Introduction:
All of us are aware of the fact that with the enactment of the Insurance Regulatory and Development Authority Act, 1999 the Indian Insurance Regulator IRDA was established. IRDA Act was enacted with the objective to protect the interests of insurance policy holders and to regulate, promote and ensure orderly growth of the insurance industry.
These twin objectives implied that products need to be priced equitably based on their individual risk experience/ exposures and the solvency margin of the insurers have to be maintained. In order to ensure these objectives, collection, compilation, dissemination and analysis of data relating to different classes of risks became paramount.
This also meant that new formats had to be devised taking into account various risk factors hitherto not considered by the rigid tariff structure. As a first step, IRDA in consultation with the insurers devised new formats for collection of past data as well as future data in the field of motor & health insurance.
Lack of proper data base in Indian market:
Generally the countries with a tariff regime and with a controlled market tend to have higher premium than those of the free-market. In India, however, the situation had been different. The motor premium rates are among the lowest in the world. The average motor premium ranges from 2% to 3% of the value of the vehicle as compared to 8% in western countries.
This is mainly due to the absence of data in the Indian market to support a justifiable pricing mechanism. However, as it appeared the public sector insurers were also unable to generate adequate database to enable scientific calculations for risk assessment and rating of different groups of vehicles.
In this context it is pertinent to look into motor insurance in the pre-liberalized scenario. Motor Insurance is a regulated business. Prior to liberalization, the public sector insurers were expected to collect and maintain data relating to underwriting, claims paid and claims outstanding of motor insurance – policy wise and vehicle wise. However, data collection and maintenance in the regulated market has been assigned a low priority by the insurers. As a result, the data collected for motor tariff revisions suffered from lack of credibility.
In the absence of quality database, the tariff revision was being done on an ad-hoc basis based on samples collected from the public sector insurance companies. Further, the actual revision recommended had been time and again definitely diluted.
Therefore, underwriting in the auto sector had been a heavily losing proposition, with claims well over 120 % of the gross premium income (in Own Damage portion as a conservative assessment) and around 250% of the gross premium income onwards (in Third Party section – on an average of past one decade’s estimation with the consideration of outstanding liabilities of PSUs).
The net result was that the administered pricing became flawed in the absence of data. For the same reason, the users, lobbyists, Government or the Courts could not be convinced to approve increase in rates even in the wake of deterioration of claims experience of the insurers. The monopoly status of the public sector insurers as also lack of credible and supporting data came handy to the commercial vehicle operators to scuttle increase in premium.
Pursuant to liberalization and the entry of private insurers, the motor underwriting scenario changed drastically. On one hand the private players refrained from underwriting the loss making areas such as stand alone liability policy and on the other, they clamored for de-tariffing of motor portfolio. They also had in place sophisticated IT set-ups and systems capable of statistical analysis of various risk factors over and above the ones prescribed by the then motor tariff.
The awareness among customers in the wake of liberalization also resulted in a movement towards risk based rating & underwriting rather than a rigid tariff structure. In the wake of liberalization, a change of mind set relating to data collection was imminent.
The Regulator’s prime concern being the protection of policyholders, the issue of fairness of rates for each class or segment of the insuring community assumed significance. Maintenance of adequate solvency margin implied elimination of cross-subsidization of motor & misc. insurance products. In this scenario, collection, compilation and analysis of sums insured, premiums and claims data with full information on risk categories and hazard factors became the utmost necessity.
The need arose to ascertain whether the required data on motor insurance was available with the insurers or not. For that purpose IRDA, in consultation with the insurers had devised formats for collection of past and future data. We are proud to say the glory of National Insurance Co’s I.T. Dept. who has provided initial base data for Motor Insurance Sector at the beginning of de-tariff regime in India.
In this context of ensuring collection and maintenance of quality data by the insurers, are absolutely indispensable for smooth transition into a detariff regime, IRDA had outlined the roadmap relating to various steps to be taken by the insurers in the areas of Underwriting, Rating of risks, Policy terms and conditions, Corporate governance and the changed role of Tariff Advisory Committee as data depository.
In a nutshell these guidelines emphasized the importance of improved internal capabilities and procedures and need for sophisticated actuarial / statistical analysis for rating of risks. It has become mandatory now that the insurers will give regular information relating to –
1. Availability of a statistical database and programmes for analysis of data as rating support.
2. Availability of technically qualified and trained underwriting staff.
3. Structured delegation of underwriting and rating authority.
4. Control on quality of underwriting through management reports and internal technical audit.
During this detariff regime:-
1. Innovations in Product introduced: Insurers have taken steps to introduce new products to meet the specific requirements of the insured. Innovations have been made to cater to the needs arising out of the structural changes in economy.
