1. Workshop On Financial Sector Assessment Programme Hyderabad 29th December, 2010 DVS Ramesh

2. Objectives • ICP – 14 – Preventive and Corrective Measures • Regulators are adequately backed by comprehensive legal structure with powers to safeguard the public interest. • ICP – 15 – Enforcement or Sanctions • Regulators are legally empowered to take action, where necessary, to ensure compliance to the Act and Regulations.

3. Preventive and Corrective Measures • Core Principle: “Supervisory authority takes preventive and corrective measures that are ‘timely’, ‘suitable’and ‘necessary’to achieve the objectives of insurance supervision”. • Regulatory intervention to protect policyholders • Regulatory Response is based on problem detected • Overall Enabling Tools: Insurance Act, 1938; IRDA Act, 1999 adequately equipped IRDA. • Section 14 (2) – An Omnibus Provision

4. Essential Criteria • Availability of Adequate Instruments for timely preventive and corrective measures • Specified returns within 6 months from the end of FY (Sec 15), Qly Accounts & Investment Returns, Solvency Margin returns, Monthly Business / Other Returns etc. • Progressive Escalation of action or remedial measures • Call for Information, Inspection, Examine Books / Accounts / Officers on oath Investigation into the affairs of Insurer (Sec 33) and Search and seizure (Sec 34 H); Penalties (Sec 102) , Suspension / Cancellation of License (Sec 3 (4)) • Formal Advise to Warning Letters / Letters of Caution • Proposed Insurance legislation makes individuals jointly and severally liable to make good the loss for contravening investment provisions • Enhances certain penalties to Rs 25 Crores

5. Contd.... • Authority shall have capacity and standing to communicate • From formal communications to Directions u/s 34, 110 C; • Require insurers to develop an acceptable plan for correction of problems, if necessary • Financial Plan (Sec 64VA (2A); Modification of rates, terms and conditions of life policies (Sec 3B); requires insurer to take action (Sec 33(6)); directions regarding reinsurance treaties (Sec 34 F) • Measures to prevent breach of law and promptly and effectively deals with non – compliance with regulation • Call for further information (Sec 21); Order the revaluation (Sec 22) Review of Returns, Examination of Grievances Areas to Strengthen • Risk Based Supervision • Powers to prescribe higher initial capital requirements in specific cases

6. Enforcement and Sanctions • Core Principle: “The Supervisory authority enforces corrective action and where needed imposes sanctions based on clear and objective criteria that are publicly disclosed. “ • Decision making lines for remedial actions to be structured • A range of actions available say from withholding approval for expansion to revoking the license • Overall Enabling Tools: Fines and Penalties & Suspension and Cancellation of Licenses

7. Essential Criteria • Issue formal directions and failure to comply has serious consequences • Advices / Formal communications • Directions u/s 27 D (3), 33 (6), 34, 14 (1) • Power to prevent issuing new policies • Sec 34 E (a) empowers IRDA to prohibit Insurers / any Insurer entering a particular transaction / Class of transactions • Reg 27 Cease to transact new business

8. Contd… • Compulsory Transfer of obligations from failing insurers • Sec 37 A empowers to prepare a scheme of amalgamation • Requiring Capital levels to increase, restrict or suspend dividend or other payments to shareholders, restrict share transfer • Capital Levels not insurer specific, Prior approval for share transfer beyond a percentage and restriction on dividend (on Par Fund)

9. Contd… • Effective means to address Management Problems and powers to impose conservatorship • Sec 34 A prior approval for appointment of CEOs/whole time directors; Sec 34 B empowers to remove managerial personnel; 34 C additional directors and 34 E (b) call for meeting of directors or depute its officers to watch the proceedings; Approval for Appointed Actuary • Sec 52 A Power to recommend appointment of Administrator for Life Insurance Business • Sec 52 H Power of Central Government to acquire undertakings of Insurers

10. Contd… • Periodical checks to determine the compliance • Regular Reviews, additional returns or a follow up inspection (where necessary) • Fines against Individuals and Insurers • Fine on individuals for acting as insurance intermediaries and for rebating • Rs 500, proposed to be escalated to Rs 10000 and to Rs 500000 respectively • Fine on Insurers for accepting business from other than licensed intermediaries • Rs 5000, proposed to be increased to Rs 1 Crores

11. Contd… • Sanctions for withholding the information or misleading information • Sec 104 Empowers to penalize for false statements in the investment returns • Barring individuals from acting in responsible positions • Part of overall due diligence – Scope for strengthening the procedures by disclosures

12. Contd… • Process of Sanctions do not delay preventive and corrective measures • Procedures in place to independently review these respective lines • Powers to withdraw the license • Reg 23 Suspension of Certificate, Section 3 (4) empowers • Powers to protect one or more insurers from financial difficulties of other parts of the group • Insurance business is relatively insulated and Policyholder’s funds are maintained separately • Abilities to infuse additional capital / Solvency Margin Review an ongoing process

13. Contd… • Authority enforces the sanctions • Section 110 AA of the proposed Bill classifies the penalty imposed is recoverable as arrears of land revenue • Escalation Provisions ensure the compliance to sanctions • Ensuring consistency in imposing sanctions • Procedures are in place

14. Contd… • Authority takes action against individuals / entities operating insurance business without a licence. • Section 103 – Rs 5 lakhs penalty or with imprisonment up to 3 years • Issues Public Statements cautioning the public • In the Proposed Bill the penalty was escalated to Rs 25 Crores with imprisonment up to 10 years

15. Thank You