India-Specific Risk Management Textbook PDF

India-Specific Risk Management FPSB Licensed Material Copyright © 2018-2020 Financial Planning Standards Board. All rights reserved. This publication may not be duplicated in any way without the express written consent of the publisher. The information contained herein is for the personal use of the reader and may not be incorporated in any commercial programs, other books, databases, or any kind of software or any kind of electronic media including, but not limited to, any type of digital storage mechanism without written consent of the publisher or authors. Making copies of this material or any portion for any purpose other than your own is a violation of United States copyright laws. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 2 Table of Contents Chapter 1: Overview of the Insurance Sector in India 5 Learning Objectives 5 Topics 5 1-1 Economic, Commercial and Social Aspects of Insurance 7 1-2 Scope of Insurance Business 7 1.2.1 Life Insurance – History and Growth 1.2.2 General Insurance – Historical Perspective and Potential (Non-Life Insurance, Health Insurance, Re-insurance) 1-3 Laws governing Insurance Business in India 10 1.3.1 The Insurance Act, 1938 1.3.2 The Insurance Laws (Amendment) Act, 2015 1.3.3 Law relating to Agency under the Indian Contract Act, 1872 1.3.4 The Consumer Protection Act, 2019 1.3.5 Doctrines of Waiver and Equitable Estoppel Chapter 2: Regulatory Infrastructure around Insurance 13 Learning Objectives Topics 2-1 Insurance Regulatory and Development Authority of India 14 2.1.1 Duties, Powers and Functions 2.1.2.Licensing and Governance - Insurance Companies, Intermediaries 2.1.3 Apex Insurance Regulator and Industry Watch-Dog 2.1.4 Supervision of Tariff Advisory Committee 2.1.5 Power to Issue Guidelines and Directions 2-2 Insurance Councils and General Insurance Council 16 2.2.1 Constitution and Powers 2.2.2 Self-Regulatory Mechanism 2-3 Insurance Information Bureau of India 16 2-4 Insurance Ombudsman 17 2.4.1 Establishment and Objectives 2.4.2 Appointment, Tenure and Jurisdiction 2.4.3 Rights and Powers 2-5 Insurance Institute of India 19 2.5.1 Authority and Functions 2.5.2 Education and Training Chapter 3 Insurance Intermediation in India 19 Learning Objectives Topics 3-1 Categories of Intermediaries, Domains, Functions and Code of Conduct 21 3.1.1 Individual Agents 3.1.2 Corporate Agents, Bancassurance 3.1.3 Insurance Brokers 3.1.4 Web Aggregators 3.1.5 Insurance Marketing Firms 3.1.6 Point of Sales Persons 3-2 Other Specialists in Insurance (other than procurement) 25 3.2.1 Insurance Surveyor or Loss Assessor 3.2.2 Medical Examiners 3.2.3 Third party Administrators (TPA) Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 3 3.2.4 Insurance Repositories (electronic issue of insurance policies) Chapter 4 Life Insurance 27 Learning Objectives Topics 4-1 Structure and Organization of Life Insurance Companies in India 30 4-2 Mandate and Responsibilities 30 4-3 Income Sources and Rate-fixing 31 4.3.1 Premium and Types 4.3.2 Factors in Fixation of premium, Rate Making 4-4 Distribution of Benefits 36 4.4.1 Bonus – With Profit or Participating Plans 4.4.2 Simple and compound Reversionary Bonus, Guaranteed Addition 4.4.3 Terminal Bonus, Survival Bonus, Loyalty Addition 4.4.4 Interim Bonus 4-5 Taxation Aspect of Various Life Insurance Policies for Individuals 37 4-6 Loans Eligibility against Life Insurance Policies 38 4-7 Group Insurance Schemes 39 4.7.1 Group Term Insurance Schemes 4.7.2 Employees’ Deposit Linked Insurance (EDLI) Scheme 4.7.3 Group Gratuity Schemes 4-8 Investment Linked Insurance – Unit Linked Insurance Plan (ULIP) 43 4.8.1 Protection, Investment and Income Tax Benefits 4.8.2 Choice of Plans and Switch options – Equity, Debt, Hybrid, etc. 4.8.3 Net Asset Value based redemption, maturity and claim settlement 4-9 Contingency Planning 45 4.9.1 Disability insurance with premium waiver option 4.9.2 Child Plans with premium waiver 4.9.3 Married Women’s Property Act and Insurance Planning 46 4-10 Insurance Policy Document and Legal Implications 47 4-11 Policy Revival Schemes 49 (Ordinary/Special Revival/Foreclosure/Surrender) 4-12 Claims 51 4.12.1 Claims by Maturity 4.12.2 Claims by Death Chapter 5 General Insurance 54 Learning Objectives Topics 5-1 Structure of Indian General Insurance Market 55 5-2 Government and Private Insurance Companies 56 5-3 Agents and Brokers 57 5-4 Loss assessors 57 5-5 Classification 58 5.5.1 Non-Life Insurance (Fire, Marine insurance, etc.) 58 5.5.2 Health Insurance 59 5.5.2.1 Taxation Aspect (Individual, Senior Citizens, HUFs, etc.) 5.5.2.2 Group Health Insurance Policies for Corporates 5.5.3 Agriculture Insurance 63 5.5.4 Credit Insurance 65 5.5.5 Reinsurance (GIC Re) – Mandatory Provisions and Ceding 66 5.5.6 Liability Insurance – Legal Liability Policies 68 5.5.6.1 Public Liability Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 4 The Public Liability Insurance Act, 1991 Environmental Impairment Liability (EIL) 5.5.6.2 Product Liability 5.5.6.3 Professional Indemnities 5.5.6.4 Employer’s Liability Insurance The Workmen’s Compensation Act, 1923 The Employees State Insurance Act, 1948 (ESI) Role of Powers of ESIC The Maternity Benefit Act, 1961 5-6 Motor Insurance 75 5.6.1 The Motor Vehicles Act, 1988 5.6.2 The Motor Vehicles (Amendment) Act, 2019 5.6.3 Motor Accidents Claim Tribunals 5.6.4 Types of Losses (Own damage and Third-Party-Liability) 5-7 Policy Document and Legal Implications 78 5.7.1 Proposal Form 5.7.2 Policy Component Chapter 6: Various Provisions and Perspectives for Policyholders 81 Learning Objectives Topics 6-1 Provisions insurance when the insurance is taken from multiple companies 82 6.1.1 Life Insurance policies 6.1.2 General Insurance Policies 6-2 Provisions related to employer provided group policies – benefits/limitations 83 6.2.1 Group life insurance 6.2.2 Group health insurance 6-3 Provision of life insurance policy surrender – merits/demerits 85 6-4 Comparative evaluation of various life insurance policies 86 6-5 Benefits and limitations in different types of non-life insurance policies 87 6-6 Health insurance and Critical Illness insurance 88 6-7 Health insurance – basic policy and top-up provisions, floater/super floaters 88 6-8 Provisions of Keyman insurance - personal and organizational perspectives 90 6-9 Provisions of Overseas Travel Insurance 90 6-10 Offline versus Online Insurance Policies 91 6-11 Global coverage of insurance policies 91 6.11.1 Life insurance policies 6.11.2 General and other non-life insurance policies Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 5 Chapter 1: Overview of the Insurance Sector in India Learning Objectives Upon completion of this section, students should be able to: 1-1 Explain the insurance sector in India 1-2 Describe the laws governing the insurance business in India Topics Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 6 1.1 Economic, Commercial and Social Aspect of Insurance Insurance is a protection and risk management mechanism. A well-built insurance sector enhances risk-taking for the Government in the economy, as it provides some safety from unanticipated, loss-causing events. Since the funds are available for the long term, investment in the long term projects becomes easier leading to rapid infrastructural development. On an individual basis, insurance money provides support to the family in the event of loss due to death, immobility, work restraints, illness etc. Thus, the insurance industry is of prime significance for any country’s economic development. The insurance sector in India has gone through a full circle - from being unregulated to completely regulated and then being partly deregulated by allowing private companies to solicit insurance and also allowing Foreign Direct Investment (FDI) of up to 49% (as of 2019) to strengthen the insurance market even further. For the society as a whole, insurance works as a protection mechanism by mitigating the effects of untoward and uncontrollable events such as illness, accident, death, natural disasters. It is thus a precondition for the development of the economy. It manages, diversifies and absorbs the risks of individuals, and companies, thereby allowing them to recover from sudden misfortune. Once the external risks are managed through insurance, productive activities such as buying a home and starting or expanding a business are spurred. In turn, these activities fuel the demand chain, facilitate supply and also support trade. The aggregate impact of all this is level consumption patterns and a wider contribution to financial and social stability. India is one of the fastest growing economies and as such the insurance market in India is poised for strong growth. The insurance industry itself is getting bigger with the country’s economy and the insurance companies are increasing their operations in the country. The insurance regulator in India (IRDAI) is actively working on diverse areas such as retention ratio, claim settlement ratio, protection of interests of policy holders, policyholder grievance redressal, consumer financial education and insurance literacy, prevention of unfair business practices, spurious calls amongst many others for ensuring orderly growth of insurance industry in India. 1.2 Scope of Insurance Business 1.2.1 Life Insurance – History and Growth The history of insurance sector in India has been aptly time-lined by the insurance regulator (IRDAI) (Reference www.irdai.gov.in). The same is edited and placed below so as to cover the developments over the entire 200 year period correctly. The year 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. Further down, the year 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect information about both life and non-life business transacted in India by Indian and foreign insurers. In 1938, with a view to protecting the interest of the insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938. The Insurance Amendment Act of 1950 got rid of Principal Agencies. However, there were a large number of insurers and the competition level was high. Unfair trade practices were also Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 7 prevailing. The Government of India, hence, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurance sector and Life Insurance Corporation (LIC) came into existence in the same year. Life Insurance Corporation absorbed 154 Indian, 16 non-Indian insurers and 75 provident societies. The process of re-opening of the insurance sector began in the early 1990s and in 1993 the Government set up a committee, under the chairmanship of R.N.Malhotra, to propose recommendations for reforms in the insurance sector. The committee suggested that the private sector be allowed to enter the insurance industry. Following the recommendations of the Malhotra Committee report, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body in 1999, and as a statutory body in 2000, to regulate and develop the insurance industry. In August 2000, IRDA opened up the market and Foreign companies were allowed ownership of up to 26%. At the end of March 2019 there are 70 insurers operating in India of which 24 are life insurers, 27 are general insurers, 7 are stand-alone health insurers and 12 are re-insurers which includes foreign reinsurers’ branches and Lloyd’s India. Of the 70 insurers presently in operation, eight are in the public sector and sixty-two are in the private sector. (Reference - IRDAI Annual Report 2018-19, www.irdai.gov.in). Other stakeholders in the insurance market include the agents (individual and corporate), brokers, surveyors and third party administrators (TPAs) servicing the health insurance claims. India is ranked 10th among the 88 countries, in life insurance business, for which data is published by Swiss Re. During 2018, India’s share in the global life insurance market was 2.61% and in this year the life insurance premium in India increased by 7.70% (inflation adjusted) while global life insurance premium increased by 0.20% (inflation adjusted). In terms of premium collected, it was US $ 73.74 billion for India while it was US $ 2820.18 billion for the world. During 2018-19, the life insurance industry in India recorded a premium of Rs. 508,000 crore (a growth of 10.75% from 2017-18) while 286.48 lakh new individual policies were issued (a growth of 5.61% from 2017-18). (Reference - IRDAI Annual Report 2018-19, www.irdai.gov.in). Insurance penetration is measured as the percentage of insurance premium to GDP while insurance density is the ratio of premium to population. For 2018, in India, the insurance penetration stood at US$ 2.74 for life and US$ 0.97 for non-life; while the insurance density was US$ 55.00 for life and US$ 19.00 for non-life. (Reference - IRDAI Annual Report 2018-19, www.irdai.gov.in). 