1. Introduction:
First of all we need to look at the how Risk Management Module presently involved in the processes presently functioning &/or adapted by Indian Life Insurance companies at the back drop of the following aspects:
i. Indian Life Insurance Penetration & Density:
ii. Indian Life Insurance companies;
iii. Indian Insurance Premium mix Sector wise / Company wise;
iv. Concept, Definition, Theory and Penetration of Traditional & Enterprise Risk Management;
v. Risk Management Framework as implemented by the Regulator, IRDA.
vi. Comparison with Global/International Market Regulations;
vii. Steps to be ensured improving steps desired;
viii. Future to the fore.
Indian economy is well-diversified and developing at a greater speed. Indian Life Insurance market is having tremendous scope and still penetration is very low compared to U.S.A., U.K., Germany & other European countries. During last one decade life insurance sector has been liberalized and around two dozen private life insurance companies are now operating in the market. To regulate this life insurance market, Central Govt. has appointed IRDA as the regulator, long back during FY1999-2000.
To create the level playing field IRDA had prescribed uniform accounting system and regulation of investment & various other related financial aspects, as being equally applicable on all life insurance companies – be private or public (i.e. Govt. run). Of course, various other important factors of Financial Risk Management processes being adopted in Indian life insurance market in this current era, are also being implement in proper means & methods – like adherence to Accounting Standards, adopting the techniques of Financial analysis, proper application of financial Management concept, implications of Anti money laundering Act, compliance of IFRS – all these are also of prominent significance on the operating result of a life insurance – even after resorting to prudent underwriting norms & its proper application.
2. Two distinct regulations of Irda in this direction worth noticeable:-
A. Corporate governance guidelines passed in august, 2009 for insurance companies vide circular ref. No. : Irda/f&a/ Cir/025/ 2009-10, dated 05-08-2009 introduced corporate governance for the insurance sector from the fy 2009-10 subject to compliance report furnished to irda time to time:
1. Corporate Governance is understood as a system of financial and other controls in a corporate entity and broadly defines the relationship between the Board of Directors, senior management and shareholders. In case of the financial sector, where the entities accept public liabilities for fulfillment of certain contracts, the relationship is fiduciary with enhanced responsibility to protect the interests of all stakeholders. The Corporate Governance framework should clearly define the roles and responsibilities and accountability within an organization with built-in checks and balances.
The importance of Corporate Governance has received emphasis in recent times since poor governance and weak internal controls have been associated with major corporate failures. It has also been appreciated that the financial sector needs to have a more intensive governance structure in view of its role in the economic development and since the safety and financial strength of the institutions are critical for the overall strength of the financial sector on which the economic growth is built upon.
As regards the insurance sector, the regulatory responsibility to protect the interests of the policyholders demands that the insurers have in place, good governance practices for maintenance of solvency, sound long term investment policy and assumption of underwriting risks on a prudential basis. The emergence of insurance companies as a part of financial conglomerates has added a further dimension to sound Corporate Governance in the insurance sector with emphasis on overall risk management across the structure and to prevent any contagion.
2 The Insurance Regulatory and Development Authority (IRDA) has outlined in general terms, governance responsibilities of the Board in the management of the insurance functions under various Regulations notified by it covering different operational areas. It has now been decided to put them together and to issue the following comprehensive guidelines for adoption by Indian insurance companies.
These guidelines are in addition to provisions of the Companies Act, 1956, Insurance Act, 1938 and requirement of any other laws or regulations framed there under. Where any provisions of these guidelines appear to be in conflict with the provisions contained in any law or regulations, the legal provisions will prevail. However, where requirements of these guidelines are more rigorous than the provisions of any law, these guidelines shall be followed.
3. The objective of the guidelines is to ensure that the structure, responsibilities and functions of Board of Directors and the senior management of the company fully recognize the expectations of all stakeholders as well as those of the regulator. The structure should take steps required to adopt sound and prudent principles and practices for the governance of the company and should have the ability to quickly address issues of non-compliance or weak oversight and controls.
