## _cr13265 — Financial System Comparatives and IMF FSAP Findings ## Source details **Canonical URL:** [_cr13265 — Financial System Comparatives and IMF FSAP Findings](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13265.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13265.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13265.pdf.json) --- ### Overview and Methodology - Assessment of India’s compliance with the IAIS Insurance Core Principles (ICP) undertaken as part of the 2011 Financial Sector Assessment Program (FSAP). - First external assessment of India’s compliance with the ICPs; based on the 2003 IAIS Insurance Core Principles and Methodology and essential criteria (EC). - Information sources: IRDA’s 2009 self-assessment and criterion-level updates; relevant laws, regulations, and circulars; discussions with IRDA, insurers, reinsurers, industry bodies, actuarial and accounting professions, and Ministry of Finance officials. - Assessor: Rodney Lester, Consultant. ### Size, Growth, and Significance — Key Statistics - Table 1 (India financial system comparatives, end 2010, in billions of Indian rupees): - Term Deposits: 44,706 - Mutual Fund Assets (Investible): 6,140 - Life Insurers AUM: 13,757 - Market Cap. Stock Exchange: 60,799 - GOI Bonds*: 22,534 - Other Bonds: 8,259 - Percent GDP figures in table header: 71.7; 9.9; 22.1; 97.6; 36.2; 13.3 - LIC’s investment assets (securities and investment property) equate to more than 16 percent of GDP. - Life AUM to GDP: 16.8 percent (84 percent of which is contributed by LIC). - Table 2 (Life assets as percent GDP 2010): - India: 19.2; U.K.: 105.7; Rep. Korea: 32.1; PRC: 8.1; Japan: 61.4; Australia: 22.0; USA: 19.7 - Real CAGRs 2005/6 to 2010/11: - Life: 13.4 percent - Nonlife: 6.8 percent - 2010 Premium $US million (selected): - Nonlife: PRC 71,628; Brazil 30,847; India 10,562 - Life: PRC 142,999; Mainland 33,246; Brazil 67,810 - 2010 density $US (selected): - Nonlife: PRC 52.9; Brazil 157.7; India 8.7 - Life: PRC 105.5; Mainland 169.9; Brazil 55.7 - Insurance sector employment (end FY10/11): - Life sector employees: 139,000 - Nonlife sector employees: 61,000 - Individuals with actuarial qualifications: 415 (including 82 IAA accredited Fellows) - Accountants active in insurance industry: approximately 5,700 - Surveyors and loss adjusters employed: more than 10,000 - Vocational/academic qualification holders: a little over half of employees - Formal insurance-related credentials: slightly less than 10 percent of employees ### Market Structure, Concentration, and LIC Dominance - Life sector: - Number of life insurers at assessment time: 23 (including state-owned LIC). - LIC market share (Annual Equivalent First Year Premium FY 2010/11): 59 percent. - Market shares FY 2010/11: LIC 59%; ICICI 9%; SBI 5%; HDFC 5%; Bajaj 4%; Remaining 18 firms combined 18%. - Herfindhal-Hirschman index (life sector): India’s index 3,704; indicative equilibrium approx 2,200 — indicates very concentrated market. - LIC holds nearly 60 percent on an annual equivalent basis and 70 percent based on actual premium flows. - LIC formed by legislation as state-guaranteed monopoly (merging/nationalizing 245 insurers in 1956). - Policy options discussed: - "Ideally, the guarantee should be removed." - Alternatively require LIC to include the modeled value of the guarantee in product pricing. - Proposed LIC Amendment Bill would relax guarantee to "the extent as the central government may by order from time to time determine." - Nonlife sector: - Composition at mission: 19 multi-line insurers; 3 specialized health (all JVs); 1 specialized agricultural insurer; 1 specialized credit insurer. - 26 percent maximum foreign holding applies to nonlife insurers. - Four nonlife multi-line insurers are PSUs; PSUs do not carry LIC’s explicit government guarantee. - Private multi-line nonlife: 13 JVs with international groups; 2 owned by local promoters. - Concentration indicators healthier than life sector but public sector still dominates. - Herfindhal-Hirschman index for multi-line nonlife insurers: 1,087 (commentary: "substantially less than the indicative nonlife equilibrium of approximately 1,500" — implies excessive fragmentation and scope for consolidation). ### Distribution, Intermediaries, and Branch Networks - Branch networks (end FY 09/10): - Life branches total: 12,018; LIC accounted for 3,250 of these. - Nonlife branches total: 6,417; the four nonlife PSUs accounted for 4,696. - Intermediaries (as of March 31, 2010) — selected figures: - Tied agent: Number 4,440,881; Share of Non-life Premium 35.7; Share of Individual Life New Business 79.6; Share of Group Life New Business 5.8 - Corporate agent (including banks): Number 2,292; Share of Non-life Premium 15.7; Share of Individual Life New Business 14.9; Share of Group Life New Business 3.6 - Broker: Number 304; Share of Non-life Premium 14.7; Share of Individual Life New Business 1.4; Share of Group Life New Business 1.3 - Direct: Life branches 12,018; Nonlife branches 6,417; Share of Non-life Premium 31.1 (life branches) and 4.1 (nonlife branches); Share of Individual Life New Business 89.3 - Banks as agents: - Banks may act as agents for only one life and one nonlife insurer; individual insurers may deal with multiple banks. - Individual life insurers have up to 12 agencies with banks; average over the 15 life offices with banc-assurance distribution is 3.6 agencies. - The 12 nonlife insurers with bank tie-ups average 4.3 agencies. - Regulatory penetration obligations by fifth year: - Social sector: insure at least 20,000 lives. - Rural sector: life insurers must write at least 16 percent of policies; general insurers must write at least 5 percent of gross premium. ### Life versus Nonlife Trends, Products, and Pricing - Life: - High life premium growth since 2005 driven by stock market performance and unit-linked, single-premium contracts; growth slowed by the global financial crisis. - ULIP/linkage trends (Life Insurance Product Trends—Share of Unadjusted First Year Premium, percent): - Life overall: 2004/5 77.3; 2005/6 73.6; 2006/7 67.4; 2007/8 59.5; 2008/9 71.2; 2009/10 65.4; 2010/11 68.1 - % linked: 2004/5 32.5; 2005/6 44.8; 2006/7 56.9; 2007/8 75.3; 2008/9 51.4; 2009/10 54.8; 2010/11 42.2 - IRDA consumer protection rules on linked products (October 2010): - Locked-in period extended from three to five years. - Forced spreading of front-end charges over the locked-in period. - Limits on expense allowances. - Pension product requirement: a guaranteed return be credited each year based on recent reverse repo returns. - Minimum guaranteed return at time of mission: 4.5 percent. - Commentary: "The guaranteed return is realized at the vesting date, but is reflected at all times in the insurer’s liabilities." Proper pricing of guarantees would "likely cost at least a hundred basis points per annum if properly priced." - Consequence: insufficient return (given current interest rates and expense constraints) to make ULIP pension business attractive to capital constrained insurers or policy holders; suggestion guarantees be properly priced and allowed in liability valuation and capital management. - At time of mission, LIC was the only insurer offering a regular premium pension product under new requirements; GOI effectively providing return guarantee on new linked products — GOI could charge LIC a fee if additional capital not set aside. - Nonlife: - Major changes: rapid growth of health insurance and increased price competition in property after tariff abolition in early 2007. - Nonlife real CAGR 2005/6–2010/11: 16.0 percent (Total Nonlife Rs Crore: 2005/6 20,360; 2010/11 42,576). - Business-line relative importance (Nonlife, percent and CAGR per annum): - Fire: 2005/6 18.5 ... 2010/11 10.9; CAGR 4.3 - Marine: 2005/6 6.3 ... 2010/11 6.0; CAGR 14.8 - Motor: 2005/6 42.9 ... 2010/11 42.6; CAGR 15.7 - Health: 2005/6 10.9 ... 2010/11 22.6; CAGR 34.1 - Other: 2005/6 21.4 ... 2010/11 17.9; CAGR 11.8 - Nonlife operating results (selected indicators): - Net Claims ratio (4 PSUs): 06/07 85.2; 07/08 90.4; 08/09 91.3; 09/10 88.3 - Net Claims ratio (Private Sector): 06/07 68.0; 07/08 72.4; 08/09 76.9; 09/10 80.3 - Combined ratio (4 PSUs): 06/07 129.8; 07/08 124.2; 08/09 128.3; 09/10 126.8 - Combined ratio (Private Sector): 06/07 103.0; 07/08 110.4; 08/09 115.0; 09/10 115.0 ### Motor Third-Party Liability (MTPL) and Pool Issues - Inadequate pricing of commercial third-party motor liability exacerbated nonlife sector profitability issues. - IMTPIP (Commercial Vehicles MTPL pool): - Operating since 2007/08; own portfolio MTPL claims ratio between 115 percent and 120 percent; commercial pool claims ratio more than 150 percent. - 2010/11 study required insurers to increase claims provisions significantly; for two PSUs this pushed solvency ratio below 150 percent; IRDA extended regulatory forbearance. - Subsequent IRDA orders (noted as subsequent to FSAP mission): 1. IRDA/NL/ORD/MPL/276/12/2011 dated December 23, 2011: dismantle existing Indian Motor Third Party Pool with effect from March 31, 2012. 2. IRDA/NL/ORD/MPL/277/12/2011 dated December 23, 2011: create a declined risk pool for Act Only Commercial Vehicle Third Party Insurance with effect from April 1, 2012. ### Health Insurance Sector — Performance and Fraud Risks - Health insurance issues: - Net claims ratio in 2009/10: private insurers 92.2 percent; PSUs 119.9 percent. - Poor results driven by heavy price competition and weak claims classification/control at service provider and TPA levels; supplier-driven over-servicing and fraud detected. - Insurers introducing fraud-control mechanisms; four PSUs developing preferred-provider network and agreed cost schedules for certain procedures. - IRDA facilitated capture and transfer of data in prescribed format to Insurance Information Bureau (IIB); IIB publishing analytical results and enhancing data quality. - RFP for systems to detect health insurance fraud open; later to extend to motor and fire insurance. - Recommendations: - Industry cooperation to identify fraud and over-servicing; specialist certification of nonlife actuaries within next three years; gather claims run-off data for long-tail classes. ### Actuarial, Accounting, and Professional Capacity - Accounting profession: - Approximately 175,000 certified accountants and half a million trainees. - Approximately 15,000 to 20,000 new accountants produced each year. - Actuarial profession: - India full member of IAA; profession revived post-1999. - As at mission date: 238 Fellowship level actuaries (72 working in insurance sector); 137 associates; more than 9,000 students. - Shortage of actuarial skills, particularly for nonlife; number of actuaries expected to double in next three to four years though relatively static over last four years. - Recommendation: consider appointed actuary system for overseas qualified actuaries to gain local accreditation after suitable experience and references if supply remains constrained. - Role of appointed actuary: - Life: appointed actuary must be full-time employee; nonlife: may be outsourced. - Actuarial certification required for technical provisions; concern over non-discounted nonlife claim provisions and lack of guidance on where on distribution to set reserves. - Suggest specialist certification and Actuarial Standards Board. ### Investments, Asset Rules, and ALM - Investment regulation: Clause 27 et seq. of Insurance Act and July 30, 2008 regulation define four liability categories and associated investment rules (Fund type 1 to Fund type 4) with specified minima for central government securities, 'Other Approved' Securities, housing and infrastructure allocations, and caps on 'Other Investments'. - Key constraints: - No international investments permitted. - Prudential/exposure limits: typically upper limit 10 percent of issued securities or fund value; 5 percent for related groups. - Overriding minimum credit ratings applied to most securities. - Investment governance: Investment and ALM Board committees with minimum nonexecutive director representation; list of 11 quarterly investment returns required. - Consideration given to monthly reporting for exceptional investment transactions. - Concern: increasing insurer/bank links and lack of specific risk loading for large exposures; overall exposure limit to financial institutions 25 percent of investment assets. - Valuation practice: - Equities valued at market; debt securities valued at amortized value (book), creating potential inconsistency with Insurance Act clause that no asset held above market value. - IRDA considers debt investments long-term; concurrent audit regime in place for larger AUM. ### Capital, Solvency, Reporting, and Corrective Regime - Minimum establishment capital: - Specialist direct writer: Rs 1 billion - Reinsurer: Rs 2 billion - Solvency reporting: - Insurers report solvency quarterly; solvency certified annually by appointed actuary. - Minimum statutory solvency requirement: 100 percent. - IRDA registration requirement: maintain minimum capital of 150 percent of statutory solvency amount; following MTPL provision strengthening this was reduced to 130 percent for nonlife insurers for one year with stepped increase back to 150 percent over three years. - No explicit corrective action ladder tied to solvency ratio under current law/regulations. - Solvency approach: - Minimum solvency broadly in line with EU Solvency I (aggregate ~ equal to QIS 5 Solvency II minimum). - IRDA requiring parallel solvency calculation based on economic capital; Solvency II QIS demonstrate Solvency I levels are inadequate. - Two quantitative impact studies for life; nonlife first study due September 2011. - Recommendations: - Formalize economic capital calculation; introduce risk-based solvency regime and a formal corrective action ladder (Supervisory Guide / Ladder of Intervention). ### Supervisory Capacity, ICP Gradings, and Key Gaps - IRDA strengths: - Ongoing supervision described as "tight"; disclosure and consumer protection "at a high level by international standards." - Most ICPs in many sections fully observed. - Principal gaps and gradings (selected highlights): - ICP 1 – Conditions for effective insurance supervision: Grading O - ICP 3 – Supervisory authority: Grading PO (concerns: uncertainty over IRDA funding/budget, incomplete oversight of LIC, central government reserve powers) - ICP 5 – Supervisory cooperation and information sharing: Grading LO (recommend formalization among key domestic supervisors) - ICP 9 – Corporate governance: Grading LO (monitoring limited; external auditor not required to report on adherence) - ICP 10 – Internal controls: Grading LO (need explicit internal audit requirements) - ICP 13 – On-site inspection: Grading O (recommend adding IT specialist to full-scope inspection teams) - ICP 14 – Preventive and corrective measures: Grading LO (lack of modern risk-based early warning and formal corrective ladder) - ICP 15 – Enforcement or sanctions: Grading PO (enforcement actions tend to be at extremes; need formalized Ladder of Intervention) - ICP 17 – Group-wide supervision: Grading LO (good conceptual start; information flows/processes need formalization) - ICP 20 – Liabilities: Life - O; Nonlife - PO (undesirable reliance on informal actuarial agreement for discount rates; nonlife valuation guidance weak) - ICP 21 – Investments: Grading LO (valuation basis inconsistency; specify required skills of investment officers) - ICP 23 – Capital adequacy and solvency: Grading LO (need formal corrective action process and economic capital formalization) - ICP 24 – Intermediaries: Grading O (recommend enhanced reporting for brokers) - ICP 25 – Consumer protection: Grading O (Ombudsmen lack coordination) - ICP 27 – Fraud: Grading PO (growing issue, especially health; industry-wide guidance developing) - ICP 28 – AML/CFT: Grading LO (recommend addressing role of brokers; strengthen sanctions for legal person intermediaries) - Recommended Action Plan (selected items): - ICP 3: Pass Insurance Amendment Bill to clarify IRDA independence and powers; improve transparency on senior officer departures. - ICP 15: Formalize enforcement through a 'Supervisory Guide' / 'Ladder of Intervention'; consider intermediate enforcement tools (selective time/volume limits, deposit requirements, license expiry dates); update financial sanctions. - ICP 20 (nonlife): IRDA to provide guidance on where long-tail provisions should be set on distribution; require actuaries to provide ranges and certify at specialist level. - ICP 21 (fraud): Continue development of fraud control systems. - Authorities’ response highlights: - IRDA asserts comprehensive oversight, is examining expert group recommendations on LIC, issued ULIP stipulations in 2010, applied to be signatory to IAIS MMOU, established Actuarial Standing Committee (Order No. IRDA/ACT/ORD/MISC/131/06/2011 dated June 21, 2011), and working on ALM stipulations effective April 1, 2012. ### Legal, Institutional Framework, and Governance - Base law: Insurance Act 1938 (as amended); IRDA established under IRDA Act 1999. - Appeals: administrative decisions appealable to High Court and Division Bench of Supreme Court; some emergency powers for central government reserved under Clauses 18 and 19. - IRDA Board composition and governance: Chairperson; up to five whole-time members; up to four part-time members; appointments by central government; reporting to central government and Parliament; annual audit by C&AG. - Supervisory powers include registration issuance/modification/cancellation; specifying intermediary qualifications; inspections; investment and solvency regulation; social and rural insurance targets. - Limits: certain central government reserved powers (e.g., appointing Administrator to a life insurer requires referral to central government); central government may direct IRDA on policy questions; such provisions rarely applied. ### Key Policy Recommendations and Market-Development Steps (selection) - Facilitate mergers and exits; encourage new business models; ensure new capital subscription when solvency corrective action required. - Develop new distribution channels beyond branch-based agency model to widen access outside top 150 cities. - Properly price guarantees on linked products and reflect them in liability valuation and capital management; consider GOI fee for LIC implicit guarantee if additional capital not set aside. - Raise bar and specialist certification for actuarial profession (particularly nonlife); establish actuarial standards and consider an Actuarial Standards Board. - Strengthen IRDA’s risk-based early warning systems, formal corrective action ladder, and intermediate enforcement powers. - Improve health insurance claims classification and TPA oversight; industry-wide fraud-control platform; mandatory data capture and actuarial analysis for long-tail classes. - Formalize supervisory cooperation and information sharing among domestic supervisors (FSDC subcommittee / MOU) and finalize IAIS MMOU membership. *Source: Excerpts from IMF staff report content unit _cr13265 (PDF chapter/section).