New products introduced by the general insurance companies include Mutual Fund Package Policy providing cover in respect of the assureds’/ insureds’ legal liability to third parties for claims towards financial loss caused by negligent act, negligent error or negligent omission on the part of an officer / employees; Third Party Liability and asset Protection Covers are available in respect of mutual funds covering their business operations; Pollution Liability Package Policy -basically intended to cover damage costs of the insured due to slow and gradual pollution activities; Event Insurance Policy indemnifying the insured against the loss or damage due to cancellation of event.
Weather Insurance cover has been launched for Indian farming community, which suffer high losses year after year due to vagaries of nature. The specific products introduced by the insurers (under the control of IRDA), which were absolutely aimed at the rural markets are Weather Insurance, Farm Income Insurance Scheme, Varsha Bima (Rainfall Insurance) and amended Farmers’ Package Policy. Good numbers of Insures’ specific Health Insurance Policy are introduced – so in the Health Insurance Sector huge positive developments have been significantly noticed.
2. Paradigm Shift in the Segments due to privatization: The contribution of the private insurers in various industry segments has increased on account of both their capturing a part of the business which were earlier underwritten by the public sector insurers and also creating additional business avenues. To this effect, the public sector insurers have been unable to draw upon their inherent strengths to capture additional premium.
3. Role of General Insurance Corporation (GIC) as the sole reinsurer in the domestic reinsurance market in India has been envisaged: As the sole reinsurer in the domestic reinsurance market, GIC now-a-days provides reinsurance to the direct general insurance companies in the Indian market.
GIC was stepped in dealing with the reinsurance of Life Insurance products w.e.f. 2007-08. With effect from 2013-14 fiscal GIC receives statutory cession of 5% on each and every policy subject to certain limits. It leads many of domestic companies’ treaty programmes and facultative placements.
The Corporation’s reinsurance programme has been designed to meet the objectives of optimizing the retention within the country, ensuring adequate coverage for exposures and developing adequate capacities within the domestic market. Marine Hull Pool continues to operate with GIC as the Manager. Similarly the Terrorism Pool is also being managed by GIC on behalf of the Indian Insurance Industry.
GIC had also spread its wings to emerge as effective reinsurance solutions partners for the Afro-Asian region and has started leading the reinsurance programmes of several insurance companies in SAARC countries, South East Asia, Middle East and Africa.
Due to increased acceptance of business and better retrocession arrangement, there has been a considerable increase in premiums. For providing its international clientele easy accessibility, efficient service and tailor made reinsurance solutions, GIC has opened liaison/ representative offices in London & Moscow.
4. Role of Tariff Advisory Committee (TAC) redefined:
Tariff Business existed earlier (up to 31/12/2006) in India in the following areas:
1) Marine Cargo Insurance (de-tariffed first during 1994);
2) Marine Hull Insurance (de-tariffed w.e.f. 01/04/2005);
3) Fire Insurance (de-tariffed w.e.f. 01/01/ 2007);
4) Industrial All Risks Insurance (de-tariffed w.e.f. 01/01/ 2007);
5) Workmen’s Compensation Insurance (de-tariffed w.e.f. 01/01/ 2007);
6) Auto Insurance (Motor Vehicles Own Damage Insurance & Third Party Liability) (de-tariffed w.e.f. 01/01/ 2007);
7) Engineering Insurance Policies (de-tariffed w.e.f. 01/01/ 2007).
Out of the entire general insurance market only auto insurance constituted almost 40% total volume of Indian market for the last decade. The erstwhile General Insurance Market was regulated and under the absolute surveillance of Tariff Advisory Committee and their role as defined in Section 64 UC (1). Now their role is re-defined and their functions which are complement to their erstwhile functions and cater to the internal requirements of the TAC.
They remained envisaged as an independent body. Earlier the Chairman GIC was Chairman of TAC. Now after the formation of IRDA, the Chairman IRDA is being considered as the Chairman TAC. Now all their decisions are subject to IRDA ratification. But during this de-tariff regime TAC needs to maintain the up to date data back sincerely as:
1) No unfair discrimination between risks (having same hazards) should exist in the general insurance market for the sake of un-healthy competition.
2) Rates take into account during the Tariff Regime was strictly based on the past claims experience & future trends (with allowances for fluctuations and catastrophic events).
