Issues facing Insurance Regulatory Agencies

1. Issues facing Insurance Regulatory Agencies C.S. Rao, Chairman, IRDA 14th November, 2005

2. Issues Economic Reforms Process Evolution of Insurance in India Registration Process Control & Regulation of Rates, Terms & Conditions Financial Monitoring of Insurance Companies Insurance Intermediaries Monitoring of Obligations to Rural & Social Sector Protection of Policyholder�s Interests Development Issues Upcoming Issues

3. Economic Reforms Process (1)

4. Evolution of Insurance in India (2-a) Life Insurance Companies Act of 1912 Provident Fund Act of 1912 Insurance Act of 1938 and amendments Life Insurance Act of 1956 General Insurance Business Nationalization Act of 1972 Insurance Regulatory and Development Act of 1999

5. Need for Regulatory Intervention (2-b)

6.

7. Registration of Insurance Companies (3-a) Legal form of insurance company. Capital and Deposit requirements Business plan Projected Balance Sheet for 5 years Suitability of Owners and Sr. Management �Fit and proper� test for Key Management appointments Assurance to infuse additional capital as and when required

8. Legal Form of New Company (3-b) Only permitted legal form is a joint stock company or cooperative societies No insurer other than an Indian insurance company, shall carry on any class of insurance business Separate companies for life and non-life business Foreign companies permitted to enter into a joint venture arrangement with an Indian company with a share holding not exceeding 26%. Holding of the foreign partners in the Indian promoter companies is considered while deciding on this limitation of 26%. No promoter to have more than 26% share and where it is in excess, it should be divested in phased manner. Preference for registration to those who underwrite Health insurance. Rationale Regulatory Comfort More Transparent Better Corporate Governance

9. Minimum Capital Requirement (3-c) No insurer carrying on the business of life or general insurance or reinsurance in India shall be registered unless: a paid-up equity capital of rupees one hundred crore (US $ 25 mn) in case of a person carrying on life insurance or general insurance or a paid-up equity capital of rupees two hundred crore (US $ 50 mn) in case of a person carrying on exclusively the business of reinsurance. Rationale Financially strong players capable to meet the liabilities of the policyholders are in the market. Entry barrier for small and marginal applicants.

10. Deposit Requirement (3-d) Amount to be deposited with the Reserve Bank of India is: In the case of life insurance business, a sum equivalent to one percent of its total gross premium written in India in a financial year not exceeding rupees 10 crores. (US$ 2.5mn) In the case of general insurance business, a sum equivalent to three percent of the total gross premium written in India in a financial year not exceeding rupees 10 crores. (US$ 2.5mn) In the case of reinsurance business, a sum of rupees 20 crores (US$ 5mn) Rationale Additional financial cushion for protection of policyholders liabilities.

11. Business Plan (3-e) Application form requires a five-year business plan: Premium Income/ Amount of sales Size of sales force/ sales support/ administrative staff Investment income Commission and other related expenses/ Expenses of management Statutory reserves/ Required solvency margin Profit and Loss Accounts and balance sheets Break-even periods and return on capital Geographical spread of business Market Segmentation Rationale Long term commitment Increased insurance penetration in the country

12. Suitability of Owners (3-f) IRDA needs to be satisfied that the financial condition and the general character of management of the applicant are sound the interests of the general public will be served if the certificate of registration is granted to the applicant Due diligence regarding the background Regulatory clearances from Indian regulators like RBI, SEBI, Income Tax clearances in case of Indian promoter Foreign promoters track record from home country regulator Rationale Comfort for the insured and the regulator

13. Suitability of Directors & Sr. Mgmt (3-g) Application details include: Name, address and the occupation of the directors, the proprietors, manager in India and key persons Detailed information required is spread over academic and professional qualifications working experience over 15 years reputation and character association with a company which was wound up or under receivership during the period of their association Key persons are defined as chief executive, chief marketing officer, appointed actuary, chief investment officer, chief internal audit and chief financial officer Rationale Professionally qualified persons are appointed to handle the affairs of the company Ensure that good people with reputable background act as trustees

14. Control and regulation of premium rates, terms & conditions (4) File & Use Life insurance Minimum sum assured Premium/ benefits Expenses/ exit conditions Actuarial assumptions Reasonableness of illustrations Non life insurance Tariff products (Fire, Motor, Engineering) regulated by TAC Non tariff products � to be filed with IRDA Rationale Protect the interests of the policyholder Encourage product innovation

15. Financial Monitoring of Insurance Companies (5) Actuarial valuation of liabilities and other matters Scrutiny Of Financial Statements Investments Reinsurance

