CHAPTER 1 IRDA Regulation Relating To General Insurance.

Insurance Regulatory & Development Authority of India (IRDA) Insurance Regulatory & Development Authority is regulatory and development authority under government of India in order to protect the interests of the policyholders and to regulate, promote and ensure orderly growth of the insurance industry. It is basically a ten members' team comprising of a Chairman, five full time members and four part-time members, all appointed by Government of India. This organization came into being in 1999 after the bill of IRDA was passed in the Indian parliament. The creation of IRDA has brought revolutionary changes in the Insurance sector.In the last 10 years of its establishment the insurance sector has seen tremendous growth. When IRDA came into being; the only players in the insurance industry were Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC), however in last decade 23 new players have emerged in the field of insurance. The IRDA also successfully deals with any discrepancy in the insurance sector. As per the section 4 of IRDA Act' 1999, Insurance Regulatory and Development Authority (IRDA, which was constituted by an act of parliament) specify the composition of Authority as under: The Authority is a ten member team consisting of (a) a Chairman; (b) five whole-time members; (c) four part-time members, (all appointed by the Government of India)

Duties, powers and functions of IRDA a) Without prejudice to the generality of the provisions contained in subsection (1),the powers and functions of the Authority shall include: a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration; b) protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance; c) specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents d) specifying the code of conduct for surveyors and loss assessors; promoting efficiency in the conduct of insurance business; e) promoting and regulating professional organizations connected with the insurance and re-insurance business; f) levying fees and other charges for carrying out the purposes of this Act;calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business; g) control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938); h) specifying the form and manner in which books of account shall be 83 i) maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries; j) regulating investment of funds by insurance companies; k) regulating maintenance of margin of solvency;

l) adjudication of disputes between insurers and intermediaries or insurance intermediaries; m) supervising the functioning of the Tariff Advisory Committee; specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause(f); n) specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and o) exercising such other powers as may be prescribed Impact of IRDA act on general insurance policy holders The formation of the Malhotra Committee in 1993 initiated reforms in the Indian insurance sector. The aim of the Malhotra Committee was to assess the functionality of the Indian insurance sector. This committee was also in charge of recommending the future path of insurance in India. The Malhotra Committee attempted to improve various aspects of the insurance sector, making them more appropriate and effective for the Indian market. The recommendations of the committee put stress on offering operational autonomy to the insurance service providers and also suggested forming an independent regulatory body. The Insurance Regulatory and Development Authority Act of 1999 brought about several crucial policy changes in the insurance sector of India. It led to the formation of the Insurance Regulatory and Development Authority (IRDA) in 2000. The goals of the IRDA are to safeguard the interests of insurance policyholders, as well as to initiate different policy measures to help sustain growth in the Indian insurance sector. The Authority has notified 27 Regulations on various issues which include Registration of Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance, Obligation of Insurers to Rural and Social sector, Investment and Accounting Procedure, Protection of policy holders' interest etc. Applications were invited by the Authority with effect from 15th August, 2000 for issue of the Certificate of Registration to both life and non-life insurers. The Authority has its Head Quarter at Hyderabad.

Protection of the interest of general insurance policy holders IRDA has the responsibility of protecting the interest of insurance policyholders. Towards achieving this objective, the Authority has taken the following steps provide for: policy proposal documents in easily understandable language; claims procedure in both life and non-life; setting up of grievance redressal machinery; speedy settlement of claims; and policyholders' servicing. The 92 Regulation also provides for payment of interest by insurers for the delay in settlement of claim. that they are in a position to meet their obligations towards policyholders with regard to payment of claims. benefits, terms and conditions under the policy. The advertisements issued by the insurers should not mislead the insuring public. head office and at their other offices. from the policyholders in connection with services provided by them under the insurance contract. INTRODUCTION OF ISSUANCE OF CAPITAL BY GENERAL INSURANCE COMPANIES REGULATIONS,2013 The Insurance Regulatory and Development Authority ("IRDA") recently notified the IRDA (Issuance of Capital by General Insurance Companies) Regulations, 2013 ("Regulations") which set outs the regulatory framework for listing of shares by general insurers in India. Earlier, the IRDA had issued anexposure draft ("Exposure Draft") pursuant to which the Regulations have been issued (please refer to the October, 2012 edition of our newsletter) and very few changes to the Exposure Draft have been made.

