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 9th 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.
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