These guidelines therefore amplify on certain issues which are covered in the Insurance Act, 1938 and the regulations framed there under and include measures which are additionally considered essential by IRDA for adoption by insurance companies.
4. The guidelines accordingly address the various requirements broadly covering the following major structural elements of Corporate Governance in insurance companies:-
1) Governance structure.
2) Board of Directors.
3) Control functions.
4) Senior management:
a. CEO & other senior functionaries.
b. Role of Appointed Actuaries.
c. External audit – Appointment of Statutory Auditors.
5) Disclosures.
6) Outsourcing.
7) Relationship with stakeholders.
8) Interaction with the Supervisor.
9) Whistle blowing policy.
B. By the instruction to the ceos of all insurance and reinsurance companies irda vide circular ref. No. : Irda/sdd/ Misc/Cir/009/01/2013, dated 22-01-2013 introduced insurance fraud monitoring framework introduced as risk management measures :
A. Introduction: Financial Fraud poses a serious risk to all segments of the financial sector. Fraud in insurance reduces consumer and shareholder confidence; and can affect the reputation of individual insurers and the insurance sector as a whole. It also has the potential to impact economic stability.
It is, therefore, required that insurers understand the nature of fraud and take steps to minimize the vulnerability of their operations to fraud. Due measures also have to be laid down to address possible frauds in each line of business viz., life, general and health as threats/vulnerabilities posed under each one of them vary significantly.
Under the Regulatory Framework put in place for insurance companies, the Authority has stipulated a number of measures to be taken by insurance companies to address the various risks faced by them. Some of these include:
- The Corporate Governance guidelines mandate insurance companies to set up a Risk Management Committee (RMC). The RMC is required to lay down the company-wide Risk Management Strategy.
- As part of the Responsibility Statement which forms part of the Management Report filed with the Authority under the IRDA (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations, 2002, the management of an insurance company is required to disclose the adequacy of systems in place to safeguard the assets for preventing and detecting fraud and other irregularities, on an annual basis.
In order to provide regulatory supervision and guidance on the adequacy of measures taken by insurers to address and manage risks emanating from fraud, the Authority has laid down the guidelines requiring insurance companies to have in place the Fraud Monitoring Framework.
Fraud Risk Management Systems for Reinsurer: Reinsurers can reduce their exposure to fraudulent claims from ceding insurers and reinsurance intermediaries by understanding the fraud risk management systems these counterparties have in place. Accordingly, these guidelines apply mutatis mutandis in case of Reinsurers.
The Guidelines mandate insurance companies to put in place, as part of their corporate governance structure:
(i) Fraud detection and mitigation measures; and
(ii) Submit periodic reports to the Authority in the formats prescribed herein.
All insurers are required to ensure that the risk management function is organized in such a way that the insurer is able to monitor all the risks across all lines of business on a continuing basis and to initiate measures to address them suitably.
B. Scope and Classification of Insurance Frauds: Fraud in insurance is an act or omission intended to gain dishonest or unlawful advantage for a party committing the fraud or for other related parties. This may, for example, be achieved by means of:
1. Misappropriating assets;
2. Deliberately misrepresenting, concealing, suppressing or not disclosing one or more material facts relevant to the financial decision, transaction or perception of the insurer’s status;
3. Abusing responsibility, a position of trust or a fiduciary relationship.
In order to adequately protect itself from the financial and reputational risks posed by insurance frauds, every insurance company shall have in place appropriate framework to detect, monitor and mitigate occurrence of such insurance frauds within its company. The said framework shall, at the minimum, include measures to protect the insurer from the threats posted by the following broad categories of frauds:
a) Policyholder Fraud and/or Claims Fraud – Fraud against the insurer in the purchase and/or execution of an insurance product, including fraud at the time of making a claim.
b) Intermediary Fraud – Fraud perpetuated by an insurance agent/Corporate Agent/intermediary/Third Party Administrators (TPAs) against the insurer and/or policyholders.
c) Internal Fraud – Fraud/ mis-appropriation against the insurer by its Director, Manager and/or any other officer or staff member (by whatever name called).
