to maximum of Rs.4000/-
4	Lower of 5% * (AP or FV) subject to a maximum of Rs.1000	Lower of 2% * (AP or FV) subject to maximum of Rs.2000/-
5 and onwards	NIL	NIL

AP - Annualised premium

FV - Fund value on the date of discontinuance

f) The LP Regulations further provide that no discontinuance charges can be imposed on single premium policies and on top ups.

The insurer shall send a statement of account to the policyholder on a half yearly basis in respect of every policy in force, including discontinued policies where the proceeds are yet to be paid. Such statement of account shall, inter alia, contain the details such as total premium paid by the policyholder, due date, investment pattern, fund value, and details of charges imposed.