16. Actuarial Matters (5-a) Life Insurer must have an appointed actuary Rendering actuarial advice to the management of the insurer product design and pricing; insurance contract wording; Investments; and reinsurance Monitoring the solvency of the insurers Valuation of the policy liabilities Distribution of surplus Peer Review In the case general insurance business to ensure fairness of rates for in-house tariff determination of liabilities for outstanding claims (IBNR) Rationale Appointed Actuary acts as the eyes and ears of the Authority in the company Matching of Assets and Liabilities Adequate provisions for outstanding claims Solvency Margin of atleast 150% to be ensured at all times

17. Scrutiny Of Financial Statements (5-b) Part of off-site inspection of the company Profitability of operations Compliance with accounting standards Capital increase to cover deficit in results Control on expenses Healthy business growth Satisfactory investment return Adequacy of the internal controls and processes Satisfactory risk management strategy Rationale To assess the financial health of the insurer To ensure that the accounts of the company are prepared as the IRDA�s accounting regulations

18. Investment of Funds (5-c) No insurer shall directly or indirectly invest outside India the funds of the policy holders Mandatory investment of funds in infrastructure & social sectors Investments only in graded securities with minimum rating of AA of Standard & Poor or its equivalent Every insurer to have an Investment Committee consisting of CEO, 2 non executive directors, Chiefs of Finance & Investment and A.A. Exposure Limits set for i) Investee Company; ii) Investee Group; iii) Industry Sector; iv) Promoter�s Group Rationale Pattern of Investments designed to control risk Ensure adequate spread of investments and diversification Maximise return on investments and have adequate safety of securities

19. Reinsurance (5-d) Obligatory cession of 20% to Indian reinsurer Filing of Reinsurance Programme and copies of Treaty slips Placement of reinsurance with at least BBB rated companies Not more than 10% of the total reinsurance premium ceded outside India can be placed with one reinsurer. Rationale Maximising retention within the country Securing the best possible protection for the reinsurance costs incurred Develop local capacity to retain risks within the country Spread of risks through placements with different reinsurers

20. Insurance Intermediaries (6) Agents/ Brokers/ Third Party Administrators/ Surveyors and Loss Assessors Licensing of Insurance intermediaries Compulsory training requirements Passing of examinations Code of Conduct Rationale Only qualified and trained intermediaries to service the insurance customers are in the insurance market Strict deterrence for any wrong doing

21. Monitoring of Rural& Social Sector Obligations (7) Rural Sector Life Insurer 7% (1st F.Y.)/ 9% (2nd F.Y.)/ 12% (3rd F.Y.)/ 14% (4th F.Y.)/ 16% (5th F.Y.) of total policies written direct in that year General Insurer 2% (1st F.Y.)/ 3% (2nd F.Y.)/ 5% (thereafter) of total gross premium income written direct in that year Social Sector � Life and General Insurer 5,000 (1st F.Y.)/ 7,500 (2nd F.Y.)/ 10,000 (3rd F.Y.)/ 15,000 (4th F.Y.)/ 20,000 (5th F.Y.) lives Rationale To carry out the mandate of the Parliament so that benefits of insurance reforms reach the poor and socially weaker classes.

22. Protection of Policyholders�s Interest (8) Prospectus of any product shall clearly state the scope of the benefits, extent of cover, warranties, exceptions and conditions of the cover. Provide all material information to the prospect to enable him to decide on buying the product. Insurers, agents and intermediaries to abide by the code of conduct. Proposal shall be processed within 15 days. Proper grievance handling system, information on ombudsman. Surveyor should reach site of accident within 72 hrs. After receipt of report settlement within 30 days. Penal interest @ 2% above bank rate for delay in payment of claim Rationale Mission of the Authority Protect interests of policyholder in its dealing with the insurers Empower policyholder to demand minimum levels of service

23.

24. Upcoming Issues (10) Health insurance Recommendation made to the Government to reduce capital requirements Creation of centralized health database, training in ICD-10 coding, new product innovation and design undertaken. Unit Linked business Guidelines framed to prevent regulatory arbitrage between life insurance industry and mutual fund industry. More disclosure requirements kept. Detariffing General insurance companies asked to show to the Authority that they have basic infrastructure such as i) upgrading underwriting skills of the underwriters; ii) IT systems to retrieve and analyse data; iii) ways and means to protect the policyholders; iv) scientific and adequate pricing of covers, etc. in place. Market conduct Mis-selling/ Rebating/ Payouts Advising and counseling insurance companies/ Establishment of Self Regulatory Organizations (SRO�s)/ Target Examinations

25. Thank You