* ### 1. Financial System Comparatives ..................................................................................... ### 1. Financial System Comparatives ### Overview and Methodology - Assessment of India’s compliance with the IAIS Insurance Core Principles (ICP) carried out as part of the 2011 Financial Sector Assessment Program (FSAP). - This is the first external assessment of India’s compliance with the ICPs. - Assessment based on the 2003 version of the IAIS Insurance Core Principles and Methodology and the essential criteria (EC) listed therein. - Information sources: - IRDA’s 2009 self-assessment and detailed updates at the individual criterion level. - Relevant laws, regulations, and circulars available on IRDA’s web-site and in the Insurance Act Manual. - Discussions with IRDA staff, insurance companies, reinsurers, industry bodies, actuarial and accounting professions, and officials in the Ministry of Finance. - Assessor: Rodney Lester, Consultant. ### Institutional and Market Structure — Key Findings - Principal supervisory authority: Insurance Regulatory and Development Authority (IRDA); central government retains some reserve supervisory powers. - Factors affecting insurance sector development include financial capacity, industry structure, distribution development, level of government control, regulatory constraints, financial sector infrastructure and institutions, and consumer education and protection. - The assessment included a more comprehensive sectoral overview than normal. ### Size, Growth, and Significance (Selected Quantitative Facts) - Table 1 (India financial system comparatives, end 2010, in billions of Indian rupees): - Term Deposits: 44,706 - Mutual Fund Assets (Investible): 6,140 - Life Insurers AUM: 13,757 - Market Cap. Stock Exchange: 60,799 - GOI Bonds*: 22,534 - Other Bonds: 8,259 - Percent GDP figures in table header: 71.7; 9.9; 22.1; 97.6; 36.2; 13.3 - LIC’s investment assets (securities and investment property) alone equate to more than 16 percent of GDP. - Life AUM to GDP figure: 16.8 percent (84 percent of which is contributed by LIC). - Table 2 (Life assets as percent GDP 2010): - India: 19.2 - U.K.: 105.7 - Rep. Korea: 32.1 - PRC: 8.1 - Japan: 61.4 - Australia: 22.0 - USA: 19.7 - Real compound annual growth rates (CAGRs) 2005/6 to 2010/11: - Life: 13.4 percent - Nonlife: 6.8 percent - 2010 Premium $US million (selected from Tables): - Nonlife: PRC 71,628; Brazil 30,847; India 10,562 - Life: PRC 142,999; Mainland [Hong Kong?] 33,246; Brazil 67,810 - 2010 density $US: - Nonlife: PRC 52.9; Brazil 157.7; India 8.7 - Life: PRC 105.5; Mainland 169.9; Brazil 55.7 - Population‑indexed density indices (2004=100) and penetration examples (2010): - Nonlife density index 2010: PRC 267; Brazil 128; India 147 - Nonlife Pen. % 2010: PRC 1.3; Brazil 1.5; India 0.7 - Life density index 2010: PRC 276; Mainland 166; Brazil 220; India 220 - Life Pen. % 2010: PRC 2.5; Mainland 1.6; Brazil 4.4; India 4.4 - Insurance sector employment (end FY10/11): - Life sector employees: 139,000 - Nonlife sector employees: 61,000 - Individuals with actuarial qualifications: 415 (including 82 IAA accredited Fellows) - Accountants active in insurance industry: approximately 5,700 - Surveyors and loss adjusters employed: more than 10,000 - Vocational/academic qualification holders: a little over half of employees - Formal insurance-related credentials: slightly less than 10 percent of employees ### Life vs Nonlife Trends and Drivers - Life premium growth (high since 2005) driven by stock market performance and popularity of unit-linked, single-premium contracts; growth slowed by the global financial crisis. - Nonlife penetration remained relatively static despite a real CAGR of 6.8 percent, attributed to price competition following removal of premium tariffs for nonmandatory insurance products in 2007. - India out-performs expected life insurance penetration and is broadly in line with expectations in nonlife (Figures 1 and 2 referenced). ### Sector Composition, Market Structure, and Concentration - Number of life insurers at assessment time: 23 (including state-owned LIC). - Private life insurers began operations after 2001; caps on foreign shareholdings of 26 percent of issued equity under current Insurance Act. - Two private life insurers are 100 percent domestically owned. - Approximately half of private life insurers were making accounting losses (reasons include costs of establishing scale and problematic business models). - LIC dominance: - LIC market share (Annual Equivalent First Year Premium FY 2010/11): 59 percent (Figure 3). - Market shares shown for major players (FY 2010/11): LIC 59%; ICICI 9%; SBI 5%; HDFC 5%; Bajaj 4%; Remaining 18 firms combined 18%. - Research indicates an equilibrium Herfindhal-Hirschman index of approximately 2,200 for the life sector; India’s index: 3,704, indicating very concentrated market. - LIC holds nearly 60 percent on an annual equivalent basis and 70 percent based on actual premium flows. - Recent increase in LIC concentration reversing prior trend to 2009 (Figure 4). - Observations on LIC and government guarantee: - LIC was formed by legislation as a state-guaranteed monopoly (merging and nationalizing 245 insurers in 1956). - The government guarantee is likely to be a useful sales aid during global uncertainty. - Policy options mentioned in the assessment: - "Ideally, the guarantee should be removed." - "An alternative would be to require LIC to include the modeled value of this guarantee in its product pricing." - A proposed amendment under the LIC Amendment Bill would modify section 37 of the Life Insurance Act, 1956 to relax the government guarantee to "the extent as the central government may by order from time to time determine." ### Distribution, Business Models, and Regulatory Actions - High growth in life driven by single-premium unit-linked and variable insurance products sold through expensive agency distribution; described as creating "poor value for consumers." - IRDA interventions have sought to re-focus life insurers on providing financial protection and to modify problematic business models. - A planned voluntary supplementary pension mechanism exists (New Pension System or NPS) but current business model described as "seriously flawed"; with modifications NPS could become a competitor for the life insurance sector. - Key issue for NPS noted: expense loadings do not allow for required marketing and sales costs. ### Human Capital and Professional Capacity - Need to increase the number of insurance professionals significantly due to rapid local growth. - India is a major supplier of skilled personnel to emerging Middle Eastern markets. *Source: IMF FSAP assessment — "1. Financial System Comparatives" (excerpt). ### 17. The nonlife sector contained 19 multi-line, three specialized health (all JVs), one ### _cr13265 - 17. The nonlife sector contained 19 multi-line, three specialized health (all JVs), one ### Market structure and ownership - Nonlife sector composition at time of mission: - 19 multi-line insurers - 3 specialized health insurers (all JVs) - 1 specialized agricultural insurer - 1 specialized credit insurer - The 26 percent maximum foreign holding also applies to nonlife insurers. - Public sector undertakings (PSUs): four nonlife multi-line insurers are PSUs competing domestically and, in the case of New India, internationally; these do not carry the explicit government guarantee provided to LIC. - Private multi-line nonlife ownership: - 13 private multi-line nonlife insurers are JVs between local enterprises and international insurance groups - 2 are owned by local promoters - Concentration: "Concentration indicators for the nonlife sector are considerably healthier than for life sector although the public sector still dominates." ### Concentration metrics and consolidation needs - Herfindhal-Hirschman index for multi-line nonlife insurers: 1,087 - Commentary: "substantially less than the indicative nonlife equilibrium of approximately 1,500" — implies industry is overly fragmented and could benefit from consolidation. - Observations: - No market-based method for these insurers to merge or exit. - Four PSUs have identical business models, are cooperating in some areas, and two may need capital injections. - Suggested policy implication: "It may be an opportune time for the GOI to review its role and strategy in the nonlife market." ### Reinsurance and international presence - There is one PSU reinsurance company, GIC, the former holding company for the four nonlife PSU insurers. - GIC developments: - Gradually developing an international portfolio to balance Indian-sourced business. - Indian-sourced business includes a 10 percent compulsory local cession. - International reinsurers: none have established local branches; most maintain representative offices. ### Intermediaries, distribution channels, and branch networks - Clear alignment of channel and product/market mix (analysis referenced as Table 5). - Market share GPI 10/11 (selected values shown in text excerpt): - New India 17% - National 14% - United 15% - Oriental 13% - ICICI 10% - Bajaj 7% - IFFCO 4% - Reliance 4% - Remaining 11 16% - Branch networks (end FY 09/10): - Life branches total: 12,018 - LIC accounted for 3,250 of the 12,018 life branches. - Nonlife branches total: 6,417 - The four nonlife PSUs accounted for 4,696 of the 6,417 nonlife branches. - Table 5 (intermediaries, as of March 31, 2010) key figures: - Tied agent: Number 4,440,881; Share of Non-life Premium 35.7; Share of Individual Life New Business 79.6; Share of Group Life New Business 5.8 - Corporate agent (including banks): Number 2,292; Share of Non-life Premium 15.7; Share of Individual Life New Business 14.9; Share of Group Life New Business 3.6 - Broker: Number 304; Share of Non-life Premium 14.7; Share of Individual Life New Business 1.4; Share of Group Life New Business 1.3 - Direct: Life branches 12,018; Nonlife branches 6,417; Share of Non-life Premium 31.1 (life branches) and 4.1 (nonlife branches); Share of Individual Life New Business 89.3 - Other: Share of Non-life Premium 2.8 - Banks as agents: - Banks are allowed to be agents for only one life and one nonlife insurer; individual insurers may deal with multiple banks. - Policy under review. - Individual life insurers have up to 12 agencies with banks; average over the 15 life offices with banc-assurance distribution is 3.6 agencies. - The 12 nonlife insurers with bank tie-ups average 4.3 agencies. ### Regulatory licensing requirements and market penetration obligations - Authorities distinguish urban, social sector, and rural populations. - Direct insurers required minimum penetrations by fifth year of operation: - Social sector: all insurers must insure at least 20,000 lives by their fifth year of operation. - Rural sector: - All life insurers must write at least 16 percent of policies in the rural sector by their fifth year of operation. - All general (multi-line) insurers must write at least 5 percent of gross premium in the rural sector by their fifth year of operation. ### Product approval and supervisory control - All new or modified insurance products in India require supervisory sign off. - IRDA has authority to specify key product parameters, including expense loadings. ### Life product trends and ULIP/pension dynamics - Historical product mix and drivers: - Prior to 2000, LIC standard product: traditional savings (endowment insurance); unit-linked contracts were included in its rate book. - New private life insurers initially focused on unit-linked contracts (ULIPs) tied to stock market performance. - Table 6: Life Insurance Product Trends—Share of Unadjusted First Year Premium (In percent) - Life: 2004/5 77.3; 2005/6 73.6; 2006/7 67.4; 2007/8 59.5; 2008/9 71.2; 2009/10 65.4; 2010/11 68.1 - Annuity: 2004/5 6.7; 2005/6 4.3; 2006/7 2.6; 2007/8 2.8; 2008/9 5.0; 2009/10 5.3; 2010/11 6.0 - Pension: 2004/5 15.6; 2005/6 22.1; 2006/7 29.9; 2007/8 37.6; 2008/9 23.4; 2009/10 29.0; 2010/11 25.7 - Health: 2004/5 0.5; 2005/6 0.0; 2006/7 0.0; 2007/8 0.1; 2008/9 0.4; 2009/10 0.3; 2010/11 0.2 - % linked: 2004/5 32.5; 2005/6 44.8; 2006/7 56.9; 2007/8 75.3; 2008/9 51.4; 2009/10 54.8; 2010/11 42.2 - Two sequential growth drivers identified: 1. Extensive distribution + booming stock market + limited retirement savings alternatives. 2. Impact of global financial crisis on risk preferences in 2008. - Decline in ULIP/pension components in 2010/11: "significant withdrawal of the private life insurers from unit linked pension business." - IRDA consumer protection rules on linked products (October 2010) included: - Extension of locked-in period from three to five years. - Forced spreading of front-end charges over the locked-in period. - Limits on expense allowances. - Requirement for pension products that a guaranteed return be credited each year based on recent reverse repo returns. - At time of mission, minimum guaranteed return: 4.5 percent (noted as "4.5 percent at the time of the mission"). - Commentary: "The guaranteed return is realized at the vesting date, but is reflected at all times in the insurer’s liabilities." - Impact: "would likely cost at least a hundred basis points per annum if properly priced" (using realistic equity market simulations). - Consequences: - Given current interest rates, allowable expense spreads and actual expense levels, there is insufficient return (even with a matched portfolio of debt securities) to make ULIP pension business attractive to capital constrained insurers or policy holders. - Recommendation/requirement: guarantees should be properly priced and allowed for in liability valuation and capital management. - LIC position: - At time of mission, LIC was the only insurer offering a regular premium pension product under the new requirements. - LIC has explicit government guarantee; "GOI is effectively providing the return guarantee on new linked insurance products." - Policy implication: GOI could legitimately charge LIC a fee for this service if PSU does not set aside adequate additional capital as exposure grows. - Other products: - Some life insurers developed products guaranteeing minimum unit values based on stock index values; these were under supervisory review due to potential to destabilize stock markets. ### Nonlife sector product mix, growth, and pricing - Major changes in nonlife sector: - Rapid growth of health insurance. - Increased price competition in property-related classes after premium tariffs abolished in early 2007. - Sector growth: - Nonlife sector recorded virtually no real growth in gross premiums written during 2008–2010. - In 2010–2011, insurers improved pricing discipline to focus on profitability. - Table 7: Relative Importance of Business Lines—Nonlife Insurers (In percent) and totals - Fire: 2005/6 18.5; 2006/7 16.6; 2007/8 12.4; 2008/9 11.1; 2009/10 11.2; 2010/11 10.9; CAGR % P.A. 4.3 - Marine: 2005/6 6.3; 2006/7 6.5; 2007/8 6.5; 2008/9 6.5; 2009/10 6.3; 2010/11 6.0; CAGR % P.A. 14.8 - Motor: 2005/6 42.9; 2006/7 43.0; 2007/8 45.6; 2008/9 43.9; 2009/10 43.4; 2010/11 42.6; CAGR % P.A. 15.7 - Health: 2005/6 10.9; 2006/7 13.3; 2007/8 17.6; 2008/9 20.1; 2009/10 21.1; 2010/11 22.6; CAGR % P.A. 34.1 - Other: 2005/6 21.4; 2006/7 20.6; 2007/8 17.9; 2008/9 18.4; 2009/10 18.0; 2010/11 17.9; CAGR % P.A. 11.8 - Total Nonlife (Rs Crore): 2005/6 20,360; 2006/7 24,905; 2007/8 27,824; 2008/9 30,352; 2009/10 34,620; 2010/11 42,576; CAGR % P.A. 16.0 - CPI Incr. (Ind. Workers) %: 2005/6 6.7; 2006/7 7.9; 2007/8 8.0; 2008/9 14.0; 2009/10 8.8; 2010/11 9.1 - Real Growth Rate % (selected values shown): 2005/6 14.6; 2006/7 3.5; 2007/8 1.0; 2008/9 0.0; 2009/10 13.0 - Nonlife underwriting performance and profitability: - Historically, business models focused on premium growth and market share; profitability suffered. - Some private nonlife insurers continue to make losses; scale less critical than in life sector. - During 2009/10 private sector nonlife insurers made an overall operating loss; seven multi-line insurers produced profits. - Late starters generally making establishment losses; exception: Shriram (benefits from joint ownership of underwriter and distribution system). ### Motor third-party liability (MTPL) issues and pools - Inadequate pricing of commercial third-party motor liability business has exacerbated nonlife sector lack of profitability. - Prior to market opening, cross-subsidy from other classes mediated through four nonlife PSUs; competition undermined this. - IMTPIP (Commercial Vehicles MTPL pool): - Established with mandatory participation by all multi-line nonlife insurers according to market share. - Operating since 2007/08 and recording consistent losses. - Own portfolio MTPL claims ratio: between 115 percent and 120 percent. - Commercial pool claims ratio: more than 150 percent. - 2010/11 study led to participating insurers being required to increase relevant claims provisions significantly. - For two PSUs, this pushed solvency ratio below 150 percent; IRDA extended regulatory forbearance to the sector. - Subsequent regulatory actions (noted in the text as "Subsequent to the FSAP mission"): 1. Order No. IRDA/NL/ORD/MPL/276/12/2011 dated December 23, 2011: decided to dismantle existing Indian Motor Third Party Pool with effect from March 31, 2012. 2. Order No. IRDA/NL/ORD/MPL/277/12/2011 dated December 23, 2011: decided to create a declined risk pool for Act Only Commercial Vehicle Third Party Insurance with effect from April 1, 2012. ### Nonlife operating results (selected indicators) - Table 9: Key Operating Results and Ratios—Nonlife Sector (In millions of Indian rupees) - 4 PSUs profit before tax and realized investment profits Rs mill: 06/07 2,565; 07/08 -483; 08/09 -17,245; 09/10 -16,360 - Private sector profit before tax and realized investment profits Rs mill: 06/07 2,709; 07/08 53; 08/09 -2,769; 09/10 -3,468 - Net Claims ratio (4 PSUs): 06/07 85.2; 07/08 90.4; 08/09 91.3; 09/10 88.3 - Net Claims ratio (Private Sector): 06/07 68.0; 07/08 72.4; 08/09 76.9; 09/10 80.3 - Net Expense ratio (4 PSUs): 06/07 34.6; 07/08 34.2; 08/09 37.0; 09/10 38.5 - Net Expense ratio (Private Sector): 06/07 35.0; 07/08 38.0; 08/09 37.0; 09/10 34.7 - Combined ratio (4 PSUs): 06/07 129.8; 07/08 124.2; 08/09 128.3; 09/10 126.8 - Combined ratio (Private Sector): 06/07 103.0; 07/08 110.4; 08/09 115.0; 09/10 115.0 ### Life sector profitability, scale, and expense competitiveness - Scale and duration correlation: - Chart analysis: "A chart of 2010/2011 life market share versus year of registration shows a clear link between duration in business and scale." - Broad rule of thumb: nonlife insurers up to 7 years to reach break-even; life insurers up to 12 years. - Profitability observations: - Figure of 2010 shareholders’ profit before tax versus year of registration: dichotomy among early starters — some reporting accounting profits (some reflecting retrenchment and cost cutting), larger number still making losses; newer entrants incurring establishment losses. - Embedded value data not available; likely some life insurers making real economic losses and needing strategy re-assessment. - Correlation: market share versus accumulated losses indicates strategy of building traditional agency forces; exception SBI Life leveraging in-situ distribution system. - Expense ratio comparison (Table 8: In percent of gross premium): - Commission Expense Ratio 2009 / 2010: - LIC: 6.4 / 6.5 - Private sector life insurers: 8.5 / 7.6 - Operating Expense Ratio 2009 / 2010: - LIC: 5.8 / 6.6 - Private sector life insurers: 26.0 / 20.9 - Observations: LIC has a significant cost advantage over most competitors. ### Regulatory and market-development recommendations - IRDA’s challenge: "encourage the life insurance industry to find its natural equilibrium without egregiously interfering in the market." - Practical steps identified: - Facilitate mergers and exits. - Encourage new business models. - Ensure new capital is subscribed when solvency-based corrective action becomes necessary. - Distribution: joint FICCI and BCG study demonstrates branch-based agency model is not viable outside top 150 cities; need to develop new distribution channels to widen access. - Life insurers majority-owned by major banks have a distinct advantage. - Product guarantees and capital: - Guarantees on linked products should be properly priced and recognized in liability valuation and capital management. - Consideration that GOI could charge LIC a fee for the implicit guarantee if additional capital is not set aside. *Italic source: Excerpt from IMF staff report content unit _cr13265 (PDF chapter/section).* ### 40. The rapidly growing health insurance sector ### The rapidly growing health insurance sector ### Health insurance performance and claims management - Net claims ratio for health insurance in 2009/10 was 92.2 percent for the private insurers and 119.9 percent for the PSUs. - Poor results, particularly for cashless coverage, reflect heavy price competition and poor claims classification and control at both the service provider and third-party administrator (TPA) levels. - Supplier-driven issues, such as over-servicing, are appearing in the Indian market. - Insurers are recognizing the need to introduce fraud-control mechanisms and tighter oversight of illness and intervention classifications. - Recent initiatives: the four PSUs are developing a preferred-provider network and agreed cost schedules for certain surgical procedures, with hospitals permitted to participate in the cashless system. - IRDA has facilitated capture and transfer of data in a prescribed format to the Insurance Information Bureau (IIB), which is publishing analytical results and enhancing data quality. - Sector cooperation is recommended to identify fraud and over-servicing; individual insurers are using multi point indicators. ### Sector sustainability and performance improvements - Current level of operating losses in the nonlife insurance sector is not sustainable; PSUs have been declaring profits through asset realization, an approach that cannot be sustained even in the medium term. - Market players indicate scope to improve performance through rationalizing distribution and introducing better controls over underwriting and claims management. - If cross-subsidies to the commercial transport sector are to be maintained, risk-management efforts should be supported by the authorities to reduce the current high claims frequency (for example, driver training and mandatory safety checks). - Given fragmentation in the nonlife sector, pressure for consolidation is likely; legal exit mechanisms (portfolio transfer, merger, acquisition, and run-off) should be fully employed to move toward an optimal market structure. ### Legal, actuarial, and data recommendations - Consider making it illegal for plaintiffs’ lawyers to benefit from the claims they are handling and capping (or bringing greater consistency to) catastrophic bodily injury awards. - Actions to gather claims run-off data for long-tail classes are appropriate; both claims paid and claims incurred data should be gathered for a full actuarial analysis. - Only actuaries formally qualified in nonlife methodologies and with appropriate experience should be allowed to certify claims provisions and nonlife premiums. - Given limited consistency in methodologies and assumptions, specialist certification should be required of nonlife insurer appointed actuaries within the next three years, and guidance provided on safety margins to be built into claims provisions. - All insurers should be required to provide the same earned premium analysis as the PSUs in public disclosures. ### Reinsurance and retention - Retention ratios of Indian insurers are broadly in line with international benchmarks after allowing for the stage of private sector development and the compulsory cession to GIC. - The state-owned reinsurer, GIC, benefits from a mandatory cession of 10 percent for all nonlife classes, calculated on a potential maximum loss (MPL) or sum-insured basis according to the nature of the cover provided. GIC also manages