But still, due to the following evident de-merits of erstwhile Tariff Market, de-tariffed market was allowed for the General Insurers by the concerned Government:
1) Standardisation inhibits innovation and restricts customer choice.
2) Destroys underwriting skills and also leads to bureaucratic attitude.
3) As erstwhile Tariff rates appeared prima-facie (& basically) are not based on adequate data, rates may not be scientific and realistic. Continuous Underwriting Losses of the General Insurers & adverse report of Malhotra Committee are having some indicators towards that direction ( & they also referred about the bad quality of service provided by the General Insurers in that monopoly PSU market)
4) Tariffs do not respond timely to changes in rates in international markets.
5) Tariffs invariably stifle product innovation.
What brought the entire gamut of this Indian market during the phase of Liberalization that crippled in along with the new regulator in Insurance market?
Liberalization is a process consisting of establishing markets functioning under competition rules where: No player achieves a dominant position. Transparency and information conditions are reinforced to allow for “informed” decisions both by buyers and sellers.
Price fixing mechanisms are changed, away from coordinated systems; rates as well as product design are determined by market forces. Privatization and enactment of competition rules allow for new domestic and often foreign entrants in the market. Liberalisation has changed the role of Tariff Advisory Committee.
As liberalization process in Indian General Insurance Market and Tariff Regime cannot go together and IRDA has to ensure the protection of Policy holders – so, De-Tariffing has to be a calibrated – it being a slow process and to achieve the true success of lliberalization the role of Tariff Advisory Committee from the second phase of this process of de-tariffing is also to attend the –
Progression from a Tariff to a non-tariff regime in terms of wordings/terms & conditions.
Certain time frame for change -Market Instability needs to be adsorbed and its consequences to be faced boldly.
Strictly observing the patterns of change in general insurance product premium rates and also to resist either the drastic fall in rates or drastic rise in rates. Even the drastic fall followed by drastic rise in rates – this kind of situations also has happened in quite a few markets in the global market. All Public and Private Underwriters should …
Develop skill of Underwriting looking at the desired underwriters’ acumen being available for them.
Create database for the purpose of working out competitive pricing based on proper evaluation of risk.
Preconditions for General Insurers during this De-Tariffing Regime:
1. Maximum use of I.T.;
2. More R & D Endeavours;
3. Maintaining up to date data bank;
4. Use of marginal costing for pricing product;
5. Strengthen General Insurers’ Internal Audit supervision;
6. Use of Actuarial knowledge for competitive pricing of insurance products during this cut-throat competition.
7. Application of prudential norms to maintain Insurers’ solvency margin.
Major role of maintaining Data Bank by TAC:
TAC now needs to concentrate on maintaining Data Bank –
1 For Claims Experience;
2 To Assess the Business Growth;
3 Customers’ Expectations;
4 Scope for Product Development or Differentiation;
5 Causes of loss of clients;
6 Availability of substitute products from competitors.
But now as this de-tariffing regime is followed by a fear of worst kind of rate-cutting, so far as to keep a strong vigil on the specific aspect unhealthy competition IRDA/TAC should maintain absolute transparency.
TAC has now become the extended arm of IRDA by assisting in the following areas:-
File and use approval for products on behalf of the IRDA.
Collection and dissemination of statistics relating to tariff as well as other products.
Onsite and off-site supervision for itself and IRDA.
Warehousing and data mining arm of IRDA.
Dissemination of insurance related knowledge by bringing out literature and manuals for user groups.
This change gives the consistent changing phenomenon in the role of TAC.
Current role of IRDA:
As a part of development role of IRDA, IRDA had finalized & issued guidelines/ regulations on several aspects like for Micro-insurance, Brokers, Corporate Agent, etc. These guidelines were issued after discussing at various forums. The Regulations on Micro-insurance provided a platform and rules to procure insurance for the targeted segment of the society.
The regulations provide for a tie-up between a life & non-life insurance company for distribution of insurance products to improve the penetration of insurance in the selected segment.
Thus cross-selling is permitted in this area by the Authority. For encouraging the sale of Micro-insurance products, IRDA has mandated that these would form part of social and rural obligations of an insurer prescribed under the provisions of the Insurance Act, 1938.
Considering that many insurers are vying for unit linked business and for protecting the interest of the policy-holders IRDA had finalized another set of guidelines in that regard. IRDA has attached great importance to the growth of Health Insurance in India.
