## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2018/cr1886.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1886.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1886.pdf.json) --- ### SCOPE AND APPROACH - This technical note provides an update and an assessment of the development of regulation and supervision of the Indian insurance sector since 2011 as part of the 2017 Financial Sector Assessment Program (FSAP) for India. - Focus: - Developments in the insurance market and its regulation and recommendations for future development. - Update of 2011 India FSAP work and evaluation of the extent to which its recommendations have been addressed. - References to IAIS Insurance Core Principles (ICPs) are to the version issued in October 2011 and revised up to November 2015. - Preparation: - Meetings held from March 10 to 23, 2017 with IRDAI and selected insurance companies and professional bodies. - Technical note prepared by Ian Tower (IMF external expert). ### MARKET STRUCTURE AND PERFORMANCE - Market growth and composition: - Sector continued to grow in scale and diversity, surmounting the adverse impact of the global financial crisis. - Companies divided into life and general insurers; provisions exist for health insurance to be written by both; stand-alone health insurers permitted more recently. - Reinsurance market opened to private companies, including branches of foreign reinsurers. - Foreign investment limit in primary insurers raised from 26 percent to 49 percent. - Premium growth: - After two years of low or negative growth during 2010–12, total gross premium income of life insurers has been growing strongly. - Growth rates in non-life insurance have been consistently high. - Number and ownership of insurers (as at March 2017): - Total licensed insurers: 63. - Life insurers: 24 (state-owned: 1). - Non-life insurers: 24 (state-owned: 6). - Health (stand-alone): 6. - Reinsurance (India incorporated): 2 (state-owned: 1). - Reinsurance (branches): 7. - Market share and concentration: - Public sector insurers command a majority of the market by premium income. - Public insurers account for about 75 percent of the life market, about 55 percent in non-life, and about 60 percent in reinsurance (including business placed outside India). - One private sector insurer (ICICI Prudential Life Insurance Company) recently listed on the Bombay Stock Exchange and the National Stock Exchange of India. - Life vs non-life composition: - Life accounts for about 75 percent of total annual premiums. - Traditional business (participating and nonparticipating) dominates life insurance. - ULIPs account for about 15 percent of the total life market. - Non-life dominated by motor insurance (third-party liability and “own damage”), which accounts for about 45 percent of total gross non-life premium income. - Health (non-life and stand-alone) and crop insurance are growing most strongly. - Penetration and international comparison (selected 2015 figures: Premium volume, Percent of GDP, Per Capita (USD)): - India: Life 2.72, 43.2; Non-Life 0.72, 11.5; Total 3.44, 54.7; Share of Global Market 1.58; Premium Volume USD 71,776. - Brazil: Life 2.10, 173.8; Non-Life 1.80, 153.7; Total 3.90, 332.1; Share 1.52; Premium Volume USD 69,061. - China: Life 1.94, 153.1; Non-Life 1.65, 127.6; Total 3.59, 280.7; Share 8.49; Premium Volume USD 386,500. - Russia: Life 0.17, 14.8; Non-Life 1.19, 102.3; Total 1.36, 117.1; Share 0.37; Premium Volume USD 16,801. - Distribution channels: - Life: Individual agents (> two million) account for about 70 percent of individual business; group business handled by direct sales. - Non-life: Individual agents about 35 percent of new business premium; brokers and direct sales each about 25 percent. - Corporate agents (mostly banks) account for about 25 percent of life and 7 percent of non-life sales. - New channels (online, point of sale) exist but account for negligible market share. - Domestic orientation and foreign participation: - Most business is Indian risk; only New India Assurance and GIC have significant operations outside India. - Many private insurers are joint ventures with foreign insurers; some foreign partners increased share from 26 percent to 49 percent. - Most foreign reinsurers authorized as branches in 2016 were already active cross-border prior to branch authorization. - Group and conglomerate structure: - Few insurance groups; many insurers part of wider financial conglomerates. - Regulatory limitations: tiered ownership not permitted; insurers face limits on investing in subsidiaries (with exceptions, including overseas business). - Financial conglomerate supervision well-established and addresses group-wide supervision needs. ### KEY MARKET CHARACTERISTICS AND RISKS - Product and risk profile: - Insurance in India associated more with savings and investments than with protection; most domestic property remains uninsured. - Life risks relatively well spread; non-life risks mainly short-term. - Many lines rely on investment income to offset poor underwriting results. - Profitability and solvency overview: - Sector profitable and solvency exceeds minimum requirements, but with exceptions at individual companies. - Specific non-life issues: - Poor underwriting discipline in non-life is a key challenge. - Fixed premiums for motor third-party liability insurance continue to affect performance. - Moves made to address unlimited liability of insurers in case of claims. - Public-sector advantages: - Public and private insurers now subject to same regulation, although some structural advantages remain for the public-sector life insurer (LIC) and reinsurer (GIC). ### INDUSTRY PROFITABILITY AND SOLVENCY — DETAILED FINDINGS - Headline solvency and profitability (end-March 2016): - Aggregate solvency ratios (simple averages): 344 percent life; 239 percent non-life and health combined. - Profitability exceptions (end-March 2016): - 5 of the 24 life companies were not profitable (all private sector). - 6 of the 23 non-life companies were not profitable (all private sector). - All the stand-alone health companies except one were not profitable. - Solvency compliance and reporting: - Solvency ratios at all companies exceeded the minimum requirement except for one state-owned non-life company (as of end-March 2016). - At end-December 2016, two state-owned non-life insurers reported ratios below the regulatory minimum. - Insurers must disclose their solvency ratios at the end of each quarter as part of IRDAI’s financial disclosure requirements. - Key short-term and structural risks: - Life: major risks are market risk related to the investment portfolio and mortality risk; offsetting factors include predominance of traditional longer-term business, limited acute interest-rate exposure, matching of liability durations and assets, participation/ULIP mix, and regulatory investment constraints (policyholders’ funds not permitted outside India). - Non-life: risks mainly short-term; limited long-tail lines except MTPL; premium-setting largely free since 2007 except MTPL where premiums are fixed annually by IRDAI; underwriting performance often loss-making with combined ratios high, sometimes over 100 percent. - Catastrophe and emerging risks: catastrophe risks viewed as relatively low but growing; flood risk significant and incidence of weather events increasing (examples: Chennai Floods November 2015; Hudhud Cyclone October 2014); growing interest in cyber-related risks but limited business so far. - Industry challenges and prospects: - Need to increase trust in products and improve persistency in life insurance. - Example gaps: most domestic property uninsured; estimated 40 percent of drivers have no motor insurance. - Government schemes contributed to increased penetration (example: Pradhan Mantri Jeevan Jyoti Bima Yojan (PMJJBY) terms (2016–17): Rs 200,000 of life cover for Rs 330 per year; LIC administers the scheme for itself and participating private insurers). - Non-life underwriting discipline concerns: risk of reduced catastrophic risk reinsurance cover to improve underwriting results; MTPL market improvements after recent premium increases; further improvements from enforcement of traffic laws, increased penalties, streamlined claims processes, and reforms to limit unlimited liabilities (proposed Motor Vehicles Act amendment to cap liability at Rs 100 million met opposition). - Public sector market share issues: public insurers’ high market share raises sustainability questions; two public non-life companies (GIC and New India Assurance) planning listings in 2017 (initially 10 percent, increased to 25 percent by government decision in February 2017). - LIC advantages: special legislation status (not a Companies Act company) with an explicit government guarantee for all sums it assures; LIC Amendment Act 2011 increased LIC equity capital from Rs 50 million to Rs 1 billion. - GIC advantages: primary insurers required to cede 5 percent of all premiums to GIC and to offer GIC first preference on other business. - Overall prospects: bright given low penetration rates (especially non-life), foreign company involvement, infrastructure and innovation strengths, IRDAI’s regulatory initiatives, strong growth in health insurance demand, and generally good capitalization with access to additional resources. - Operational/market statistics: - Combined ratios in many non-life lines are high, sometimes over 100 percent. - Transition measures: in transitioning to pool arrangements for MTPL, IRDAI relaxed its informal 150 percent minimum solvency ratio requirement on a tapering basis (starting at 130 percent) over three years to 2014–15 as insurers built required reserves. ### DEVELOPMENTS IN INSURANCE REGULATION - Legal and regulatory changes: - Revisions to the Insurance Act 1938 (2015 amendments) transferred powers from government to IRDAI, including wider powers to issue regulations and to intervene in individual companies without recourse to government. - Foreign insurers may increase interest to 49 percent; foreign reinsurers may operate as branches. - IRDAI empowered to set a “control level of solvency” (Section 64 VA) and set