1.2.2 General Insurance – Historical Perspective and Potential General Insurance in India started with the Triton Insurance Company Ltd. in 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up as the first company to transact all classes of general insurance business. The year 1957 saw the formation of the General Insurance Council, which framed a code of conduct for ensuring fair conduct and sound business practices. In 1972, the general insurance business was nationalized with the passing of the General Insurance Business (Nationalization) Act. A total of 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. In 1971, the General Insurance Corporation of India was incorporated as a company. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 8 In December, 2000, General Insurance Corporation of India’s (GIC) subsidiaries were restructured as independent companies and simultaneously GIC was converted into a national re-insurer. In July, 2002, the Parliament passed a bill de-linking the four subsidiaries from GIC. (edited and reproduced from www.irdai.gov.in) 1.2.2.1 Non – life Insurance General insurance, or non-life insurance, companies offer various types of insurance products in areas of health, motor, personal accident, home, travel insurance products etc. With increasing income levels in India , there is an increased demand for vehicles. Also, increasing health awareness combined with a growing economy is giving a major boost to this sector. In the year 2018, the general insurance industry in India underwrote a total direct premium of Rs. 1.69 lakh crore (a growth of 12.47% from 2017). However, the share of Indian non-life insurance premium in global non-life insurance premium was at 1.1% and India ranked 15th in global non-life insurance markets. The Motor business is the largest non-life insurance segment with a share of 38% and a premium collection of Rs. 64,522 crore in 2018-19. The fire and marine are the other important areas of the non-life insurance sector. (Reference - IRDAI Annual Report 2018-19, www.irdai.gov.in). 1.2.2.2 Health Insurance Health insurance is one of the emerging sectors in India. The Indian health system is one of the largest in the world on account of the sheer size of India’s population. Rising cost of healthcare and increasing longevity has created awareness among the citizens concerning the importance of health insurance. As a result, the health industry in India has rapidly become one of the foremost necessary sectors in terms of income and job creation. In business terms, the standalone health insurers registered a growth rate of 36.56% in the year 2018-19 and the health insurance premium continues to grow over 20% year-on-year during the last 4 years. Health insurance in India is classified into Government sponsored health insurance, group health insurance and individual health insurance. In the year 2018-19, the general and health insurance companies have issued around 2.07 crore policies covering a total of 47.20 crore lives. (Reference - IRDAI Annual Report 2018-19, www.irdai.gov.in). 1.2.2.3 Re-Insurance After its de-nationalization in the year 2000, the General Insurance Corporation of India (GIC Re) has become the only Indian reinsurer. Foreign reinsurers were in operation as only servicing offices in India, liaising with Indian marketplace for their parent offices. Doors were opened for foreign reinsurers in the year 2016, once the Insurance Act was amended. At present, GIC Re is the national reinsurer, providing reinsurance to the direct general insurance companies in India. The total net premium written by GIC Re during 2018- 19 increased by 3.62% to Rs. 38,996 crore as compared to 2017-18. Along with ITI Reinsurance Limited (ITI Re) the reinsurance program was designed to meet the objective of optimizing the retention of reinsurance within the country, ensuring adequate coverage for exposure, developing adequate capacities within the domestic market and providing reinsurance support to direct insurance companies in Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 9 India and foreign insurers/reinsurers. Meanwhile, ITI Re did not commence business operations and surrendered their certificate of registration for cancellation. Section 101A of the Insurance Act, 1938 stipulates that every insurer shall reinsure with the Indian reinsurer such percentage of the sum insured on each general insurance policy as may be specified by the Authority. With a view to make India a Reinsurance hub, the Insurance Law (Amendment) Act, 2015 has allowed foreign reinsurers and the Society of Lloyd’s to open their branches in India to transact reinsurance business. (Reference - IRDAI Annual Report 2018-19, www.irdai.gov.in). 1.3 Laws governing insurance business in India 1.3.1 The Insurance Act, 1938 Insurance industry, like any other industry, is governed by a number of Acts. The Insurance Act of 1938 was the primary legislation governing all types of insurance to furnish strict state jurisdiction over insurance business. This Act has been amended by Insurance (Amendment) Act, 2002. It is applicable to all the states of India. Part I of this Act lays down the definitions such as ‘the insurance company’, ‘insurer’, ‘insurance agent’, ‘actuary’, ‘intermediaries’ and others related to all aspects of the Insurance industry. Part II is the main section of this Act which deals with the provisions applicable to the insurers. It spells out the various mandatory requirements for an Insurance Company including registration of policies and claims, furnishing reports, provisions regarding investments by the insurance company, assignment and transfer of policies, registration of intermediaries including agents, insurance business in rural or social sector and various other provisions of law for protection of the insured. Part V of this Act lays down the penalty for default in complying with this Act. It also gives power to the Authority (IRDA) to make regulations. (Reference The Insurance Act, 1938 at www.irdai.gov.in). 1.3.2 The Insurance Laws (Amendment) Act, 2015 This Act amended three previous Acts related to the insurance sector in India - The Insurance Act, 1938, The General Insurance Business (Nationalization) Act, 1972 and The Insurance Regulatory and Development Authority Act, 1999. In order to make the insurance sector more practical, the insurance regulator in India (Insurance Regulatory and Development Authority of India - IRDAI) has been given further authority to formulate Rules. Under the new Act: - Various Sections have been amended, omitted or substituted, while some new Sections have been inserted, - Provisions related to investments by insurance companies and prohibition for investment of funds outside India have been strengthened, - The power of investigation and inspection by the Authority has been further increased, - Provisions related to assignment and transfer of insurance policies, nomination of policy holder, prohibition of payment by way of commission have all been strengthened, - Revised limitation of management expenses in insurance business have been set, - New provisions have been inserted related to the appointment and record of insurance agents. As per Section 7A, the cap on Foreign Direct Investment (FDI) in Indian insurance companies has been raised to 49% providing additional capital flow in the insurance sector. Another important amendment was related to mis-statement wherein no policy of life insurance shall Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 10 now be called in question by the insurer on any ground whatsoever after the expiry of three years from the policy date. The Act has also allowed foreign reinsurers to do business in Indian territory. In order to set up an efficient grievance redressal system, the Securities Appellate Tribunal (SAT) has been made the appellate authority to IRDAI’s order. 1.3.3 Law relating to Agency under the Indian Contract Act, 1872 Agency connotes a relationship between two persons/parties wherein one person (the Agent) has the power to act on behalf of another (the Principal) to create a legal relationship between the two parties. It is important for a financial advisor to understand the laws regarding Agency because nearly all business transactions worldwide are meted out through this relationship between the Agent and the Principal. Chapter X of the Indian Contract Act, 1872 deals with laws regarding Agency. Section 182 of the Act defines an “agent” as a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such an act is done, or who is so represented, is known as the “principal”. It also deals with appointment and authority of agents/sub-agents, Agent’s duty to Principal and Principal’s duty to Agent amongst other important subject matters. In business law, Agency contracts are quite common. An Agency is created when one person delegates his authority to some different person, or appoints him to do some specific tasks in their specified areas of work. As such, establishing a Principal-Agent relationship bestows the rights and duties upon both the parties. Some examples of such a relationship are insurance agency, advertising agency, travel agency, brokers, etc. (Reference The Indian Contract Act, 1872 at http://uputd.gov.in/site/writereaddata/siteContent/indian-contract-act-1872.pdf) 1.3.4 The Consumer Protection Act, 2019 The Consumer Protection Act, 2019 is enacted to protect the interests of the consumers in India. It makes provision for the establishment of authorities for timely and effective administration and settlement of consumers' disputes. It applies to all goods and services. The 2019 Act repeals the 1986 Act whereby it has substantially enhanced the scope of protection afforded to consumers by bringing within its purview advertising claims, endorsements and product liability. While it continues to have Dispute Redressal Commissions at the District, State and National levels, the monetary value of complaints that can be entertained at each of these commissions has been increased substantially. The jurisdiction of the Consumer Commissions has been expanded to allow complaints to be made at the place where the complainant resides or works as opposed to the 1986 Act where complaints had to be instituted where the other party resides or conducted business, or where the action cause arose. The 2019 Act also introduces the power of judicial review, which will allow Consumer Commissions to review their orders. In contrast to the 1986 Act, appeals from the State Commission to the National Commission may now only be made where they involve a major question of law. Similarly, appeals from the National Commission to the Supreme Court can only be made against complaints which originated in the National Commission. Also, the period prescribed for preferring appeals has now been made more stringent. The Consumer Protection Act, 2019 is a positive step towards further reformation and development of consumer laws in India. (Reference http://egazette.nic.in/WriteReadData/2019/210422.pdf, and https://consumeraffairs.nic.in/acts-and-rules/consumer-protection). Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 11 1.3.5 Doctrines of Waiver and Equitable Estoppel The legal doctrines of Waiver and Estoppels are directly related to the responsibilities of insurance agents. They are important to individuals because they can work to their advantage when dealing with an insurance company. Application of these doctrines to the specific situation can make the difference between the insurance policy being cancelled or remaining in force, or, between claims being denied or being paid. Let us understand these two specific terms – Waiver and Estoppel. Waiver is the conscious and discretionary giving up of a known legal right. It is a unilateral act of one person which results in his surrender of a legal right. The legal right could be constitutional, statutory, or a written agreement. The key issue is whether or not the person voluntarily gave up his right. A waiver can be express or implied. Express waiver could be oral or written. In either case, it is a clear statement that a right is being given up. For example, if an insurance company notifies a policy holder that it has not lapsed the insured's policy for non-payment of premiums, even though it had the right to do so, it has explicitly waived that right. Implied waivers are created through the conduct of the waiving party that clearly indicates that a right will not be enforced. For example, if the insurance company accepts the premium from a policyholder after the expiration of the grace period, the company has impliedly waived its right to claim that the policy had lapsed. Estoppel: Cambridge dictionary defines Estoppel as “a legal rule that prevents someone from changing their mind about something they have previously said is true in court”. As per Investopedia, “estoppel prevents someone from arguing something contrary to a claim made or act performed by that person previously.” Often described as a rule of fair play, equitable estoppel prevents a person from going back on his words. From the insurance point of view, an insurer may waive a right, and after the policy holder has relied upon the waiver and acted upon it, the insurer will be stopped from claiming the right. Assume an individual fails to disclose some information in the insurance proposal form and the insurer does not request that information and issues the insurance policy (a waiver). Now, in future when a claim arises, the insurer cannot question the contract on the basis of non- disclosure. This is estoppel. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 12 Chapter 2: Regulatory Infrastructure around Insurance Learning Objectives 2-1 Understand the regulatory infrastructure around insurance 2-2 Explain the authorities which control- various insurance functions Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 13 2.1 Insurance Regulatory and Development Authority of India (IRDAI) Act, 1999 The Insurance Regulatory and Development Authority of India (IRDAI) was incorporated as an autonomous and statutory body in April 2000, following the recommendations of the Malhotra Committee, with a purpose to regulate and develop the insurance industry. It had been established by the Insurance Regulatory and Development Authority Act, 1999. IRDAI is a 10-member body including the Chairman, five full-time and four part-time Members, all appointed by the Government of India. The Insurance Act, 1938, which is the principal Act governing the insurance sector in India, provides the powers to IRDAI to frame Regulations for supervision of the insurance sector. IRDAI states its mission as “To Protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto." 2.1.1 Duties, Powers and Functions Section 14 of the IRDAI Act, 1999 mentions the duties, powers and functions of IRDAI - which includes the following: - Registering and regulating insurance companies - Protecting policyholders’ interests - Licensing and establishing norms for intermediaries of insurance - Promoting professional organizations in insurance - Regulating and supervision of premium rates and terms of general insurance covers - Specifying financial reporting norms of insurance companies - Regulating investment of policyholders’ funds by insurance companies - Ensuring the protection of solvency margin by insurers - Safeguarding insurance coverage in rural and weaker areas of society 2.1.2 Licensing and Governance of Insurance Companies and Intermediaries One aspect of the Regulator is to ensure that the insurers have in place good governance practices with an emphasis on overall risk management and also to ensure financial stability. In the year 2009 IRDAI had outlined comprehensive guidelines on Corporate Governance practices of the management of insurance functions. On account of the changes brought in by the Companies Act, 2013, those guidelines were further revised with effect from 2016 after due consultation with the industry representatives and other stakeholders and professionals. Termed as Corporate Governance Guidelines for Insurers in India - 2016, the objective of these guidelines is to ensure that the Board and the management of the insurance company recognize the expectations of all stakeholders and those of the Regulator. The company should also have the ability to quickly address issues of non-compliance. These Guidelines address various requirements covering the following elements of Corporate Governance in insurance companies: - Governance structure - Board of Directors - Key management functions - Role of appointed actuaries - External audit - appointment of statutory auditors - Disclosures - Relationships with stakeholders - Whistle-blower policy Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 14 2.1.3 Apex Insurance Regulator and Industry Watch-Dog IRDAI is the apex body overseeing the insurance business in India. Every insurance company is registered under IRDAI and it sets all rules and regulations on the insurance industry. IRDAI draws its power from the IRDAI Act, 1999 and the Insurance Act, 1938. As defined in Section 14 of the IRDAI Act, the functions, roles and responsibilities of IRDAI are far-reaching. The regulator serves as an industry watch-dog for regulating and promoting the insurance and reinsurance industries in India. The role of IRDAI is to protect the interest of the policy holders, to oversee the growth of the insurance industry and to help in bringing economic growth. All the insurance companies and related associates such as agents, TPAs, brokers, surveyors, repositories etc are expected to perform and function under the aegis of the rules framed by IRDAI. There are stiff reporting guidelines for the companies and the agents which need to be adhered to. 2.1.4 Supervision of Tariff Advisory Committee (TAC) Tariff Advisory Committee is a statutory body established by the Insurance (Amendment) Act, 1968 "to control and regulate the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business." The management of the TAC is as per the Insurance Act, 1938 (as amended from time to time), the Insurance Regulatory and Development Act, 1999 and the regulations passed by IRDAI. The IRDAI Chairman is the TAC Chairman, while a senior officer of IRDAI is nominated as Vice- Chairman. There are ten elected members from the Indian market. Under Section 14(2) of the IRDAI Act, 1999, the duties, powers and functions of TAC are as follows: - Drawing up and Updating Tariffs - Clarifying Queries of Insurers - Ensuring Implementation of the Tariffs - Collection of Data and Analysis - Publishing Tariffs and Other Regulations - Inspection of Risks The Tariff Advisory Committee's role as a Regulator of products and prices are left unchanged by the IRDAI Act, though IRDAI supervises the functioning of TAC. Thus, there are complementary but mutually exclusive work areas for both organisations. Decisions taken by the TAC within its jurisdiction, subject to observance of prescribed procedures, are final and binding on all non-life insurers as well as the insured in India. 2.1.5 Power to Issue Guidelines and Directions Section 14 of Chapter IV of the IRDAI Act, 1999, gives authority and power to IRDAI to act in the best interest of the policy holder. Accordingly, IRDAI shall have the duty to regulate, promote and ensure orderly growth of the insurance business and reinsurance business. Various Sections of the Act give powers to IRDAI such as the Power to Delegate to the Chairperson, or any other member, any of its powers and functions. IRDAI may, by a general or special order, also form committees of the members and delegate to them the powers and functions of the Authority. IRDAI may also establish a Committee, to be known as the Insurance Advisory Committee, and in consultation with the Committee make regulations consistent with the Act and the rules made thereunder to bring out the purposes of the Act. However, every rule and every regulation made under the Act shall be laid before each House of Parliament while it is in session. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 15 2.2 Insurance Councils and General Insurance Council 2.2.1 Constitution and Powers Life Insurance Council is a forum that provides linkage among all the stakeholders of the industry. It evolves and coordinates all discussions and analysis between the government, regulatory body and the public. It functions through many sub-committees and includes all life insurance companies in India. The General Insurance Council is again a very important link between IRDAI and the non-life insurance industry. The Council not only plays the role envisaged for it by the Insurance Act, but it also facilitates the overall growth of the industry for the best interest of all the stakeholders. The Life Insurance Council and the General Insurance Council have been constituted under section 64C of the Insurance Act, 1938 in the year 2001. The Insurance Council functions through several sub-committees and includes all insurance companies in India. The mission of Insurance Council is to: - Function as an effective forum to assist, advise and assist insurers in maintaining high standards of conduct and provide services to policyholders - Interact with the government and various bodies on policy matters - Actively participate in disseminating insurance awareness in India - Take steps to develop education and analysis in insurance (Reference: www.lifeinscouncil.org) 2.2.2 Self- Regulatory Mechanism The Insurance Councils have been conferred various powers under the Insurance Act, 1938 and the IRDAI Act, 1999. They interact with the government and other statutory bodies on various policy issues and work as an active link between the Indian life insurance industry and the global markets. The Insurance Councils work as a self-regulatory organization. They develop codes of conduct for the member companies, compliance programs to observe rules and regulations etc. They represent the collective interest of the insurance companies and provide help and guidance to members. They are responsible for building a positive image of the insurance industry among people. The Councils aid, advise and assist insurers for rendering efficient service to the policy holders. They also interact with other organizations of the financial service sector. The General Insurance Council also has a Code of good Insurance Practices which lists down general provisions, application of the law, regulations and guidelines, claims handling and grievance redressal amongst other provisions. (Reference: www.gicouncil.in/regulations/self-regulation) 2.3 Insurance Information Bureau of India (IIB) Insurance industry is data-driven. It depends on data for all activities including pricing of the insurance products. With the growth of the insurance industry, and also opening up of the sector to private players, the Insurance Regulatory and Development Authority of India (IRDAI) required strong and credible information support. However, there was no dedicated agency to collect data and consolidate the same into an industry-level pool/repository. In the year 2009, IRDAI constituted the Insurance Information Bureau of India (IIB) supported by an advisory body under the Chairmanship of IRDAI. The Bureau was later registered as an independent society in November 2012. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 16 The Bureau works through its insurance verticals of Life, Health, Motor, Property, Fire, Engineering with exclusive support from IT and analytics. The main functional areas of IIB includes: - Act as sole point for the whole insurance industry data - Ensure data is accessible to numerous market players, researchers, policyholders and general public for real time decision making - Provide benchmark rates for the industry - Publish reports to help IRDAI in regulatory functions and insurers in decision making - Publish reports for the advantage of the entire industry - Provide the mandated inputs for policy analysis and insurance industry development activities - Take initiative for detection of fraud, identification of vehicles not insured, etc. All the insurance companies submit transaction level data on policies and claims at predetermined frequencies. This data covers demographic, policy and product attributes which is then used by IIB to generate annual reports, thematic reports and customized reports, besides undertaking various research studies. It also provides data to IRDAI for setting the premium rates for third party motor insurance. The Bureau provides a bundle of services associated with motor insurance to various stakeholders like public, police, transport departments and insurers through its service package titled V-Seva. The services are call centre, SMS and web-based and supply data relating to insurance status of the vehicle, stolen vehicles, possession of recovered vehicles, accident record etc. IIB also handles the Central Index Server that acts as a nodal point between any two insurance repositories and helps in de-duplication of demat accounts. The Bureau has also built a repository of insurance salespersons. Through this, based on key identifiers, the de- duplication is expedited to confirm that the applicant is not engaged with any other insurance company or insurer intermediary. (Reference: www.iib.gov.in) 2.4 Insurance Ombudsman 2.4.1 Establishment and Objectives The Insurance Ombudsman was created by a Government of India Notification in the year 1998. The purpose was quick disposal of the grievances of the policy holders in an efficient, economical and impartial manner. For a policyholder, the insurance company is the first point of contact for any complaint. In case of a non-satisfactory reply or no reply, one can approach the Ombudsman. The Executive Council of Insurers, earlier known as Governing Body of Insurance Council (GBIC), has been started under the Insurance Ombudsman Rules, 2017, to set-up and facilitate the insurance ombudsman institution in India. It comprises members of the Life Insurance Council and General Insurance Council formed under Section 40C of the Insurance Act, 1938. They are empowered to entertain complaints on all aspects of insurances including: - repudiation of claims by the insurer - delay in settlement of claims - dispute in regard to premium paid or payable - dispute on the legal construction of the policies - non-issuance of insurance documents to policyholders after receipt of premium Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 17 Presently there are 17 insurance Ombudsman in different cities (Reference www.ecoi.co.in) and any person who has a grievance against an insurer can make a complaint in writing to the Ombudsman within jurisdiction over the location of the insurance company office. The institution of Ombudsman is of great importance for the protection of interests of policyholders for building their confidence in the system. 2.4.2 Appointment, Tenure and Jurisdiction The Executive Council of Insurers issues orders of appointment of the insurance Ombudsman on the recommendations of the committee comprising of Chairman of IRDA, Chairman of LIC, Chairman of GIC and a representative of the Central Government. Eligibility: The incumbents for the position of an Ombudsman are drawn from Insurance Industry, Civil Services, Administrative Services and Judicial Services within India. Tenure: An insurance Ombudsman is appointed for a term of three years or till the age of seventy, whichever is earlier, and is eligible for re-appointment. Jurisdiction: The Executive Council of Insurers has appointed seventeen (17) Ombudsman across the country allotting them different geographical areas. The Ombudsman can hold sitting at different places within their area of jurisdiction in order to expedite clearance of complaints. 2.4.3 Rights and Powers Vide Notification dated 25 April 2017, published in Gazette, the Insurance Ombudsman Rules, 2016 were further revised, and now referred to as the Insurance Ombudsman Rules, 2017. Accordingly, various rights and powers have been provided to the Insurance Ombudsman, as listed below: 1. The Ombudsman receives and take into account complaints or disputes relating to: (a) delay in settlement of claim, beyond the time period stated in the regulations; (b) any repudiation of claims either wholly or part by the insurer; (c) disputes regarding to paid premiums or payable in case of insurance policy; (d) misrepresentation of policy terms and conditions at any time within the policy document or policy contract; (e) legal construction of insurance policies; (f) policy servicing related grievances against insurance companies and their agents and intermediaries; (g) issuance of insurance policy, which is not in conformity with the proposal form submitted by the proposer; (h) non-issuance of insurance policy after the receipt of premium; and (i) any other matter arising from the violation of provisions of the Insurance Act, 1938 or the rules, circulars, guidelines issued by the IRDAI from time to time. 2. The Ombudsman shall act as counsellor and mediator relating to matters provided there is written consent of the parties to the dispute. 3. The Ombudsman shall be prohibited from handling any matter if he is an interested party or having conflict of interest. For policyholders, the insurance ombudsman offices provide hope and the institution has helped to generate faith and confidence amongst the consumers. 2.5 Insurance Institute of India (III) The Insurance Institute of India (III), earlier known as Federation of Insurance Institutes, was formed in 1955 in Mumbai, for the purpose of promoting insurance education and training to people working or intending to work in the insurance sector. It is a professional institute Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 18 devoted mainly for insurance-related education. The institute awards Certificates and Diplomas to successful candidates. These are recognized by the Indian Government, the IRDAI and various insurance companies in India and abroad. Such Certificates and Diplomas are also recognized by similar institutes in various countries like UK, Canada and the United States, for grant of exemption from some of their papers. In its role as an apex education and training provider III is associated with all the sectors of the insurance industry. 2.5.1 Authority and Functions The management and control of the Institute, its affairs and business shall be carried on by and vested in the Council subject to the provisions of the Memorandum and Regulations of the Institute. The Council consists of Members from LIC and GIC and elects amongst themselves a President, Deputy President and other executive positions. The President holds office for a period of 2 years and the Deputy President and other office bearers shall hold office for 1 year. It shall be the duty of the Council to coordinate and direct the work of the Institute and to present a report on the position of the Institute on the affairs and proceedings during the past year. The Council has power to make Provisions for carrying out the objects of the Institute and for conducting its affairs, make Rules or Bye-laws. The main functions of Insurance Institute of India are: - To run college and conduct examinations within the insurance field and related subjects for awarding certificates, diplomas and degrees to those interested in insurance. - To prepare and provide reading materials and similar alternative education methods for encouraging and helping the study of any subject bearing on any branch of insurance. - To form and maintain a library. - To provide scholarships, grants and prizes for research or any other educational work pertaining to insurance. - To ascertain the law and practice relating to all matters connected with insurance and to disseminate such knowledge among those interested in insurance. - Assist people in the insurance industry to acquire the skills and expertise. 