Article by Celia Jenkins and Anuj Bahukhandi
2017 was an interesting year for the Indian insurance industry which witnessed a rapid increase in number of Insurers, significant transactions in the existing players, new forms of online commerce, addition of new categories of insurance intermediaries, diversity in the products on offer and evolving business processes. From a regulatory perspective, the year also saw a continued overhauling of the existing insurance regulatory framework with a slew of new regulations being introduced and existing guidance being amended and updated.
We provide an overview below of some of the key regulatory changes introduced in 2017.
Guidelines on lnsurance e-commerce
The IRDAI issued the "Guidelines on lnsurance e-commerce" on 9th March 2017 (E-commerce Guidelines) regulating the setting up of Insurance Self-Network Platforms (ISNP) by Insurers and insurance intermediaries (other than insurance agents) to sell and service insurance policies.
The E-commerce Guidelines lay down the manner and procedures for grant of permission to establish an ISNP for undertaking insurance e-commerce activities in India. The salient features of the E-commerce Guidelines are as follows:
- ISNP is defined as an electronic platform (website/mobile app) used for sale and/or servicing of insurance policies. The procedure for grant of permission for establishing an ISNP is stipulated, and such permission is to be co-terminus with the expiry of the certificate of registration in case of insurance intermediaries and indefinite (until revoked) in the case of Insurers;
- The registration of the ISNP has been made mandatory, and only such permitted entities can sell insurance products online. Existing Insurers and insurance intermediaries who have already set-up their own ISNPs or insurance portals for selling and servicing insurance products are permitted to continue operating their platforms or portals, provided they comply with the requirements under the E-commerce Guidelines within a period of 3 months and obtain necessary permissions from the IRDAI;
- It is specified that all products are to be sold in electronic form in accordance with the IRDAI (Issuance of e-insurance Policies) Regulations 2016, as amended.
- The E-commerce Guidelines recognize payment of premiums through e-wallets, however, cashback, promotional incentives and discounts (to the extent not permitted by the IRDAI) are expressly prohibited in the Code of Conduct;
- The ISNP is prohibited from accepting "redirected internet traffic/ references from other than market participants";
- The market participants are to ensure that provisions of Section 64VB(1) of the Insurance Act 1938 are complied with at all times;
- No fees, charges or payments, by whatever name called, can be paid or shared between the market participants for utilizing an ISNP, other than that allowed under the IRDAI (Payment of commission, remuneration or reward to insurance agent or insurance intermediaries) Regulations 2016 of 14 December 2016 (Commission Regulations).
- Further, an annual review of the controls/systems/procedures in place is prescribed to review the operations of the registered ISNP, and any material adverse findings are to be reported to the IRDAI.
With increased market awareness and rising availability and access to online forms of commerce, IRDAI has stated that the E-commerce Guidelines have been issued as part of its developmental mandate, to promote e-commerce in the insurance space as well.
Guidelines on Information and Cyber Security for Insurers
On 31st October 2016, the IRDAI had issued a circular to all insurers regarding the formulation of a comprehensive information and cyber security framework. After considering the response from various stakeholders and expert committee sub-groups, the IRDAI issued the "Guidelines on Information and Cyber Security for insurers" on 7th April 2017 (Cyber Security Guidelines).
The requirements regarding maintenance of records under the IRDAI (Maintenance of Insurance Records) Regulations 2015 was limited in scope to maintenance of policy data and claims data. The Cyber Security Guidelines are, however, wider in scope and are applicable to all data created, received or maintained by Insurers wherever these records are and in whatever form they are, in the course of carrying out their designated duties and functions.
Per the Cyber Security Guidelines, all Insurers are required to, inter alia:
- Formulate a Cyber Security Policy;
- Appoint a Chief Information Security Officer (CISO);
- Constitute an Information Security Committee.
Insurers who have been in business for less than three years are exempted from designating a full time CISO, whose responsibility may be assumed by another officer who reports to the Board.
The Cyber Security Guidelines stipulate that in case policyholder information is shared with intermediaries and other regulated entities, it is the responsibility of Insurers to ensure that adequate mechanisms are put in place to prevent leakage of personal and confidential policyholder information and ensure that information is shared only on a need-to-know basis.
Norms for data confidentiality, integrity and availability have been introduced, along with contractual requirements to be put in place prior to engagement with third parties (including reinsurers).
The Cyber Security Guidelines also prescribe norms for security of information processed, transmitted and stored on the cloud architecture. A business justification for considering the hosting of data and systems on the cloud is required, and such data is to be classified under highly confidential/confidential/public or internal. For electronic maintenance of core business records, it is stated that such records are required to be hosted in India.
Insurers shall also be required to ensure independent assurance audit annually with respect to its information and cyber security. A copy of the executive summary of the audit report along with action taken note shall be submitted to the IRDAI within 30 days of completion of audit.