the marine hull, terrorism, and commercial vehicle MTPL pools. - International reinsurers have not established operations in India due to the 74 percent local-partner requirements and the relatively high initial capital requirements (Rs 2 billion). - International placements may only be made with reinsurers rated at least BBB by S&P over the prior five years unless otherwise approved by IRDA. - IRDA actively prevents fronting to ensure local capacity is fully employed. - GIC has tightened terms following very poor results from local cessions and is well placed to exercise discipline on market pricing. - GIC is the twenty-third largest reinsurer in the world and operates internationally, with ambitions to further expand and become less dependent on the Indian market. ### Technical provisions and actuarial practices - Nonlife claims provisions and life mathematical reserves need to be actuarially certified by an appointed actuary in India; for life insurers the appointed actuary must be a full-time employee, while this role may be outsourced for nonlife insurers. - Unexpired risk provisions are formula-based unless otherwise approved, and tend to be conservative (50 percent of net premium, except for long tail Marine, which is fully reserved to premium). - Life mathematical reserves are set on a gross premium basis with allowance for adverse deviations; the discount rate is established via informal agreement among life appointed actuaries, allowing a book value/amortized book-value approach. - Nonlife claims provisions are set according to a range of actuarial methodologies on a non-discounted basis; there is no guidance on where within the range provisions should be set and no requirement for the actuary to provide a range to the insurer’s Board. - High-level analysis using the ratio of technical provisions (outstanding claims plus unearned premium provisions) to average net earned premiums in the last two years indicates at least one private sector insurer would appear to need closer examination; two insurers have ratios well below the heuristic of 100 percent (60 percent outstanding and 40 percent unearned) for short tail classes. ### Investment practices and constraints - Investment regulation is comprehensive and governed by Clause 27 et seq. of the Insurance Act and the July 30, 2008 regulation and subsequent guidelines. - The July 30, 2008 regulation defines four liability categories that guide investment rules: - Fund type 1: must be invested not less than 25 percent in government securities, and 50 percent in government securities plus 'Other Approved’ Securities'. At least 15 percent must be invested in the housing and infrastructure sectors. No more than 35 percent may be invested in Approved Investments and Other Investments, with a 15 percent cap on the latter. - Fund type 2: must be invested not less than 20 percent in Government Securities with not less than 40 percent being in Government Securities plus 'Other Approved Securities'. The balance is to be invested in Approved Investments subject to specified exposure and prudential norms. - Fund type 3: largely unconstrained (subject to policy terms) except that assets must be liquid and no more than 25 percent may be invested in 'Other Investments'. - Fund type 4: must be invested at least 20 percent (of investment assets) in Government Securities and not less than 30 percent in Government Securities and 'Other Approved Securities'. Housing investment must be at least 5 percent of invested assets and infrastructure not less than 10 percent. No more than 25 percent of investments may be in 'Other Investments'. - ‘Other approved securities’ include state government bonds, state government guaranteed loans and guaranteed equity. Housing investments cover loans to State Government for housing, loans to HUDCO and institutions guaranteed by NHB, and debt instruments issued by HUDCO and NHB or under state mandated housing schemes. - Prudential and exposure limits apply to individual securities, groups and industrial sectors with an upper limit of 10 percent of issued securities or fund value generally applying, except for related groups in which case 5 percent normally applies. Overriding minimum credit ratings are applied to most securities. No international investments are permitted. - Investment governance structure is specified (Investment and ALM Board committees with minimum representation from nonexecutive directors and key management) and a list of 11 quarterly investment returns is required. - Exceptional investment transactions should be reported in a timely fashion; consideration given to monthly reporting similar to exceptional insurance underwritings. - Bank linkages are largely the responsibility of the directors, subject to an overriding aggregate limit; an overall exposure limit to financial institutions of 25 percent of investment assets remains in place. Given increasing insurer/bank links and no specific risk loading for large exposures, reconsideration of per bank exposure limits may be warranted. - Actual asset allocations have been driven by the popularity of unit linked products in the life sector and are broadly in line with specified minima for nonlife insurers (IRDA data show central government debt, state government debt, housing and infrastructure, approved investments, and other investments allocations for life and nonlife as of March 31, 2009 and March 31, 2010). ### Capital, solvency, and reporting - Minimum establishment capital for a specialist direct writer is Rs 1 billion and twice this for a reinsurer. - Insurers are required to report solvency quarterly and this is disclosed on their web sites; solvency is certified annually by the appointed actuary. - Minimum solvency is broadly in line with the EU Solvency I regime (i.e., in aggregate approximately equal to the minimum solvency requirement under QIS 5 of Solvency II). - Insurers are required to maintain a minimum capital of 150 percent of the statutory solvency amount. Following a recent strengthening of Commercial Motor Pool claims provisions this requirement has been reduced to 130 percent for nonlife insurers for one year, with a stepped increase back to 150 percent over three years. - Under current law and regulations there is no explicit corrective action ladder tied to the solvency ratio. - Solvency ratios at the end of FY 2009/10 were largely in the acceptable range; the life sector appears stronger than the nonlife sector. If a risk based solvency regime is introduced, solvency bars are likely to move to the left. ### Main findings and supervisory capacity - Preconditions for effective supervision are generally met; gaps exist for five main reasons: - Some lacunae require legislative action (Insurance Amendment Bill pending) to treat reinsurers, facilitate amalgamations and transfers, appeals processes, oversight of related party transactions, introducing fines, and clarifying respective roles of IRDA and the central government. - Some ICPs have not had the same priority; IRDA has begun work on combating fraud and exit processes. - IRDA has decided India is not yet ready for a full transition to cutting-edge international approaches due to informational and skills shortages and lack of international consensus; IRDA will need to augment resources in core supervisory departments to introduce a rigorous corrective action and enforcement regime built on a risk based approach. - IRDA has adapted to policy decisions applying in the larger Indian context (accounting approaches for assets fall under this category). - Other major issues include stabilizing MTPL results, putting health insurance onto a sound footing, raising the bar for the Actuarial Profession in terms of specialization, and formulating a framework for pension ULIPs that balances consumer protection and commercial viability. Taxation and supplementary pension provision are noted as not appropriately dealt with in a formal assessment. *Source: IMF staff report content unit _cr13265 - 40. The rapidly growing health insurance sector.* ### 66. There are also areas where IRDA has strong and explicit regulation in place or ### _cr13265 - 66. There are also areas where IRDA has strong and explicit regulation in place or ### IRDA strengths and remaining lacunas - Ongoing supervision of insurance companies, markets, and consumers is described as "tight" and displays a strong level of control. - Most ICPs in these sections are fully observed. - Disclosure and consumer protection are "at a high level by international standards." - Key supervisory gaps: - The application of prudential requirements is currently "reliant on informal arrangements agreed by appointed actuaries." - Recommendation to produce relevant standards and ideally establish an Actuarial Standards Board. - A plan is recommended to introduce specialized certification of actuaries, particularly for nonlife business. ### Summary of ICP gradings and principal comments (selected highlights) - ICP 1 – Conditions for effective insurance supervision: Grading O - If supply continues to be an issue consider an appointed actuary system for overseas qualified actuaries to gain local accreditation after suitable experience and references. - IRDA should regularly obtain a listing of approved auditors from ICAI. - ICP 3 – Supervisory authority: Grading PO - Current uncertainty regarding IRDA’s control of its funding and budget, incomplete oversight of LIC, and reserve powers of the central government potentially detract from supervisor’s powers and independence. - ICP 5 – Supervisory cooperation and information sharing: Grading LO - The cooperation and information sharing system among the three key domestic financial sector supervisors should be formalized. - IRDA should formalize mechanisms to advise host supervisors of actions relevant to them. - ICP 9 – Corporate governance: Grading LO - Corporate Governance Guidelines are comprehensive, but monitoring appears limited. - Company secretary often beholden to CEO; external auditor not required to report on adherence to guidelines—this check should be instituted. - Related party transactions should be reported on an exceptions basis; IRDA should seek independent advice and take supervisory action if pricing appears egregious. - ICP 10 – Internal controls: Grading LO - Corporate Governance Guidelines should explicitly cover internal audit function, senior officer responsibility, resources, independence, and direct access to audit committee and Board. - ICP 13 – On-site inspection: Grading O - Recommend adding a staff member with IT system skills to full scope inspection teams. - For normal scheduled full scope inspections a three or four year cycle is adequate. - ICP 14 – Preventive and corrective measures: Grading LO - IRDA lacks a modern risk-based early warning system; measured ratios appear largely generic. - Concern that IRDA does not have a direct role when insurers engage in capital management such as buy-backs—should be rectified in any Amendment Bill. - ICP 15 – Enforcement or sanctions: Grading PO - Enforcement actions tend to be at extremes—relatively light or very heavy. - IRDA needs to refer certain fundamental corrective actions to central government. - Corrective actions regime needs formalization through a 'Supervisory Guide' or Ladder of Intervention. - Financial sanctions are outdated and need to reflect modern scale and inflation. - ICP 16 – Winding-up or exit from the market: Grading O - Authorities may wish to consider allowing voluntary wind-up of solvent nonlife insurers subject to safeguards; consider bringing administrator provisions for nonlife in line with life insurers. - ICP 17 – Group-wide supervision: Grading LO - Good conceptual start, but information flows, processes, and early warning mechanisms need formalization, possibly via an MOU among four supervisors. - Individual supervisors should have more power to consider group structures, exposures, and related party transactions. - Ideally an ad hoc committee of an insurer’s directors (majority independent) should consider each related party transaction. - ICP 18 – Risk assessment and management: Grading O - Assessed on control of investment and underwriting risk; further work needed on operational risk monitoring. - ICP 20 – Liabilities: Life - O; Nonlife - PO - Undesirable reliance on informal agreement for life appointed actuaries to determine valuation discount rates. - Expense over-runs should be provided for if chronic post-establishment period. - Nonlife valuation rules lack guidance on where claims provisions should be set on the distribution of possible results. - ICP 21 – Investments: Grading LO - In a high interest rate environment the investment valuation basis is potentially inconsistent with the Insurance Act statement that no asset may be held above its market value. - Required skills and experience of investment officers should be specified. - ICP 23 – Capital adequacy and solvency: Grading LO - Solvency II Quantitative Impact Studies demonstrate Solvency I levels are inadequate. - IRDA recognizes this with a non intervention 150 percent solvency ratio requirement, but this has not been translated into a mandatory corrective action process and has been weakened for the nonlife sector. - Desirable that economic capital calculation be formalized, possibly as an adjunct to corrective action regime. - ICP 24 – Intermediaries: Grading O - As brokers become more important, statutory reporting should be upgraded—annual or six monthly report showing premiums collected, commissions received, amounts forwarded to insurers, and amounts held in policyholder trust funds recommended. - ICP 25 – Consumer protection: Grading O - The 12 Ombudsmen do not communicate; grounds for a mechanism to share experiences and observations. - ICP 27 – Fraud: Grading PO - Fraud is a growing issue, particularly in health insurance; industry-wide response limited and relevant IRDA guidance still to be developed. - ICP 28 – Anti-money-laundering, combating the financing of terrorism: Grading LO - Advise addressing growing role of brokers through a new directive; strengthen financial sanctions for legal person intermediaries; existing name and shame option likely to be effective in interim. ### Recommended Action Plan (selected items from Table 14) - ICP 3 – Supervisory authority - Pass and make effective the Insurance Amendment Bill to ensure IRDA is clearly independent and has a wider range of direct powers of intervention. - Greater transparency over the early departure of senior officers is required. - ICP 15 – Enforcement or sanctions - Formalize enforcement regime through a regulatory ‘Supervisory Guide’ or ‘Ladder of Intervention’ to provide stronger legal backing and limit forbearance. - Consider additional intermediate enforcement powers, including: - The ability to impose selective time and volume limitations on business activities (including by geography and product); - The ability to require deposits if asset security is a concern; and - The ability to impose an expiry date for a license to encourage timely rectification of undesirable financial ratios or operating practices. - Update financial sanctions to reflect the impact of inflation since fines were first established. - ICP 20 – Liabilities (nonlife) - IRDA should provide guidance as to where long tail provisions should be set on the distribution of possible results. - Ideally nonlife actuary should provide a range of possible values to management and Board and show where the 75 th percentile value lies. - Nonlife appointed actuaries should be certified on the basis of training and experience in this specialized area. - ICP 21 – Fraud - Continue development of fraud control systems. ### Authorities’ response and sectoral context - Overall assessment - IRDA was set up under an Act of parliament in the year 2000 with objectives of regulation and development of the insurance sector in India. - The insurance sector witnessed significant progress over 2000-2011; supervisory and regulatory framework has been built up to match international standards while adapting to Indian needs. - Issues noted regarding de jure independence due to certain powers vested with central government; authorities state these powers are for emergent situations and do not impinge on IRDA’s independence. - Life insurance industry - Since opening to private participation in 2000, 23 life insurance companies have been registered to underwrite business in the country. - Life insurance industry remains concentrated but LIC’s market share had declined post-opening up except in last one year where market corrections occurred after directions on ULIPs. - Supervisory and regulatory framework is asserted to be a level playing field for private and state-owned companies; oversight of LIC is comprehensive. - Government is examining recommendations of an expert group set up in August 2010 to examine LIC functioning. - In 2010 IRDA issued stipulations on ULIPs and variable insurance products to address imprudent practices. - Nonlife industry - Pre-2007 tariff pricing regime largely produced satisfactory underwriting except in catastrophic years (1998, 2001, 2005). - Tariff pricing dismantled in 2007 (except Motor Third Party Insurance) to encourage competition and risk-based pricing; price levels dipped and underwriting performance deteriorated in subsequent benign years. - 24 nonlife insurers competing; IRDA uses file-and-use procedure and requires appointed actuary certification of pricing adequacy and viability for new products. - IRDA advises companies through General Insurance Council interactions and has initiated review exercises on underwriting performance and adequacy of Reserves for Claims via interaction with appointed actuaries. - Health insurance - Health insurance gross premium growth has been over 30 percent year-on-year in the last five years. - Third-party administrators facilitated claims servicing and linkages between insurers and health service providers. - Initial data capture was insufficient; IRDA facilitated prescribed data capture and transfer to the Insurance Information Bureau (initiative of IRDA and General Insurance Council). - Insurance Information Bureau has started publishing analytical results and is working on enhancing data quality. *Source: _cr13265 - 66.* ### 76. Acknowledging that fraud in this line of business is a challenge to be met ### _cr13265 - 76. Acknowledging that fraud in this line of business is a challenge to be met ### Fraud detection and regulatory framework - IRDA is deploying a software tool to detect probable fraud cases and assist insurers in tackling and curbing them effectively. - The authority encourages exchange of information on fraud cases amongst insurers through the General Insurance Council. - A regulatory framework on detection, classification, monitoring, reporting, and mitigation of frauds is presently being put in place. - Under ICP 27, IRDA is working on a regulatory framework to require insurance companies to have a robust framework to address, monitor, and mitigate risks arising from frauds, and to report frauds for life, nonlife, and reinsurance companies. ### Government role and strategy in nonlife insurance - The government of India is examining its role and strategy in the nonlife insurance market and has commenced consultation with stakeholders, including public sector insurance companies. - A White Paper on various alternatives (including merger, partial disinvestment) has been circulated. - Dominant challenge: dealing with the huge workforce of over 70,000 employees in the four direct insurance companies. - Two of the four public sector companies have better financial credentials while the other two do not. ### Motor Third Party Insurance (commercial vehicles) - A review on adequacy of reserves toward claims under the Indian Motor Third Party Insurance Pool for commercial vehicles led to corrections that resulted in dipping solvency levels of two companies; IRDA has brought this to the attention of the government. - IRDA directed an increase in the price of the Motor Third Party Insurance line; it is expected to correct the trend to a considerable extent. - IRDA issued directions: (i) dismantling the existing Indian Motor Third Party Pool with effect from March 31, 2012; and (ii) setting up the framework for Motor Third Party Declined Risk Insurance Pool for commercial vehicles. ### Investments and bank exposures - IRDA has put in place robust mechanisms for investment of insurers’ assets, with prescribed limits of exposure at the company, group, and industry levels. - Responsibility for compliance rests with the Investment Committee of each insurer, with audit oversight and reporting to Boards. - It is felt that no additional oversight is required specifically for bank exposures; responsibility is with Boards via the Investment Committee. ### Solvency requirements and early warning mechanisms - Statutory solvency stipulation: 100 percent. - IRDA registration requirement: solvency set at 150 percent, which must be complied with at all times. - IRDA does not envisage the need for a ladder approach to intervention levels but is working on early warning signals to enable quick action as part of regular monitoring. - IRDA is examining issues related to moving toward a risk-based approach to solvency (on lines similar to the European Union) and will decide after deliberations with stakeholders. - Under ICP 23, IRDA has laid down stipulations on computation of economic capital by life and nonlife insurers and is examining merits of moving toward a standardized risk-based solvency