Development of Regulatory Mechanism

Development of Regulatory Mechanism Critical Analysis of Role of IRDA (Regulator) In the Last Decade In Respect of  General Insurance Companies In India, insurance has a very deep-rooted history. Insurance in India has evolved over time heavily drawing from other countries, England in particular. The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Kolkata by the British. In 1907, the Indian Mercantile Insurance Ltd., was set up. This was the first company to transact all classes of general insurance business. In 1968, the Insurance Act was amended to regulate investments and set up minimum solvency margins. The Tariff Advisory Committee was also set up then. In 1972, with the passing of the General Insurance Business (Nationalization) Act, general insurance business was nationalized with effect from 1st January, 1973. 107 insurers were 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. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on 1st January, 1973. Evolution of IRDA In 1993, the Government set up a committee under the chairmanship of RN Malhotra, the former Governor of RBI, to propose recommendations for reforms in the insurance sector. The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein, among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies should be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. Following the recommendations of the Malhotra committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objective of IRDA includes promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market. The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from the year 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders interests. In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002. Today there are 24 general insurance companies including the ECGC and Agriculture Insurance Corporation of India. IRDA plays a vital role in shaping the growth of the insurance industry as a whole. Ever since IRDA came into existence and started regulating the insurance industry, there were many changes which were brought in the insurance industry which immensely helped the customers in choosing the right policies as well as helped the insurance companies in delivering the right policies to its customers as well as the insurance company. IRDA made a huge impact of its presence in the insurance industry since it started regulating the insurance industry firmly and stiffly as well as imposed many new regulations on the insurance companies to protect the policy holders interests and help the insurance companies grow and have a healthy competition among each other so that no insurance companies are declared bankrupt. Insurance companies were made to comply with all the regulations framed by IRDA and IRDA had full authority to penalize any insurance company for non-compliance of the guidelines of IRDA. IRDAs role in shaping the whole insurance industry has been a challenging job since its inception because the insurance companies enjoyed the freedom of non-regulation before IRDA came into existence. This is the reason why IRDA worked tiresomely in order to put everything in place and faced so many challenges for regulating the insurance industry as a whole. Mission Statement Of The Authority To protect the interest of and secure fair treatment to policyholders; To bring about speedy and orderly growth of the insurance industry (including annuity and superannuation payments), for the benefit of the common man, and to provide long term funds for accelerating growth of the economy; To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates; To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery; To promote fairness, transparency and orderly conduct in financial markets dealing with insurance and build a reliable management information system to enforce high standards of financial soundness amongst market players; To take action where such standards are inadequate or ineffectively enforced; To bring about optimum amount of self-regulation in day-to-day working of the industry consistent with the requirements of prudential regulation. Composition of Authority As per section 4 of IRDA Act, 1999, Insurance Regulatory and Development Authority specify the composition of Authority: The Authority is a ten member team consisting of: a Chairman; Five whole-time members; Four part-time members. (All the members are appointed by Govt. of India) Review of Literature Insurance Regulatory Development Authority IRDA since its inception has done a wonderful job in carrying out its duties, powers and functions without failing. The powers and functions of IRDA are such that it has the authority to issue to the applicant a certificate of registration, renew it, modify it, withdraw, suspend or cancel such registration. IRDA plays an important role in protecting the policy holders interests in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim and other terms and conditions of contracts of insurance. IRDA also specifies the requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents. It clearly states the code of conduct for surveyors and loss assessors as well as promotes efficiency in the conduct of insurance business and regulates the professional organizations connected with the insurance and re-insurance business. IRDA always calls for information related to undertaking inspection, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business. IRDA fully controls and regulates the rates, advantages, terms and conditions that are offered by the insurers in respect of general insurance business which were earlier not so controlled and regulated by the Tariff Advisory Committee. IRDA also specifies the form and manner in which books of account shall be maintained and statements of accounts shall be rendered by the insurers and other insurance intermediaries. Now to discuss some of the guidelines and regulations framed by the IRDA in respect of General Insurance Companies, IRDA issued some regulations relating to protection of policy holders interests which stated that an insurer or its agent or other intermediary shall provide all material information in respect of a proposed cover to the prospect to enable the prospect to decide on the best cover that would be in his or her interest. Where the prospect depends upon the advise of the insurer or its agent or and insurance intermediary, such a person must advise the prospect dispassionately. Except in case of marine insurance cover, whereby current market practices do not insist on a written proposal form, a proposal for grant of cover for general business must be evidenced by a written document. It is the duty of an insurer to furnish to the insured free of charge, within 30 days of the acceptance of a proposal, a copy of the proposal form. Every insurer should have proper procedures and effective mechanism in place in order to address complaints and grievances of policy holders efficiently