this at 150 percent in separate life and non-life 2016 regulations. - New arrangements for agents: individual agents no longer required to be licensed by IRDAI but must be appointed by the insurance company (limited to one in each of life, non-life and health business); IRDAI retains sanctioning powers (Section 42). - Increased financial sanctions (example: Rs 100,000 fine per day for non-compliance with a direction, subject to Rs 10 million maximum (Sections 102 to 105B)). - IRDAI regulatory activity and conduct reforms: - Extensive new regulations strengthening policyholder protection, including product regulations and controls on commissions and other expenses. - Corporate Governance Guidelines 2016 and detailed requirements on product specification, maximum commission levels, limits on management expenses, and higher training and competence standards for agents. - Retail focus: most changes concentrate on retail customers; non-retail non-life products no longer require IRDAI approval (use-and-file notification), while life products generally still require prior approval. - Stronger non-life reserving requirements and a new insurance fraud framework introduced. - Accounting and valuation: - Implementation of International Financial Reporting Standards (IFRS) from financial year 2020–21 will require a move toward economic valuation for financial statements. - IRDAI working with industry on plans for economic valuation for solvency purposes and risk-based capital. - India is an outlier in Asia and internationally in not having moved toward economic valuation and risk-based capital as yet. - Investment and resolution frameworks: - Investment regulations remain conservative with unusual minimum requirements on investment in infrastructure and the housing sector. - Resolution framework appears comprehensive though untested. - Regulatory integration and cooperation: - IRDAI’s independence and overly informal approaches in some areas have been addressed. - Insurance regulation more closely integrated into wider financial sector supervision domestically and internationally. - Memorandum of Understanding signed by RBI, SEBI, IRDAI, and PFRDA in 2013 to support cooperation in conglomerate supervision; Financial Data Management Center to be established under FSDC; insurance companies brought into CRILC. - IRDAI participating in IAIS MMoU and putting in place MoUs with foreign regulators; supervisory colleges for certain groups initiated where relevant. ### CURRENT SOLVENCY FRAMEWORK AND VALUATION - Framework status: - Largely as in 2011 with additions: control level of solvency and provisions for new forms of capital, including subordinated debt. - Retains a robust "Solvency I" approach: valuation requirements with prudent margins and a simple factor-based solvency set that is volume-linked and insensitive to many risk types. - Insurers required since 2011 to develop and report an economic capital calculation to IRDAI as a basis for discussions. - International context and accounting convergence: - Ind AS adoption for the insurance sector required for periods beginning from April 1, 2018 under Ministry of Corporate Affairs requirements; IRDAI deferred implementation to coincide with IFRS17 (issued May 2017, due to take effect January 2021). - Existing valuation provisions continue to apply for solvency requirements at present. - Investment regulations and infrastructure/housing mandates: - 25 percent of investments backing non-linked life insurance policyholder liabilities must be invested in central government securities (20 percent in the case of non-life). - Statutory minimum requirement: 15 percent of the total aggregate value of investments must be invested in infrastructure and the housing sector (with specified exceptions). - LIC reported gross nonperforming assets of 5.19 percent of the loan portfolio at end-December 2016. - Resolution framework: - IRDAI may issue directions, appoint/remove directors, appoint an administrator, and initiate winding-up; no policyholder compensation arrangements. - Government draft Bill proposed a Resolution Corporation (RC) with a resolution fund financed by the financial sector. ### RECOMMENDATIONS — SOLVENCY MODERNIZATION AND RISK-BASED CAPITAL (KEY POINTS) - Core priority: - IRDAI should formulate a strategy, plan, and timetable as soon as possible for modernization of the solvency framework. — Responsible: IRDAI. Priority: High. - Design considerations: - Consider basing valuation approach on IFRS 17 to align valuation with financial statements, accepting differences for Indian markets and solvency needs. - Consider IAIS Insurance Capital Standards (ICSs) as input, adapted and recalibrated for application to all insurers at solo and group level, with additional SII requirements as appropriate. - Likely appropriate to implement only a standardized approach to risk-based capital (given market nature and complexity/costs of internal models), covering all risks and requiring insurers to develop an Own Risk and Solvency Assessment (ORSA). - Include operational risks on a quantified basis. - Calibration: a VaR approach based on a prescribed level of stress may be suitable and should be consistent with international standards and practices. - Implement two levels of solvency control, including a minimum capital requirement (MCR) as an absolute floor; current effective MCR applies as 50 percent of the minimum initial capital of Rs 1 billion (equivalent to only about US$7.5 million), albeit twice that level for reinsurers. - IRDAI may retain a structure of limits at least initially rather than immediately adopting a “prudent person approach.” - Timing and implementation: - Implementing in January 2021 to coincide with IFRS 17 effective date may have advantages. - Calibration will take time; multiple quantitative impact studies likely necessary. - Parallel running period advisable: insurers calculate solvency margin on old and new bases and comply with the higher requirements. - Preparing the sector: - IRDAI should lead once committee reports are published and focus initially on insurers’ existing economic capital evaluations to gain insight into possible impacts of risk-based capital and prepare industry and supervisors for ORSA oversight. ### RECOMMENDATIONS — RISK-BASED SUPERVISION, RESOURCES, AND ORGANIZATION - Core supervisory recommendation: - IRDAI should move to a more risk-based framework for supervision. — Responsible: IRDAI. Priority: High. - Risk-based supervisory cycle (core elements): - Develop a risk-based supervisory cycle with appropriate weighting for impact and risk in determining supervisory focus. - Integrate assessment of impact (size) with criteria for identification of SIIs. - Ensure risk assessment addresses all risks, including operational risks. - Allocate supervisory resources and determine scope/frequency of onsite work to reflect both impact and pure risk, with higher supervisory attention for larger insurers. - Inform insurers regularly of risk assessment findings and key aspects of the work program; apply approach to intermediaries as well as insurers. - Conglomerate coordination: - Consider commonality of approach with other Indian supervisors to support conglomerate supervision and increase supervisory contact with non-executive directors, Boards, and external auditors. - Resources and organizational changes: - IRDAI should review adequacy of resources, reconsider reliance on staff on deputation from public sector insurers, and consider organizational structure changes to support risk-based supervision. — Responsible: IRDAI. Priority: Medium. - Staff totals: 237 in March 2017; 181 at end-March 2016; 25 percent of total staff on three-year deputations from state-owned insurers. - Current onsite target: one per company every one to two years; present practice about every four years. - Consider supervisory teams that lead risk assessments and maintain day-to-day relationships with insurers, drawing on specialists as needed; maintain separate enforcement and regulatory policy functions. - Specific supervisory practice changes: - Move onsite inspections from primarily compliance-based to include evaluation of risks inherent in strategy, business model, governance, and controls. - Consider reducing dependence on prior product approvals in favor of stronger product governance frameworks at insurers. - Review the appointed actuary role and guard against over-dependence; implement ORSA requirements in parallel with prescribed regulatory minimums. - Reconsider reliance on deputations and consider recruitment of permanent staff and selective secondments (including from private companies) to fill skills gaps; potential reconsideration of salary scales and training requirements. - Additional supervisory recommendations and priorities: - IRDAI should review aspects of its cross-border supervision. — Responsible: IRDAI. Priority: Medium. - IRDAI and members of the FSDC and the IRF should consider extension of scope of financial conglomerates regulation. — Responsible: IRDAI. Priority: Medium. - Government of India and IRDAI should review requirements on minimum investment in infrastructure and the housing sector to ensure they do not conflict with IRDAI’s regulatory objectives. — Responsible: Government of India and IRDAI. Priority: Low. - IRDAI and the government of India should continue reforms of the motor insurance market. — Responsible: IRDAI and Government of India. Priority: Medium. - IRDAI and, as necessary, the government of India, should consider further measures to level the playing field where advantages for public sector insurers exist. — Responsible: IRDAI and Government of India. Priority: High. ### CORPORATE GOVERNANCE, SUPERVISORY PRACTICE, AND OTHER REGULATORY MATTERS - Corporate governance: - Corporate Governance Guidelines 2016 are comprehensive but monitoring appears limited; company secretary often beholden to CEO. - Recommendations: require external auditor reporting on adherence to guidelines; report related-party transactions on an exceptions basis; seek independent pricing advice for egregiously mispriced related-party transactions. - Related-party transactions must