model. ### Governance, supervisory powers, and transparency (ICP highlights) - ICP 1: Minimum eligibility criteria established for statutory auditors; IRDA will not maintain an approved-auditor list from ICAI. - ICP 3: Regulatory oversight on LIC is comprehensive; reserve powers of the central government are “reserve” in nature and intended for emergent situations; de jure independence concerns are deemed unfounded. - ICP 5: IRDA has applied to be a signatory to the Multilateral Memorandum of Understanding (MMOU) with the IAIS to facilitate information exchange. - ICP 6: Timelines for registration of intermediaries are specified in IRDA Regulation; government-prescribed timelines for new insurance companies may not be appropriate. - ICP 7: CEO and executive directors require IRDA approval; IRDA is examining requiring insurers to intimate the authority on fit-and-proper compliance for new directors. - ICP 8: Section 35 of the Insurance Act, 1938 and IRDA (Scheme of Amalgamation and Transfer of General Insurance Business) Regulations, 2011 provide framework for transfers/mergers; IRDA will consider explicitly stating that policyholders’ interests of both insurers must be taken into account and supported by an Independent Actuarial report. - ICP 9: Authority will examine enhancing statutory auditor’s report scope to cover compliance with corporate governance guidelines; consideration of reducing periodicity and increasing oversight of related-party transaction reporting is under discussion. - ICP 10: Internal control and internal audit mandated; statutory auditors and Audit Committee have oversight; IRDA does not consider it necessary to mandate internal audit be in-house but will examine the framework. - ICP 12: Proposal to make reporting more robust to cover all risks faced by an insurance company; once stable, periodicity may be reduced to half-yearly. - ICP 13: Onsite inspection teams include systems personnel; reports shared with companies; IRDA has an internal Standing Committee to review findings and responses; proposal to ensure full financial audit at a periodicity of three to four years for each company, with shorter intervals if warranted. - ICP 14: Strengthening preventive and corrective measures through an early warning system; IRDA proposes requiring concurrence/compliance for capital management actions such as buy-back of shares. - ICP 15: Section 102 of the Insurance Act, 1938 enables IRDA to levy a penalty of Rs 5 lakhs for each instance of violation without an overall cap; Insurance Amendment Bill, 2008 proposes raising the maximum penalty to Rs 25 crores. - ICP 16: IRDA is examining recommendations to allow voluntary wind-up of solvent nonlife insurers subject to safeguards and to align provisions for appointment of an administrator for nonlife insurers with life insurers. - ICP 17: Formalizing information-sharing mechanisms is being addressed via FSDC subcommittee to consider group structures, exposures, and related-party transactions. - ICP 18: Internal audit/control functions and corporate governance guidelines to be dovetailed for a robust risk-assessment-management framework; addressing operational risks is a priority; Asset Liability Management stipulations become effective April 1, 2012. - ICP 20: FSAP recommendations on valuations of liabilities: (a) life actuaries should avoid compensating differences between philosophies underlying liability and asset valuation; expense over-runs should be provided for if chronic after establishment period; (b) nonlife valuation rules lack guidance on long tail provisions. IRDA established an Actuarial Standing Committee via Order No. IRDA/ACT/ORD/MISC/131/06/2011 dated June 21, 2011 to advise on actuarial standards; recommendations have been forwarded to the Committee. - ICP 21: Debt instruments are being valued at acquisition cost subject to provision for nonperforming assets rather than market/realisable value per section 64V of the Insurance Act, 1938; IRDA considers these investments long term. Investment Committee requirements fall within Board oversight. - ICP 22: Reporting mechanism with respect to derivatives will be strengthened when insurers take exposure to derivatives. - ICP 24: Reporting requirements exist for insurance brokers, including segment-wise premiums placed and brokerage received; licensed direct insurance brokers are not permitted to accept insurance premiums in their accounts (reinsurance brokers only), and brokers must have professional indemnity cover; reporting norms for reinsurance brokers about amounts held in reinsurance accounts can be examined. - ICP 25: Recommendations on strengthening the Ombudsman framework are under consideration by the Government of India; IRDA will provide inputs. - ICP 26: IRDA proposes working on a snapshot of financial performance parameters to be disclosed by insurance companies at an annual periodicity, which may be shortened. - ICP 27: (See Fraud detection and regulatory framework above.) - ICP 28: Recommendation to bring insurance brokers within AML/CFT guidelines is under examination; percentage of business procured through brokers is very low at around 1 percent for life insurance companies but more significant for nonlife insurance companies. ### Key statistics, dates, and regulatory actions cited - Workforce in four direct insurance companies: over 70,000 employees. - Statutory solvency requirement: 100 percent. - IRDA registration solvency requirement: 150 percent. - Dismantling of existing Indian Motor Third Party Pool effective: March 31, 2012. - Asset Liability Management stipulations effective: April 1, 2012. - Actuarial Standing Committee established by Order No. IRDA/ACT/ORD/MISC/131/06/2011 dated June 21, 2011. - Penalty under Section 102 of the Insurance Act, 1938: Rs 5 lakhs per instance; Insurance Amendment Bill, 2008 proposes maximum penalty: Rs 25 crores. - Percentage of business procured through brokers for life insurance companies: around 1 percent. *IMF staff report content as provided in the source PDF chapter/section.* ### References to ‘the Act’ refers to the Insurance Act 1938, as amended. ### _cr13265 - References to ‘the Act’ refers to the Insurance Act 1938, as amended. ### Legal and institutional framework - References to ‘the Act’ refers to the Insurance Act 1938, as amended. - The base law covering the insurance sector is the Insurance Act 1938, recently subject to frequent amendment; a number of key changes included in a draft 2008 Bill are still awaiting legislative approval. - IRDA was established under the Insurance Regulatory and Development Authority Act, 1999. - Under the Constitution, administrative decisions (including sanctions) applied by IRDA are appealable to the High Court and the Division Bench of the Supreme Court. - The legal system is based on the British Common Law tradition; court decisions are expected to be enforced. - The Bar Council of India and state level legal associations function as SROs. ### Professional capacity: actuarial and accounting professions - Accounting profession: - Approximately 175,000 certified accountants and half a million trainees. - Approximately 15,000 to 20,000 new accountants are produced each year after a rigorous qualification process based on examinations and experience. - Accounting and Auditing standards are formulated by the Institute of Chartered Accountants of India (ICAI); these are applicable to insurers, with a carve-out for investments. - ICAI has produced guidance manuals covering annual and concurrent auditing of insurers. - Actuarial profession: - India is a full member of the International Actuarial Association but the profession is relatively young due to atrophy during the nationalized years; revival has occurred since private entry after 1999. - The institute of actuaries gained full legal status in 2006 and is responsible for standards, training and accreditation and discipline. - As at the mission date: - 238 Fellowship level actuaries qualified to practice in India of which 72 were working in the insurance sector. - 137 associates. - more than 9,000 students. - Current shortage of actuarial skills (particularly for nonlife); the number of actuaries is expected to double in the next three to four years (although numbers have been relatively static for the last four years). - Comment: India is becoming an outsourcer of actuarial services; the number of actuaries in the country is significantly greater than those qualified to practice locally. If availability of qualified actuarial professionals continues to be an issue, consideration may be given to an appointed actuary system whereby qualified actuaries from acceptable overseas members of IAA can gain local accreditation after suitable experience and references. - Auditors and appointed actuary: - External auditors of insurance companies are appointed with shareholders’ approval. - IRDA has laid down minimum eligibility criteria for appointment as a statutory auditor and a dual audit system applies. - Unlike the RBI, IRDA does not require a listing of approved auditors from ICAI. - Requisite qualifications for the appointed actuary are laid down in the IRDA (appointed actuary) Regulations, 2000; prior IRDA approval required for appointment. ### Market statistics and information transparency - General economic, financial and social statistics are available via government publications and regulator websites (Economic Survey, Annual Report of the Ministry of Finance, RBI, SEBI and IRDA reports). - Insurance-specific dissemination: - IRDA website and publications: Annual Report, Handbook on Insurance Statistics, monthly journal; Insurance Information Bureau (www.iib.gov.in). - IRDA Circular (January, 2010) mandated insurers to publish financial data for the last five years on their websites; quarterly disclosures on companies’ websites and half yearly disclosures in newspapers. - In 2010, disclosure requirements were further enhanced: company-wide insurance statistics available to the public through individual companies’ websites. - Market size and liquidity (2009–2010): - Turnover on all stock exchanges in the cash segment: Rs 55.2 trillion (US$1.1 trillion). - Insurance sector total assets: Rs 12.7 trillion (US$260 billion). - Number of trades in corporate bonds increased by 68.5 percent. - Insurers hold 35 percent of outstanding corporate bonds. - Turnover in the Wholesale Debt Market (WDM) segment: Rs 5.6 trillion (US$115 billion). - Main issue for insurers: debt markets are relatively illiquid; dependence on the primary issue market to acquire new securities. - IRDA levies and fees: - IRDA collects its own levies: 0.1 percent of premiums, and fees; maintains control of planning and budgeting subject to Board and government auditor oversight. ### Supervisory objectives and mandate - Principal objectives as stated in the preamble to the IRDA Act: “to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry”, covering insurance and reinsurance business. - Section 14 of the IRDA Act specifies IRDA functions; powers and functions include: - Protection of the interests of policyholders. - Promoting efficiency in the conduct of the insurance business. - Dual mandate (policyholder protection and promoting orderly growth) is explicit; IRDA applies an access agenda requiring insurers to support penetration of socially deprived and rural populations, applied consistently without directing individual insurer strategies. ### Supervisory powers and interventions - Duties, powers and functions are laid down in section 14 of IRDA Act, 1999 and Sections 33, 34 and 114A of the Insurance Act, 1938; broad authority includes: - Issuance, modification, suspension and withdrawal of registration. - Specifying qualifications of intermediaries and codes of conduct. - Carrying out inspections of all insurance entities under the Insurance Act. - Control and regulation of insurance contract rates and terms. - Specifying the form of accounts to be maintained and rendered by insurers. - Regulating investments. - Regulating solvency. - Specifying social and rural insurance targets. - Specific powers: - s34(1): broad power to issue directions in public interest or to prevent actions detrimental to policyholders or insurer; adequate notice and right to appeal required. - Section 33: IRDA may investigate insurers at any time and require corrective actions, cancel registration or direct application for winding up; may publish reports. - Art 34A(1): appointments of managing/executive directors, managers or CEOs must be approved by IRDA; IRDA may remove directors/CEO for reasons similar to Art 34(1) with protections (except in severe risk where hearing can occur after removal). - The “Controller” (Chairman) may appoint a replacement director and additional directors (up to one third of Board) if severe concerns exist. - Clause 34E: Controller can prevent insurers from entering undesirable transactions, require the Board to effect managerial changes, and appoint an IRDA officer to observe day-to-day running. - Power to issue desist directions regarding undesirable reinsurance arrangements and require closure of prejudicial foreign branches. - Broad powers of search and seizure of books. - Clause 37A(1): IRDA may prepare a scheme of amalgamation of an insurer with another insurer if in interests of policyholders, public interest or insurance business of the country; other insurer must give written consent. - Limits and central government reserved powers: - Certain functions reserved for the central government (Ministry of Finance); IRDA may not appoint an administrator to a life insurer without referral to the central government. - Central government may compulsorily acquire an insurer after an IRDA report indicating noncompliance or actions detrimental to policyholders/shareholders/public interest; detailed rules (including valuation) yet to be published. - Section 114 sets out powers of central government and IRDA to make rules; central government rules relate to actuary qualifications, definition of insurance activities and certain fees; IRDA rules cover administrative matters. - Under Clause 18 the central government may direct IRDA on questions of policy; any decision of central government is final. - Under Clause 19 the central government may usurp IRDA’s authority for up to six months under specified conditions (IRDA cannot carry out functions; IRDA has not complied with government direction or defaulted; in public interest). These provisions have not been applied during IRDA’s 11-year life and are rarely applied by precedent. ### Governance, accountability and staffing - IRDA Board composition per IRDA Act, 1999: Chairperson; not more than five whole-time members; not more than four part-time members. Members appointed by central government with specified expertise (life insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration). Chairperson has general superintendence and direction on administrative matters. Policy decisions by majority vote. - Chairperson is administratively appointed by the Cabinet Committee on Appointments, headed by the Prime Minister; central government reserves the right to remove any member under specified conditions, but no member shall be removed without a reasonable opportunity to be heard. - Appointment of officers and staff is transparent; IRDA may appoint officers and staff as necessary. - Reporting and audit: - IRDA required to submit report to central government giving true and full account of activities including promotion and development; copies to be laid before both Houses of Parliament. - IRDA’s accounts audited annually by the Comptroller & Auditor General of India (C&AG); annual accounts and audit report forwarded to central government and laid before each House of Parliament. - Internal audit by independent auditors on a quarterly basis. - IRDA operations reviewed annually by the Standing Committee on Finance. - Staff conduct and conflict of interest protections: - Code of conduct defines conditions of service, restrictions on employment and activities to guard against conflict of interest. - Officers prohibited from trading/speculating in stock, shares or securities of any insurance company or any other company likely to affect discharge of official duty; limits on value of investments in an insurance company or its subsidiary; annual reporting on assets required. - Disciplinary proceedings and confidentiality requirements defined and applicable to outside experts. - No officer/employee who has retired can accept commercial employment in any insurance company except with previous sanction of the Supervisor, within 2 years from cessation of IRDA employment. - Chairman, Members, officers and staff are Public Servants and protected from being sued for actions done in good faith; cost of defending legal action incurred treated as official expenses of IRDA. - Staffing adequacy and specialist recruitment: - Income levels and benefits appear largely adequate for lower and mid-level staff; most have formal insurance qualifications or are obtaining them. - Staff turnover relatively low; some turnover in specialized areas; Member–actuary position recently vacant. - Difficulty finding a senior actuary; recommendation that remuneration be brought to market levels or consider long term contractor arrangements to recruit suitably qualified Member – actuary. ### Transparency, consultation and supervisory process - IRDA issues regulations/guidelines in consultation with stakeholders: - Councils of Life and General insurers consulted. - IRDA sets up consultative committees/groups of experts to examine issues; recommendations submitted to IRDA. - IRDA considers comments and drafts are vetted by Insurance Advisory Committee; final approval by IRDA Board; regulations notified in Official Gazette. - All IRDA regulations and circulars placed on its website. - IRDA has adequate rapid intervention powers to order investigations; investigating authority can employ any auditor and/or actuary; based on reports IRDA can issue directions including cancellation of registration or apply for winding up after due opportunity to be heard. ### Assessments, observations and outstanding issues - Assessment labels used in the source: - Observed (for several items including supervisory objectives and powers). - Partly observed (for IRDA independence and control issues). - Key assessments and comments: - The legal system is long established and appears to operate reliably. - There is currently a chronic shortage of actuarial skills (particularly for nonlife); numbers expected to double in the next three to four years, despite relative stagnation over the last four years. - If actuarial availability continues to be an issue, consider accreditation pathways for overseas IAA members after suitable experience and references. - LIC (Life Insurance Corporation of India) provides an exception to IRDA’s powers regarding management/governance as directors and senior management are appointed by central government; LIC has its own Act and lies outside some Insurance and IRDA requirements (mainly related to capitalization). - LIC accounts for approximately 70 percent of the life market and has been increasing market share; is a significant player in financial markets and a key source of long term financing for the government and infrastructure. - Current uncertainty regarding IRDA’s control of its funding and budget, incomplete oversight of LIC, and reserve powers of the central government to direct IRDA activities potentially detract from supervisor’s powers and independence. - The Amendment Act of 2008 and proposed changes to the LIC Act are intended to address some issues (including LIC’s transparency regarding its level of capitalization). - It is important that a suitably qualified Member – actuary be recruited. *Source: _cr13265 - References to ‘the Act’ refers to the Insurance Act 1938, as amended. (PDF) https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13265.pdf* ### 1. Consultation with the Councils ### 1. Consultation with the Councils ### Governance and Decision‑making - Steps in rulemaking and decision processes: - 1. Consultation with the Councils - 2. Hosting of the website, inviting comments of stakeholders. - 3. Consideration of draft regulations through the Insurance Advisory Committee. - 4. Approval of the Board - 5. Notification of the Regulations. - Insurance Advisory Committee (Section 25 of the IRDA law) composition: - Representatives from commerce, industry, transport, agriculture, surveyors, agents, intermediaries, organizations engaged in safety and loss prevention, research bodies and employees’ association in the insurance sector. - Decision records and application: - All decisions of the IRDA are based on properly recorded notes that take into account any precedents relevant to the issue under consideration to ensure consistent application. - Board and emergency powers: - Decisions on major policy issues are taken by the IRDA Board. - Matters requiring immediate decision are dealt with by the Chairman and full time members; full Board meetings can be called at short notice. - Under Section 9 of the IRDA Act, the Chairperson has powers of general superintendence and direction in respect of all administrative matters. - Under Sections 33 and 34 of the Insurance Act IRDA have adequate powers to take emergency actions. - Judicial review and limits: - Most, but not all, actions of the IRDA are subject to Judicial Review. - Investigations and actions under Section 33 of the Insurance law cannot be questioned in a Court of Law except for cancellation of registration. - Section 110 of Insurance Act provides for appeal before the Court having jurisdiction over specific orders (cancellation of registration under section 3; directing insurer to change its name under section 5; cancelling a license issued to an agent under Section 42). - Currently, no administrative provision is available to appeal penalties imposed by the IRDA. - Most administrative actions under Section 34 require prior notification, an opportunity to state its case, and review by an expert Consultative Committee before an Order is issued. - IRDA publishes its decisions, constraining egregious use of authority. ### Transparency, Reporting and Outreach - Public availability: - All applicable legislation, regulations and circulars, and consultation papers are available on IRDA’s website. - Reporting: - Section 20 of the IRDA Act requires IRDA to submit an annual report giving a true and full account of its activities including the promotion and development of insurance business during the previous financial year; the document covers an overview of the insurance market, and reviews of policies, programs and operations. - IRDA publishes a Monthly Journal on its website providing up to date data on the sector and covering topics of current interest. - Outreach: - IRDA has an outreach program mediated through the press. ### Supervisory cooperation and information sharing (Principle 5) - Legal basis and policy: - Neither the Insurance Act nor the IRDA law explicitly mentions information sharing. - IRDA has laid down an Internal Policy on sharing of information both within India and other jurisdictions under Circular No. IRDA/F&I/CIR/GLD/202/12/2010. - Classification of data under the policy framework: 1. Information in the public domain 2. Information not in the public domain – confidential information; information that could impinge on proprietary rights. 