Set out below are some of the key issues that arise out of the Regulations given that the IRDA seems to have not taken into account the comments of the stakeholders on the Exposure Draft. promoters should divest their shareholding as required under Section 6AA of the Insurance Act, 1938("Insurance Act") and further allow general insurers to raise funds by way of public issuance. promoter to divest its shareholding to 26% "in a phased manner" and in a manner specified by regulations framed by the IRDA. Therefore, the Insurance Act does not seem to contemplate divestment of shareholding at one go to 26%. However, since the Regulations contemplate public issuance as the only mode for Indian promoters to divest their shareholding, the Indian promoters will have to rely on follow on public offerings to divest down to 26% which may not be a preferred approach. Prior IRDA Approval: A general insurer needs to apply to the IRDA for its approval prior to approaching the Securities Exchange Board of India ("SEBI") for issuance of shares (whether initial or subsequent) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. The approval will be valid for a period of 1 year, within which period, the insurer has to file the draft red herring prospectus ("DRHP") with the SEBI. As part of the application process, the applicant general insurer needs to provide financial and non-financial information as prescribed in Form A to the Regulations. Since the obligation is only to fileDRHP within 1 year of the IRDA approval, and there is no obligation to update the financial information provided under with the application process, the IRDA would have effectivelygiven its approval on the basis of dated financials if the approval is delayed. granting its approval under the Regulations, including the extent to which the promoters would dilute their "respective shareholdings" and the maximum shareholding that may be allotted to any class of foreign investors. However, upon listing of shares of a general insurer, the minimum non-promoter shareholding will

have to be at least 25% under prevalent norms. The extent to which promoters may be required by IRDA to divest will have to be in compliance with the above requirement of maintaining the non-promoter shareholding. Approval for transfer of shares: Under the Insurance Act, transfers in excess of the prescribed shareholding require prior IRDA approval, e.g., where after the transfer, the shareholding of a transferee is likely to exceed 5% (or 2.5% in case the transferee company is a banking company or an investment company) or where the transfer exceeds 1% of the shareholding of the insurer. The IRDA has further clarified that in case of a rights issue, any renunciation of the right to participate in such offer will also be considered a transfer and will require an IRDA approval. Such a requirement may be features onerous for listed companies especially in instances where the IRDA takes time to grant approvals to share transfers and renunciations. It is noteworthy that the obligation to obtain an approval is on the insurer and not the acquirer, which is further likely to complicate the approval process in companies with diffused shareholding. NTRODUCTION OF REGULATIONS,2013 GENERAL INSURANCE-REINSURANCE

The IRDA on 16 February, 2013 notified the IRDA (General InsuranceReinsurance) Regulations, 2013("GIR Regulations") which has replaced the IRDA (General Insurance-Reinsurance) Regulations, 2000. The GIR Regulations regulate reinsurance arrangements between insurers, reinsurers and retrocessionaire. Some of the significant changes that have been introduced are as follows. and 'Cover Note' have been inserted in the GIR Regulations. The term 'Reinsurance Contract' has been defined to mean 'a legally binding document on all the parties that provides a complete, accurate and definitive record of all the terms and conditions and other provisions of the reinsurance contract'. requirement under the previous regime of reinsurers submitting their reinsurance programmes to the IRDA 45 days before the beginning of the next financial year (i.e., 1 April), the GIR Regulations entitles the IRDA, if it deems necessary, to

make changes to such reinsurance programme submitted and direct the reinsurer accordingly. to file with the IRDA a new reinsurance arrangement, providing IRDA with full details, documentation, reasons for such an arrangement together with the approval of the board of directors of the reinsurer within 15 days of such Board meeting. The renewal of the reinsurance arrangement must coincide with the financial year. The reinsurer will also be required to submit returns (instead of statistics, as required under the previous regime) on reinsurance transactions in such forms as the IRDA prescribes. prescribed limitsfor the total reinsurance premium ceded with any one foreign reinsurer as: (i) 10% to a foreign reinsurer enjoying a credit rating of BBB with Standard and Poor (or an equivalent rating with any equivalent rating agency); (ii) 15% to a foreign reinsurer enjoying credit rating of greater than BBB and up to AA; and (iii) 20% to a foreign reinsurer enjoying a credit rating of up to AA including a rating of AAA. Cessions in excess of these limits require prior IRDA approval.

CHAPTER 2 Claim Management In General Insurance Companies. Claims Management in General Insurance - Issues & Concerns Underwriting and claims settlement are the two most important aspect of the functioning of an insurance company. Out of any insurance contract, the customer has the following expectations: i. Adequate insurance coverage, which does not leave him high and dry in time of need, with right pricing. ii. Timely delivery of defect free policy documents with relevant endorsements / warranties / conditions / guidelines. iii. Should a claim happen, quick settlement to his satisfaction. For the purpose of this article, we shall be concentrating on (iii), as (i) and (ii) relate to underwriting, though proper u/w facilitates claim settlement. Unlike life insurance, where all policies necessarily result in claims either maturity or death in general insurance not all policies result in claim. Approximately around 15% policies in general insurance result in claim. The claim settlement in general insurance thus have their own peculiarities and therefore need proper handling. Also how 15% policy holders are attended is of great importance. The insurance companies have hitherto been handling the claim rather than managing them. Typically this process involves i. As soon as a claim is reported, the insurance company checks as to whether the cover was in force at the time of loss and whether the peril is covered under the policy. ii. A surveyor is appointed who visits the spot, do the assessment and submits the report.

