Regulation & Supervision of the

Insurance Sector in India

by
C. S. Rao, Chairman
Insurance Regulatory and Development Authority
Hyderabad, India

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INDIA PROFILE
GEOGRAPHIC/ DEMOGRAPHIC

z Total Area: 3.28 million sq kms.

z Coastline: 7,517 kms
z States & Union Territories 29 & 6
respectively

ƒ Population: 1.05 billion

ƒ Share of world popn: 16.9%
ƒ Urban : Rural popn: 28: 72
ƒ Life expectancy
Male: 64.4 yrs, Female: 62.9 yrs

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 ECONOMIC REFORMS
PROCESS
¾Reform process initiated in 1991.
¾Abolition of Licensing, Permits and Quotas in Industrial Sector
¾Financial Sector Reforms
™Banking Sector Reforms
Freeing of interest rates by the Central Bank
Rationalization of priority sector lendings & lowering of directed credit
™Capital Market Sector Reforms
Abolition of Controller of Capital Issues and Establishment of
Securities and Exchange Board of India in 1992
Issuance of regulations for mutual funds, portfolio managers,
registrars, merchant bankers, depository and participants, etc
™Insurance Sector Reforms
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 INSURANCE SECTOR
REFORMS
¾Committee on Reforms in Insurance sector – 1994
¾Setting-up of Interim Insurance Regulatory Authority – May
1996
¾IRDA Act Passed – December 1999
¾Statutory Authority (IRDA) established – 19th April 2000
¾First set of Regulations notified – 19th July, 2000
¾First set of Certificate of Registration (Licenses) granted –
23rd October 2000

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 NEED FOR REGULATORY
INTERVENTION
-Level playing field
-Consumer Protection - No Regulations
-Public Private - Plagued by
fraud
Partnership Regulated Free
Market Market
IRDA Act, 1999 Insurance Act, 1938

-contribution to
development of market Nationalised Regulated
-untapped market Market Market - Urban centric
potential high -Planned Economy
-absence of consumer --Optimum utilization
choice LIC Act, 1956 of resources
-poor customer service GIBNA, 1972
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 Composition of Authority &
Regulatory Framework
Composition:
Presently the Authority comprises of:
– Chairman
– Four full-time members
– Four part-time members
Regulatory Framework:
– Insurance Act, 1938
– IRDA Act, 1999
– Notification of Regulations
– Issue of Circulars/ letters

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 Duties, Powers & Functions
of IRDA
Registration of insurers & licensing of
insurance intermediaries
Financial & regulatory supervision
Control & Regulation of premium rates
Protection of Policyholders’ interests
Specifying rural & social sector obligations

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 Registration of supervised
entities

Insurance companies
Intermediaries:
– Agents & Corporate Agents
– Brokers
– Third Party Administrators
– Surveyors & Loss Assessors

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 Registration Requirements – Insurance
Companies

Joint Stock public limited Company

Capital prescriptions –
– Contributions only through equity route
– Rs.1000 million for life and non-life companies
– Rs.2000 million for re-insurance companies
Foreign Direct Investment (FDI) – 26%
Foreign promoter – clearance from home country regulator
Indian promoter - regulatory clearances from Indian regulators like
RBI; SEBI; Income Tax clearances
Promoter & Senior Management – “Fit and proper” status
Sources of funding
Long term commitment
Business plan
Projected Balance Sheet for 5 years
Infusion of additional capital at periodic intervals
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 Licensing of Insurance Agents/
Corporate Agents
Tied agents (one life insurer and general insurer)
Delegated to designated persons in insurance
companies
Minimum educational qualification
Stipulated training requirements (registration & Renewal)
Clear examination
Adherence to code of conduct
Banks/ FI’s/ NBFC’s acting as Corporate Agents:
– Promoter Banks/ FI’s/ NBFC’s of insurance companies
– Other banks
– Agent of one life and one non-life insurance company
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 Insurance Brokers

Represent the client

Not risk carriers
Capital & deposit requirements
Professional Indemnity policy
Membership of Brokers’ Association
Minimum qualifications & training requirements
for CEO and at least two other persons
Adherence to code of conduct
Banks/ FI’s/ NBFC’s acting as Insurance Broker
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 Third Party Administrators –
Health Insurance

Outsourcing agency for servicing of health insurance

claims
No marketing rights
Introduced to promote “cash less hospitalization”
Not risk carriers
Working Capital requirements
Minimum qualifications & training requirements for
CEO/ CAO
Adherence to code of conduct
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 Surveyors & Loss Assessors

Mandatory for claims above specified limits

Independent professionals
Minimum educational qualifications & training
Adherence to code of conduct
Setting up of the independent Institute of surveyors &
loss assessors

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 Supervision of Insurance
Companies
Structure:
– Approval of changes in ownership
– Appointment of CEO/ Appointed Actuary
Operations & Monitoring of performance:
– Approval of Products
– Investments
– Reinsurance
– Financial & Actuarial returns
– On site inspection
Protection of policyholders’ interests:
– Issues of market conduct
– Advertisements & Disclosures
– Grievance Redressal Mechanism
Developmental Issues
– Rural & Social Sector obligations
– Micro Insurance
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 Product Approval

Insurers file proposed products for approval.