be disclosed in quarterly disclosures (report L30); external auditors required to review arm’s length nature. - Internal controls and internal audit: - Recommendation: Corporate Governance Guidelines should explicitly cover internal audit function, require senior officer responsible, ensure independence, sufficient resources, and direct access to the Audit Committee and the Board. - Current guidelines require internal audit capability and independence demonstration; head of internal audit not explicitly subject to fit-and-proper requirements. - Reporting to supervisors: - Recommendation: monthly reports should include more short-term risk data in addition to sales and branch/geographical development data; IRDAI currently relies on quarterly and annual reports but collects substantial monthly information. - Onsite inspection and IT skills: - Recommendation: add staff with IT system skills to full-scope inspection teams and arrange feedback meetings after inspections; IRDAI already includes staff with IT knowledge and conducts exit meetings and draft reports. - Enforcement and sanctions: - Recommendation: formalize enforcement regime via a Supervisory Guide or Ladder of Intervention; consider intermediate enforcement powers (selective time/volume limits, deposits, expiry date for license); update financial sanctions for inflation. - Implementation: solvency margin requirements enacted (150 percent PCR, 50 percent MCR); IRDAI’s broad powers of direction (Section 34); financial sanctions increased (example: Rs 100,000 per day up to Rs 10 million maximum). - Winding up and exit: - Recommendation: consider allowing voluntary wind-up of solvent non-life insurers subject to safeguards and aligning administrator appointment provisions for non-life with life insurers. - Current law (Section 54) precludes voluntary winding up except for amalgamation, reconstruction, or insolvency grounds. - Group-wide supervision: - Recommendation: formalize information flows, processes, and early warning mechanisms for financial conglomerate group supervision (possibly via MOU among supervisors); enhance powers to consider group structures and related-party transactions. - Current arrangements: 2013 MOU between RBI, SEBI, IRDAI and PFRDA; insurance companies included in CRILC; oversight of related-party transactions assigned to Boards by Corporate Governance Guidelines. - Risk assessment, liabilities, investments, derivatives, intermediaries, consumer protection, fraud, AML/CFT: - Economic capital submission required annually must cover insurance, market, credit and operational risks (reporting for information only). - Life valuation: 2016 regulations set valuation interest rate requirements though some discretion remains for actuaries; expense overruns to be provided for if chronic. - Non-life valuation: 2016 regulations and Institute of Actuaries guidance; recommendation for guidance on long-tail provisions and certification of non-life appointed actuaries. - Investments: specify required skills/experience for investment officers; existing valuation regulations state assets may not be held above market value. - Derivatives: master circular August 2016 sets permitted derivatives; if IFRS implemented fully, derivatives may become more attractive and governance/monitoring should be strengthened. - Intermediaries: recommend upgraded statutory reporting for brokers as they become more important. - Consumer protection: ombudsman system reformed (now 17 ombudsmen) and Insurance Ombudsman Rules, 2017 issued; coordination improved. - Fraud: Guidelines issued in 2013 require Board-approved fraud policies; compliance assessed offsite and in onsite inspections. - AML/CFT: Insurance Brokers Regulations 2013 remind brokers of AML obligations; financial sanctions for legal person intermediaries should be strengthened. *Source: EXECUTIVE SUMMARY, cr1886.* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### SCOPE AND APPROACH - This technical note provides an update and an assessment of the development of regulation and supervision of the Indian insurance sector since 2011. It is part of the 2017 Financial Sector Assessment Program (FSAP) for India. - The note: - Focuses on developments in the insurance market and its regulation and makes recommendations for future development. - Updates work carried out as part of the 2011 India FSAP and evaluates the extent to which its recommendations have been addressed. - Does not present a full assessment of observance of the IAIS Insurance Core Principles (ICPs); references to ICPs are to the version issued in October 2011 and revised up to November 2015. - Preparation: - Meetings were held from March 10 to 23, 2017 with IRDAI and a selection of insurance companies and professional bodies. - The technical note was prepared by Ian Tower (IMF external expert). ### DEVELOPMENTS SINCE 2011 — MARKET STRUCTURE AND PERFORMANCE - Market growth and composition: - The sector has continued to grow in scale and diversity, surmounting the adverse impact of the global financial crisis. - Companies are divided into life and general insurers; provisions exist for health insurance to be written by both. - Stand-alone health insurers have been permitted more recently. - The reinsurance market has been opened up to private companies, including branches of foreign reinsurers. - The limit on foreign investment in primary insurers has been raised from 26 percent to 49 percent. - Premium growth: - After two years of low or negative growth during 2010–12, total gross premium income of life insurers has been growing strongly. - Growth rates in non-life insurance have been consistently high. - Number and ownership of insurers (as at March 2017): - Total licensed insurers: 63. - Life insurers: 24 (state-owned: 1). - Non-life insurers: 24 (state-owned: 6). - Health (stand-alone): 6. - Reinsurance (India incorporated): 2 (state-owned: 1). - Reinsurance (branches): 7. - Market share and concentration: - Public sector insurers command a majority of the market by premium income. - Public insurers account for about 75 percent of the life market, about 55 percent in non-life, and about 60 percent in reinsurance (including business placed outside India). - One private sector insurer (ICICI Prudential Life Insurance Company) has recently been listed on the Bombay Stock Exchange and the National Stock Exchange of India. - Life vs non-life: - Life accounts for about 75 percent of total annual premiums. - Traditional business (participating and nonparticipating) dominates in life insurance. - ULIPs account for about 15 percent of the total life market. - Non-life is dominated by motor insurance (third-party liability and “own damage”), which accounts for about 45 percent of total gross non-life premium income. - Health (non-life and stand-alone) and crop insurance are growing most strongly. - Penetration and international comparison: - Penetration rates are unchanged from 2011 and generally lower than in comparator countries, with non-life especially low. - Selected 2015 figures (Premium volume, Percent of GDP, Per Capita (USD)): - India: Life 2.72, 43.2; Non-Life 0.72, 11.5; Total 3.44, 54.7; Share of Global Market 1.58; Premium Volume USD 71,776. - Brazil: Life 2.10, 173.8; Non-Life 1.80, 153.7; Total 3.90, 332.1; Share 1.52; Premium Volume USD 69,061. - China: Life 1.94, 153.1; Non-Life 1.65, 127.6; Total 3.59, 280.7; Share 8.49; Premium Volume USD 386,500. - Russia: Life 0.17, 14.8; Non-Life 1.19, 102.3; Total 1.36, 117.1; Share 0.37; Premium Volume USD 16,801. - Distribution channels: - Life: Individual agents (> two million) account for about 70 percent of individual business; group business handled by direct sales. - Non-life: Individual agents about 35 percent of new business premium; brokers and direct sales each about 25 percent. - Corporate agents (mostly banks) account for about 25 percent of life and 7 percent of non-life sales. - New channels (online, point of sale) exist but account for negligible market share. - Domestic orientation and foreign participation: - Most business is Indian risk; only New India Assurance and GIC have significant operations outside India. - Many private insurers are joint ventures with foreign insurers; some foreign partners have increased share from 26 percent to 49 percent. - Most foreign reinsurers authorized as branches in 2016 were already active cross-border prior to branch authorization. - Group and conglomerate structure: - Few insurance groups; many insurers are part of wider financial conglomerates. - Regulatory limitations: tiered ownership is not permitted; insurers face limits on investing in subsidiaries (with exceptions, including overseas business). - Financial conglomerate supervision is well-established and addresses group-wide supervision needs. ### KEY MARKET CHARACTERISTICS AND RISKS - Product and risk profile: - Insurance in India has been associated more with savings and investments than with protection; most domestic property remains uninsured. - Life risks are relatively well spread; non-life risks are mainly short-term. - Many lines rely on investment income to offset poor underwriting results. - Profitability and solvency: - The sector is profitable and solvency exceeds minimum requirements, but with exceptions. - Specific non-life issues: - Poor underwriting discipline in non-life insurance is a key challenge. - Fixed premiums for motor third-party liability insurance continue to affect performance. - Moves have been made to address the unlimited liability of insurers in case of claims. - Public-sector advantages: - Public and private insurers are now subject to the same regulation, although some structural advantages remain for the public-sector life insurer and reinsurer. ### DEVELOPMENTS IN INSURANCE REGULATION - Legal and regulatory changes: - Revisions to the key insurance law have transferred powers from government to IRDAI, including wider powers to issue regulations. - Foreign insurers can increase interest to 49 percent; foreign reinsurers may operate as branches. - Higher financial penalties are now available to IRDAI. - IRDAI regulatory activity: - After extensive consultation, IRDAI has