An illustrative list of Insurance Frauds is given at Appendix – 1. These instances include frauds perpetuated internally; by insurance agent/Corporate Agent/intermediary/TPAs; and instances of claims/policyholder frauds.
C. Anti-Fraud Policy: All insurance companies are required to have in place an Anti Fraud Policy duly approved by their respective Boards. The Policy shall duly recognize the principle of proportionality and reflect the nature, scale and complexity of the business of specific insurers and risks to which they are exposed. While framing the policy, the insurance company should give due consideration to all relevant factors including but not limited to the organizational structure, insurance products offered, technology used, market conditions, etc.
As fraud can be perpetrated through collusion involving more than one party, insurers should adopt a holistic approach to adequately identify, measure, control and monitor fraud risk and accordingly, lay down appropriate risk management policies and procedures across the organization.
The Board shall review the Anti Fraud Policy on atleast an annual basis and at such other intervals as it may be considered necessary.
The anti-fraud policy shall broadly cover the following aspects:
i. Procedures for Fraud Monitoring:
Well-defined procedures to identify, detect, investigate and report insurance frauds shall be laid down. The function of fraud monitoring shall be either an independent function or can be merged with existing functions like risk audit etc., The Head of this function should be placed at sufficiently senior management level and should be able to operate independently.
ii. Identify Potential Areas of Fraud:
Identify areas of business and the specific departments of the organization that are potentially prone to insurance fraud and lay down a detailed department-wise, anti-fraud procedures. These procedures should lay down the framework for prevention and identification of frauds and mitigation measures.
iii. Co-ordination with Law Enforcement Agencies:
Lay down procedures to coordinate with law enforcement agencies for reporting frauds on timely and expeditious basis and follow-up processes thereon.
iv. Framework for Exchange of Information:
Lay down procedures for exchange of necessary information on frauds, amongst all insurers through the Life and General respective councils. The insurance companies are well advised to establish coordination platforms through their respective Councils and/or Forum to establish such information sharing mechanisms.
v. Due Diligence:
Lay down procedures to carry out the due diligence on the personnel (management and staff)/ insurance agent/ Corporate Agent/ intermediary/ TPAs before appointment/ agreements with them.
vi. Regular Communication Channels:
Generate fraud mitigation communication within the organization at periodic intervals and/or adhoc basis, as may be required; and lay down appropriate framework for a strong whistle blower policy. The insurer shall also formalize the information flow amongst the various operating departments as regards insurance frauds.
D. Fraud Monitoring Function (FMF):
The FMF shall ensure effective implementation of the anti-fraud policy of the company and shall also be responsible for the following:
i. Laying down procedures for Internal reporting from/and to various departments.
ii. Creating awareness among their employees/ intermediaries/ policyholders to counter insurance frauds.
iii. Furnishing various reports on frauds to the Authority as stipulated in this regard; and
iv. Furnish periodic reports to their respective Board for its review.
E. Reports to the Authority: The statistics on various fraudulent cases which come to light and action taken thereon shall be filed with the Authority in forms FMR 1 and FMR 2 providing details of
(i) Outstanding fraud cases; and
(ii) Closed fraud cases
– every year within 30 days of the close of the financial year.
F. Preventive mechanism: The Insurer shall inform both potential clients and existing clients about their anti-fraud policies. The Insurer shall appropriately include necessary caution in the insurance contracts/ relevant documents, duly highlighting the consequences of submitting a false statement and/or incomplete statement, for the benefit of the policyholders, claimants and the beneficiaries.
G. Insurer’s to Ensure Compliance: The stipulations on fraud detection, classification, monitoring and reporting by the insurers shall be effective from the financial year 2013-14. A compliance certificate confirming laying down of appropriate procedures shall be submitted by 30th June 2013.