3. Other information. - Criteria for disclosure of non‑public information to Indian regulators, international supervisors or public authorities: - Convincing reasons for the request made. - Nature of the information (not proprietary). - Maintenance of confidentiality. - Reciprocity. - Right to withhold information: - IRDA retains the right to withhold information if it could destabilize a regulated entity or the sector as a whole. - International and regional memberships: - SAARC level: South Asian Insurance Regulators Forum (SIRF). - Asian level: Asian Federation of Insurance Regulators (AFIR). - Global: IAIS (the Chairman of the IRDA is on the IAIS Executive Committee). IRDA has applied to become a signatory to the IAIS MMOU. - Observations and recommendations: - Exchange of information rules and policy have yet to be tested in cases where IRDA proposes to act on information received from another supervisor or intends to take action as a home supervisor relevant to a host supervisor. - Given current shareholding rules, IRDA is unlikely to become a host supervisor. - Existing domestic information sharing is effected through the former RBI hosted high level committee, now part of the FSDC. - Assessment: Largely Observed. - Comments: The cooperation and information sharing system between the three key domestic financial sector supervisors (the former RBI High Level Committee) should be formalized. Relevant international agreements should be formalized as soon as membership of the IAIS MMOU is ratified. IRDA should formalize mechanisms to advise host supervisors of actions that are relevant to them – e.g. requiring an insurer to close down a poorly performing branch. ### Licensing (Principle 6) - Legal and entity forms: - Sec 2(7A) and Sec 2(8) of the Insurance Act define permissible forms of insurers: company formed under Companies Act 1956 or a Cooperative Society registered under the Cooperative Societies Act, 1912 or under the Multi-State Cooperative Societies Act, 1984. - Section 2C prohibits unauthorized insurance activities. - Section 14(2) of the IRDA Act, 1999 gives the IRDA powers to issue certificates of registration. - Sec 3 stipulates grant of certificate of registration by the IRDA. - Exclusions from IRDA oversight: - Certain insurance activities do not come under IRDA oversight: state based government employee life insurance schemes, health mutuals and insurance supervised by the Postal Department. - Total premiums involved currently amount to approximately IR40 million (US$0.8 million) and is not material. - Registration process for Indian insurance companies: - Three stage process – R1, R2 and R3. - R1: capital structure, overall business plans, due diligence on promoters (Indian and joint venture partner), financial strength examination; R1 taken to IRDA Board. - R2: further details; on approval of R2, R3 (certificate of registration) is granted. - Key information sought: - R1 seeks business plan for next 5 years including business lines, projected setting up costs, capital requirements, projected development of business, solvency margin, reinsurance arrangements, expenses of management, incurred claims ratio, projected investments, etc.; details of directors and key persons, significant owners and suitability of promoters. - R2 seeks details of risk management systems, reinsurance arrangements, internal control systems, information technology systems, products, internal controls on underwriting, customer service, investment, accounting, claims settlement, regulatory compliance and solvency margin. - Outsourcing and core functions: - Core function outsourcing is not permitted and must be carried out in‑house. - Noncore activities are subject to the requirements of an outsourcing circular. - Suitability and due diligence: - Suitability requirements imposed at registration on prospective owners, directors, key management and senior technical staff, including the appointed actuary. - IRDA writes to promoters’ regulatory bodies or foreign supervisory authorities regarding track record, credibility and financial strength. - Additional registration requirements applied by IRDA: - Five-year lock in for founding promoters. - Requirement that insurers maintain at least 150 percent of the minimum statutory solvency requirement. - Timelines and refusals: - No specific timeframe in law: normally IRDA processes applications within a period of eight to nine months. - Sec 3(2B) allows refusal if applicant does not fulfill legal requirements. - IRDA registration regulation paras 7 and 12 grant powers to refuse registration for incomplete applications or where not desirable to grant registration. - Sec 3(2C) requires IRDA to give reasons for rejection and provide an opportunity to be heard. - Paras 8, 9, and 13 of IRDA’s registration regulations provide for reconsideration and right of appeal to the central government. - Assessment: Observed. - Comment: The central government may wish to specify maximum timeframes for the IRDA to respond to applications including specifying requirements for more information. ### Suitability of persons (Principle 7) - Definition and scope: - Insurer registration regulations define a key functionary as the Chief Executive Officer, Chief Marketing Officer, appointed actuary, Chief Investment Officer, Chief of Internal Audit and Chief Finance Officer. - Key functionaries, significant promoters (those who will hold more than 1 percent of the issued shares) and proposed directors are required to meet fit and proper criteria, assessed by IRDA via detailed questionnaires under Clause 12 of the IRDA (Registration) Regulations 2000. - After registration, fit and proper compliance is required on an on‑going basis. - Appointed actuary and senior appointments: - Special regulation (2000) covers appointed actuary fit and proper requirements and mandates prior IRDA approval before appointment. - Insurance Act requires prior IRDA approval for appointment or reappointment of CEO/MD and full time directors, with fit and proper checks. - Auditors: - Fit and proper checks on statutory auditors are performed by insurance companies based on guidelines on appointment of statutory auditors of insurance companies. - Insurers must advise IRDA the name and address of audit firms within one week of appointment. - IRDA does not maintain a list of approved auditors and it is not clear how it carries out the relevant checks. - Remedial powers: - Under Section 37A, IRDA has powers to ask a shareholder to disinvest where they no longer meet fit and proper requirements. - Adequate disciplinary powers for actuaries exist under the Actuaries Act; the chief executive of the institute has withheld renewal of certificates to ensure practitioners are suitably qualified. - Gaps and governance practices: - Main gap: continuous monitoring of fit and proper status of non‑executive directors—appointments may be made during the financial year without supervisory oversight. Responsibility rests with insurers’ Boards under Paragraph 5.3 of the Governance Guidelines. - A Nomination Committee is not mandatory under the Corporate Governance guidelines. - Corporate governance constraints: - Section 48A and section 48B prohibit a life insurance agent from being a director of a life insurance company, subject to one exception: IRDA (Licensing of Corporate Agents) Regulations, 2002 allows a corporate agent/specified person to nominate a director if it holds more than 10 percent of the insurer’s equity. - Law prohibits common directorships among life insurance companies. - Managing director or other officer of a life insurer carrying on life insurance may not be the managing director or other officer of any other insurer carrying on life insurance business or of a banking company or of an investment company. - Annexures 2 and 3 to the Corporate Governance guidelines require insurers to annually document directors’ declarations and undertakings, deeds of covenant, details of qualifications, experience, integrity, etc. - IRDA brings supervisory concerns to the attention of insurers’ Boards and senior management. - Assessment: Observed. - Comment: It is desirable to either mandate that Boards appoint a largely independent Nominating Committee or require that the compliance officer immediately advise IRDA of the fit and proper details of any new directorial appointment. It is also desirable that the Actuarial Certificate of Practice specify the areas in which an actuary is qualified to practice. ### Changes in control and portfolio transfers (Principle 8) - Definition of control: - Section 4(2) of the Companies Act, 1956: a company's Board of Directors is deemed controlled by another company if that other company can appoint or remove the holders of all or a majority of the directorships by exercising some power without the consent or concurrence of any other person. - Share transfer approval thresholds and constraints: - Post registration share transfers need IRDA approval when, after transfer: - total holding of the transferee is likely to exceed 5 percent of paid-up capital, or - if the transferee is a banking or investment company, if it is likely to exceed 2.5 percent of paid-up capital. - Approval also required where the nominal value of shares intended to be transferred exceeds 1 percent of the paid-up capital of the insurer. - Acquisition of shares by foreign entities capped at 26 percent under the IRDA (Registration of Indian Insurance Companies) Regulations 2000. - Due diligence on foreign promoters is carried out. - Transfer of control practice: - IRDA approves transfer of a controlling interest to an entity within or outside India only after due diligence, if necessary in coordination with foreign supervisory authorities; standards follow those applied at licensing. - Section 6A (4) requires transferees to furnish declaration whether they hold shares for own benefit or as nominee; nominees must provide name, occupation and address of beneficial owners and extent of beneficial interest. - Group structures are examined as part of due diligence to ensure independence of operational activities of Indian insurance business. - Portfolio transfer and amalgamation: - Transfer of business or amalgamation of one life insurer with another can only be made under a scheme prepared under section 35 of the Insurance Act. - Insurance companies are required to file a notice of intention with IRDA; the application must cover the nature of amalgamation or transfer and reasons, together with: 1. Draft of the agreement for amalgamation or transfer 2. Balance sheets in respect of insurance business of both insurers - Assessment: Observed. *Source: _cr13265 - 1. Consultation with the Councils* ### 3. Actuarial reports and abstracts in respect of the life insurance business of each of ### _cr13265 - 3. Actuarial reports and abstracts in respect of the life insurance business of each of ### Actuarial reports and abstracts; portfolio transfers and amalgamations - Required items: - Actuarial reports and abstracts in respect of the life insurance business of each of the insurers. - Report on the proposed amalgamation or transfer prepared by an independent actuary who has never been professionally connected with any of the parties concerned during the preceding 5 years. - Any other reports on which the scheme was founded. - Practice and guidance: - Regulation recommends notification to and feedback from policyholders, although this is not a legal requirement. - Similar provisions apply under recently issued guidelines for nonlife insurers. - No instances to date of portfolio transfer or transfer of insurance business. - The IRDA advised it would be guided primarily by the need to secure the interests of policyholders; due diligence would be similar to process for considering application for registration of insurance companies. - Assessment: Observed - Comments / Policy recommendations: - The Insurance Act should ideally state that the interests of the policyholders of both insurers involved must be taken into account in assessing a portfolio transfer or merger. - An independent actuarial report should be required to confirm protection of policyholder interests. - Policyholders should at law be given adequate notification and an opportunity to provide feedback. ### Principle 9. Corporate governance - Description: - IRDA issued a Circular laying out insurers’ minimum corporate governance standards in August 2009; effective from the financial year 2009-10 (i.e., the year ending March 31st 2010). - Original document modified re related parties: IRDA accepted existing disclosure standards in the Companies Act and under accounting standards were adequate and prior clearance by IRDA is not necessary. - Compliance with guidelines required to be disclosed as part of annual report; certification by the corporate governance compliance officer (Company Secretary). - External auditor does not have to report on compliance. - Guidelines cover: Board of Directors; control functions (internal controls, internal audit function and independence from operations); senior management (CEO and senior officers, appointed actuaries and external audit); disclosures; outsourcing; interactions with the supervisor. - Annex I lists Board responsibilities: define business conduct and ethical standards; standards to be maintained in policyholder servicing and redressing grievances; provide strategic guidance; ensure information systems to identify strategic threats and opportunities. - Clause 5: Board delegates responsibilities to mandated and recommended Committees while retaining primary accountability. - Five mandatory Board committees: Audit; Investment; Risk Management; Policyholder Protection; Asset Liability Management (ALM). - Option for life insurers: make ALM part of Risk Management Committee provided ALM terms of reference included. - Remuneration, Nomination and Ethics committees are not mandatory. - Guidelines require insurers comply with statutory provisions and regulations through sound systems of internal controls and audit; systems reviewed annually by Board for effectiveness. - Internal Audit function: to be performed in an objective, independent and risk oriented manner, with timely feedback to the Board; however, existence is mentioned in law/regulations but no reference to internal audit function in the guidelines. - Board responsibilities include defining and periodically reviewing corporate business policy; underwriting policy; retention and reinsurance policy; levels of risk retentions; nature and extent of reinsurance; investment policy consistent with appropriate ALM; policy on appointments and qualification requirements for staff and fixing remuneration and benefits. - Board composition: competent and qualified directors with appropriate knowledge, skills, experience and commitment and a minimum specified number independent directors — in any case at least two. - Directors shall have access to all relevant information for taking informed decisions including strategic business plans and forecasts; organizational structure; delegation of authority; corporate and management controls and systems; marketing environment; product information and updates; major expenditure information; periodic reviews of performance. - IRDA assesses: adoption and effective implementation of sound corporate governance policies and practices; fitness and propriety of Board members; Board performance; quality of internal reporting, risk management, audit and control functions; effects of group structure on governance; and periodically shares supervisory findings with management. - Assessment: Largely observed - Comments / Policy recommendations: - Monitoring process of insurers appears limited. - Company Secretary (relevant Compliance Officer) often beholden to the CEO and has numerous other responsibilities. - External auditor not required to report on adherence — "this independent check should be instituted." - Desirable that internal audit role and functioning be mentioned in the guidelines. - IRDA advised insurers may not offer guarantees; related party transactions arguably should not require supervisor clearance though transactions above a certain size require shareholder clearance. - Advisable that related party transactions be reported on an exceptions basis according to size or nature (see ICP 17 re. related party reporting). - If a related party transaction appears egregiously mispriced, IRDA should seek independent pricing advice and, if necessary, take supervisory action. ### Principle 10. Internal control - Description: - IRDA (Registration of Insurance Companies) Regulations 2000 require applicant to establish, on grant of registration, internal controls adequate to nature and size of business. - Corporate Governance Guidelines require insurers have requisite control functions on an ongoing basis; oversight vested with Boards. - Product File & Use Circulars for nonlife insurers require Board approval of underwriting policies; Board-approved delegation of authority for underwriting; separation of underwriting from business development; internal technical audits quarterly. - Board approves risk retention and reinsurance program annually before submission to IRDA. - Investment regulations require internal audit of investment transactions and systems on a quarterly basis where AUM is less than Rs 1,000 crore (approx. US$50 million). - For larger amounts, a concurrent (i.e., daily) audit is required by an external CA firm that does not already have an appointment with the insurer; this CA firm must certify internal controls satisfy a technical standard relating to investment risk and systems. - All insurers must subject systems and processes to audits at least once every three years by an external auditor who is not the statutory, concurrent or internal auditor. - Corporate Governance Guidelines provide for roles of appointed actuaries and statutory auditors and lay down role of Audit Committee and certain roles for internal audit. - Board Risk Management Committee responsible for effective operation of risk management system; must look at risk profile on individual and group-wide basis and advise Board on risk management decisions at strategic and operational levels. - Audit Committee must be chaired by an independent director (ideally a CA) and place findings before main Board; responsibilities include ensuring efficient functioning of internal audit department (assuming internal function). - No specific section covering internal audit function in Corporate Governance Guidelines; IRDA’s questionnaire states audit reports go to the CEO. - Internal audit included as a noncore activity under outsourcing guidelines. - Insurers already have to use up to five external CA firms on a three-year cycle; addition of a sixth with a permanently staffed department within the insurer seems excessive. - Internal audit function needs to assess specialized processes and functions such as underwriting and claims handling. - Possible practical approach: allow outsourcing of some internal audit activities for small insurers (including recently licensed) subject to a dedicated individual (say a risk manager) within insurer responsible for effective carrying out and with direct line to audit or risk management committee. - Other Audit Committee responsibilities: set up procedures to ensure adequacy of checks and control mechanisms; procedures relating to maintenance of accounting systems, transactions and administrative activities; Board expected to discuss internal controls with statutory auditor. - Policyholder Protection Committee mandatory; duties include ensuring complaints and grievances process is in place, adequacy of disclosed information and policyholders are aware of insurance ombudsman