issued many new regulations strengthening policyholder protection, including extensive product regulations and controls on commissions and other expenses. - IRDAI has not yet comprehensively updated its solvency requirements. - A more formal approach to solvency control levels and new forms of eligible capital have been introduced. - Accounting and valuation: - Implementation of International Financial Reporting Standards (IFRS) from financial year 2020–21 will require a move toward economic valuation for financial statements. - IRDAI is working with industry on plans for economic valuation for solvency purposes and risk-based capital. - India is an outlier—both in Asia and internationally—in not having moved toward economic valuation and risk-based capital as yet. - Investment and resolution frameworks: - Investment regulations remain conservative, with unusual minimum requirements on investment in infrastructure and the housing sector. - The insurance resolution framework appears comprehensive, though untested. - Regulatory integration and cooperation: - Issues with IRDAI’s independence and overly informal approaches in some areas (including solvency control levels and arrangements for cooperation with other regulatory bodies) have been resolved. - Insurance regulation is more closely integrated into wider financial sector supervision, both domestically (including supervision of financial conglomerates) and internationally. - Stronger non-life reserving requirements and a new insurance fraud framework have been introduced. ### RECOMMENDATIONS — STRATEGY, RISK-BASED SUPERVISION, AND RESOURCES - Primary recommendations (priorities indicated): - IRDAI should formulate a strategy, plan, and timetable for modernization of the solvency framework as soon as possible. — Responsible: IRDAI. Priority: High. - IRDAI should move to a more risk-based framework for supervision. — Responsible: IRDAI. Priority: High. - IRDAI should review the adequacy of its resources in light of the demands of a more risk-based approach, reconsider reliance on staff on deputation from public sector insurers, and consider changes in organizational structure to support risk-based supervision. — Responsible: IRDAI. Priority: Medium. - Implementation details and approach: - Solvency modernization: - IRDAI should consider the expected new IFRS 17 on insurance liabilities as an input into solvency valuation requirements. - IRDAI should consider the well-advanced new IAIS Insurance Capital Standards, adapted and recalibrated as necessary for application to the Indian market. - Given market nature and complexity of internal models, IRDAI should implement only a standardized approach to risk-based capital, covering all risks, and require insurers to develop an Own Risk and Solvency Assessment (ORSA). - Time should be taken to calibrate the approach appropriately. - Risk-based supervision: - Onsite inspections are currently compliance-based; there is scope for more evaluation of risks inherent in an insurer’s strategy, business model, and operations, and the adequacy of governance and controls. - IRDAI could develop a risk-based supervisory cycle, using impact and risk assessment to determine supervisory focus. - Some commonality of approach with other Indian supervisors could support further development of conglomerate supervision. - Resources and organization: - Current resources are inadequate to support IRDAI’s target onsite work program. - Moving to a more risk-based approach could both release some resources and impose new demands on skills and expertise. - IRDAI should review reliance on staff on deputation from public sector insurers and consider organizational changes. - Other recommendations (responsibilities and priorities): - IRDAI should review aspects of its cross-border supervision. — Responsible: IRDAI. Priority: Medium. - IRDAI and the other members of the FSDC and the IRF should consider extension of the scope of financial conglomerates regulation. — Responsible: IRDAI. Priority: Medium. - The government of India and IRDAI should review the requirements on minimum investment in infrastructure and the housing sector to ensure they do not conflict with IRDAI’s regulatory objectives. — Responsible: Government of India and IRDAI. Priority: Low. - IRDAI and the government of India should continue with current reforms of the motor insurance market. — Responsible: IRDAI and Government of India. Priority: Medium. - IRDAI and, as necessary, the government of India, should consider further measures to level the playing field for insurers in the limited areas where there are, or may be perceived to be, advantages for public sector insurers. — Responsible: IRDAI and Government of India. Priority: High. *Source: EXECUTIVE SUMMARY, cr1886.* ### 11. The industry is profitable and solvency ratios exceed the minimum requirements, but ### 11. The industry is profitable and solvency ratios exceed the minimum requirements, but with significant exceptions at individual companies ### Industry profitability and solvency — headline findings - At end-March 2016 (the most recent financial year-end for which figures are available), the industry was profitable and aggregate solvency ratios were well above the 150 percent minimum: - 344 percent life (calculated as a simple average) - 239 percent non-life and health combined (calculated as a simple average) - Profitability exceptions at end-March 2016: - 5 of the 24 life companies were not profitable (all from the private sector) - 6 of the 23 non-life companies were not profitable (all from the private sector) - All the stand-alone health companies except one were not profitable - Solvency compliance: - Solvency ratios at all companies exceeded the minimum requirement except for one state-owned non-life company (as of end-March 2016) - At end-December 2016 (most recent quarterly reporting date), two state-owned non-life insurers were reporting ratios below the regulatory minimum - Regulatory disclosure: - Insurers must disclose their solvency ratios at the end of each quarter as part of IRDAI’s financial disclosure requirements ### Key short-term and structural risks - Life insurance sector: - Major risks: market risk related to the investment portfolio and mortality risk - Offsetting factors: - Predominance of traditional, longer-term business but limited acute interest-rate exposure (products not written with high guaranteed rates) - Durations of liabilities and available investment assets allow for a high degree of matching, taking into account persistency experience - Much business is participating or (in the private sector) ULIP - Regulatory investment rules constrain asset risks; insurers are not permitted to invest policyholders’ funds outside India - Concentration risk from group life insurance, which represents a significant part of life business - Non-life insurance sector: - Risks are mainly short-term; most business is short-term - Limited business in liability or other long-tail lines, other than motor third-party liability (MTPL) - Premium-setting: - Insurers free to determine non-life premiums since 2007, except in MTPL where premiums are fixed annually by IRDAI - In MTPL insurers must underwrite minimum amounts set by reference to market share - Underwriting performance: - Much non-life business is loss-making despite significant premium increases allowed by IRDAI in recent years - Insurers have low investment risk but face exposure to reductions in returns given poor underwriting results - Combined ratios are high, sometimes over 100 percent, indicating reliance on investment income to offset underwriting losses - Catastrophe and emerging risks: - Catastrophe risks viewed as relatively low but growing - India has relatively limited exposures to certain natural perils such as earthquake and volcano; flood risk is significant and incidence of weather events is increasing (examples: Chennai Floods November 2015; Hudhud Cyclone October 2014) - Growing interest in cyber-related risks but limited business so far ### Industry challenges and prospects - Increasing penetration and protection focus: - Insurance in India has been strongly associated with savings and investments and less with protection - Need to increase trust in products and improve persistency in life insurance - Example gaps: - Most domestic property remains uninsured - It is estimated that 40 percent of drivers have no motor insurance - Regulatory and government initiatives: - IRDAI well placed to support development and raise customer-treatment standards and persistency - Focus on making available simple products sold at low cost, including online channels - Government schemes (example: Pradhan Mantri Jeevan Jyoti Bima Yojan) contributed significantly to increased penetration - PMJJBY terms (2016–17): Rs 200,000 of life cover for Rs 330 per year; LIC administers the scheme for itself and participating private insurers - Non-life underwriting discipline and MTPL challenges: - Poor underwriting discipline in many lines; reliance on investment income unsustainable long term - Risks of insurers seeking to improve underwriting results via reduced catastrophic risk reinsurance cover - Market improvements in MTPL after recent premium increases; prospects for further improvement from: - Enforcement of traffic laws - Increased penalties for unsafe driving and failing to insure - Streamlining accident claims processes - Reforms to limit current unlimited liabilities (proposed Motor Vehicles Act amendment to cap liability at Rs 100 million met opposition) - Public sector market share issues: - Continued high market share of public sector insurers raises sustainability questions - Two public non-life companies (GIC and New India Assurance) in advanced stages of planning for listing in the course of 2017 (initially 10 percent of their shares, but increasing under a government decision taken in February 2017 to 25 percent) - LIC advantages: - LIC remains advantaged by special legislation status (not a Companies Act company) with an explicit government guarantee for all sums it assures - LIC Amendment Act 2011 increased LIC equity capital from Rs 50 million to Rs 1 