Illustrative List of Insurance Frauds
Broadly, the potential areas of fraud include those committed by the officials of the insurance company, insurance agent/corporate agent/intermediary/TPAs and the policyholders/ their nominees. Some of the examples of fraudulent acts/omissions include, but are not limited to the following:
1. Internal Fraud:
a) Misappropriating funds
b) Fraudulent financial reporting
c) Stealing cheques
d) Overriding decline decisions so as to open accounts for family and friends
e) Inflating expenses claims/over billing
f) Paying false (or inflated) invoices, either self-prepared or obtained through collusion with suppliers
g) Permitting special prices or privileges to customers, or granting business to favoured suppliers, for kickbacks/favours.
h) Forging signatures
i) Removing money from customer accounts
j) Falsifying documents
k) Selling insurer’s assets at below their true value in return for payment.
2. Policyholder Fraud and Claims Fraud:
a) Exaggerating damages/loss
b) Staging the occurrence of incidents
c) Reporting and claiming of fictitious damage/loss
d) Medical claims fraud
e) Fraudulent Death Claims
3. Intermediary fraud:
a) Premium diversion-intermediary takes the premium from the purchaser and does not pass it to the insurer
b) Inflates the premium, passing on the correct amount to the insurer and keeping the difference
c) Non-disclosure or misrepresentation of the risk to reduce premiums
d) Commission fraud – insuring non-existent policyholders while paying a first premium to the insurer, collecting commission and annulling the insurance by ceasing further premium payments.
3. Specific directives of irda in regard to ensuring financial risk management aspects:
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 for absolute mitigation of various financial risks that do exists in the operation of Life Insurance Companies:
1. A) Financial Reporting and Disclosure:
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 applicable to Enterprises carrying on Insurance Business are:
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.
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. B) Corporate Governance Reporting to the Regulator (IRDA):
The items include –
B.1. A brief statement on company’s philosophy on the code of governance, to be submitted to the regulator at regular frequency.
B.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.
B.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.
B.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.
B.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.
B.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.
B.7. Various Disclosures:
- 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.
B.8. Information about General Shareholders:
- 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 Senesx, 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.
C. Mandatory risk management requirement compliance by life insurers:
1. Disclosure about risk management process: Risk identification results:
Like involvement of –
a. Political Risk.
b. Business Risks: Like –
i. Client construction;
ii. Credit Control;
iii. Geographical Risks;
iv. Economic Risks;
v. Technology Risks.
c. Financial Risks: Like –
i. Liquidity;
ii. Leverage;
iii. Foreign Currency Fluctuation.
d. Legal & Statutory Risks: Like –
i. Legal & Statutory Risks;
ii. Contractual Risks;
iii. Statutory Compliance.
e. Management Risks: Like –
i. Human Resources Management and enhancement
ii. Internal up gradation.
iii. Internal Control System.
iv. Disaster Recovery Plans.
2. Concern & control of identified risks & risk mitigation: Every LIFE INSURANCE 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. The company has adopted risk management policies commensurate with the size and requirements of business to manage risks in different following mentioned categories:
a. Political;
b. Foreign Exchange;
c. Credit Risks;
d. Operation Risk : Technical;
e. Operation Risk : Management;
f. Market;
g. Environment.
The policies are reviewed regularly keeping in tandem with the developments taking place from time to time and the volatile corporate scenario.
3. The task of life insurance underwriting for risk avoidance, mitigation, reduction & control risk & enhanced risk handling capacity & capability: While discussing about the simple task of underwriting, we need to look at the basics of life insurance underwriting. The basic objective of insurance underwriting is to ensure that the on the entirety – the mortality and associated insured contingencies experienced should not be worse than which is assumed by the actuary in calculating the premium rates.
Generally these premium rates are calculated based on the mortality & other related insured contingency rates in our insurance population. The rates of Life Insurance are listed product wise in a premium table as the standard premium for all ages and both the genders.
The main risk manger in this case is the underwriter who’s function is to look at the applications received for grant of insurance cover; as such these applications are assessed, checked, thoroughly scrutinized and finally their risk is classified after arriving at a befitting and adequate premium, matching to the risk those policies bring into the portfolio of the life insurer.
References:
Different contemporary discussions & information as collected & collated from various text materials – as available in hard & soft form.