with speed. An insured or the claimant should give notice to the insurer after any loss has occurred arising under the contract of insurance at the earliest and within specified time period which may be allowed by the insurer. On receipt of such a communication, the insurer has to respond immediately and give clear indication to the insured on the procedures that he or she should follow. In case a surveyor is appointed for assessing the loss, it shall be done within 72hours of the receipt of intimation from the insured. On receipt of the survey report, the insurer should offer a settlement of claim to the insured within a period of 30days. If the insurer for any reason decides to reject or repudiate the claim under the policy, it has to do so within a period of 30days from the receipt of the survey report. Non-Tariff Regime In the year 2005, General Insurance Companies and other stake holders in the insurance market voiced the demand for removal of tariff as the existence of tariff was considered contrary to free market principles and insurance products needed to be priced based on market forces. IRDA accordingly considered moving to a tariff free regime. IRDA stated that in a market free of tariffs, all the insurance companies should have in place internal capabilities, procedures and controls. It also stated that the functions of underwriting and rating of insurance business should be independent of the business development function and not be made subservient to the business development function. Employees with authority were to be trained to evaluate proposals, underwrite and rate the risks as per the guide tariff. Following the decision of the tariff advisory committee to de-tariff Marine Hull Insurance, IRDA issued certain guidelines in respect of Marin Hull Insurance. All the general insurers who had wish to underwrite marine hull business, should follow the exact existing policy wordings, terms and conditions including clauses such as the Institute clauses as it was before de-tariff regime. It was also indicated and stated that all the insurance companies who wanted to underwrite marine hull class of business should file separately with the IRDA regarding the reinsurance arrangements for protecting the net account exposures. Guidelines Pertaining to Corporate Agents Outsourcing of Activities All the non-life insurers were directed to lay down minimum business requirements for Individual agents. The said provision of minimum business requirements is extended to all Corporate Agents as well. Accordingly, all the non-life insurers were directed to lay down minimum business requirements for Corporate Agents and monitor the performance of Corporate Agents as often as it is required. Insurers in India increasingly used outsourcing, as a means of both reducing cost and accessing expertise, not available internally and in order to achieve strategic aims. IRDA in respect of outsourcing stated that, all applicants will carry on functions in respect of insurance business including management of investment, within its own organization. It was observed that certain insurers were even outsourcing the core activities such as investment, underwriting and policy servicing. IRDA said that it was not desirable to outsource the core and important activities which will immensely affect the corporate governance, protection of policy holders, solvency and revenue of flows of insurer. IRDA further stated that outsourcing arrangements should neither diminish its ability to fulfill its obligations to policy holders nor impede effective supervision by IRDA. Insurers therefore were to take steps to ensure that the service provider employs the same standards in performing the services as would be employed by them if the activities were conducted in house. Accordingly, Insurers were not to engage in outsourcing that would result in their internal control, business conduct or reputation being compromised or weakened. Therefore, IRDA does everything that they can in order to protect the policy holders interest as well as control the Insurance Industry as a whole for betterment. Need of the Study What is the purpose of IRDA in regulating the General Insurance Companies? How IRDA framed and implemented the policies. Role of IRDA. Objectives of the Study A comprehensive wide case analysis of the role of IRDA in the last decade in respect of General Insurance Industry will aid and help in understanding the details regarding the benefits of the guidelines bestowed upon on the General Insurance Companies by the IRDA as well as to know the problems faced by General Insurance Companies in complying with IRDA regulations. Rationale of the topic Insurance industry in India has come a long way since the time when businesses were tightly regulated and concentrated in the hands of a few public sector insurers. Following the passage of the Insurance Regulatory and Development Authority Act in 1999, India abandoned public sector exclusivity in the insurance industry in favour of market-driven competition. This shift has brought about major changes to the industry. This topic will help in identifying the role of IRDA and its impact on the General Insurance Industry since its inception. IRDA plays a vital role in shaping the growth of the insurance industry as whole due to which it is very important to understand how IRDA framed and implemented the policies in order to protect the policy holders and bring transparency in the insurance market. This is the reason why it is very important to critically analyze the role of IRDA since its inception and find out whether the general insurance companies have strictly adhered to the rules framed by IRDA and followed it without any problems faced. Research Methodology Research method: Descriptive Research Sampling tool: Questionnaire Data collected: primary Statistical tool used: Microsoft excel Data collection methods Primary data: the primary data will be collected by means of a survey. Questionnaire will be prepared and the General Insurance companies will be approached to fill up the questionnaire. The filled up information will later be analyzed to obtain the required information. Hypothesis Null: H0: Guidelines framed by the regulator are useful. Alternative: H1: Guidelines framed by the regulator is not useful. Null: H0: IRDA treats all the insurance companies both Public and Private, equally and fairly. Alternative: H1: IRDA doesnt treat all the insurance companies both Public and Private, equally and fairly. Data Analysis Interpretation Q1. Insurance Regulations includes all the objective of insurance business. Code Response Frequency Precentage 1 Agree 10 100 2 Disagree 0 0 According to the survey collected from 10 respondents one each from 10 general insurance companies, it was found that the regulations framed by IRDA includes all the objective of insurance business. Q2. Regulator Examines the documents thoroughly before issuing a license to any new insurance