billion, bringing LIC into compliance with IRDAI requirements - GIC advantages in reinsurance market: - Primary insurers required to cede 5 percent of all premiums to GIC and to offer GIC first preference on other business ahead of foreign reinsurers’ branches and the international market - IRDAI concentrated on ensuring state-owned companies restore adequate solvency; weakest insurers are state-owned - Overall prospects: - Prospects are bright given low penetration rates (especially in non-life lines), foreign company involvement, infrastructure and innovation strengths, and IRDAI’s regulatory initiatives - Noted strong growth in underlying demand, particularly health insurance - Market is generally well capitalized, with access to additional resources ### Operational/market statistics and specific observations - Combined ratios in many non-life lines are high, sometimes over 100 percent - Transition measures: - In transitioning to pool arrangements for MTPL, IRDAI had relaxed its informal 150 percent minimum solvency ratio requirement on a tapering basis (starting at 130 percent) over three years to 2014–15 as insurers established increased required reserves --- ### Developments in insurance regulation — regulatory architecture - Regulator role and structure: - IRDAI remains the single national regulator of the insurance sector, covering supervision of intermediaries and business conduct and regulation and development of the insurance market, including policyholder protection - IRDAI accountable to parliament via the Department of Financial Services at the Ministry of Finance - IRDAI regulates intermediaries including third-party administrators, web aggregators, and insurance repositories (who maintain policies in electronic form) - Organizational structure and resources: - IRDAI headquartered in Hyderabad with small offices in Delhi and Mumbai for onsite inspections - Separate units for offsite and onsite supervision, finance and investment, actuarial and consumer protection, and a small enforcement function - IRDAI staff totals: - 237 in March 2017 - 181 at end-March 2016 - Relies heavily on expert staff on three-year deputations from state-owned insurers (25 percent of the total staff) - IRDAI is inadequately resourced to meet target onsite inspection workload (target: one per company every one to two years; present practice: about every four years) - IRDAI increasing focused inspections and offsite engagement with management, but risk of insufficient onsite frequency remains - Consultation and transparency: - IRDAI is open and consultative when developing regulations: publishes exposure drafts, works through trade associations, establishes committees comprising industry, IRDAI and other experts; IRDAI makes final decisions - Requirements and statistical information are highly transparent and published on IRDAI’s website and in regular publications - Actuarial support and appointed actuary: - IRDAI relies on the Institute of Actuaries of India for technical guidance and peer review arrangements - Appointed actuary system well established; all insurers must have an appointed actuary approved by IRDAI - External auditors may rely on the valuation of insurance liabilities undertaken by the appointed actuary - Actuary numbers: 344 fellows of the Institute and 156 associate members (including some working outside India) - Large numbers of students suggest increased senior actuarial expertise availability in the future - Conglomerate supervision and cross-regulator arrangements: - Banks permitted to own insurers, subject to IRDAI and Reserve Bank of India (RBI) requirements - Of 11 financial conglomerates: - RBI is the lead regulator for 7 bank-led conglomerates - IRDAI is the lead regulator for 4 conglomerates - SEBI is the lead regulator for 1 conglomerate - Designated lead entity within a conglomerate subject to additional reporting requirements on risk concentrations, although no capital adequacy test is required for conglomerates ### Regulatory developments since 2011 — major changes - Amendments to primary legislation (Insurance Act 1938 revisions enacted in 2015) — notable effects: - Powers transferred from the government of India to IRDAI, including powers to issue a wider range of regulations in solvency, investments, expenses, and commissions, and to intervene in individual companies without recourse to government - Foreign participation: - Foreign insurers may increase interest in Indian insurers from 26 percent to 49 percent - Foreign reinsurers enabled to operate in India as branches - Requirement that an “Indian Insurance Company” be “Indian owned and controlled” (Section 2 (7A) of the amended Insurance Act); IRDAI issued guidance to clarify interpretation in governance and other areas - Regulations on reinsurance issued in 2016 apply main aspects of regulation, including solvency requirements, to branches while adapting governance requirements for branches - Solvency powers: - IRDAI empowered to specify and enforce a “control level of solvency” (Section 64 VA); IRDAI set this at 150 percent in separate life and non-life 2016 regulations - IRDAI considers it could set individual minimum solvency requirements by company, although it does not presently do so - Agents regulation: - New arrangements: individual agents no longer required to be licensed by IRDAI but must be appointed by the insurance company which engages them (limited to one in each of life, non-life and health business) - IRDAI retains powers to sanction or bar agents; insurers are responsible for agents’ compliance (Section 42) - Increased financial sanctions: - Example: Rs 100,000 fine per day for non-compliance with a direction, subject to Rs 10 million maximum (Sections 102 to 105B) - Wide-ranging rights of appeal against sanctions and other IRDAI interventions, including appeal to the Securities Appellate Tribunal - Governance, consumer protection, and conduct: - Extensive development of regulatory framework for governance (Corporate Governance Guidelines 2016), including mandated Board committees such as a Policyholders Protection Committee - Major effort to improve customer treatment with detailed requirements on product specification, maximum commission levels, limits on management expenses, and higher training and competence standards for agents - Increased focus on complaints handling through the Integrated Grievance Management System - Retail focus: most changes concentrate on retail customers; non-retail non-life products no longer require IRDAI approval (use-and-file notification), while life products generally still require prior approval - Motor insurance and MTPL reform: - Non-life insurers now required (under 2015 amendment) to underwrite the MTPL in proportion to their market share - Transition from prior quota/declined risks pool arrangements to current market and pool arrangements; tapering relaxation of solvency requirement (from 150 percent down to 130 percent) applied during earlier transition to allow reserve build-up - Cross-regulatory cooperation and data integration: - Memorandum of Understanding (MoU) signed by RBI, SEBI, IRDAI, and PFRDA in 2013 to support increased cooperation in conglomerate supervision - Coordination architecture includes the Financial Stability and Development Council (FSDC) and its Sub-Committee (FSDC-SC), an Early Warning Group, and the Inter-Regulatory Forum (IRF) - Additional arrangements: - A Financial Data Management Center will be established under the FSDC for integrated data collection and analysis across the financial sector, including insurance - Insurance companies brought into the scope of the Central Repository of Information on Large Credits (CRILC), the shared credit information system managed by the RBI - International cooperation: - IRDAI has started to put in place MoUs with foreign regulators and to participate in supervisory colleges for Reinsurance Group America (USA), QBE Insurance Group (Australia), and Sanlam Group (South Africa), although Indian operations for these groups are new or relatively small - IRDAI is a signatory to the IAIS Multilateral Memorandum of Understanding on Cooperation and Information Exchange (MMoU) - IRDAI has not established supervisory college arrangements for Indian insurers with foreign operations, but is ready to communicate bilaterally with host supervisors where necessary *Source: cr1886 - 11. The industry is profitable and solvency ratios exceed the minimum requirements, but (IMF PDF).* ### 23. IRDAI has not, however, comprehensively updated its solvency requirements in ### 23. IRDAI has not, however, comprehensively updated its solvency requirements in ### Current solvency framework and valuation - Framework remains largely as in 2011, with additions of: - the control level of solvency, and - provisions for new forms of capital, including subordinated debt (which has been issued by some insurers). - Retains a robust "Solvency I" approach: - valuation requirements that build in prudent margins (in assets and liabilities), and - a simple, mainly factor-based set of solvency requirements that move in line with business volume but are otherwise insensitive to risk, including investment and operational risks. - Insurers have been required since 2011 to develop and report to IRDAI an economic capital calculation, as a basis for discussions. ### International context and accounting convergence - India is an outlier in Asia and internationally; most countries in Asia have adopted more risk-based solvency approaches and a more economic basis for valuation of assets and liabilities. - Convergence with IFRS will be consistent with moving the insurance sector to a risk-based solvency approach, but implementation is deferred: - Ind AS adoption for the insurance sector was required for periods beginning from April 1, 2018 under Ministry of Corporate Affairs requirements. - IRDAI decided to defer implementation of Ind AS to coincide with IFRS17 implementation after issuance of final IFRS on insurance liabilities in May 2017 (IFRS17, due to take effect in January 2021). - IRDAI is monitoring the impact of Ind AS via private reporting; insurers noted the most significant impact