One of the reasons for low penetration in India is the lack of regulations in the health sector resulting in exposure of the beneficiaries to various malpractices present in the system. As a follow up of the recommendations of the Health Insurance working group, IRDA has decided to establish a separate Health Insurance Unit in IRDA.
In the context of ensuring collection and maintenance of quality data by the insurers, indispensable for smooth transition into the detariff regime, IRDA had outlined a road map relating to various steps to be taken by the insurers in the areas of Underwriting, Rating of risks, Policy terms & conditions, Corporate Governance and the Role of Tariff Advisory Committee. All their guidelines emphasize the importance of internal capabilities and procedures and need for sophisticated actuarial / statistical analysis for rating of risks.
Financial or Money Management is all about controlling our company’s finances so that we can make better decisions. We appoint accountants and officials in our internal audit department to keep proper track of our income and spending.
The concept of corporate governance is defined in several ways because it potentially covers the entire gamut of activities having direct or indirect influence on the financial health of individual corporate entities.
Corporate Governance is a system by which business corporations are directed and controlled. It specifies the distribution of rights and responsibilities among different participants in the corporation. Corporate Governance also spells out the rules and procedures for corporate decision-making.
The issues with which General Insurers’ Corporate Governance must address today – mainly may be:
1. The growth of private companies;
2. The magnitude and complexity of corporate groups;
3. Rise in hostile activities of predators (take over);
4. Insider trading;
5. Litigations against directors;
6. Need for restructuring of boards;
7. Changes in auditing practices.
Enforcement of Corporate Governance:
In India, company legislation has until recently been the main instrument for improving corporate governance. Subsequently incorporating the recommendations of the BHABA Committee, this Act legislated, among other things, the abolition of the system of managing agencies, an institution that had served the country well during the early days of corporatization, but has fallen into disrepute through abuse and malpractice in its application by its latter day exponents.
SEBI has an ongoing program of reforming the primary and secondary capital markets. Among the professions, The Institute of Chartered Accountants of India has emerged as a mature body regulating the profession of public auditors, and counts among its achievement the issue of a number of accounting and auditing standards.
A formal effort was initiated by the CII when it produced a document titled “Corporate Governance – A Desirable Code” in 1998, through a Task Force headed by Mr. Rahul Bajaj, that probably for the first time formally recognized the obligation of listed corporations to create wealth and distribute it among all their shareholders.
Good corporate governance is the key to efficiency in a competitive environment, as it provides a cutting edge. It is necessary not just because it is good for the shareholders and other stakeholders, it is essential because it is in the interest of the company itself in the present competitive environment existing in Insurance.
It is good for the general insurance company’s shareholders because it is good for the company on which their future depends. If the quality of corporate governance is good, decision making process should be transparent, consistent with the need to protect the competitive interests of the company as otherwise shareholders and other stakeholders in the enterprise would lose out.
Corporate Governance is the acceptance by the management of the inalienable rights of share holders as the true owners of the corporation and of their own role as trustees on behalf of the share holders.
It is about commitment of values, about ethical business conduct and about making a distinction between personal and corporate funds in management of the Company. Investment is an act of faith in the ability of Corporate Management. Investors expect Management to act as trustees and ensure safety of capital and also to earn rate of return higher than cost of capital.
Management is expected to protect the best of investors’ interest and adopt good Corporate Governance practice. Good corporate governance is not ‘one size fits all” proposition, and a wide diversity of approaches to corporate governance should be expected and entirely appropriate.
Specific Directives Of Irda For Financial Management:
IRDA has recently instructed the insurers to follow the under noted guidelines on Investment Risk Management. Besides, the following Corporate Governance norms also find place in Insurance Industry though in spirit not in letter:
1. Financial reporting and disclosure of insurance companies:
Where in preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in Corporate Governance Report.
As per the provisions of Section 211(3B) of the Act, where in the preparation of Profit & Loss Account and Balance Sheet any deviation has been made from the accounting standards, such deviation has to be disclosed in the Profit & Loss Account and Balance Sheet.
In addition, this sub-Clause requires the deviations to be also reported in Corporate Governance Report in more representative of the true and fair view of underlying business transaction.
Accounting Standards as existing & applicable to Enterprises carrying on Insurance Business (like ours) are listed below for our ready reference:
AS 1 – Disclosure of Accounting Policies.
AS 3 – Cash Flow Statement.
AS 4 – Contingencies and/or events occurring after the Balance Sheet date.
AS 5 – Prior Period Items and changes in accounting Policies.
AS 6 – Depreciation Accounting Methods.