company. Code Response Frequency Precentage 1 Agree 10 100 2 Disagree 0 0 As per the pie chart above, we can easily interpret that all the respondents agree on the fact that the regulator examines the documents thoroughly before issuing a license to any new insurance company. Q3. Insurance Companies are able to meet the capital requirement set by the regulator. Code Response Frequency Precentage 1 Agree 10 100 2 Disagree 0 0 The response on the capital requirement is that Insurance Companies are able to meet the capital requirement set by the regulator as responded by the survey respondents. Q4. True disclosure of the working of insurance company ensures the soundenss of the business of the insurance company. Code Response Frequency Precentage 1 Agree 10 100 2 Disagree 0 0 According to the respondents, all of them agree to the fact that true disclosure of the working of insurance company does always ensures the soundness of the business of the insurance company thus showing transparency in the workings of insurance companies. Q5. Regulator has a very important role in the selection of the management. Code Response Frequency Precentage 1 Agree 2 20 2 Disagree 8 80 As the chart speaks for itself, we can clearly see that 80% of the respondents does not agree to the fact that regulator has a very important role in the selection of the management as opposed to 20% who agree to the statement. This shows that regulator is not so important when it comes to the selection of management. Q6. Guidelines framed by the regulator are useful Code Response Frequency Precentage 1 Agree 9 90 2 Disagree 1 10 According to the survey conducted, it shows that 90% of the respondents feel that guidelines framed by the regulator are useful whereas 10% feels it is not useful meaning that majority of the insurance companies feel that the guidelines are very useful for insurance companies to sustain and grow in the market. Q7. Filing a new product with regulator for approval is easy. Code Response Frequency Precentage 1 Agree 1 10 2 Disagree 9 90 The survey on the filing of new conducted concluded with 90% denying the fact that filing a new product with the regulator for approval is easy meaning that they feel it is difficult to file a new product. Only 10% feels it is easy which is quite bad. Q8. Setting up of the customer grievance cell as the directives by the regulator helps in satisfying the policy holders and getting more business for the company. Code Response Frequency Precentage 1 Agree 9 90 2 Disagree 1 10 90% respondents feel that setting up of the customer grievance cell as directed by the regulator helps in satisfying the policy holders and getting more business for the company where as 10% of the respondents doesnt support the statement. Q9. Establishment of the IRDA to regulate the insurance industry was a wise step taken by the government of India in order to protect the policy holders interest and insurance industry as a whole. Code Response Frequency Precentage 1 Agree 10 100 2 Disagree 0 0 The above pie chart shows that all the insurance companies that were surveyed feels that establishment of the IRDA to regulate the insurance industry was a wise step taken by the government of India in order to protect the policy holders interest and insurance industry as a whole. Q 10. IRDA treats all the insurance companies both public and private equally and fairly. Code Response Frequency Precentage 1 Agree 10 100 2 Disagree 0 0 All the 100% respondents agree to the fact that IRDA treats all the insurance companies both public and private equally and fairly. Q11. IRDA takes strict actions on insurance companies for non-compliance with the regulator. Code Response Frequency Precentage 1 Agree 10 100 2 Disagree 0 0 According to the pie chart, we can easily come to a conclusion that all the respondents from 10 general insurance companies accepts that IRDA is very strict and that it takes strict actions on insurance companies for non-compliance with the regulator. Findings Insurance Regulations does include all the objectives of insurance. IRDA always examines the documents thoroughly before issuing a license to any new insurance company. Regulator doesnt have much role in the selection of management according to the general insurance companies. Guidelines framed by the regulator are very useful for the insurance companies. Filing a new product with the regulator for approval is not at all easy. Establishment of the IRDA to regulate the insurance industry was a wise step taken by the government of India in order to protect the policy holders interest and insurance industry as a whole. IRDA treats all the insurance companies both public and private equally and fairly. IRDA takes strict actions on insurance companies for non-compliance with the regulator. Suggestions Since regulator doesnt have important role in the selection of the management, I think the regulators should take part in the selection of the management so that there is a fair and transparent management. Since filing of a new product for approval from the regulator is not so easy, IRDA should take into account such problems and issues so that various types of products are available immediately in the market which would help the customer choose the best suited product. IRDA can try to increase their man power and examine the new products filed thoroughly in a quick moment. Although guidelines framed by the regulator are useful, few insurance companies feel it is not due to which IRDA should also take the consent of the insurance companies for sharing their ideas on the guidelines, then note it down and if the regulator feels it is valid, then adapt that guideline. Conclusion The study of the topic Critical Analysis of the Role of Regulator (IRDA) in the Last Decade in Respect of General Insurance Companies it was found that regulator plays a very vital role in protecting the policy holders interests as well as growing and shaping the insurance industry as a whole. It was also found out that establishment of IRDA to regulate the insurance industry was a wise step taken by the Government of India as well as the most important factor for IRDA to be a very prominent and successful regulator is due to the hard work and wise firm decisions and steps taken by the Government as well as the Management of the regulator. The study also found out that there was not much gaps and flaws in the functioning of the regulator since the regulator has properly framed the guidelines taking into account the customers protection and the Insurance Industrys protection as a whole. The general insurance companies are all satisfied with decisions taken by IRDA and do appreciate the presence of IRDA. So finally, it is concluded that IRDA as a regulator does play a very important role in shaping the whole insurance industry and that IRDA should maintain the same henceforth so that even the new insurance companies would also stick to the norms and proper procedures. Sonam Tobgay