of Ind AS would come through IFRS 17. - Existing valuation provisions continue to apply for solvency requirements at present. ### Investment regulations and infrastructure/housing mandates - Investment regulations are conservative: - 25 percent of investments backing non-linked life insurance policyholder liabilities must be invested in central government securities (20 percent in the case of non-life). - Higher risk investments, including equities, are permitted but generally must meet demanding standards (broadly AA rating or a long track record of dividend payment), limits on individual credit and sector risks, and are subject to a rigorous auditing regime (“concurrent audit”). - Minimum mandated investment in infrastructure and housing: - A statutory minimum requirement of 15 percent of the total aggregate value of investments must be invested in infrastructure and the housing sector, as set in IRDAI regulations. - The requirement may be met by investments within categories of Central and State Government Securities, Other Approved Securities and Approved Investments. - The requirement does not apply to funds relating to Pension and General Annuity and Group Business and unit reserves of all categories of Unit Linked Business of a life insurer. - LIC reported gross nonperforming assets of 5.19 percent of the loan portfolio at end-December 2016, but this is a small share of its overall investments. ### Resolution framework - Framework for resolution is comprehensive though untested, and may change due to wider government plans: - IRDAI may issue directions, appoint and remove directors, appoint an administrator, and initiate a winding-up. - There are no policyholder compensation arrangements. - Government published a draft Bill (Financial Resolution and Deposit Insurance Bill) proposing a Resolution Corporation (RC) to handle financial sector entities if sectoral regulator restructuring/revival options are exhausted; entities classified by risk, with “critical risk” entities going into liquidation with RC as receiver and access to a resolution fund financed by the financial sector. ### Outcomes since 2011 reforms - IRDAI is more independent and better resourced; empowered to set fee levels and control its budget (subject to government review). Government retains certain reserve powers and right of scrutiny of IRDAI draft regulations. - IRDAI moving to more risk-based regulation in areas such as intermediary regulation and application of regulations to reinsurance companies; Boards and senior management feel held responsible for compliance. - Need for increased focus on Systemically Important Insurers (SIIs); approach awaits development of the proposed new resolution framework. - IRDAI generally applies regulations consistently to all insurers; exception: minimum investment requirement in infrastructure and housing is not being enforced for LIC. - Insurance regulation more closely integrated into wider financial sector supervision domestically and internationally; arrangements for conglomerate supervision enhanced but not comprehensive (exclude smaller conglomerates). - Most 2011 FSAP recommendations on insurance addressed via regulatory reform and 2015 legislative amendments; remaining issues include setting time limits on IRDAI consideration of new license applications, bringing independent and other non-executive directors into scope of approvals, and clarifying head of internal audit subject to fit-and-proper requirements. ### Recommendations — Developing a more risk-based solvency framework (key points) - IRDAI should formulate a strategy, plan, and timetable as soon as possible for modernization of the solvency framework. - A committee (industry, professional body, IRDAI) is working on issues, starting with market consistent valuation of insurance liabilities (a report has been issued); a second report on risk-based capital was due shortly at mission time. - Key design and policy issues to address: - Basis in international standards: - Option to base valuation approach on IFRS 17 (issued in May 2017) to align valuation with financial statements, accepting some differences for Indian markets and solvency needs. - IAIS Insurance Capital Standards (ICSs) are well advanced and IRDAI is participating; ICSs are targeted at IAIGs and group consolidated level, while IRDAI needs a framework applicable to all insurers at solo and group level with additional SII requirements as appropriate. - Alternative: draw on established approaches in other countries, e.g., Singapore. - Whether to offer an internal model approach: - Given nature of Indian insurance business and costs/complexity, likely appropriate to implement only a standardized approach to risk-based capital. - Scope of risks covered: - Inclusion of operational risks on a quantified basis would be appropriate. - Basis of calibration: - A VaR approach based on a prescribed level of stress may be suitable, but should be consistent with levels reflected in international standards and practices. - “Pillar 2” (ORSA): - Implement requirements for insurers to develop an Own Risk and Solvency Assessment (ORSA), as elaborated in ICP 16, in parallel with prescribed regulatory minimum approach; consider a simple framework for applying capital add-ons. - Solvency control levels: - Implement two levels of solvency control, including a minimum capital requirement (MCR) that could be an absolute floor on acceptable solvency ratio. - Current effective MCR applies to all insurers as 50 percent of the minimum initial capital of Rs 1 billion (equivalent to only about US$7.5 million), albeit twice that level for reinsurers. - Ideally, linked to the definition of “critical risk” under the new legislative framework for resolution. - Approach to investment regulations: - IRDAI may retain a structure of limits at least initially, rather than immediately adopting a “prudent person approach.” - Timing considerations: - Implementing in January 2021 to coincide with IFRS 17 effective date may have advantages. - If moving sooner, IRDAI could draw on IAIS valuation framework for ICS (aimed at IAIGs). - Calibration will take time; multiple quantitative impact studies likely necessary. - Parallel running period advisable: insurers calculate solvency margin on old and new bases and comply with the higher requirements. - Preparing the sector: - Awareness of solvency framework issues appears relatively limited; IRDAI should lead once committee reports are published. - IRDAI could focus initially on insurers’ existing economic capital evaluations (required and reported to IRDAI) to gain insight into possible impacts of risk-based capital and prepare industry and supervisors for ORSA oversight. ### Recommendations — Supervision and supervisory approach - IRDAI should move to a more risk-based framework for supervision: - Supervisory tools remain relatively compliance-based, especially in onsite work. - Onsite inspections are thorough, professional, include exit meetings and timely written reports, and integrate business conduct and financial issues. - Current focus predominantly on establishing compliance and enforcement action; less focus on evaluation of risks inherent in an insurer’s strategy, business model, operations, or adequacy of governance, risk management, and other controls. - Moving to risk-based supervision would complement risk-based capital development: - Focus offsite and onsite supervision on key insurer risks to support a risk-based solvency standard and ORSA regime. - Would complement IRDAI’s increased emphasis on effective governance and encourage/reward effective risk management. - Larger companies are likely ready for the approach, many having benefited from risk management tools from foreign part-owner groups. *INDIA — INTERNATIONAL MONETARY FUND (cr1886).* ### 35. It is recommended that IRDAI develop a risk-based supervisory cycle with appropriate ### 35. It is recommended that IRDAI develop a risk-based supervisory cycle with appropriate weighting for impact and risk in determining supervisory focus ### Core recommendation: risk-based supervisory cycle - Develop a risk-based supervisory cycle with appropriate weighting for impact and risk in determining supervisory focus. - Integrate the assessment of impact (broadly, size) with criteria for identification of SIIs. - Ensure risk assessment addresses all risks, including operational risks. - Allocate supervisory resources and determine the scope and frequency of onsite work to reflect both impact and pure risk—with appropriate weighting for impact to ensure that however low risk the business model and effective the management, the larger insurers would receive an appropriately high level of supervisory attention. - Note: Some supervisors now seek to maintain continuous contact with the larger companies, while carrying out a mix of full scope and thematic onsite work for others. - In line with good practice, inform insurers regularly of risk assessment findings and key aspects of the work program. - Apply the approach to intermediaries as well as insurers. ### Conglomerate and cross-supervisory coordination - Consider commonality of approach with other Indian supervisors to support development of conglomerate supervision. - Cooperate with other financial sector regulators; consider whether IRDAI’s risk assessment methodology and supervisory toolkit could share common core features with other regulators, particularly the RBI, to facilitate group wide risk identification and coordination of supervisory work. - Consider increased supervisory contact with non-executive directors and the Board as a whole, and with external auditors—building on current practice for problem companies where supervisors meet with Board members, particularly including the chairperson of the Audit Committee. ### Supervisory approach consequences and calibration - Consider reducing dependence on prior approval of new products in favor of greater focus on the new product governance framework at individual insurers. - Review the position and work of the appointed actuary. - Risk: reliance on the actuary’s work may detract from Boards of Directors’ responsibility to oversee key