AS 10 – Accounting, Disclosure & Revaluation of Fixed Assets
AS 11 – Accounting for the effects of changes in Foreign Exchange Rates
AS 13 – Accounting for Investment
AS 15 – Accounting for Retirement Benefits in the Financial Statements of Employees
AS 17 – Segment Reporting
AS 18 – Related Party Disclosures
AS 22- Accounting for Taxes on income
AS 26 – Recognition and Accounting of Intangible Assets
AS 28 – Impairment of Assets.
AS 29 – Provisions, Contingent Liabilities & Contingent Assets.
2. Corporate Governance reporting to the Insurance Regulator (IRDA):
The items include –
2.1. A brief statement on company’s philosophy on code of governance.
2.2. Information about the Board of Directors:
The composition and category of the Board of Directors of the Company. For example- promoter, executive, non-executive, independent non-executive, nominee director, etc. and which institution represented as lender or as equity investor.
Attendance of each director at the Board meetings and the last Annual General Meeting and information relating to the number of Boards or Board Committees in which he/she is a member or Chairperson.
Number of Board meetings held, dates on which held.
2.3. Information about Audit Committee:
Information with brief description of terms of reference given to the Audit Committee.
Composition, name of members and Chairperson of the Audit Committee.
Details of the meetings of Audit Committee held and attendance of the members during the year.
2.4. Remuneration Committee:
Brief description of terms of reference of the Remuneration Committee.
Composition, name of members and Chairperson of the Remuneration Committee.
Details of attendance of the members of Remuneration Committee during the year.
Remuneration policy and details of remuneration to all the directors (as per format in main report).
2.5. Shareholders Committee:
Name of non-executive director heading the committee
Name and designation of compliance officer
Number of shareholders’ complaints received so far
Number not solved to the satisfaction of shareholders
Number of pending complaints
2.6. Information relating to the General Body meeting:
Location and time, where last three Annual General Meeting held.
Whether any special resolutions passed in the previous 3 Annual General Meeting
Whether any special resolutions passed last year through postal ballot – details of voting pattern.
Whether any special resolution is proposed to be conducted through postal ballot
Procedure for postal ballot.
2.7. Various disclosures required from the insurers:
Disclosures on materially significant related party transactions that may have potential conflict with the interests of company at large
Details of non-compliance by the company, penalties, strictures imposed on the company by Stock Exchange or SEBI or any statutory authority, on any matter related to capital markets, during the last three years.
Whistle Blower policy and affirmation that no personnel has been denied access to the Audit Committee.
Details of compliance with mandatory requirements and adoption of non-mandatory requirements of this clause.
2.8. Information to be given about General Shareholders:
Details of Annual General Meeting – date, time and venue
Financial Year
Date of Book Closure
Dividend payment date.
Listing on Stock Exchange
Stock Code
Market Price Data : High, Low during each month in last financial year
Performance in comparison to broad-based indices such as BSE Sensex, CRISIL index etc.
Register and Transfer Agents
Share Transfer System
Distribution of share holding
Dematerialization of shares and liquidity
Outstanding GDRs/ ADRs/ Warrants or any Convertible instruments, conversion date and likely impact on equity
Plant locations
Address of correspondence.
3. Risk Management:
A. Disclosure about Risk Management
Like involvement of –
a. Risk relating to various policies / Political Risk;
b. Business Risk
i. Client construction
ii. Credit Control
iii. Geographical Risks
iv. Economic Risks
v. Technology Risks;
c. Financial Risks
i. Liquidity
ii. Leverage
iii. Foreign Currency Fluctuation;
d. Legal & Statutory Risks
i. Legal & Statutory Risks
ii. Contractual Risks
iii. Statutory Compliance;
e. Management Risks
i. Human Resources Management and enhancement
ii. Internal up gradation
iii. Internal Control System
iv. Disaster Recovery Plans,
B. Risks & Concern & Risk Mitigation:
The company has built up a Risk inventory of all the identified risks cutting across its various business units.
The risks have been prioritized through a company-wise exercise. Members of senior management have undertaken the ownership of the top risks of the company and work on mitigating the same.
All the Indian general insurers need to fulfill IRDA’s specific directive to them – “The Authority advises that a Chartered Accountants firm, who is not the Statutory or Internal or Concurrent Auditor of the concerned Insurer and having a minimum of three to four of experience of IT systems, risk management and process controls of Banks or Mutual funds or Insurance Companies, shall certify that the Investment Risk Management System and Processes envisaged by these guidelines are in place and working effectively.”
Author-Anabil Bhattacharya