service. - Insurance Act and IRDA (appointed actuaries) Regulation 2000 require every abstract by actuary to be accompanied by a certificate from the principal officer that full and accurate particulars of every policy with liability actual or contingent have been furnished to the actuary. - Actuarial reports form basis for finalization of final accounts and are reviewed by the Board while adopting accounts; appointed actuary must certify actuarial report and abstract and be available to the Board. - Assessment: Largely observed - Comments / Policy recommendations: - Internal controls relating to investment function for larger insurers are exemplary. - Need for a more structured approach to internal audit function (process oriented) distinct from Risk Management (forward looking). - Corporate Governance Guidelines should explicitly cover internal audit function; specify it needs a senior officer responsible; sufficient resources; unfettered access to required information; sufficient independence; direct access to audit committee and Board as a whole. - SEBI and RBI have interpreted such requirements to mean internal audit should be an internal department. - For small insurers, outsourcing allowed subject to dedicated internal responsibility and direct reporting lines. ### Ongoing Supervision — Principle 11. Market analysis - Description: - IRDA analyzes performance of insurance companies monthly, based on business figures reported by life and nonlife insurers. - Business trends studied frequently; sector performance more fully analyzed annually. - IRDA publications (available through IRDA’s web site): Monthly Journal; Annual Report; Insurance Sector Appraisal. - Issue-based analysis examples: Features of ULIPS and their accounting treatment; Infrastructure investments; Premiums Awaited Policies; Claims settlement; Motor Third Party Provisioning. - Analysis of trends and scenarios is not formally carried out by IRDA, though Journal carries articles touching on international developments (Solvency II etc). - Both publicly available and confidential sources used. - Quantitative analysis based on data filed with IRDA, Insurance Information Bureau, Tariff Advisory Committee, other regulators and public documents; Councils of General and Life Insurance. - Qualitative analysis based on market conduct activities brought to attention through public/media and publicity material filed with IRDA for information and/or prior approval; market conduct issues assessed through IRDA Grievance Cell. - IRDA publishes: Annual Report of the supervisor; Handbook of Insurance Statistics; Business statistics on monthly and quarterly basis. - IRDA has established the Insurance Information Bureau (IIB) primarily to support pricing; data collected also facilitates market analysis. - Additional data captured by Councils of the Life and General industries. - IRDA obtains information and monitors developments when market-wide events occur (examples: Sumatra Tsunami (2006); Investment exposures in Satyam Computers Ltd). - Assessment: Observed - Comments: (no additional comments provided in source) ### Principle 12. Reporting to supervisors and off-site monitoring - Description: - Section 11 of the Insurance Act requires all insurers to submit prescribed annual financial statements. - Format and accounting principles prescribed in the Preparation of Financial Statements Regulations of March 2002. - Audited annual accounts required to be signed by chairman and two directors and by the principal officer. - Actuarial report and abstract prepared by appointed actuary must be filed, accompanied by certification from principal officer that full and accurate particulars of every policy with liability actual or contingent have been furnished to the actuary. - Valuation bases of assets and liabilities are not consistent: - Largest asset class, fixed interest securities, valued on a book/ amortization basis. - Liabilities by regulation valued at fair value (in practice actuarial profession has adjusted – see ICP 23). - This approach reduces volatility of results/solvency fluctuations but means economic performance not properly disclosed and apparent capital strength could be overstated if significant mismatching. - Insurance sector not consistent with Indian accounting standards (IndAs). - IRDA provides 60 pages of reporting forms covering all operational and financial aspects except investments (subject to alternative concurrent audit process). - Monthly reports tend to focus on business volumes and branch openings and could include more short-term risk information. - Large insurance risks report required, but no requirement to report significant investment items such as related party transactions. - Audit opinion required on financial statements annually; half year financials subject to a limited audit review. - Under specific circumstances (strategic changes affecting policyholders), additional statistics/data or reports may be sought at shorter intervals; IRDA may require more frequent/detailed additional information for industry-wide implications or special circumstances. - No distinction in reporting requirements on basis of ownership; State owned entities and private insurers equally governed. - Both life and nonlife insurers required to file an annual Financial Condition Report in a prescribed format. - Actuarial Reports required to be compliant with Guidance Notes issued by the Institute of Actuaries of India (IAI). - Accounting regulations require reporting on off-balance sheet exposure via disclosure of nature and amounts of contingent liabilities. - Where insurers are part of defined financial conglomerates, information is collected on a group wide basis. - Regulation 7 (c) of IRDA (Registration of Companies) Regulations, 2000 states: “The applicant will carry on “all functions” in respect of insurance business including “management of Investment” within its own organization.” - February 2011 circular clarified core and noncore activities; Noncore activities include pension fund trustee activities, website development, HR services and tele-marketing. Details of outsourced functions must be advised to IRDA. - Assessment: Observed - Comments / Policy recommendations: - In practice there is greater consistency than apparent from accounting and actuarial liability valuation standards; asset valuation issue covered under ICP 21. - Desirable that monthly reports include more short term risk data on an exceptions basis. - Concept of peak risk underwritings could be extended to cover major investment allocations, including related party transactions breaching defined thresholds. ### Principle 13. On-site inspection - Description: - Insurance Act empowers supervisor to call for information, undertake inspection, conduct enquiries and investigations including audit of insurers. - Regulations governing insurance intermediaries empower IRDA to conduct on-site inspection of intermediaries. - IRDA’s (Insurance Brokers) Regulations, 2002; IRDA’s (Third Party Administrators – Health Insurance Services) Regulations, 2001; IRDA’s Insurance Surveyors and Loss assessors (Licensing, Professional Requirements and Code of Conduct) Regulations, 2001 empower IRDA to conduct on-site inspection of brokers, TPAs and surveyors & loss assessors. - Insurance Act envisages appointment of an external qualified person to carry out an investigation and specifies manner of reporting to IRDA; similar provisions for brokers, surveyors and loss assessors under cited regulations. - On-site inspections carried out after considering inputs/data from relevant off-site regulatory departments. - Inspections led by Inspections Department, which may draw on other resources. - Current plan: have enough capacity to carry out scheduled inspections every 2 years for every insurance entity; however, current resources would not permit this. - On-site inspections are carried out in two ways: (source text ends before listing the two ways) - Assessment and comments: (assessment snippets present earlier for on-site inspection planning and resource constraints) *Source: IMF content unit _cr13265 - 3. Actuarial reports and abstracts in respect of the life insurance business of each of* ### 1. Financial / Comprehensive inspections, and ### 1. Financial / Comprehensive inspections, and ### On-site inspections — scope, process, and findings - IRDA has prepared detailed procedures manuals for on-site financial condition and market conduct inspections. - The financial condition manual contains a questionnaire covering the main processes and procedures in an insurance operation. - Typical inspection team composition: - actuarial personnel - accounting personnel - insurance operations personnel - IT staff is not formally included, although IRDA currently has such an individual on staff and the lacuna has been covered in practice. - Post-inspection report components: - statement of the Methodology and sampling process - Executive Summary - accumulated individual findings and information informing the findings - Reporting and follow-up: - A report is sent to the insurer after the inspection. - No formal feedback meeting is required under current procedures, although procedures prescribe giving the insurer an opportunity to be heard before action is taken on an investigation report. - An internal Standing Committee deliberates on the findings of the inspection teams and the responses of management prior to taking any prescribed actions. - Circular on outsourcing covers third parties for the purpose of on-site inspection insofar as it relates to the processes and documents of the insurance company. - Assessment: Observed - Comments and recommendations: - It is recommended that a staff member with IT system skills is added to a full scope inspection team – particularly given the growing role of IT in Indian insurers’ strategies. - It would be helpful to managements and Boards of insurers, possibly through the Audit and Risk Management Committees, to arrange a feedback meeting as a matter of course after an inspection is completed. - For normal scheduled full scope inspections a 3 or 4 year cycle is adequate: insurers normally have very different risk profiles to banks which do need more frequent inspection. - Emphasis: the role of the supervisor is not to replicate the work of the external auditors; rather the role is to carry out a risk audit with the primary objective of ensuring the insurer is following sound business and financial practices and that policyholder interests are being satisfied. ### Principle 14 — Preventive and corrective measures (description, powers, practice) - Principle statement: The supervisory authority takes preventive and corrective measures that are timely, suitable and necessary to achieve the objectives of insurance supervision. - Legal and regulatory instruments available to IRDA: - Section 14(1) of the IRDA Act directs IRDA to regulate, promote and ensure the orderly growth of the insurance business and sub-section (2) empowers IRDA to perform the necessary functions to achieve these objectives. - Clause (h) of Section 14(2) enables IRDA to call for information, undertake inspections, and conduct inquiries and investigation including audit of registered entities and other organizations connected with the insurance business. - Section 33 of the Insurance Act empowers the IRDA to appoint an investigation authority to investigate the affairs of any insurer and seek a report thereon. - Section 34 of the Act empowers the IRDA to issue directions to secure the interests of the general public, policyholders, and the insurer. - Clauses 34B to 34H give the IRDA wide ranging powers over management. - 34H specifies powers to conduct searches and seize documents and records. - Section 37A – Prepare a scheme of amalgamation. - Section 64VA(2) requires the submission of an action plan where the solvency margin is breached. - Section 102 specifies the penal provisions for non-compliance with the provisions of the Insurance Act. - The IRDA (Registration of Indian Insurance Companies) Regulations 2000 provide for the suspension/cancellation of registration in certain circumstances. - Progressive escalation of action or remedial measures (as stated by IRDA, intervention practice not presently documented): - Calling for information - Rectification of anomalies observed - Financial penalties - Suspension of business - Cancellation of license - Governance over capital management and share transfers: - Section 6A of the Insurance Act requires that any transfer of shares above the stipulated limits requires prior approval of the IRDA. - Buyback of shares governed by general commercial law; administration differs for unlisted companies (central government) and listed companies (SEBI). Detailed procedural guidelines exist. - Practice and thresholds: - No progressive corrective actions according to the level of solvency margin are currently formalized, leading to potential for forbearance. - In practice, supervisory action begins if an insurer’s solvency ratio drops below 150 percent although this tends to be largely consultative. - Relatively minor procedural irregularities are rectified by insurers and corrective measures are taken to obviate the need for a formal order or action. - The IRDA may call for an acceptable course of action with appropriate time schedules as and when required. - Assessment: Largely Observed - Comments and recommendations: - IRDA does not have a modern risk based early warning system in place and what ratios are measured appear to be largely generic rather than being based on emerging experience. - The supervisor is currently examining the Northern European traffic light methodology and other early warning systems. - Concern: IRDA 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. ### Principle 15 — Enforcement or sanctions (description, powers, limitations, proposed changes) - Principle statement: The supervisory authority enforces corrective action and, where needed, imposes sanctions based on clear and objective criteria that are publicly disclosed. - Statutory enforcement powers and mechanisms: - 34 E (b) enables the IRDA to call for a meeting of directors and to depute its officers to watch the proceedings. - Sec 52A provides the authority to recommend to the central government that an Administrator be appointed for a life insurer. Similar provisions could conceptually be invoked with respect to general insurance companies under section 14 of the Insurance Act. - Section 52 H provides the central government with the power to acquire the business of an insurer. - Monitoring and interim measures: - IRDA closely monitors the operations of insurers in light of any directions issued or compliance schedules and can seek more frequent reporting. - Where situations call for immediate and prompt action, the supervisor issues ad-interim directions pending investigation and enquiry as a preventive measure. - Fines and criminal sanctions: - Fines against individuals and insurers are specified under the Insurance law under sections 102 to 105C. These include failure to follow directions, failure to maintain an adequate solvency margin, acting illegally as insurance intermediaries and rebating, accepting business from other than licensed intermediaries, failure to comply with specific provisions of the Insurance Act and the wrongful submission of information. - Current monetary cap: fines capped at Rs 5 lakh (approximately US$11,000) based on conditions when the Insurance Act was drafted. - Draft 2008 Amendment Bill proposals (would update sanctions): - Section 102: proposes to levy a penalty of Rs 1 lakhs for each day of such failure to comply with Act, rules or regulations subject to a maximum of Rs 1 crore. - Section 103 proposes to levy a penalty of Rs 25 crore and with imprisonment up to 10 years for doing insurance business without obtaining a certification of registration. - Section 104 proposes to levy a penalty up to Rs 25 crore for not complying with Section 27, 27 A, 27 B and 27 D and 27 E. - Section 105 proposes to levy a penalty up to Rs 1 crore for wrongfully obtaining or withholding property. - Section 105 B proposes to levy a penalty up to Rs 25 crore for not complying with the provisions of 32 B, C & D. - Scope for imprisonment is noted as appropriate. - Administrative and supervisory actions: - IRDA at its discretion can bar an insurance promoter who withdraws from an insurance venture from re-entering the insurance business. - Persons in positions of responsibility found to be delinquent would not be given regulatory clearance. - Operations of defined conglomerates across banking, NBFCs, insurance and capital markets are monitored through sharing of information amongst the regulators; this system is still informal and to some extent ad-hoc. - The IRDA (Registration of Companies) Regulations 2000 provide for the suspension of registration of an insurer in the case of default in complying with, or acting in contravention of any requirements of the legislation/regulations/directions/guidance/ orders applicable to them. - Performance of “financial conglomerates” is monitored closely for any systemic risks. - All decisions are recorded through speaking orders. - Assessment: Partly observed - Comments and recommendations: - Enforcement actions and sanctions open to IRDA tend to be at the extremes – relatively light or very heavy. - IRDA needs to refer certain fundamental corrective actions, such as appointing an administrator, to the central government. - The enforcement regime needs to be formalized through a ‘Supervisory Guide’ or ‘Ladder of Intervention’ to provide IRDA with stronger legal backing and to limit scope for forbearance. - Suggested intermediate enforcement powers could include: - The ability to impose selective time and volume limitations on business activities (including by geography and product) - The ability to require deposits if asset security is a concern - The ability to impose an expiry date for a license to encourage timely rectification of undesirable financial ratios or operating practices - International experience shows supervisors can be unwilling to intervene early in the absence of a formalized set of rules; these could be based purely on solvency measures or on a more inclusive risk rating system. - Given limitations of current tools, IRDA has adopted a name and shame approach whereby sanctions and enforcement actions are disclosed on its web site. ### Principle 16 — Winding-up and exit from the market (framework and provisions) - Principle statement: The legal and regulatory framework defines a range of options for the orderly exit of insurers from the marketplace; it defines insolvency and establishes the criteria and procedure for dealing with insolvency. In the event of winding-up proceedings, the legal framework gives priority to the protection of policyholders. - Solvency and continuation thresholds: - A minimum solvency ratio of 150 percent (based on the statutory minimum solvency requirement) has been stipulated by the IRDA through insurers’ registration requirements. - Section 64VA of the Insurance Act stipulates the requirement for sufficiency of assets. - Under the Insurance Act, where an insurer is in breach of solvency requirements and is unable to rectify the position within such time as stipulated by the IRDA, it is not permitted to continue its business. - Central government powers and administrator appointment: - If IRDA has reason to believe a life insurer is acting in a manner prejudicial to interests of its policyholders, it may make a report to the central government which then has powers to appoint an Administrator. - For nonlife insurance companies, provisions of section 14 of the IRDA Act would be invoked. - Statutory winding-up provisions (Sections 52 to 58): - Sections 52 H to 52 K deal with the power of central government to acquire the undertakings of an insurer and to make a scheme for carrying transferring such business to another insurer. - Section 52K and L authorize the Central government to establish a Tribunal with the powers of a Civil Court to deal with insurer wind ups. - Section 53 covers conditions under which a Tribunal may order an insurer to be wound up, including in accordance with the Companies Act, 1956, application by a sufficient corpus shareholders and upon the application of the IRDA based on continued non-compliance with the Insurance Act, insolvency and in the interest of policyholders or the general public. - Section 54 states that an insurer may not be wound up voluntarily, except for the purposes of amalgamation or restructuring if by reason of its liabilities it cannot continue in business. - Section 57 deals with situations where cross liabilities exist between insurers. *IMF staff report content unit: _cr13265 - 1. Financial / Comprehensive inspections, and* ### Section 58 deals with scheme for the partial winding up of insurance companies (again ### Section 58 deals with scheme for the partial winding up of insurance companies (again under a Tribunal) ### Partial winding up and policyholder priority - Sections relating to winding up give priority to the interests of policyholders within policyholder funds, which must be held in separately earmarked accounts. - Thereafter policyholders are treated as secured creditors. - Assessment: Observed - Comments: - The authorities may wish to consider allowing the voluntary wind up of solvent non-life insurers, subject to satisfactory safeguards. - In some circumstances, claims run off can be the most efficient method of exit. - For consistency, the provisions relating