Further, by way of a clarificatory circular on "Compliance on Guidelines related to Information and Cyber Security" of 12th October 2017, the IRDAI also subsequently included reinsurers (including the branches of foreign reinsurers) within the ambit of the Cyber Security Guidelines.
The Cyber Security Guidelines laid a strong emphasis on the protection and security of the personal data of policyholders as well as the critical systems of the insurance sector participants from the possible harm that could be inflicted by exposure of insurance data.
IRDAI (Insurance Web Aggregators) Regulations 2017
The erstwhile 2013 regulations were overhauled by way of the IRDAI (Insurance Web Aggregators) Regulations 2017, issued on 25th April 2017 (Web Aggregator Regulations). The key highlights of the Web Aggregator Regulations are:
- Web aggregators are now required to have a minimum capital of ₹25 lakhs (earlier ₹10 lakhs);
- The new regulations now expressly stipulate that the sale of insurance products online shall be in accordance with the Guidelines on Insurance e-commerce of 9th March 2017;
- The provision stipulating payment of fixed flat fee for the display of insurance products on the designated website of the web aggregator is now required to be subject to an overall ceiling as specified under the rewards portion specified in the Commission Regulations;
- Web aggregators are now permitted to undertake outsourcing activities "only" through tele-marketing and distance marketing modes;
- The Web Aggregator Regulations now allow unit linked insurance plans (ULIPs) to be sold on the web aggregator's platform;
- With regard to commission, a new provision has been included which stipulates that the Web Aggregator shall not be denied payment of remuneration on the grounds that insurance policies being sourced through it are direct online sales of insurance policies by the insurance companies (except in the case of zero commission products);
- Web aggregators are required to ensure compliance with the revised provisions relating to paid-up equity capital and net-worth requirements stipulated under the Regulations within a period of one year from the date of issuance of the Regulations and with other requirements within six months;
- It is now clarified that renewal commission is payable on annual insurance policies such as motor insurance, health insurance and other similar policies provided the insurance policies are renewed without any break.
While the Web Aggregator Regulations do not drastically change the regulatory framework, and mainly aim to address some of the ambiguities that existed in the erstwhile framework, industry experts are largely hopeful that it will bring about greater participation of web aggregators in the overall sale of insurance products in India.
IRDAI (Outsourcing of Activities by Indian Insurers) Regulations 2017
The IRDAI (Outsourcing of Activities by Indian Insurers) Regulations 2017 notified on 5th May 2017 (Outsourcing Regulations) supersede the earlier "Guidelines on Outsourcing of Activities by Insurance Companies" of 1st February 2011, and seek to ensure that Insurers follow prudent practices on management of risks arising out of outsourcing with a view to preventing negative systemic impact and to protect the interests of the policyholders.
The key highlights include:
- The definition of "outsourcing" remains largely the same but now specifically excludes "Legal services, Banking Services, Courier services, medical examination, forensic analysis" and other services which are generally not expected to be carried out internally by Insurers;
- Insurers are now required to put in place an "Outsourcing Policy" in accordance with the provisions of the Regulations, and constitute an "Outsourcing Committee", comprising of the comprising of key management persons, to perform the functions stipulated under R8 of the Outsourcing Regulations;
- The IRDAI has defined core activities that are prohibited from being outsourced, while the list of non-core activities have been removed;
- In cases where Insurer outsources to service providers outside India, all original policyholder records must continue to be maintained in India;
- All outsourcing arrangements assessed as "material" based on the detailed parameters outlined are required to be subject to due diligence in accordance with R10 of the Outsourcing Regulations;
- Where an Insurer outsources any activity to a related party or a group entity, the Outsourcing Regulations require the Insurer to conduct a complete due diligence, ensure that the pricing for such outsourcing arrangements are consistent with accepted arms' length principles, and report consideration amounts and payments made to the IRDAI.
- Ensuring that the pricing for outsourcing arrangements with related parties or group entities are consistent with accepted arms' length principles.
- If any of the outsourcing service providers become a related party or a group entity of either the insurer or insurance intermediaries, the insurer has to report the fact to IRDAI within 30 days of such an event.
The Outsourcing Regulations are applicable to outsourcing arrangements entered into by an Insurer with outsourcing service providers located both within and outside India, and with the modifications will undoubtedly lead to a review of the existing outsourcing arrangements and the outsourcing reporting methodology of Insurers.
Compulsory Linkage of Aadhaar and PAN/Form 60
The year also saw linkage of Aadhaar and PAN/Form 60 being made mandatory by the Indian Government for obtaining all financial services, including insurance, per the Gazette Notification of 1st June 2017 on Prevention of Money-laundering (Maintenance of Records) Second Amendment Rules 2017.