aspects of insurer financial management. - Notwithstanding the development of a peer review process by the Institute of Actuaries and oversight by IRDAI, there is a risk of overdependence on the appointed actuary, exacerbated by the lack of full external audit of the insurance liabilities. - Implementation of Ind AS is expected to strengthen cooperation between auditors and actuaries. - IRDAI should move cautiously given the benefits of current approaches. ### Resources, staffing, and organizational structure - Review adequacy of resources in light of demands of a more risk-based approach. - Current resources are clearly inadequate—as reflected in the inability of IRDAI to deliver its onsite work program. - Moving to a more risk-based approach can be expected to release some resources and impose new demands on skills and expertise; some activities may be dropped. - Overall, IRDAI’s resources do not appear greatly out of line with risk-based supervisory systems, considering the size and concentration of the market and supervisory model. - Countries such as the United States and China are outliers, with their highly devolved supervisory systems and/or much larger numbers of insurance companies.34 - A net increase in resources is sure to be required, as well as training and development of staff more used to compliance-based supervisory work. IRDAI is already moving in this direction. - Reconsider reliance on staff on deputation. - Reduce reliance on deputations from public-sector insurers in favor of recruitment of permanent staff and selective secondments (including from private companies) to fill skills gaps and assist transfer of expertise. - This may require reconsideration of salary scales. - Consider organizational structure changes to support a risk-based approach. - IRDAI’s current structure is highly functional and has led to occasional lack of coordination (for example, requests for similar information from different departments). - Consider supervisory teams that lead preparation of risk assessments and maintain day-to-day relationships with insurers and intermediaries, drawing on specialist expertise (finance, investment, actuarial) as needed. - Maintain separate enforcement and, potentially, regulatory policy functions. - Objective: support comprehensive oversight and effective coordination of supervisory effort. ### Key statistic and note - China has over 3,000 staff at the insurance regulator, but many are in branch offices of the regulator, while the United States (as state-based system) has about 11,500 (Source: IMF FSAPs).34 *Source: cr1886 - 35. It is recommended that IRDAI develop a risk-based supervisory cycle with appropriate (PDF chapter/section).* ### 9. Corporate ### 9. Corporate ### Corporate governance - Finding: The Corporate Governance Guidelines are comprehensive, but the monitoring process appears limited. The company secretary, who is the relevant compliance officer, is often beholden to the chief executive officer and has numerous other responsibilities. - Recommendation: The external auditor is not required to report on adherence to the guidelines—this additional check should be instituted. - Recommendation: Related-party transactions should be reported on an exceptions basis according to size or nature—ideally as part of the quarterly reporting process. - Recommendation: If a related-party transaction (e.g., provision of expert advice by one of the significant shareholders) appears to be egregiously mispriced then IRDAI should seek independent advice on the pricing and, if necessary, take appropriate supervisory action. - Comments / Existing arrangements: - The Corporate Governance Guidelines 2016 (paragraph 11) require that insurers designate a Compliance Officer to monitor compliance with the guidelines. Annual reporting must include a certification from the Compliance Officer and a detailed annual compliance report from insurers. The external auditor is not required to make such a report. - Related-party transactions must be disclosed in quarterly disclosures (report L30) and oversight is carried out in IRDAI offsite supervision. - IRDAI has powers to commission review by external expert parties and has done so in practice. - External auditors are required to review whether related-party transactions are carried out at arm’s length. - Guidelines on Outsourcing of Activities by Insurance Companies (section 9.15) cover reporting of activities outsourced to a group company or company with a common director. - Note: More detailed regulations on outsourcing have been issued by IRDAI since the FSAP Mission: Insurance Regulatory and Development Authority of India (Outsourcing of Activities by Indian Insurers) Regulations, May 2017. ### Internal controls - Recommendation: The Corporate Governance Guidelines should explicitly cover the internal audit function, specify a senior officer responsible, require sufficient resources and unfettered access to required information, ensure sufficient independence, and require direct access to the Audit Committee and the Board. - Comments / Existing arrangements: - The 2016 Corporate Governance Guidelines, paragraph 6, require an internal audit function capable of reviewing and assessing adequacy and effectiveness of internal controls and reporting on strategies, policies and procedures. - Paragraph 6 requires “the independence of the control functions...from business operations [be] demonstrated by a credible reporting arrangement.” - The Board certification includes a statement that management has put in place an internal audit system commensurate with the size and nature of its business, and that it is operating effectively. - It could be clearer that the head of internal audit is subject to fit-and-proper requirements. “Key Management Persons” include CFO, Appointed Actuary, Chief Investment Officer, Chief Risk and Compliance Officers and “functional heads one level below the Managing Director /CEO.” Internal audit is not mentioned. - IRDAI notes the internal audit function could be an external agency and that internal control and internal audit requirements flow from the Companies Act, 2013, as well as Corporate Governance Guidelines. - The relationship of the head of internal audit to the Board/Audit Committee should be elaborated; in practice internal functions report to the Board. ### Reporting to supervisors - Recommendation: It is desirable that the monthly reports include more short-term risk data in addition to sales and branch/geographical development data. - Comments / Existing arrangements: - Monthly reporting requirements have not been extended. IRDAI relies on quarterly and annual reports for risk-related information, although it would react to information in the monthly numbers indicating a significant change in risk. - IRDAI collects more monthly information from insurers than most regulators. ### Onsite inspection - Recommendation: Add a staff member with IT system skills to a full-scope inspection team. - Recommendation: Arrange feedback meetings after inspections are completed to help managements and Boards. - Comments / Existing arrangements: - Staff with IT knowledge are included in all full scope inspections—they are supervisors with understanding and experience of IT issues. IRDAI can engage greater IT expertise externally if necessary. - Onsite inspections are generally concluded with an exit meeting with senior management; draft inspection reports are prepared and sent to the company after onsite work. ### Preventive and corrective measures - Finding: IRDAI did not have a modern risk-based early warning system; ratios measured appeared largely generic. The supervisor was examining the Northern European traffic light system. - Finding: IRDAI does not have a direct role when insurers engage in capital management such as buy-backs; this should be rectified in any Amendment Bill finally agreed. - Comments / Existing arrangements: - IRDAI has significantly increased information reported to it (e.g., asset/liability mismatch reports) and installed capacity to analyze financial information and identify trends, outliers and potential non-compliance. - The “Northern European traffic light system” has not been adopted; solvency control level framework adopts a Red, Amber, Green approach (Green above 150 percent, etc.). - An automated system of electronic reporting, validation and generation of alerts has been implemented (the Business Analytics Project (BAP) Model). - IRDAI does not have explicit powers to approve share buybacks, but relies on solvency requirements as a basis for intervention and on Companies Act provisions. IRDAI takes the view any change in capital structure requires prior written approval under section 6A of the Insurance Act, 1938, including buyback. ### Enforcement or sanctions - Recommendation: The enforcement regime needs to be formalized through a regulatory ‘Supervisory Guide’ or ‘Ladder of Intervention’. - Recommendation: Additional intermediate enforcement powers could include ability to impose selective time and volume limitations; to require deposits if asset security is a concern; and to impose an expiry date for a license. - Recommendation: Financial sanctions need to be updated to reflect the impact of inflation since the fines were first established. - Comments / Existing arrangements: - Implementation: This has been implemented in relation to solvency margin requirements where insurers must meet 150 percent of the requirements (effectively the PCR in terms of ICP 17); and must never go below 50 percent of the minimum initial capital (the MCR). There are extensive further intervention powers in the Act. - IRDAI’s powers of direction (Section 34 of the Insurance Act) are broad, covering anything IRDAI considers necessary to protect policyholders or in the public interest. - Financial sanctions have been significantly increased through amendment to the Insurance Law (Sections 102 to 105B)—for example, Rs 1 lakh (Rs 100,000) fine per day for non-compliance with a direction, subject to Rs one crore (Rs 10 million) maximum. ### Winding up or exit from the market - Recommendation: Consider allowing voluntary wind-up of solvent