to the appointment of an Administrator for non-life insurers preferably should harmonize with those applying to life insurers. ### Principle 17. Group-wide supervision - Principle statement: The supervisory authority supervises its insurers on a solo and a group-wide basis. - Description: - In the Indian context there is no definition of an ‘Insurance Group’. Insurance companies can, however, belong to specified promoter groups under a defined conglomerate structure. - Current coordination mechanisms for financial conglomerates (FC) are largely informal, although information is generated at individual supervisor level: - A. IRDA (Registration of Indian Insurance companies) Regulations, 2000: at the time of registration, the applicant is required to furnish details of other group companies. - B. Guidelines on monitoring framework of Financial Conglomerates - C. The High Level Committee on Capital and Financial Markets (now a FSDC sub-committee) defined Group, Specified Financial Intermediaries (SFI), Non-specified Financial Intermediaries (NSFI) and Non-Financial Intermediaries (NFI) and has laid down the criteria for the identification of FC. - The scope of supervision through the FC mechanism covers all group companies especially Specified Financial Intermediaries and Non-financial intermediaries and Non-specified financial intermediaries in the financial sector. - A FC group is assigned to respective regulator based upon its overall exposure in a regulated financial activity – banking/NBFC/securities market/insurance. However, the other sectoral supervisors are required to share their specific concerns with the lead supervisor. This avoids unnecessary duplication in the supervision in the regulatory processes. - The reporting format prescribed for FC captures the following information: - Group structure and cross holdings. - Capital Adequacy/solvency position. - Financial information of SFIs such as capital adequacy/solvency position, NPA, investments, operating profit, net profit, etc. - Intra-group transactions & exposures. - Outstanding exposure of each SFI. - The format also captures qualitative information such as governance structure, auditors, penal action and the group risk profile report. - The IRDA is lead supervisor for three FC groups (including LIC). Reports are prepared quarterly by the Finance and Investment (F&I) department. Meetings with the other regulators occur six-monthly, when one group is normally discussed. - It is not clear from the reporting documents provided to the assessor that all intra group exposures are currently captured (including insurer deposit with banks). - Insurers are allowed to lend money to parent or subsidiary companies (Para. 29 of the Insurance Act) and only need to report this (within 30 days) if it is from a life fund. However, the monthly reports do not have an explicit section on related party transactions. - The current approach conceptually provides an oversight of group structure, their interrelationship, ownership structure, management structure, capital adequacy, various risks including reinsurance to which the group is exposed to, inter-group transactions and internal control mechanism. However, an oversight of the current reporting requirements for insurers indicates that the information to carry out such detailed and complex analysis is not currently available. - Controlled subsidiaries may not be included as assets for solvency determination. - There is no specific provision for withdrawal of an insurer’s registration if the organizational or group structure hinders effective supervision. - The Insurance Amendment Bill 2008 has a provision for cancellation / suspension of the license in case the home supervisor has cancelled or suspended the license of a foreign insurer having presence in India. - Assessment: Largely Observed - Comments: - India has made a good start on creating a conceptual framework for conglomerate group supervision (and oversight of systemic risk) but the information flows, processes and early warning mechanisms involved need to be formalized, possibly through an MOU between the four supervisors if a coordination body with statutory status is not seen as being desirable. - Individual supervisors should have more power to consider group structures and exposures and related party transactions in determining its interventions. - Ideally an ad hoc committee of an insurer’s directors (the majority of whom should be independent) should, by law, consider each related party transaction to ensure that market prices have been applied, that the transaction is in the interests of the insurer and that the quantum of value involved does not warrant shareholder approval (if there is more than one shareholder) or otherwise is not materially relevant to the insurer’s net asset position. ### Principle 18. Risk assessment and management - Principle statement: The supervisory authority requires insurers to recognize the range of risks that they face and to assess and manage them effectively. - Description: - The Corporate Governance Guidelines require that an insurer shall have a proper policy framework in place which is a “robust and efficient mechanism for the identification, assessment, quantification, control, mitigation and monitoring of the risks.” They place the responsibility for monitoring and controlling risks on the Board’s Risk management Committee. The committee reports to the Board which is ultimately responsible for such compliance. - Sections 13, 27, 64V, 64VA of the Insurance Act require investigations to be made by the Appointed actuary into the financial conditions of the insurer. The appointed actuary’s Annual Report (AAAR) template requires that all the major risks including withdrawal, expenses, mortality and investment risks, should be analyzed. - Risk control: The following risk controlling mechanisms are mandatory: - Annual submission of re-insurance return. - Approval of re-insurance treaties. - Approval underwriting at File & Use level. - Analysis of surplus in order to take any corrective action and modification of valuation assumptions. - For complex products, risk mitigation procedures are checked at the File and Use level: - Investment mechanism. - Pricing and monitoring of guarantees and options. - Reinsurance arrangements. - Result of experience analysis supporting the assumptions used in pricing. - Underwriting procedure used. - The extent of requirements indicated above vary depending on the complexity, size and nature of business. - Regulations on preparation of Financial Statements require that management make disclosure with regard to overall risk exposure and strategy adopted to mitigate risks. - The IRDA (Investment) Regulation of November 2008 lays down a framework for portfolio diversification and reduction of over-exposure to a particular asset class/company/group/industry. - Assessment: Observed - Comments: - This ICP has been assessed on the basis of control of investment and underwriting risk. Further work needs to be done on the monitoring of operational (including general systems) risk - see Internal Control (ICP 10). ### Principle 19. Insurance activity - Principle statement: The supervisory authority requires insurers to evaluate and manage the risks that they underwrite, in particular through reinsurance, and to have the tools to establish an adequate level of premiums. - Description: - Under IRDA’s File & Use circular issued in September, 2006 nonlife (general insurance) underwriting policy is to be placed before the Board of Directors of insurers (Board) for approval. The form and frequency of reporting to the Board on the performance of the management in underwriting the business is also specified. Any changes in the underwriting policy are required to be approved by the Board. - The appointed actuary has been assigned the responsibility of ensuring that the premiums charged are fair. Similar requirements now also apply for life insurers following an earlier self-assessment. - A circular issued in 2001 requires life insurers to furnish details of pricing and reserving assumptions in the ‘File & Use’ application for new products/ modification of existing products. These are reviewed by the IRDA. - Under the IRDA (appointed actuaries) Regulations, 2000, the appointed actuary is responsible for ensuring that the premiums rates are fair. The actuary files an actuarial report with the IRDA every year where he/ she expresses an opinion on the mathematical reserves being adequate to meet the insurer’s future commitments under the contracts given policyholder reasonable expectations. - A Circular issued in February 2010 requires life insurers to submit an annual report on risk management which includes a detailed analysis of expenses. - The appointed actuary and the underwriters of a nonlife insurers are required to ensure that various details on claims incidence, claims payments etc are captured at the underwriting stage. - The appointed actuary and the underwriters are responsible for compiling first loss rating schedules and schedules of discounts for higher deductibles or franchise for different products based on statistical data. - In respect of long term insurance products, the appointed actuary states the basis on which the reserves for unexpired risks are calculated. - The IRDA (Life Re-insurance) Regulations 2000 require insurers to submit details of their re-insurance program to the IRDA for approval. The policy spells out the limits on the amount of risk to be retained on the account of the insurer, names of re-insurers with whom the insurer proposes to place the reinsurance and the types and extent of reinsurance contracts arranged. The reinsurer shall have a minimum credit rating by specified credit rating agency. - The IRDA (General Insurance-Reinsurance) Regulations 2000 require the reinsurance program of a general insurer, after approval by the Board, to be submitted to the IRDA. The reinsurance program is to be guided by the following objectives: - a) maximize retentions within the country; - b) develop adequate capacity; - c) secure the best possible protection for the reinsurance costs incurred; and - d) simplify the administration of business. - The regulation spells out the limits on the amount of risk to be retained on the account of the insurer, types and extent of reinsurance contracts arranged etc. - Assessment: Observed - Comments: - Ideally the IRDA should not formally approve reinsurance schedules as this could expose it to legal liability. Rather all reinsurance schedules should be submitted to IRDA and the supervisor should have the power to require that the insurer seek an independent expert report on its reinsurance strategy, to be submitted to the Board if it deems that the strategy needs modification. ### Principle 20. Liabilities - Principle statement: The supervisory authority requires insurers to comply with standards for establishing adequate technical provisions and other liabilities, and making allowance for reinsurance recoverables. The supervisory authority has both the authority and the ability to assess the adequacy of the technical provisions and to require that these provisions be increased, if necessary. - Description: - The valuation bases for insurance liabilities is laid out in Schedules II-A (life) and II-B (nonlife) of the IRDA Assets, Liabilities and Solvency Margin of Insurers Regulations 2000. - The valuation of liabilities for traditional insurance contracts (whole of life, endowment assurance etc) is carried out using a gross premium (bonus reserve) valuation method on a policy by policy basis. This employs realistic assumptions about future cash flows (including bonuses allowing for reasonable policyholder expectations). Mortality, interest and other key assumptions are based on realistic projections after adjusting for margins for adverse deviation. For solvency purposes negative reserves have to be set at zero and if the surrender value is greater than the reserve calculation the higher figure applies. - The reserve calculation also needs to take into account the nature of the assets and the basis under which they are valued. This provision has enabled appointed actuaries to make adjustments to allow for the amortization valuation basis of debt instruments (i.e., debt instrument valuations do not necessarily reflect current market values). In particular, they have been determining investment returns based on both market and actual asset valuation bases and choosing the lower figure for purposes of determining the immediate discount rate. The issue of earning rates on future new cash flows is less easily dealt with and could potentially lead to inconsistencies but again the profession appears to have taken appropriate steps. - Unit linked policies have a combination of a unit value based liability and a general liability to cover other future cash flows. - The reserve determination is subject to peer review by an independent actuary. - Of potentially more concern is the treatment of expenses when insurers are running consistent expense over-runs. Currently, actuaries are not required to use the current expense rate in determining prospective expenses. - Nonlife provisions are partly formulaic and partly actuarially determined. Unexpired risk reserves are calculated as a conservative proportion of net written premium, according to the class of insurance. Outstanding claims provisions are determined actuarially. The relevant guidelines state that undiscounted provisions should be established based on expected future claims flows projected employing at least three different models, with the largest value being chosen. By not discounting the methodology implicitly assumes that future excess claims inflation (called super-imposed inflation in the actuarial literature and usually arising from changing court attitudes) over that assumed in the models will be matched by investment income. - Both the life and nonlife policy liability estimates are subjected to a Peer Review Committee within the IRDA. - Policy liabilities need to be reported on a gross and net basis, with limits being placed on the reinsurance allowance. - Assessment: - Life: Observed - Nonlife: Partly observed - Comments: - The need for life appointed actuaries to determine valuation discount rates through informal agreement is undesirable. In addition expense over-runs should be provided for if they appear to be chronic once the establishment period is finished. - The nonlife valuation rules do not provide any guidance as to where claims provisions (typically the main component of the technical reserves) should be set on the distribution of possible results. Ideally the nonlife actuary should provide a range of possible values to management and Board and show where, say the 75th percentile value lies (depending in the risk margin specified by relevant regulations or standards). - The recent need to impose a significant increase in commercial MTPL claims provisions and the impact this had on numerous insurers’ total technical reserves also brings into question the quality of nonlife actuarial work in the affected insurers. - A concern was expressed that some actuaries establishing long tail claims provisions are not properly qualified to do this work. In addition, there is a lack of data at present as long tail business claims paid run-off triangles are still being developed and there is no requirement that claims incurred data is gathered. Some significant insurers appear to have only 4 years run off data. - It is advisable that actuarial certification be made specific to the work being done (life, nonlife etc). This could be introduced over the next 3 years to allow a sufficient supply of nonlife actuaries to emerge and in line with the development of adequate claims run-off (triangle) data. - IRDA has recently set-up (vide Order No.IRDA/ACT/ORD/MISC/131/06/2011 dated June 21, 2011) an Actuarial Standing Committee (ASC) to advise on various matters relating to actuarial standards/regulations etc. ### Principle 21. Investments - Principle statement: The supervisory authority requires insurers to comply with standards on investment activities. These standards include requirements on investment policy, asset mix, valuation, diversification, asset-liability matching, and risk management. - Description: - Sections 27, 27A, 27B, 28 of the Insurance law and the IRDA (Investment) Regulations, 2000 lay down the framework for the management of investments including exposure limits. - IRDA (Preparation of Financial Statements and Auditor Report of Insurance Co) Regulations, 2002 and INV/GLN/003/ 2003-04 lay down the norms for valuation of assets. The guidelines for determining the market value of securities are covered in Sections 27A, 27B of the Insurance Act and Regulations 9 and 11 of the IRDA (Investment) Regulations 2000; and a Circular issued in 2008/9. Equities are valued at market, debt securities at amortized value, loans at book and property at book value. - While the Insurance Act (Clause 64V) states that no asset may be valued at more than its market value this provision has been over-ridden by a circular that stipulates that debt securities will be valued at amortized value regardless of underlying market value. - There are no liquidity requirements specified in the law or regulations. However, the insurer’s Investment Policy document is required to include management of all investment risks, liquidity, and stop loss limits. Clear individual responsibility and accountability for transactions should be laid down for the Investment department. - Policyholders’ funds cannot be invested outside India. - Permissible investments are explicitly indicated in the Insurance Act and the regulations. - Assets (other than deposits with the Reserve Bank and assets of foreign insurers held under trust) must be held in the name of a public officer approved by the IRDA. - The use of derivatives is permitted to a very limited extent for the purpose of hedging only. - Insurers are required to hold unencumbered assets. Short selling of assets is not permitted. *IMF staff report content provided in the source PDF.* ### Section 28 of the Insurance Act and Regulations 9 and 11 of the IRDA (Investment) ### Section 28 of the Insurance Act and Regulations 9 and 11 of the IRDA (Investment) ### Risk management, governance, and appointed actuary - Regulatory requirements: - Section 28 of the Insurance Act, Regulations 9 and 11 of the IRDA (Investment) Regulations 2000 and a Circular issued in 08/09 require insurers to have clearly defined risk management systems and procedures and that compliance should be certified by a “systems auditor”. - The appointed actuary’s Report covers Insurance Risk, Credit Risk, Market Risk, Operational Risk and Liquidity Risk. - The Investment Policy document is required to be reviewed by the Board to ensure compliance with the law and regulations. - Investment functions are treated as core activities and may not be outsourced. - The Investment Regulations require a proper methodology for matching of assets and liabilities. - Corporate Governance Guidelines lay out the constitution of the Asset Liability Committee for life insurance companies; this may be formed under the Risk Management Committee. - Assets subject to supervisory oversight may not be charged in most circumstances. - Insurers must report any event that could have a material adverse impact on the investment portfolio and consequently on the security of policy-holder benefits or expectations. - The investment policy is required to be reviewed on a half yearly basis. - The Corporate Governance Guidelines provide for the Investment Committee to take cognizance of any deteriorating conditions and to have contingency plans. - Internal control and segregation: - IRDA (Investment) Regulation requires clear segregation of the investment function and related middle and back office operations. - Heads of the front and back offices are required to independently report to the CEO. - Functions of front, mid and back offices are defined in the guidelines. - Every investment transaction is required to be certified by a third party concurrent auditor and the report of this individual has to be placed before the Board Audit Committee. - The Standard Operating Procedure specifies guidelines for investment officers; however, the skill set and required experience of investment personnel have not been specified. - Assessment and comment: - Assessment: Largely observed - Comment: 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. ### Derivatives and similar commitments (Principle 22) - Regulatory stance and market practice: - The supervisory authority requires insurers to comply with standards on the use of derivatives and similar commitments, covering restrictions, disclosure, internal controls and monitoring. - Fixed interest derivatives may be used by Indian insurers purely for hedging purposes (i.e., the underlying securities must be held by the purchaser). - Fixed interest and foreign exchange derivatives markets exist, but fixed interest derivatives are constrained by illiquidity of debt markets. - To date, no Indian insurer has employed derivatives. - Required procedures before transacting: - Insurers must submit a policy for Board approval before transacting in derivatives, including how risk will be measured. - Before dealing in fixed income derivatives, the insurer’s Board must produce a risk management policy, ensure adequate internal controls (including qualifications of dealers; separation of front, middle and back office; periodical audit; and capital