2.5.2 Education and Training The IRDAI has recognized the Institute as the examining body to conduct pre-recruitment examinations for Insurance Agents, Corporate Agents, Web Aggregators, Insurance Marketing Firm and Renewal of Insurance Broker exams as well as pre-licensing test for Insurance Surveyors and Loss Assessors. The Directorate of Postal Life Insurance, New Delhi has licensed the Insurance Institute of India to develop the course material for Postal Life Insurance Agents and also recognized them as the exam conducting body to organize licensing examination of Postal Life Insurance Agents. (Reference www.insuranceinstituteofindia.com) Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 19 Chapter 3 Insurance Intermediation in India Learning Objectives 3-1 Describe the categories of intermediaries 3-2 Compare other specialists in insurance 3.1 Categories of intermediaries, their respective Domains, Functions and Code of Conduct 3.1.1 Individual Agents 3.1.2 Corporate Agents, Bancassurance 3.1.3 Insurance Brokers 3.1.4 Web Aggregators 3.1.5 Insurance Marketing Firms 3.1.6 Point of Sales Persons 3.2 Other Specialists in Insurance (other than procurement) 3.2.1 Insurance Surveyor or Loss Assessor 3.2.2 Medical Examiners 3.2.3 Third Party Administrators 3.2.4 Insurance Repositories (electronic issue of insurance policies) Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 20 3.1 Categories of Intermediaries, their respective Domains, Functions and Code of Conduct 3.1.1 Individual Agents In the insurance industry, an individual agent is one who has undergone the required training, passed an examination and then duly licensed by IRDAI to sell insurance policies and provide after-sales service, including claim assistance. The Insurance Act, 1938 defines an insurance agent as "one who is licensed under Section 42 of that Act and is paid by way of commission or otherwise, in consideration of his soliciting or acquiring business of insurance, including business concerning continuance, renewal or revival of policies of insurance." The license can be issued for life insurance, general insurance or both. In addition, an agent can also represent one standalone health insurance company, Agriculture Insurance Company of India for selling crop insurance and Export Credit Guarantee Corporation of India for credit insurance. Agents serve as representatives of the insurance companies and sell policies on behalf of the insurers. The insurer enters into a contractual agreement with the agent that specifies the types of products the agent may sell and the commission the insurer will pay for each. While some agents are salaried, most agents rely on commissions for income. Some insurers try to encourage agents to sell new policies by paying a higher base commission for new policies than for renewals. In addition to base commissions, many insurers pay trail commissions. The role of an agent begins at the stage of sale and continues through the duration of the contract. Every agent has to adhere to the code of conduct specified by IRDAI. Some of these are: - Disseminate the requisite information in respect of insurance products offered by his insurer; - Disclose the commission scales, if asked by the prospect; - Denote the premium to be charged; - Explain to the prospect the type of information required in the proposal form, and also the importance of disclosure of material information; - Bring to the notification of the insurance company any adverse habits or income inconsistency of the prospect, within the form of a report (called “Insurance Agent’s Confidential Report”), and any material proven fact that could adversely have an effect on the underwriting decision; - Inform the prospect concerning the acceptance or rejection of the proposal by the insurer; - Obtain the necessary documents while filing the proposal form and other documents afterwards asked for. 3.1.2 Corporate Agents, Bancassurance Every corporate entity (firm/company) may represent an insurance company and sell its policies. While involved in a specific business, companies can sell insurance policies to their already existing clients. For instance, a travel agent might recommend a travel insurance policy or a car dealer might recommend a motor insurance policy. Corporate agent thus represents a company or a registered firm for solicitation and procurement of insurance business and the insurer allots the agency code to the company/firm. During the validity of a certificate of registration, a corporate agent can have agreements with a maximum of three life insurance companies or three general insurance companies or three Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 21 health insurance companies to solicit and service their insurance products. In addition, they can represent Export Credit Guarantee Corporation and Agriculture Insurance Corporation of India. The license validity is for three years from its issuance date, and can be renewed for a period of three years. The corporate agents are regulated as per the IRDAI (Registration of Corporate Agents) Regulations, 2015. Every corporate agent shall abide by the Code of Conduct as specified in Schedule lll of these Regulations, and: - be answerable for all the acts of omission and commission of its principal officer and each specified person; - ensure that the principal officer and all specified persons are properly trained, skilled and knowledgeable in the insurance products they market; - ensure that the principal officer and therefore the specified person do not make any misrepresentation on policy benefits to the prospect; - ensure that prospect does not purchase an insurance under any compulsion; - extend all probable help and assistance to an insured in completing all formalities and documentation in the event of a claim. While doing so, every corporate agent will: - conduct its transactions with clients with utmost good faith and integrity at all times; - act with carefulness and persistence; - treat all data given by the potential clients as totally confidential. Bancassurance Banks and insurance companies collaborate to make a partnership within which the bank sells the insurance firm’s product to its clients. This arrangement of selling an insurance product by the insurance company through a bank is known as Bancassurance. The Bancassurance channel helps to: - improve the channels through which insurance policies are sold/marketed so as to make them reach to the common man - widen the area of working of the banking sector - increase in competition and better servicing, better pricing for the customer This arrangement works well for both the bank and the insurance company, because the bank earns a commission amount from the insurance company whereas the insurance company widens its market share and customer base. Being the mixture of the banking and also the insurance sector, bancassurance comes beneath the scope of both RBI and IRDAI. As per RBI, any scheduled commercial bank is allowed to undertake insurance business as an agent of the insurance company without any risk participation. Banks cannot become brokers, as RBI does not allow banks to promote separate insurance broking business. As per IRDAI (Licensing of Banks as Insurance Brokers) Regulations, 2013 banks can act as corporate agents for solely one life and one non-life insurance firm for a commission and no alternative pay except commission. The current architecture of one-bank-one-insurer helps banks sell the product of their own insurer and might lead to conflict of interest in some cases. IRDAI has recently drafted guidelines to promote open architecture in bancassurance. In the new model, the banks will have to have multiple tie-ups and sell products of multiple insurers. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 22 3.1.3 Insurance Brokers The concept of Insurance Broker was introduced by IRDAI through IRDAI (Insurance Brokers) Regulations, 2002, which were amended in 2013 and 2018. The objective of these Regulations is to supervise and monitor the insurance broker as an insurance intermediary. Insurance brokers provide insurance from all the companies under one roof. Unlike an agent who is tied with one company, a broker is not bound by any one company. Brokers can find a good deal on insurance for their client because they have a complete understanding of the insurance market and they can negotiate premiums with the insurer. Application to act as an insurance broker can be made for any one of the following categories: (i) direct broker (general) (ii) direct broker (life) (iii) direct broker (life and general both) (iv) composite broker (v) reinsurance broker The Insurance Brokers Regulations define the distinction between them. While a direct broker can solicit only insurance business for its client, the reinsurance broker can solicit reinsurance business and a composite broker can solicit both insurance and reinsurance business for its clients with insurers and/or reinsurers located in India and/or abroad. The brokers have to invest minimum capital as prescribed by IRDAI and have to comply with other requirements like infrastructure, Professional Indemnity cover, payment of license fee etc. The functions of an insurance broker, as prescribed by the Regulations, include the following: - Rendering advice on appropriate insurance cover, - Maintaining detailed information of available insurance markets, - Submitting quotation received from insurer/s to the client, - Providing underwriting information of the client to the insurer, - Assisting clients in paying premium, negotiation of the claims, maintaining proper records of claims. The Regulations also prescribe a code of conduct in matters related to sales practices wherein every insurance broker shall: - confirm that he is a member of the Insurance Brokers Association of India (IBAI) or any other body of insurance brokers; - confirm that he does not employ agents to bring in business by canvassing, call centers; - ensure that the client understands the type of service he can offer; - ensure that the policy proposed is suitable to the needs of the client; - give guidance only on those matters in which it is conversant - recommend other specialist for guidance when required; - not make inaccurate or unfair criticisms of any insurer; - explain why a policy is proposed and provide comparisons; - explain when and how the premium is payable. 3.1.4 Web Aggregators Insurance Web Aggregators compile and supply information regarding insurance policies of different companies on a website. Web aggregators are licensed to supply data relating to insurance products, comparison of comparable products offered by different insurance companies and have linkages to websites of various insurers from where customers will choose and get policies on-line. They are governed under IRDAI (Insurance Web Aggregators) Regulations, 2017. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 23 The Insurance Web Aggregator has to: - Exhibit information in their designated website describing the insurer’s products - Ensure that the data systems, together with the aggregation website(s)/portals, Lead Management System and the Data Centers hosting the website(s)/Portal(s)/Lead Management System are in compliance with the data security standards and procedures - Ensure that the leads and other information is transmitted to the insurers and others using secured layer data encryption technologies - Use solely RBI registered payment gateways for assortment and transfer of premium to insurers - Ensure to get the information systems (both hardware and software) audited by CERT-In empanelled Information Security Auditing organizations - Submit a certificate from the statutory auditor every year For conduct in matters relating to client relationship every web aggregator shall: - handle all its transactions with clients with utmost good faith and honesty - act with care and diligence - ensure that the customer understands his relationship with the Web Aggregator and on whose behalf the Web Aggregator is acting - consider all the information supplied by the prospective customers as totally confidential - avoid conflict of interest Every web aggregator is also expected to follow guidelines in relation to complaint handling wherein he shall have a system of recording and monitoring complaints, ensure that the website contains details of complaints handling procedure and ensure that the grievance is resolved to the fullest satisfaction of the customer in a reasonable time bound manner. 3.1.5 Insurance Marketing Firms Insurance Marketing Firms are a distribution channel meant to solicit insurance products and to distribute other financial products by employing individuals licensed to market, distribute and service such financial products. They are regulated under the Insurance Act, 1938, the IRDAI Act, 1999, the IRDAI (Registration of Insurance Marketing Firm) Regulations, 2015 and various Regulations, Circulars, Guidelines and instructions issued thereunder. The registration which is issued under these Regulations is valid for three years. The Insurance Marketing Firms can undertake the insurance servicing activities of only those insurers with whom they have an agreement. Such firms engage Insurance Sales Person (ISP) for the purpose of soliciting and procuring insurance products of a maximum of two Life insurance companies, two General and Health insurance companies at any point of time, along with Export Credit Guarantee Corporation Ltd. (ECGC) and Agriculture Insurance Company of India Ltd (AIC). They may engage the same person for sale of other financial products also, if that person fulfills the criteria of qualification and certification requirements as mentioned in the Regulations. The other financial products include mutual funds regulated by SEBI, pension products regulated by PFRDA, financial products of banks/ banking / NBFC regulated by RBI, non- insurance products offered by Department of Posts, Government of India. IMFs are allowed to solicit or procure: - all kind of products sold on individual and retail basis, including crop insurance Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 24 - group personal accident, group health, property, GSLI and term insurance policies for Micro, Small and Medium Enterprises (MSME) Insurance Marketing Firms shall: - ensure that ISPs are competent, qualified, and have undergone the required training and passed the examination as specified by IRDAI - not divulge any confidential information about its client except where such disclosures are required to be made in compliance with any law - act in the public interest and in fiduciary capacity be accountable for the omissions and commissions of their own employees/persons engaged by them - maintain at all times a professional indemnity insurance cover throughout the validity of the period of the registration 3.1.6 Point of Sales Persons (PoSP) To increase insurance penetration in the country and to facilitate growth in the non-life and health insurance business, IRDAI introduced a new distribution model called “Point of Sales Person” (PoSP) in the year 2015. Every PoSP can represent an insurance company or an insurance intermediary. PoSP have a lower qualification compared to other insurance distributors such as agents, brokers and corporate agents. Accordingly, IRDAI has directed these individuals to sell only basic insurance products viz. motor insurance, travel insurance and personal accident insurance which do not require a lot of underwriting. These products also do not require much discussion with the customer at the time of sale and their benefits are simple to explain. Based on the information provided by the customer, the insurance policy is automatically generated by the system. The “Point of Sales Person” is authorized to sell only the following pre-underwritten products: - Motor Comprehensive Insurance Policy for Two-wheeler, commercial vehicles and private cars. - Third party liability Policy for Two-wheelers, commercial vehicles and private cars. - Personal Accident Policy - Travel Insurance Policy - Home Insurance Policy 3.2 Other Specialists in Insurance (other than procurement) 3.2.1 Insurance Surveyor or Loss Assessor Regulation 12 of the IRDAI (Insurance Surveyors and Loss Assessors) Regulations, 2015 mandates appointment of Surveyors and Loss Assessors either by Insured or Insurer to assess the loss under an insurance policy in respect of (a) motor insurance (b) other than motor insurance. The regulations define the “Surveyor and Loss Assessor” as a person who is licensed by the Authority to act as a Surveyor and Loss Assessor. The definition of intermediary and insurance intermediary includes insurance surveyors and loss assessors. Indian Institute of Insurance Surveyors and Loss Assessors (IIISLA) is promoted by IRDAI. Every person who is a student of IIISLA, and intending to act as a Surveyor and Loss Assessor in respect of general insurance business, can apply to IRDAI for grant of a License. The validity of the license is for three years. As per the Regulations, following are some of the duties and responsibilities of a Surveyor and Loss Assessor: - Maintaining confidentiality without exposing the insurer’s liability and insured’s claim; - Conducting inspection/survey of the property on behalf of insurer or insured; Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 25 - Investigating and checking reasons of the loss including extent of loss, type of ownership and insurable interest; - Conducting surveys and remark about excess/under insurance; - Guiding the insurer and the insured on loss minimization, loss control, safety and security measures; - Evaluating liability under the insurance contract; - Replying to the queries of the insured/insurer in regard to the claim/loss; - Commenting on salvage and its disposal wherever necessary. Every Surveyor and Loss Assessor have to follow a code of conduct wherein they shall: - behave ethically and with integrity, - strive for objectivity in professional judgment, - act impartially, - conduct with courtesy and consideration to all people - not accept or conduct survey works in areas for which he does not hold a license, - not accept or perform task which he is not competent to accept, - carry out his professional task with due diligence, - keep himself informed about all developments pertinent to his professional practice, - maintain a proper record for the work done by him and comply with all relevant laws. 3.2.2 Medical Examiners Underwriting is a very important aspect for the insurers at the time of sale of a policy. Any misstatement or wilful concealment of material information leads to disputes at the time of claim settlement. Health is one of the important parameters for the insurer to decide the premium rates. It is utmost important for the insurer to know the factual health condition of the person proposing to buy the policy, especially in case of health insurance and life insurance (term) plans. Insurers engage the facilities of reputed doctors and hospitals for carrying out health check- ups of the applicant. A medical test is done which includes a detailed health check-up of the applicant. It usually includes two parts: - A questionnaire where the doctor asks a series of questions. It could be verbal or written down. - Basic sample collections of urine and blood to determine vital medical parameters. These tests indicate whether any medical conditions and illnesses exist which the insurer should be aware of, at the time of sale of the insurance policy; and then provide the most suitable cover. However, in India, most times the insurers ask for such medical tests only for applicants over a specific age or a high sum assured. 3.2.3 Third Party Administrators (TPAs) A third-party administrator is a company/agency/organisation, holding a license from IRDAI, which provides various operational services as an outsourcing entity of an insurance company. Processing of claims is a recurring and standardized activity. Insurance companies, therefore, outsource some of their administrative burden to third parties and use the services of TPAs. The stakeholders involved are the insurance companies, health care providers and the policyholder. Introduced by the IRDA in 2001, TPAs function as an intermediary between the insurer and the insured. The job of a TPA is to maintain databases of all the policyholders, issue them identity cards and handle all the post policy issues including claim settlements. As such they need a deep knowledge of the rules and regulations of the insurance services. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 26 The TPAs run round the clock toll-free number. TPAs also perform some of the pertinent aspects of insurance such as providing ambulance services, medicines and supplies, guidance for specialized consultation to policyholders, and providing information about health facilities, bed availability, organizing well-being programs. They bring about greater efficiency/quality in delivery of services, greater penetration of health insurance, improved standardization in procedures and due diligence while minimizing costs/expenditure. 3.2.4 Insurance Repositories Insurance Repository is a company which is formed and registered under the Companies Act, 2013 and has been granted a registration certificate by IRDAI for maintaining insurance policies data in electronic form on behalf of the insurance companies. This enables policy holders to buy and keep insurance policies in an electronic form, rather than paper form. Such policies are known as “electronic policies” or “e-Policies”. A policyholder needs to open an e-Insurance Account (e-IA) with the Insurance Repository to buy and keep policies in electronic mode. Once an e IA is opened, the account holder can ask for the conversion of all his policies, issued by different insurers, into electronic mode to this single account. A person can have just one e-IA with any of the Insurance Repositories. There are 4 such Insurance repositories as of June 30, 2019: - NSDL Database Management Limited - Central Insurance Repository Limited - Karvy Insurance Repository Limited - CAMS Repository Services Limited There are many benefits of holding insurance policies in electronic form including: - The policies are in safe custody and can be easily accessed when needed. - All insurance policies (life, pension, health or general) can be electronically held under a single e-IA. - Premium can be paid online for all the policies. - There is no requirement to visit the offices of individual insurance companies for service. - No need to go through KYC verification again at the time of purchase of new policy. - All services are available free of charge. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 27 Chapter 4 Life Insurance Learning Objectives 4-1 Illustrate the structure and organization of life insurance companies in India 4-2 Understand the insurer’s fixing of premium and distribution of benefits 4-3 Illustrate various group insurance schemes 4-4 Understand the features of Insurance Contract and Policy Document 4-5 Distinguish policy revival schemes and claims 4.1 Structure and Organization of Life Insurance Companies in India 4.2 Mandate and Responsibilities 4.3 Income Sources and Rate-fixing 4.3.1 Premium and Types 4.3.2 Factors in Fixation of premium, Rate Making 4.3.2.1 Mortality Tables and Actuarial Valuation 4.3.2.2 Age, Medical Condition and Sum Assured 4.3.3.3 Rate of Guaranteed Benefits 4.3.3.4 Right Premium and Adverse Selection 4.4. Distribution of Benefits 4.4.1 Bonus – With Profit or Participating Plans 4.4.2 Simple and compound Reversionary Bonus, Guaranteed Addition 4.4.3 Terminal Bonus, Survival Bonus, Loyalty Addition 4.4.4 Interim Bonus 4.5 Taxation Aspect of Various Life Insurance Policies for Individuals 4.6 Loans Eligibility Against Life Insurance Policies – With Profit, Endowment and investment Plans 4.7 Group Insurance Schemes 4.7.1 Group Term Insurance Schemes 4.7.2 Employees’ Deposit Linked Insurance (EDLI) Scheme 4.7.3 Group Gratuity Schemes 4.7.3.1 Actuarial Valuation; data of retirement, resignation, death, disability 4.7.3.2 Methods to Manage – Create internal resources, Set up a Gratuity Fund 4.8 Investment Linked Insurance – Unit Linked Insurance Plan (ULIP) 4.8.1 Protection, Investment and Income Tax Benefits (subject to Lock-in Period) 4.8.2 Choice of Plans – Equity, Debt, Hybrid, Money Market Fund and Switch options 4.8.3 Net Asset Value based redemption, maturity and claim settlement 4.9 Contingency Planning 4.9.1 Disability insurance with premium waiver option 4.9.2 Child Plans with premium waiver 4.10 Insurance Policy Document and Legal Implications 4.10.1 Preamble 4.10.2 Operative Clause 4.10.3 Proviso 4.10.4 Schedule 4.10.5 Attestation 4.10.6 Conditions and Privileges Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 28 4.11 Policy Revival Schemes 4.11.1 Ordinary and Special Revival 4.11.2 Instalment Revival 4.11.3 Loan-cum-Revival 4.11.4 Foreclosure of Policy and Reinstatement provisions 4.11.5 Surrender of Policy 4.11.6 Assignment of Policy 4.12 Claims 4.12.1 Claims by Maturity 4.12.1.1 Claims at Periodic Intervals (Money-Back Plans) 4.12.1.2 Claims at Maturity (on surviving the Policy term) 4.12.2 Claims by Death 4.12.2.1 Claimant (Nominee/Assignee) or Legal Representative (Proof of Title) 4.12.2.2 Documents Required – Letter of Intimation, Death Certificate (Proof of Death) 4.12.2.3 Non-Early Death Claim (Beyond three years) – Presumed to be Dead for missing persons, applicability of Indian Evidence Act,1872 Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 29 4.1 Structure and Organization of Life Insurance Companies in India Insurance sector is divided into two distinct categories – Life Insurance and Non-Life Insurance (also termed as General Insurance). In India, both Life Insurance and General Insurance businesses are governed by the Insurance Regulatory and Development Authority of India (IRDAI) which is the primary regulator for insurance in India. It was established in 1999 under the government legislation called the Insurance Regulatory and Development Authority (IRDAI) Act, 1999. Presently, there are 24 life insurance companies which are operative in India. Life Insurance Corporation (LIC) of India is the only public sector company while there are 23 private sector life insurance companies. Many of the insurance companies are joint ventures either between public or private sector banks and national/international insurance financial corporates. This collaboration with the foreign markets has made the insurance sector grow tremendously in India. The life insurance companies in India have traditionally kept an investment perspective to insurance, with an idea of providing insurance along with a growth in savings. They have also introduced emerging trends like product innovation, multi-distribution and better claims management in the Indian market. The postal department also transacts life insurance business through Postal Life Insurance, which is exempt from the purview of the regulator. The government is also striving hard to provide insurance to individuals below the poverty line by introducing schemes such as: - Pradhan Mantri Suraksha Bima Yojana (PMSBY), - Rashtriya Swasthya Bima Yojana (RSBY) and - Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY). Insertion of these schemes have assisted in increasing the insurance reach to the masses. All these efforts have led to massive growth within the life insurance sector in the past few years. Today in India, life insurance forms a formidable part of the capital market and is second only to the banking sector for mobilizing savings. As per the provisional figures published by the Life Insurance Council as of 31st December, 2019, the life insurance sector controls: - More than Rs. 37,455 crore of deployed capital - Over Rs. 39,62,775 crore of managed assets - Investments in infrastructure exceeding Rs. 4,15,049 crore comprising: - Over 11,295 branches - More than 22.60 lakh agents - 2.92 lakh direct employees and growing significantly - 32.69 crore in-force policies Other demographic factors like the growing awareness of the need for insurance, growing middle class and young insurable crowd will substantially increase the growth of the Insurance sector in India. 4.2 Mandate and Responsibilities The Insurance Act, 1938 is the main Act governing the insurance sector in India. It provides the powers to the Insurance Regulatory and Development Authority of India (IRDAI) to frame regulations for supervision of the insurance industry. IRDAI is a statutory body formed under an Act of Parliament. The preamble to the IRDAI Act, 1999, is “to protect the interests of Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 30 holders of insurance policies, to regulate, promote and ensure orderly growth of the Insurance industry” for overall supervision and growth of the Insurance sector in India. IRDAI sets the mandate for the insurance sector to: - Encourage systematic growth of the insurance industry. - Protect the interest of the policyholders. - Promote high standards of integrity within the market. - Speed up claim settlement. - Set standards and conduct vigilance. Section 25 of IRDAI Act, 1999 also lays down the establishment of the Insurance Advisory Committee which advises on matters relating to making of regulations for the insurance industry. The draft regulations are first placed in the meeting of the Insurance Advisory Committee and after incorporating the recommendations they are approved by the IRDAI. Every Regulation approved is then notified in the Gazette of India. (Reference www.financialservices.gov.in) The key responsibility of insurers is to assist policyholders in managing risk in an efficient way through their insurance products, and to pay the claims covered by such insurance products. Insurers, being large institutional investors, help in funding the economic activity of the country. They also play an important role in the operation of the economy by encouraging people and businesses to make high-value investments. Some other key responsibilities of the insurance companies are: - To mobilize savings of the people. - To extend the sphere of insurance, thereby including the socially and economically backward classes. - To act as trustees of the insured public. - To safeguard economic use of resources collected from policyholders. - To manage business in a fiduciary capacity. 4.3 Income Sources and Rate-fixing Insurance companies mostly generate revenue in three ways: (a) By charging premiums to the customers for insurance cover, which is their underwriting income, (b) Reinvesting such income in low-risk investments, and (c) Unpaid claims on lapsed policies. Let us see how. Underwriting income: Insurance companies fix the premium by calculating the risk on each policy. During the year, the company collects huge premiums and may not have to pay claims on those policies for many years ahead. The difference between such premiums collected by the insurer and the money paid out by way of claims is the underwriting income for the insurer. In certain years such income is large on account of few claims paid, while, in other years the income could be less due to high claim amount on account of natural calamities etc. Reinvesting: Insurance companies invest a portion of the collected premiums in low-risk investments such as stocks, bonds, and other interest-bearing accounts hopefully earning a sizable return. Lapsed coverage: A policy lapses when people no longer pay the premium and abandon their policy. Also, many times the insured survives the policy term (i.e. outlives the term). In all such cases while the company has collected all the premiums over the years it has not made any pay out thereby generating income for the company. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 31 Since an insurance company is into business, the rate charged should cover expenses and losses, and earn some profit. Rate fixing (also called insurance pricing) is the determination of what rates, or premiums, to be charged for insurance. It is also the process of establishing rates for reinsurance or other risk transfer mechanisms. The rate reflects three major elements: the loss cost per unit of risk exposure, the administrative expenses and the profit. A rate provides for all costs associated with the transfer of risk so that equity among all the insured is maintained. Such rates fulfill these four criteria which are usually used by actuaries: - Rates should be reasonable, - Rates should not be disproportionate, - Rates should be adequate, and - Rates should not be unfairly biased. 