By way of its Circular of 8th November 2017, the IRDAI clarified that Aadhaar and PAN/Form 60 shall be mandatory for all life, general and standalone health insurance companies, which included the linkage of Aadhaar number to already existing policies.
On 18th December 2017, the deadline for submission of the requisite was subsequently extended to 31st March 2018 (or six months from the date of commencement of the "account based relationship") upon notification of the PML (Maintenance of Record) (Seventh Amendment) Rules 2017.
IRDAI (Protection of Policyholders' Interests) Regulations 2017
The IRDAI (Protection of Policyholders' Interests) Regulations 2017, notified in the e-gazette issued on 30th June 2017 (Policyholder Regulations), revised the regulatory framework for protection and addressing the concerns of the policyholders. The objective of the Policyholder Regulations is to ensure that the interests of policyholders are protected, the Insurer along with distributions channels, surveyors and other regulated entities are fulfilling their obligations towards policyholders and provide a policyholder-centric governance with an emphasis on grievance redressal.
The Policyholder Regulations provides for certain general principles to be followed by an Insurer as follows:
- Insurers shall cooperate with the distribution channels for all compliances provided under the provisions and maintain absolute confidentiality as to client data;
- The liability for breach of obligations under the Policyholder Regulations shall now be cast upon the distribution channels or surveyors as well.
The Policyholder Regulations revise the definition of "Prospectus" to mean a document issued by the insurer to "sell or promote the insurance products", either in physical or electronic or in any other format.
Further, matters now expressly required to be stated in a life insurance policy include date of commencement of risk, date on which survival benefit is payable, policy conditions for conversion of the policy into a paid up policy, foreclosure, non-forfeiture, and discontinuance provisions in case of linked policies.
The Policyholder Regulations also impose timelines for settling life insurance claims, with applicable interest in case of delay. Death claims must be settled within 30 days from the date of receipt of all relevant papers and required clarifications, and where investigation is warranted, the same must be completed within 90 days and claim settled 30 days thereafter. In respect of maturity, survival benefit claims and annuities, the claims must be settled be on or before the due date. Further, amounts due for free look cancellation, surrender, withdrawal, request for refund of proposal deposit, refund of outstanding proposal deposit if any, must be paid within 15 days of receipt of request or last necessary document. Failing the timelines provided for claim settlement, an interest rate which is 2% above bank rate shall apply from the payment due date or receipt of last necessary document.
Lastly, Insurers are required to strictly follow the grievance redressal procedure as prescribed in the Annexure I of the Policyholder Regulations, however, the turnaround periods as stipulated in the erstwhile Circular have now been omitted. Complaints are required to be responded within 30 days as per Rule 14(3) of the Ombudsman Rules 2017.
Guidelines on Motor lnsurance Service Provider
On 31st August 2017, the IRDAI notified the "Guidelines on Motor Insurance Service Provider (MISP Guidelines) based on the report submitted by the committee on motor dealer payouts on motor insurance business of 31st May 2017, and aimed at identifying and regulating the role of the automobile dealers in distributing and servicing motor insurance products.
Automobile dealers distributing motor insurance were required to become "Motor Insurance Service Providers" (MISPs) from 1st November 2017 to be eligible to sell insurance to customers. MISP has been defined to mean an automobile dealer appointed by an insurer or an insurance intermediary to distribute and/or service motor insurance policies of automobiles sold through such automobile dealer. Accordingly, automotive dealers having an insurance intermediary license could not distribute or service motor insurance policies until they surrendered the existing insurance intermediary license.
Insurers/insurance intermediaries that seek to enter into an arrangement with an MISP are required to enter into a written agreement with the MISP. Further, the insurer /insurance intermediary engaging the MISP is required to upload the relevant data of the MISP on the Insurance Information Bureau portal, including the details of the persons and designated person engaged by such MISP.
The MISP Guidelines also prescribe the maximum "Distribution Fees" that can be paid to the MISP for soliciting insurance business by the Insurer or insurance intermediary engaging the MISP, and no other form of payment, by whatever name called, can be received by such MISP either directly or indirectly.
Per the MISP Guidelines, liability for acts of omission and commission of MISP shall lie jointly on the MISP and the Insurer/insurance intermediary engaging such intermediary. The Insurer or insurance intermediary is mandated to conduct an annual review of controls, systems, procedures and safeguards put in place by the MISP, which are to be placed before the Board or sub-committee for observations. Further, the Insurer, insurance intermediary and MISP are all required to put in place a system for grievance redressal of policyholders' in line with the Policyholder Regulations.
The recognition of the already existing practices of solicitation and servicing of insurance by dealerships by way of the MISP Guidelines, serves to now legitimise the distribution of insurance through these automobile dealerships, and bring them within regulatory supervision.
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