iii. Insurance company examines the report, calls for relevant supporting documents. iv. On receipt of survey report and documents, the same are examined. The claim file is processed and settlement is offered. The claims handling is thus more process oriented and does not pay adequate attention to the monitoring and claims cost aspect as also to the service parameters. In the present liberalized scenario, with cut-throat competition being the order of the day, the insurance companies have to go much beyond the handling of claims. The following aspect needs to be kept in mind. I. General insurance being a market driven service industry, the customer has to be kept satisfied. With so many options available, a customer once lost is most likely a loss forever. Claim settlement can be used as a marketing tool. Brining in a new customer is much more costly than retaining the existing ones. II. In a de-tariffed market, pricing will be the key factor. Proper claims management - quick settlement at optimal cost will help keep the price competitive. III. A dissatisfied customer is a bad publicity. It has all the potential to damage the reputation of the company. It is an accepted fact that most of the customers complaint relate to claims. It should be the endeavour of any insurance company to ensure that such complaints do not occur in the first place and in some cases if they do occur it is attended promptly, efficiently and transparently. IV. IRDA guidelines on protection of policyholders interest stipulates certain obligation on the part of insurance company including time limit for claim settlement. This is a regulatory requirement and insurance company personnel at every level must understand its implication.

V. Delayed claim settlement generally result in higher claims cost. Claims cost is a very important factor vis--vis profitability.Are we undertaking necessary follow up steps for timely submission of report. The surveyors are duty bound as per IRDA regulations to submit report within a stipulated time. Even after submission of report and completion of other requirements how much time does it take to finally issue settlement cheque and its delivery to the claimant. VI. Claims files must be monitored as they progress. A little time spent thinking clearly right from the beginning will avoid lot of unnecessary and time consuming patch-ups and straightening out later on. Unpleasant decisions conveyed timely with proper justification of the decision is better than procrastination which is bound to create more problems and unpleasant situations. VII. Proper u/w is essential as defective u/w results in complication at the time of settlement of claims. U/w and claims department should not work in isolation. There has to be a coordination between them. Defective U/w may saddle the companies with unwanted claims. Various court judgments and consumers forum awards bear testimony to the same. Any defect / ambiguity in the documents issued invariably goes against insurance companies. It is therefore of utmost importance that the client is made aware in very clear terms about what exactly is covered and what is not. There should be a strong system of audit for examining the documents being issued. VIII. Lot of time / energy / money is spent when claim cases go to Ombudsman / Consumer Forum/ Court. Besides, adverse comment bring bad name, when we are held liable. Insurance companies are invariably at the receiving end. The watch and wait attitude must change. There is a need to find out why so many cases go

to consumer forum or the ombudsman and what should be done about it. IX. Claims-settlement have social service angle which must be met. In times of natural calamity lot of bad publicity comes to insurance company for delay in settlement of claims. This is in spite of the fact that in such situation insurance 3 companies goes out of their way to settle claims. In any case claims relating to the assets of weaker section needs to be attended on priority. CLAIMS MANAGEMENT IS ONE OF THE BIGGEST CHALLENGES FOR INSURERS The claims function is the single largest and most onerous overhead in an insurance company, accounting for 75% to 90% of total administrative costs.1 Wasted resources in the claims function drive these costs: Many processes are still based on old legacy or manual systems, and insurance workers spend a large proportion of their time on associated routine interactions that have little or no impact on the outcome of a claim. The use of old, legacy-based claims systems creates a series of obstacles and challenges to European insurers: 1. Most importantly, multiple claims systems increase turnaround times dramatically. Most large insurers in Europe still deal with dierent product claims systems for single product lines: It is not uncommon to see small insurance departments using 20 or more dierent claims systems at the same time for motor insurance alone. Having such a multiplicity of systems to deal with is a barrier to ecient claims turnaround times: The amount of time claims handlers spend on reporting, registering, reserving, and paying cases increases dramatically. For example, Winterthur, one of the largest European insurance groups, still takes an average of 35 days to process a motor insurance claim from inception to nal payment.

2.Other severe operational blockages result from the use of old claims systems. Another common problem that insurers using multisystem claims management models face is the inecient use of operational sta. For example, insurance employees using old, paper-based claims systems in practice end up spending valuable time doing administration instead of adjudicating claims. This leads to customer and internal dissatisfaction and, consequently, high sta turnover levels. In addition, sta training costs are substantially higher than necessary due to new sta having to learn so many disparate systems. 3.Legacy claims systems also bring severe deciencies in customer relationship management. Traditional paper-based claims processing systems frequently lead to high redundancy and inconsistency in data across systems and, with it, high error rates in customer claims handling. In addition, most of the prevalent claims systems are inecient at analyzing client claims information for patterns, trends, and strategies to better address customer complaints. All of this contributes to declines in customer satisfaction and perceptions of customer advocacy bad news for an industry that is already plagued by low customer endorsement. Several industryleading names, such as Prudential in the UK and Generali in Italy, have su ered signicant customer satisfaction setbacks due to persistently inecient claims systems. 4. Existing and new regulation only makes matters worse. Back-oce application systems are the repositories for claims adjudication and insurance policies systems. These back-oce systems are very complex because of their need to comply with various industry rules and regulations, which only compound the already heavy operational problems of old claims processes. New Europewide insurance regulation like Solvency II, which requires insurers to have higher capital available and a closer segmentation of individual risk proles, puts pressure on European insurers to rationalize and urgently modernize their extremely capital-intensive claims systems.

CHAPTER 3