Article by Celia Jenkins and Priya Misra
The financial year 2017-18 has been an eventful year for the Indian insurance sector, with several landmark changes being introduced to the insurance regulatory framework. Amongst others, the IRDAI issued the IRDAI (Insurance Web Aggregators) Regulations 2017, the IRDAI (Outsourcing of Activities by Indian Insurers) Regulations 2017, the IRDAI (Appointed Actuary) Regulations 2017 and the IRDAI (Protection of Policyholders' Interests) Regulations 2017, to update the existing regulatory framework. The IRDAI also issued the "Guidelines on Insurance e-commerce" of 9th March 2017 and the "Guidelines on Information and Cyber Security for insurers" of 7th April 2017 to take into account changes in modes of sales and servicing and address data security threats, respectively.
In the midst of these landmark changes, the IRDAI released an Exposure Draft for revising the IRDA (Insurance Brokers) Regulations 2013 (2013 Regulations) for comments from stakeholders. Following various representations made by insurance brokers and other stakeholders, the IRDAI issued the IRDAI (Insurance Brokers) Regulations 2018 (2018 Regulations) to repeal the erstwhile 2013 Regulations, bringing changes to the earlier provisions and adding to the existing compliance requirements for insurance brokers.
The key changes introduced by the 2018 Regulations are as follows:
Norms for Risk Management Services
The 2018 Regulations prescribe the conditions in accordance with which an insurance broker may perform risk management services for commercial risks for a fee. The term "risk management services" is defined to mean provision of services such as risk assessment, risk advisory, risk mitigation or risk minimization for the benefit of its client.
Revised Norms for Claims Consultancy Services
Under the 2013 Regulations, an insurance broker was permitted to undertake claims consultancy for claims upto Rs. 1 crore. Pursuant to the 2018 Regulations, this limit has been increased to Rs.10 crores. However, an insurance broker is only permitted to undertake such claims consultancy vis-à-vis commercial lines of general insurance business. The insurance broker may undertake claims consultancy for a claim exceeding the prescribed limit, with the prior approval of the IRDAI.
Limitations on Outsourcing
The new regulations set out express norms with respect to the outsourcing of activities by insurance brokers in India. Insurance brokers are now expressly prohibited from outsourcing their functions listed in the 2018 Regulations to third party service providers. In addition, insurance brokers are also prohibited from outsourcing risk management and claims consultancy services, unless the insurance broker does not undertake this activity at all. Every insurance broker is required to put in place a Board approved Outsourcing Policy. All outsourcing arrangements where annual payment per outsourcing service provider is Rs.10,00,000 (Rupees Ten Lakh) or more are required to be placed before the Board of Directors for review.
Solicitation of Insurance
Every Insurance broker is now required to have in place a Board approved policy on the manner of soliciting insurance policies. The Board approved Policy, is required to include, inter alia, the approach to be followed by the Insurance broker in having multiple tie-ups, type of products sold, mode of solicitation, grievance redressal mechanism, reporting requirements and any other item with regard to different business segments. This policy is required to be reviewed every three years.
The 2013 Regulations stipulated the norms that an insurance broker is required to follow for undertaking online sale of insurance business. In March 2017, the IRDAI released the "Guidelines on Insurance e-commerce" of 9th March 2017 (e-commerce Guidelines) to prescribe the norms for the solicitation and servicing of insurance through an insurance self-network platform (ISNP) of an Insurer/insurance intermediary. Further, the IRDAI also released the Web Aggregators Regulations which prescribed additional norms applicable to insurance web aggregator for the sale and servicing of insurance products on the designated website of the insurance web aggregator. Perhaps, in order to ensure uniformity, the 2018 Regulations stipulate that an insurance broker is required to comply with the e-commerce Guidelines and the Web Aggregators Regulations, to the extent applicable, with respect to the sale of insurance online by the insurance broker. It is, however, still unclear to what exact extent the Web Aggregators Regulations have been made applicable to insurance brokers vis-à-vis online sale of insurance.
Further, insurance brokers are also required to comply with the Web Aggregator Regulations with respect to solicitation and procurement of insurance using telemarketing and distance marketing modes. Insurance brokers are permitted to undertake outsourcing activities to the extent of tele-marketing and distance marketing modes for Insurers.
Remuneration & Fees
The 2018 Regulations now expressly clarify that an insurance broker is permitted to receive "fees" for undertaking any of the services provided to the client, as permitted, including claims consultancy, risk management service or other similar services which is not a percentage of premium or claim amount. This fee is distinct from remuneration that may be earned by the insurance broker for solicitation and procurement of insurance business.
In relation to placement of reinsurance business, the 2018 Regulations stipulate that composite and reinsurance brokers are required to enter into a Terms of Business Agreement with the (re)insurer setting out the minimum terms as prescribed under the regulations.
Norms for Amalgamation & Transfer of Business
The 2018 Regulations set out the procedure for obtaining the approval from the IRDAI for any scheme of amalgamation or merger and acquisition or transfer of business of an insurance broker registered with the IRDAI.
Revised Capital and Deposit Requirements
The 2018 Regulations also stipulate the manner for calculation of equity capital held by foreign investors and also set out the revised minimum capital, net worth and deposit requirements that are required to be complied with by a registered insurance broker.
Despite the various press reports released in the past year suggesting that foreign direct investment in insurance broking entities will be increased to 100%, per the 2018 Regulations, insurance brokers are required to continue to comply with Indian owned and controlled guidelines which stipulate that foreign direct investment in, inter alia, an insurance broking entity, shall not exceed 49%.
In addition, the 2018 Regulations now stipulate an additional consideration for an insurance broker's application for certificate of registration, pursuant to which the IRDAI will take into account whether a foreign investor or Indian Promoter of the venture has exited for any reason, at any time during the preceding two financial years from the date of application.
The new regulations continue to state that ordinarily, a corporate group shall be issued only once certificate of registration for insurance intermediation.
Therefore, it appears that the new 2018 Regulations, while increasing the compliance requirements, have also attempted to some extent to create a level playing field between insurance brokers and insurance web aggregators. Further, by way of the new norms, there is a distinct focus on building better controls and corporate governance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.