adequacy) and set prudential limits. - Oversight and audit: - Essential criteria are addressed in the IRDA (Investments) Regulations, 2000, and subsequent guidelines and circulars. - IRDA has prescribed minimum standards for Investment Risk Management Systems and processes. - These are audited in real time by an on-site third party (Internal/ Concurrent Auditor). Exception reports go to the Audit committee of the Board. - Assessment and comment: - Assessment: Observed - Comment: If IFRS is fully implemented in India for insurers, the value of debt holdings will fluctuate and derivatives may become more attractive instruments to stabilize results. IRDA would need to strengthen governance oversight and perhaps require more frequent reporting of exposures. ### Capital adequacy and solvency (Principle 23) - Entry capital and minimum solvency: - Minimum capital at entry is Rs 100 crore (approximately US$22 million) for a direct insurer and Rs 200 crore for a reinsurer. Capital has to be in the form of ordinary shares with a single par value. - The minimum solvency requirement has been set at the greater of Rs 50 crore or a formulaic solvency value. - For corrective action purposes, a minimum solvency ratio of 150 percent has been prescribed. This is monitored on a quarterly basis. If the insurer falls below the 150 percent level the insurer will be subjected to more frequent solvency reporting. However, no prescribed ladder of corrective actions has been put in place. - Formulaic solvency and sector specifics: - The formulaic solvency value is a combination of an amount based on the EU solvency I formula and, for life insurance, an asset based value. In practice the weighting for asset risk has been set at zero. - For nonlife insurers, the minimum formulaic solvency margin is the greater of: - 20 percent of the greater of net premiums and an assumed minimum retention factor applied to gross premiums; and - 30 percent of the greater of net incurred claims and an assumed retention factor applied to gross net incurred claims. - For life insurers, the IRDA (Actuarial Report and Abstract) Regulations 2000 apply factors to: - a minimum of 85 percent of gross mathematical reserves; and - a minimum of 50 percent of sum at risk. - The factor varies according to contract type and whether there are embedded guarantees. The maximum factor applied to the net mathematical reserve is 4 percent. - Recent adjustments and parallel solvency work: - Following a recent mandated increase in claims provisions for the MTPL Commercial Pool the minimum capital requirement for nonlife insurers has been reduced to 130 percent to accommodate 2 of the PSUs. The 150 percent level has to be re-attained by 2104. - IRDA has required insurers to undertake a parallel solvency calculation based on an economic capital calculation. - Relevant papers and circulars have not been specific as to methodology. The assessor was advised that a Market Consistent Embedded Value (MCEV) approach has been adopted by the life appointed actuaries (i.e., required economic capital is determined by stressing the MCEV). - Two quantitative impact studies have occurred so far for the life sector, with the 2nd study being based on a relatively harmonized approach. - Nonlife insurers are in the process of carrying out their first study and are due to report in September 2011. - Assessment and comment: - Assessment: Largely observed - Comment: Solvency II quantitative impact studies demonstrate that Solvency I levels of capital are inadequate. IRDA has recognized this with a non-intervention 150 percent solvency ratio requirement, but this has not been translated into a mandatory corrective action process and has been weakened for the nonlife sector. The rating reflects the informal solvency testing system in process, ownership structure of insurers, the need to examine asset liability matching, and the ongoing oversight role of the actuarial profession. IRDA has issued exposure drafts on asset liability management requirements and stress testing; comments received are being considered. ICP 20 has identified prudential shortcomings in the nonlife sector. It is desirable that the economic capital calculation be formalized, possibly as an adjunct to the corrective action regime under examination. ### Intermediaries and distribution (Principle 24) - Licensing and definitions: - The Insurance Act defines “intermediary or insurance intermediary” to include insurance brokers, reinsurance brokers, insurance consultants, surveyors and loss assessors. - Only licensed intermediaries may transact any insurance business in India. - Sections 42, 42D and Section 64UM of the Insurance Act require intermediaries (agents, brokers, third-party administrators, surveyors & loss assessors) to be issued licenses to transact insurance business in India. - Regulations and mandatory disclosures: - IRDA’s (Insurance Brokers) Regulations 2002 set minimum conditions for grant of Insurance Broker License. A 2007 Circular makes it mandatory to insert the word “insurance broker” in the company name to enable the public to distinguish licensed brokers from unregistered entities. - IRDA’s (Licensing of Insurance Agents) Regulations and IRDA’s (Licensing of Corporate Agents) Regulations, 2002 lay down the procedure for issuance of an agency license. - IRDA’s (Insurance Surveyors and Loss Assessors (Licensing, professional Requirements and Code of Conduct)) Regulations 2000 deal with licensing requirements for surveyors & loss assessors. - (Third Party Administrators – Health Services) Regulations, 2001 deal with licensing conditions for TPAs. - Under the IRDA’s (Sharing of database for distribution of insurance products) Regulations, 2010 the authority recognizes referral arrangements for selling insurance. - Qualifications, training and capital/infrastructure requirements: - Sec.14 of the IRDA Act, 1999 empowers IRDA to specify requisite qualifications, codes of conduct and practical training for intermediaries. - Sec.42D disqualifies a license applicant if he does not possess requisite qualification, practical training and has not passed the examination specified by IRDA. - Mandatory training specified for Agents, Corporate Agents, Insurance Brokers, surveyors and TPAs. - Individuals are required to have completed at least 50 hours of relevant training from an approved institution (or 75 hours if they wish to be a composite insurance agent). Applicants with specified existing insurance qualifications have to undertake a lesser number of hours of training. - Agents and staff of Corporate Agents must have a minimum qualification of tenth pass for rural agents and twelfth pass for urban agents. - All agents must pass the examination before obtaining a license. - A broker shall have in his employment a minimum of two persons who have the necessary qualifications and cleared the Insurance Broker Examination. - In case of corporate intermediaries, regulations specify minimum capital requirements and minimum infrastructure requirements of the entity. - Conduct, segregation of funds and indemnity: - Direct insurance brokers are not permitted to accept insurance premiums in their account. Reinsurance brokers may collect and transmit premiums. - Art 23 of the IRDA (Insurance brokers) Regulations 2002 requires money collected by a licensed insurance broker to be segregated and kept in a separate bank account or with an institution approved by the supervisor. The broker is permitted to recover only charges, fees or commission earned and interest received from such funds. - Clause 24 requires that insurance brokers hold professional indemnity insurance of at least 3 times annual fee income or an absolute amount depending on the nature of the broker. - Sec.64VB of the Insurance Act, 1938 prescribes that money collected through agents or corporate agents has to be deposited with the insurer before the commencement of risk; an insurance agent must deposit/dispatch the full amount collected to the insurer without deducting their commission within 24 hours of collection. - Codes of conduct, exclusivity and penalties: - Codes of Conduct require intermediaries to furnish relevant information to prospective customers, identify themselves, educate clients on insurance contracts and processes, and disclose scales of remuneration if asked. - When an insurance broker belongs to the same group as an insurance company it is required to make adequate disclosure to clients. - The Insurance Act stipulates that an insurance agent can work for one insurer only. - The authorized representative of the insurer can cancel the license of an agent (selected personnel in insurance companies have a portal into IRDA’s agency registration system). - Range of possible sanctions relevant to brokers include suspension and withdrawal of a license. - The Insurance Act and regulations provide penal provisions for any person/entity who acts as an insurance agent/insurance broker without a valid license; such persons shall be punishable with a fine. *Source: _cr13265 - Section 28 of the Insurance Act and Regulations 9 and 11 of the IRDA (Investment)* ### Section 64UM (7) of the Insurance Act, 1938 gives powers to the IRDA to take suitable ### _cr13265 - Section 64UM (7) of the Insurance Act, 1938 gives powers to the IRDA to take suitable ### Overview - Section 64UM (7) of the Insurance Act, 1938 gives powers to the IRDA to take suitable action against unlicensed insurance surveyors and loss assessors. - Assessment status in the source text: Observed, Partially observed, Largely observed (applied to specific principles below). - Key supervisory focus areas in the unit: consumer protection (Principle 25), information/disclosure (Principle 26), fraud (Principle 27), and AML/CFT (Principle 28). ### Principle 25 — Consumer protection: Findings on insurers - Main consumer issues identified: mis-selling of ULIPS and handling of health insurance claims. - Regulatory instruments and actions: - 2009 Circular mandates a Board sub-committee for Policyholders’ Protection. - IRDA (Insurance Advertisement & Disclosures) Regulations 2000 require filing of insurance advertisement with IRDA and procedure for remedial action on complaints. - Guidelines on Group Insurance Policies 2005 define “group” and prescribe group marketing and administration guidelines; compliance verified at product filing. - 2006 Circular on non-availability of compulsory motor third party liability insurance established a high risk motor pool and a zero tolerance policy regarding refusal to accept Motor TP Insurance; backed up by mystery shopping checks. - 2008 Circular prescribes benefit illustrations for ULIPS; proposal forms confirm proposer has seen/received the benefit illustration. - 2009 Circular on renewability of health insurance prescribes a zero tolerance policy on any refusal to renew individual health insurance policies; compliance examined under File & Use Guidelines. - 2010 Circular on public disclosure requires insurers to show details of consumer complaints on their website. - 2010 Circular provides guidelines on ULIP policies prescribing a minimum sum assured, minimum lock-in periods and maximum expense charges. - 2010 IRDA directive on ‘Treatment of Discontinued Linked Policies’ mandates creation of a separate fund for discontinued policies, separate balance sheet presentation, and filing of statements on discontinued policies. - Recent Guideline on Complaints Redressal prescribes time limits for complaint resolution; grievance redressal policies must be Board-approved and filed with the authority. - Additional circular on Variable Insurance Products prescribes benefits that may be allowed. - Assessment: Observed. - Recommendation (from source comments): - As insurance brokers become more important in insurance intermediation the relevant statutory reporting should be upgraded. - In particular an annual or six monthly report showing premiums collected, commissions received, amounts forwarded to insurers and the amounts held in policyholder trust funds would provide more focused risk information. ### Principle 25 — Consumer protection: Findings on intermediaries and recourse - Codes of conduct and licensing: - Clause (8) of IRDA (Licensing of Insurance Agents) Regulations, 2000 prescribes an Agents Code of Conduct. - Chapters IV & VI of Insurance Surveyors & Loss Assessors (Licensing Professional Requirements & Code of Conduct) Regulations, 2000 prescribe duties and Code of Conduct for Surveyors & Loss Assessors. - Chapter IV of the IRDA (Health Services) Regulations 2001 prescribes a Code of Conduct for Health TPAs. - Regulation 9 of the IRDA (Licensing of Corporate Agents) Regulations 2002 prescribes a Code of Conduct for Corporate Agents. - Schedule III of Insurance Brokers Regulations 2002 prescribes a Code of Conduct for Insurance Brokers. - Qualifications and training: - Regulation 4 and 5 of IRDA (Licensing of Insurance Agents) Regulations 2000 prescribe qualification and training of agents. - Regulations 3, 14, and 16 of Insurance Surveyors and Loss Assessors (Licensing Professional Requirements & Code of Conduct) Regulations 2000 prescribe practical training. - Sections 3(5) and 8 of the IRDA (Health Services) Regulations 2001 prescribe qualifications of the CAO/CEO of a TPA. - Regulations 4, 5, and 6 of IRDA (Licensing of Corporate Agents) Regulations 2002 prescribe practical training of the CIE of a Corporate Agent. - Regulation 9 (2)(F) of the IRDA (Insurance Brokers) Regulations 2002 prescribe qualifications and training for the Principal Officer of Insurance Broker. - Consumer-facing processes and monitoring: - Licensing regulations require sufficient information be obtained to advise the consumer. - Warning notices regarding unsupervised entities are issued and available on IRDA website. - Regulations 5, 8, and 9 IRDA (Protection of Policyholders' Interests) Regulations 2002 prescribe time limits for claim acknowledgement and disposal, interest for delayed settlement, appointment of surveyor and time-frame for surveyor/investigator reports. - Insurers required to have effective grievance redressal mechanisms; July 2010 guidelines prescribe time limits for complaint resolution. - Consumer education and ombudsman: - IRDA has a separate department for consumer education (print, radio, television, seminars). - Insurance Ombudsman system established under the Register of Public Grievance Rules 1998: - There are 12 Insurance Ombudsmen in India. - Each is appointed for 13 years and has a staff of experts deputed from the PSUs. - Ombudsmen are authorized to settle claims up to a cap of IR20 lakhs. - Ombudsmen do not deal with MTPL claims — these are settled through local dispute settlement arrangements. - All decisions of the Ombudsmen are required to be fully documented. - Assessment: Observed. - Recommendation (from source comments): - The 12 Ombudsmen do not communicate and there may be some grounds for establishing a mechanism to share experiences and observations. ### Principle 26 — Information, disclosure & transparency - IRDA disclosure framework: - IRDA issued comprehensive guidelines on public disclosures in January 2010. - All insurers required to disclose their quarterly results and other relevant information within 45 days from the end of the quarter. - Quarterly disclosures are made on insurers’ web-sites; half yearly & yearly disclosures are published in the major newspapers. - Disclosure content and governance: - Disclosures specified by IRDA cover financial position and performance, product composition, business concentration, grievance disposal status, solvency status, geographic spread, investment pattern by duration, information about the Board of Directors and senior management, and aggregate data on related party transactions. - Quarterly disclosures must be approved by the Board of Directors of insurers. - Half yearly disclosures are subject to limited review in addition to Board approval. - The format of disclosure is specified by the IRDA. - Statutory financial statements: - Sections 11 and 12 of the Insurance Act require all insurers to produce annual financial statements, duly audited, filed with the supervisor within six months from the close of the financial year ending March 31st. - Statements made available to shareholders and the supervisor. - IRDA further stipulated that the financials shall be filed with it within 15 days of adoption by the Board. - Insurers are required to maintain the last five years financial statements on their web sites. - Assessment: Observed. ### Principle 27 — Fraud - Legal and regulatory context: - Claims fraud is a pecuniary fraud punishable under the Indian Penal Code. - No explicit reference to fraud exists in the corpus of Insurance Acts and rules; no specific requirements currently for insurers to dedicate resources to combating fraud. - Section 42 (4) of the Insurance Act sanctions agents who engage in criminal misappropriation, breach of trust, cheating, forgery, or fraud/dishonesty/misrepresentation against an insurer or policyholder, with loss of license. - Industry practices and initiatives: - Codes of Conduct for agents and intermediaries prescribe etiquettes to ensure ethical market conduct. - Central list of declined lives maintained by life insurers at the Tariff Advisory Committee (TAC) to detect life insurance fraud prior to underwriting. - General insurers maintain a central database on stolen vehicles to prevent fraud from sale of stolen vehicles. - IRDA proposes to issue industry guidelines prescribing procedures for minimizing fraud and relevant reporting. - Intention that all instances of fraud be shared via a common platform (within IRDA or managed through the Life and General Insurance Councils). - RFP for systems to detect health insurance fraud is currently open and will later be extended to motor and fire insurance. - Assessment: Partially observed. - Comments and implications: - Fraud is a growing issue, particularly in the health insurance business. - Preventive actions are being taken by individual insurers but there has been little in the way of an industry-wide response; relevant IRDA guidance is still to be developed and promulgated. ### Principle 28 — Anti-money laundering, combating the financing of terrorism (AML/CFT) - Legal framework and supervisory responsibilities: - AML/CFT regulation and supervision for the financial sector (including insurance) is directed by the Prevention of Money Laundering Act, which came into force in 2005. - IRDA has responsibility for supervision of insurers’ AML/CFT prevention systems and has issued sector-specific circulars under Arts 34 of the Insurance Act and 14 of the IRDA law. - This places full responsibility for AML/CFT prevention on direct insurance companies, though this is inconsistent with FATF guidelines that also apply directly to intermediaries. - Actual reporting of suspicious transactions goes directly to the FIU located in the Ministry of Finance; any AML/CFT transactions relevant to insurance are notified to IRDA by the FIU. - FATF mutual evaluation and follow-up: - India underwent an assessment of compliance with the 40+9 recommendations of FATF as part of the Mutual Evaluation process resulting in India gaining membership of FATF in June 2010. - The assessment appears to assume all insurance intermediaries are tied agents. - A concern from the Mutual Evaluation was that sanctions are potentially not sufficient to dissuade criminal activity by legal persons. - A committee has been set up by the Ministry of Finance as part of India’s action plan committed to FATF. - Certain deficiencies not requiring law changes have been addressed through circular. - Specific IRDA implementation measures (subject text): - Application: in case of life insurance companies due diligence requirements are to be carried out and complied with at all stages of an insurance contract; for general insurance companies these are required to be carried out at the payout stage. - CDD: KYC processes introduced including photographs/proof of identity, enhanced due diligence and identification of sources of funds. High and low risk categories identified. - Monitoring: systems needed to identify large transactions under five headings (>Rs 10 lakh over one month), objective criteria and systems to identify suspicious transactions; a principal compliance officer of sufficient seniority with access to the insurer’s Board must be appointed; adequate internal audit processes and a system of exceptions reporting to the Board required; a list of banned entities must be maintained by insurers. - IRDA is working with the FIU to develop a typology of suspicious transactions for training and monitoring purposes. - AML/CFT is examined as part of on-site inspection for insurers. - AML policy: an AML/CFT policy needs to be drafted, cleared by the Board of Directors of insurers and submitted to IRDA. - Screening: proper screening processes for agents and staff are in place via fit and proper requirements; insurers required to train staff and agents on AML/CFT periodically. - IRDA outreach activities to date: three sessions (which have included staff from the FIU). - Assessment: Largely observed. - Recommendations and comments (from source): - It is advisable that the growing role of brokers be addressed through a new directive. - Financial sanctions also need to be strengthened for legal person intermediaries but the existing name and shame option is likely to be effective in the interim. *Source: IMF staff assessment text as provided in the content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13265.pdf_