Focus on
– Transparency of the product
– Actuarial assessment
– Reasonableness of premium
– Benefits flowing to policyholders
– Fairness of contract terms
If no clarification sought, deemed approved
within 30 days.
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 Investments

Stipulations for life/non-life insurance

segments
Pattern of Investments designed to control risk
Mandated investment for Infrastructure/Social
Sector
Prudential norms
Exposure Limits
Outsourcing not permitted (other than
computation of NAV)
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 Reinsurance

Guided by objectives of:

– maximizing retention within the country
– securing the best possible protection for the reinsurance
costs incurred
Obligatory cession of 15% to Indian re-insurer
Filing of Reinsurance Program and copies of
Treaty slips
Placement with atleast BBB rated companies

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 Scrutiny Of
Financial & Actuarial Returns

Assess financial health of companies:

• Solvency margin requirements
• Profitability of operations
• Shareholders’ responsibility to fund deficit
through capital infusion
• Control on expenses
• Healthy business growth
• Satisfactory investment return
• Adequacy of internal controls and processes
• Satisfactory risk management strategy 18
 On-site Inspections

Statutory powers
Limited inspections:
– Targeted
– Investments
– Market Conduct
Training of Staff

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 Market Conduct

Dealing with the customer

Disclosure of relevant information
Licensed personnel authorized to sell
Advertisement Regulations define unfair or misleading
advertisements
Regulations on protection of interests of policyholders
Sales literature to highlight mandatory disclosures,
benefits, exclusions
Servicing Benchmarks, timeframe for settlement of
claims, payment of penal interest in case of delay
Procedure & mechanism to address grievances
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 Grievances Handling Mechanism

The system & its effectiveness

Analysis of complaints
Arbitration and Conciliation options
Insurance Ombudsman
Grievance Redressal Cells at IRDA to
facilitate resolution of dispute

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 Obligations to Rural & Social
Sectors

Introduced post opening up of the insurance sector

Rural Sector obligations:
– Life companies: Linked to per cent of no. of new policies issued
during financial year
– Non life companies: Linked to per cent of gross premium direct
underwritten during the year

Social Sector obligations:

– Minimum no. of lives to be covered annually

Targets linked to the year of operations

In respect of existing public sector insurers obligations linked to
performance in 2001-02
The amendment regulations 2007 being notified shortly

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 Micro Insurance

Objective – Reach the bottom of the pyramid by making

it accessible and affordable
Channel – Leveraging on the established entities
already engaged in rural initiatives – NGO/SHG/MFIs
Innovation –
– Enormous scope for innovative products
– Integration of Life/ General insurance products
– Cover life, health, livestock, dwellings, assets, crops
Approach – Insurers view it as a potential business
opportunity and developing sustainable delivery channel

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 Overview of Insurance Market
2000 2007
Total
no. of
Total number of Public Private# Public Insurers
insurers Sector Sector Sector (Public and
Private)
Life insurers 1 15 1 16
General
insurers 4 8 4 12
Specialized
Institutions 1* 1@ 2 3
National
Reinsurer 1 0 1 1
Total 6 24 8 32
# 2 Life and 1 General insurer do not have Foreign Joint Venture partner.
*ECGC (not registered in 2000) and Agricultural Ins Co. Ltd. established recently
@Standalone Health insurance Company

2007-08, registration granted to one life, non-life and health insurance company
each. Thus, as on date no. of entities registered increased to 35. 24
 Insurance Penetration

Year Total Business Life Non Life

1996 1.84 1.29 0.55
2000 2.32 1.77 0.55
2001 2.71 2.15 0.56
2002 3.26 2.59 0.67
2003 2.88 2.26 0.62
2004 3.17 2.53 0.65
2005 3.14 2.53 0.62
2006 4.8 4.1 0.6
Premium as % of GDP
Source: Sigma/ Swiss Re 25
 Insurance Density

Year Total Business Life Non Life

1996 7.00 5.00 2.00

2000 9.90 7.60 2.30
2001 11.50 9.10 2.40
2002 14.70 11.70 3.00
2003 16.40 12.90 3.50
2004 19.70 15.70 4.00
2005 22.70 18.30 4.40
2006 38.4 33.2 5.2
Premium per capita in USD
Source: Sigma/ Swiss Re
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 AGENDA FOR ACTION

¾Life and General Insurance

™ Increase in Foreign Direct Investment (FDI)
¾Health insurance
™ Need to reduce capital requirements for establishing health insurance
companies
™ Creation of centralized health database, training in ICD-10 coding, new
product innovation and design undertaken.
¾Detariffing
™ Insurance companies to establish basic infrastructure such as i) strong
underwriting teams; ii) IT systems to retrieve and analyse data; iii) ways
and means to protect the policyholders; iv) scientific and adequate pricing
of covers, etc.
¾Market conduct
™ Establishment of Self Regulatory Organizations (SRO’s) to monitor and
control Mis-selling/ Rebating/ Payouts in life and general insurance 27
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