4.3.1 Premium and Types Each insurance policy is a contract between the individual (the insured) and the insurance company (the insurer). If the insured suffers a loss, then, based upon the contract terms, the insurer is bound to cover that loss. However, the insured must pay a fee to the insurer, known as premium, to enable them to take the risk of such a loss. Since premiums are used by the insurer to pay for claims of the insured, the insurer must charge an adequate premium, which will cover for losses, administrative costs of running the company and eventually result in profit for the company. At the same time, there should not be excessive charging of premium by the insurer and they should be justifiable. Also, same rates should be charged from all members of an underwriting class with a similar risk profile. Premiums can be classified as Pure premium and Gross premium. The pure premium, determined by actuarial studies, consists of that part of the premium which is necessary to pay for losses and loss related expenses. ‘Load’ is in addition to the premium which is necessary to cover other expenses, particularly sales expenses, and to allow for a profit. The gross rate is then the sum of pure premium and the loading per exposure unit. Gross Rate = Pure Premium + Load Thus, gross premium is the premium which is charged from the insurance applicant and is calculated as the gross rate (as above) multiplied by the quantity of exposure units to be insured. Gross Premium = Gross Rate x Quantity of Exposure Units 4.3.2 Factors in Fixation of premium, Rate-making The process of premium fixation involves various considerations including selling goals, competition, legal restrictions and also estimating future costs related to the transfer of risk. Such costs include the amount of claims and expenses of their settlement, operational and administrative expenses, and the cost of capital. Insurers face a problem in setting fair and adequate premiums. Since the premium pays for insurance coverage in the immediate future, actual losses and expenses are not known when the premium is collected. Only after the premium period has elapsed, will the insurer come to know what its true costs are. Larger insurance firms maintain their own databases to estimate frequency and also the amount of losses for each and every underwriting category, however smaller firms rely on rating bureaus for loss data. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 32 Rate-making (also called rate-fixing, insurance pricing, premium fixation) for life insurance is simpler, since there are mortality tables that tabulate the number of deaths for each age, which includes a population of many people. Rate-making in life insurance is based on mortality rate, interest and expense. Some of the important factors in Rate-Making are: - Rates should be fair - Rates should produce a premium adequate to meet total losses but should not bring unreasonably large profits. - Rates should be revised often enough to reflect current costs Rates charged for life insurance increase with age as people are more likely to die as they get older. 4.3.2.1 Mortality Tables and Actuarial Valuation A mortality table (life table or actuarial table) shows the rate of deaths likely to occur in a defined population during a selected time interval. It shows the probability of a person's death before his next birthday, based on his current age. Thus, a mortality table gives a probability of the number of people who are expected to die per 1,000 living in any given year. They typically cover from birth of a person through his age 100, in one-year increments. A most basic mortality table would look like as the one given below. Essentially, mortality tables are long-term mathematical tabulations to measure a population's longevity and are usually constructed separately for men and women. Since people with different characteristics die at different rates, characteristics such as smoking status, occupation, income levels and socio-economic class are also included in mortality tables to distinguish different risks. Mortality tables are a very crucial part of actuarial work. After analysing the data from the mortality tables, actuaries perform risk assessments and try to predict the probability of claim. Through separate mortality and sickness tables they also try to predict the probable losses due to sickness. In mathematical terms, they have to figure out the amount of death benefit payable in each future year, and its present value, and the probability that the insured person will die in each of those years. From there, the premium can be determined. If the probability of a claim is high, the premium amount is high for the associated risk. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 33 4.3.2.2 Age, Medical Condition and Sum Assured Besides relying on mortality tables, there are several factors that insurance companies consider at the stage of underwriting and subsequently price the premium of their life insurance policies. Age: Age is one of the most essential underwriting factors. The possibility of a young individual contracting a life threatening disease or dying young is very unlikely. Also, a young person will pay more number of premiums compared to someone older. Therefore, the premium amount is lower for people buying a life insurance policy at a younger age. Gender: Premium rates are higher for men than for women as statistically men have a shorter life expectancy than women and thereby they pose a higher risk of claim. Hence, premiums for males is higher than compared to females falling within the same criteria. Smoking and drinking: For a policyholder, smoking and drinking are injurious to health and increase his risk of contracting life threatening diseases. As such, insurance companies charge a higher premium for off-setting higher risk from people who smoke or drink alcohol. Current health status: Insurers have the applicant undergo a few medical tests such as sugar level, blood pressure, etc to determine the current health state of the individual applying for the life insurance policy. If any critical illness or condition is revealed in such tests, it will result in higher premiums, or even in rejection of his application. On the other side, healthier individuals get the benefit of lowered premiums. Medical History of the family: If a policyholder has a history of serious illnesses from a hereditary perspective, it increases his probability of getting it transmitted. Hence, the individual’s premium goes up. On the contrary, someone who has had a relatively smooth medical history, he stands a greater chance of availing lower premiums for his policy. Death benefit and Policy Term: The larger the amount of death benefit, the higher is the premium charged by the insurance company to the policyholder. Likewise, longer the policy term, higher will be the premium. This is because the risk of death of the policyholder is higher for a policy which covers him for 30 years than a policy which covers the same risk for 10 years. Occupation: People engaged in occupations like shipping, mining, fishing, industrial production etc are considered doing a more dangerous job than people working in an office where the work environment is relatively safer. As such, premiums charged by life insurance companies from policyholders in such occupations are much higher than from people engaged in relatively safer jobs or desk jobs. Every insurance policy is based on each individual person and premiums are computed based on the insurer's rules of rating. How these factors affect the premium is dependent on the insurer and the way they treat a combination of these and other similar factors. Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 34 4.3.2.3 Rates of Guaranteed Benefits Insurance providers offer a “guaranteed benefit” option with the traditional insurance plans. In such plans, in lieu of a bonus which varies depending on the profits generated, the insurers declare a 'guaranteed addition' (GA) or a 'guaranteed return'. A guaranteed benefit on the investment means that the investment amount in the policy will grow at the rate of return which is guaranteed. The insured is assured to receive such benefits as stated in the benefit illustration of the policy plan. Guaranteed benefit plans are designed to cater to the risk-averse investors and offer them the benefit of life insurance along with guaranteed payouts at different stages of the policy, in addition to the maturity amount. However, the structure of the guaranteed plans may vary across insurers. Some offer a guaranteed return based on the premium paid, while others on the sum assured of the policy. The amount may also vary based on the policy term or the premium paying term. In some plans, the guaranteed returns get added to the policy from the second year onwards, while in some, they start at a later date. The plans that come with these options usually charge a higher premium than the non- guaranteed plans. Therefore, the returns, after adjusting for the costs on account of the guarantee, are low in such plans. Since these plans come at a higher cost and low return they should be chosen by the customers only if they suit their requirements. 4.3.2.4 Right Premium and Adverse Selection Insurance is a contract between the insurer and the life assured. Premium is the consideration which makes the contract valid. Insurers use premiums to cover liabilities associated with the policies they underwrite and to keep the revenue model viable. As such, it is utmost important for the insurers to charge the right premium amount from the policyholders. Normal insurance premiums are calculated on the basis of policyholders being in average good health and a safe work environment. ‘Adverse selection’ in insurance refers to insurance firm's acceptance of applicants who are at a greater than normal risk, but have concealed information about their actual condition. In such situations, the applicant has deliberately hidden material information, which is of critical nature for ascertaining his risk profile. The insurer, with less information, is at a disadvantage to the applicant in determining the correct premium. As the risk is not factored at the time of sale of the policy, this adverse selection leads to faulty determination of premiums and loss to the insurance company. Truth is, the insurance company cannot possibly know the individual factors that determine every potential buyers health profile. Therefore, before the sale, the company asks all individuals to fill out questionnaires to spell out the material information - followed by a very detailed underwriting process. Say, an individual, who is a habitual smoker and does not exercise, knowing well that answering truthfully means higher insurance premiums, lies and does not declare about his smoking and exercise habits. This leads to adverse selection where the insurer is at a disadvantage and will charge the normal premium to such an individual of higher risk. Implications of Adverse Selection Insurance will not be commercially viable for the company when prospective buyers have better information about their risk than the company itself. In such cases of adverse selection, people who know that they have a higher risk than the average of the group will buy the insurance plan. However, those who have a below-average risk Copyright ©2018-2020, Financial Planning Standards Board Ltd. All rights reserved. 35 may find that the policy is too costly than their perceived value of risk and so may not buy. In such cases, premiums set by the insurer, basis the average risk ascertained by the underwriters and the data outlined in the mortality tables, will not be sufficient for the insurer to cover the claims that eventually arise. The reason is that there will be more wilful buyers of the policy who have above-average risk than those who have below- average risk. 4.4 Distribution of Benefits All the premiums collected from the policyholders get accumulated in the corpus of the insurance company. A large part of this is invested by the company in government secured debt instruments and a small part is invested in equities. On the basis of earnings from these investments, valuation of the assets and liabilities of the insurance company, and the claims paid, the insurance comp

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