non-life insurers, subject to safeguards; claims run-off can be efficient. Consider aligning provisions for appointment of an administrator for non-life insurers with those for life insurers. - Comments / Existing arrangements: - The Insurance Act (Section 54) provides that an insurance company shall not be wound up voluntarily except for amalgamation, reconstruction, or insolvency grounds—this precludes solvent run-off. - IRDAI should consider providing for voluntary wind-up in future. - Provisions on appointment of an administrator by IRDAI (Section 52A) continue to apply only to life insurance; IRDAI should consider extending the power to non-life insurers. - IRDAI notes that given non-life liabilities are short-term, there may not be a need to appoint an administrator. ### Group-wide supervision - Recommendation: Formalize information flows, processes, and early warning mechanisms involved in financial conglomerate (FC) group supervision, possibly through an MOU among the four supervisors. - Recommendation: Individual supervisors should have more power to consider group structures and exposures and related-party transactions in determining interventions. - Recommendation: An ad hoc committee of an insurer’s directors should, by law, consider each related-party transaction. - Comments / Existing arrangements: - A Memorandum of Understanding was signed between RBI, SEBI, IRDAI and PFRDA in 2013 covering cooperation on supervision of FCs. Processes for sharing information continue to develop. - Insurance companies have been brought into the scope of the Central Repository of Information on Large Credits (CRILC), managed by the RBI. - No additional powers were included in the Amendment Act or otherwise extended to IRDAI. - Oversight of related-party transactions and conflicts of interest is assigned to the Board of Directors by the Corporate Governance Guidelines (paragraph 3A). - IRDAI notes the definition of ‘related party’ is being tightened through the ‘Corporate Governance Framework’ and Regulations on Preparation of Financial Statements. - Investment Regulations prevent an insurer from having investments of more than 5 percent in aggregate of its investments in all companies belonging to the promoters’ groups; such investments shall not be by way of private placement or in unlisted instruments. ### Risk assessment and management - Recommendation: Further work needed on monitoring operational (including general systems) risk—see Internal Control (ICP 10). - Comments / Existing arrangements: - The economic capital submission required annually must cover and quantify insurance, market, credit and operational risks. This reporting is for information only. - Full oversight of operational risks will be developed as IRDAI moves towards risk-based capital and more risk-based supervision. - IRDAI collects information on operational risk from life and non-life companies in the Appointed Actuary’s Annual Report (AAAR) and, since 2012, in a standard quarterly reporting format and also annually. ### Liabilities - Life - Finding: The need for life-appointed actuaries to determine valuation discount rates through informal agreement is undesirable. Expense over-runs should be provided for if chronic after establishment period. - Comments / Existing arrangements: - IRDAI’s 2016 regulations on valuation and solvency (Assets, Liabilities and Solvency Margin of Life Insurance Business Regulations) now set out requirements on valuation interest rates, although some discretion remains for the actuary. This is a key focus of IRDAI supervision (identification of outliers, changes in choice of valuation rate, etc.). - Regulations prescribe that policy maintenance expenses shall have regard to actual expense experience, that all expenses shall be increased in future years for inflation (the rate of inflation assumed should be consistent with the valuation rate of interest), and that appropriate additional provisions shall be made if actual experience has not been considered for the valuation. - Non-life - Recommendation: IRDAI should provide guidance as to where long tail provisions should be set; non-life actuary should provide a range of possible values (e.g., 75th percentile); non-life appointed actuaries should be certified based on training and experience. - Comments / Existing arrangements: - Requirements on valuation have been elaborated in 2016 regulations under the amended Insurance Act (Assets, Liabilities and Solvency Margin of General Insurance Business Regulations) and in guidance issued by the Institute of Actuaries. - Further work will be done in the context of development of risk-based capital adequacy requirements. ### Investments - Finding: In a high interest rate environment, the investment valuation basis is potentially inconsistent with the Insurance Act, which states that no asset may be held above its market value. - Recommendation: Specify required skills and experience of investment officers (broad terms) subject to Board oversight. - Comments / Existing arrangements: - IRDAI’s 2016 regulations on valuation and solvency state that assets may not be held at above market value, reflecting the Insurance Act provision. - Regulations specify the basis for setting valuation rate of interest, including prudent assessment of yields from existing assets, expected yields on future investments, expected cash flows from investments on hand and policy blocks, likely future investment conditions, reinvestment/disinvestment strategy, risks associated with investment, and expenses associated with investment functions. - Key Management Persons for fit-and-proper requirements include the Chief Investment Officer, but no specific skills and experience are mandated. Board oversight of the investment function is mandated in the 2016 Corporate Governance Guidelines. ### Derivatives and similar commitments - Finding / Recommendation: If IFRS is fully implemented for insurers, debt holdings will fluctuate and derivatives may become more attractive to stabilize results; IRDAI would need to strengthen governance oversight and perhaps require monthly reporting of exposures. - Comments / Existing arrangements: - Indian Accounting Standards, based on IFRS, are being implemented from April 1, 2018. - IRDAI has no plans specifically to focus more on monitoring derivatives, but collects information and would identify developments via offsite monitoring. - Master Circular issued August 2016 sets out types of derivatives permitted and purposes for which they may be used. ### Capital adequacy and solvency - Finding: IRDAI’s non-intervention 150 percent solvency ratio requirement had not been translated into a mandatory corrective action process. Need for insurers to examine asset-liability matching and for economic capital calculation to be formalized. - Comments / Existing arrangements: - The 150 percent minimum has been established in regulations made by IRDAI using powers in (new) Section 64VA of the (amended) Insurance Act 1938. - Companies falling below 150 percent are required to submit a plan for restoring solvency within six months (which may be extended to one year). - Work is underway with industry and actuarial profession on development of risk-based capital, which will influence the economic capital framework (currently in 2011 Guidelines). - IRDAI covers ALM requirements in the 2016 Corporate Governance Guidelines and ALM Guidelines (2012); collects information in the Appointed Actuary’s Annual Report (AAAR) and standard quarterly and annual reporting since 2012. ### Intermediaries - Recommendation: As insurance brokers become more important, statutory reporting should be upgraded (annual or six-monthly report showing premiums collected, amounts held in policyholder trust funds, etc.). - Comments / Existing arrangements: - Regulation of intermediaries has been overhauled, including move to indirect regulation of individual agents, enabling IRDAI to focus on corporate agents and brokers and new channels. - Only reinsurance brokers may hold customers’ premiums or money from settlement of claims (with time limits). There are reporting requirements on brokers in relation to business volumes by line of business. ### Consumer protection - Finding: The 12 Ombudsmen did not communicate and there may have been grounds for establishing a mechanism to share experiences. - Comments / Existing arrangements: - The (now 17) ombudsmen are subject to coordination by the Governing Body of Insurance Council and now communicate and exchange information via meetings and electronically, while remaining autonomous. - The ombudsman system has been reformed and a legislative framework (Insurance Ombudsman Rules, 2017) issued by the Ministry of Finance. - The new framework empowers IRDAI to review ombudsmen activities through their annual reports, provides for an Advisory Committee constituted by IRDAI to review performance, and for IRDAI to make proposals for improvements. ### Fraud - Finding / Recommendation: There had been little industry-wide response and relevant IRDAI guidance was still to be developed; continue development of fraud control systems. - Comments / Existing arrangements: - Guidelines issued in 2013 (Insurance Fraud Monitoring Framework) require insurers to have Board-approved fraud policies and appropriate systems and controls to detect and manage fraud, and to share and exchange information as appropriate. - Compliance is being assessed in offsite analysis and as part of onsite inspections. ### Anti-money-laundering, combating the financing of terrorism (AML/CFT) - Recommendation: It is advisable that the growing role of brokers be addressed through a new directive. - Recommendation: Financial sanctions need to be strengthened for legal person intermediaries, but the existing name-and-shame option is likely to be effective in the interim. - Comments / Existing arrangements: - The Insurance Brokers Regulations 2013 remind brokers of obligations to comply with applicable anti-money-laundering requirements. - Financial sanctions have been strengthened (see ICP 11 comments). *cr1886 - 9. Corporate* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1886.pdf_