Reserve Bank of India states Core Investment Companies – Guidelines on Investment in Insurance

At present NBFCs venturing into insurance are guided by the circular DNBS(PD).CC.No.13/02.01/99-2000 dated June 30, 2000 on amendment to NBFC Regulations which contains the ‘Guidelines for entry of NBFCs into Insurance’. In view of the unique business model of Core Investment Companies (CICs), Reserve Bank of India (RBI) has decided to issue a separate set of guidelines for their entry into insurance business.

While the eligibility criteria, in general, are similar to that for other NBFCs, no ceiling is being stipulated for CICs in their investment in an insurance joint venture. Further it is clarified that CICs cannot undertake insurance agency business. The Guidelines are enclosed for meticulous compliance.

CICs exempted from registration with RBI do not require prior approval provided they fulfil all the necessary conditions of exemption as provided under/ in CC No.206 dated January 05, 2011. Their investment in insurance joint venture would be guided by IRDA norms.

Guidelines for Entry of CICs into Insurance

1. Any Core Investment Company (CIC) registered with RBI which satisfies the eligibility criteria given below will be permitted to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards. The maximum equity contribution such a CIC can hold in the joint venture company will be as per IRDA approval.

2. The eligibility criteria for joint venture participant will be as under, as per the latest available audited balance sheet.

1. The owned funds of the CICshall not be less than Rs. 500 crore;
   
2. The level of net non-performing assets shall be not more than 1% of the total advances;
   
3. TheCIC should have registered netprofit continuously for three consecutive years;
   
4. The track record of the performance of the subsidiaries, if any, of the concerned CIC should be satisfactory;
   
5. The CIC shall comply with all applicable regulations including CIC Directions, 2011. Thus CICs-ND-SI are required to maintain adjusted net worth which shall be not less than 30% of aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items.
   

3. No CIC would be allowed to conduct such business departmentally. Further, an NBFC (in its group / outside the group) would normally not be allowed to join an insurance company on risk participation basis and hence should not provide direct or indirect financial support to the insurance venture.

4. Within the group, CICs may be permitted to invest up to 100% of the equity of the insurance company either on a solo basis or in joint venture with other non-financial entities in the group. This would ensure that only the CIC either on a solo basis or in a joint venture with the group company is exposed to insurance risk and the NBFC within the group is ring-fenced from such risk.

5.In case where a foreign partner contributes 26 per cent of the equity with the approval of insurance Regulatory and Development Authority/Foreign Investment Promotion Board, more than one CIC may be allowed to participate in the equity of the insurance joint venture. As such participants will also assume insurance risk, onlythose CICs which satisfy the criteria given in paragraph 2 above, would be eligible.

6. CICs cannot enter into insurance business as agents. CICs that wish to participate in insurance business as investors or on risk participation basis will be required to obtain prior approval of the Reserve Bank. The Reserve Bank will give permission on case to case basis keeping in view all relevant factors. It should be ensured that risks involved in insurance business do not get transferred to the CIC.

Notes:

1. Holding of equity by a promoter CIC in an insurance company or investment in insurance business will be subject to compliance with any rules and regulations laid down by the IRDA/Central Government. This will include compliance with Section 6AA of the Insurance Act as amended by the IRDA Act, 1999, for divestment of equity in excess of 26 per cent of the paid up capital within a prescribed period of time.
   
2. CICs exempted from registration with RBI in terms of the Core Investment Companies(Reserve Bank) Directions, 2011 do not require prior approval provided they fulfil all the necessary conditions of exemption.

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FINMA Opens Consultation on Insurance Bankruptcy Ordinance

The Swiss Financial Market Supervisory Authority FINMA has opened the consultation on the new Insurance Bankruptcy Ordinance. This Ordinance is needed because the Insurance Supervision Act only provides a rudimentary framework for bankruptcy proceedings and because FINMA is responsible for overseeing the bankruptcy of insurance companies since 1 September 2011. The consultation period ends on 30 June 2012.

 

Since 1 September 2011, FINMA is responsible for initiating and conducting bankruptcy proceedings concerning companies subject to the Insurance Supervision Act (ISA). The ISA only provides a rudimentary framework for bankruptcy proceedings, so the new Ordinance adds the necessary detail and thus ensures legal certainty and predictability.

 

The draft Ordinance of the Swiss Financial Market Supervisory Authority on the Bankruptcy of Insurance Companies (FINMA Insurance Bankruptcy Ordinance, IBO-FINMA) is intended to protect insurance policy holders in the event of an insurance company’s bankruptcy. Policy holders' claims that are to be secured by the insurance company using tied assets are especially important here. On the one hand, such claims are to be classified as preferential to other privileged claims (see Art. 219 para. 4 of the Debt Enforcement and Bankruptcy Act for ranking) and settled before the latter (see Art. 54a para. 2 in conjunction with Art. 17 ISA). On the other hand, provision is made for bankruptcy dividends to be paid to policy holders from tied assets in full or in part prior to the schedule of claims takes legal effect. This is significant because several years may pass before the schedule of claims takes effect after an insurance company goes bankrupt, and policy holders' money would remain blocked until then.

 

While the Banking Act gives FINMA the authority to issue implementing regulations for the law on both bankruptcy and restructuring as far as banks are concerned, the ISA and thus the draft IBO-FINMA cover only the bankruptcy of insurance companies.

Bermuda Monetary Authority Reduced License Fees for Special Purpose Insurers

The Bermuda Monetary Authority (‘the Authority’ or ‘BMA’) announced that the registration fees for Special Purpose Insurers (SPI’s) has been nearly halved. Effective 1st April 2012, all new SPI’s licensed in Bermuda will pay $6,000 for annual registration. This is a significant reduction from the current registration fee of $11,600.

Accordance to Press Release Shelby Weldon, the Authority’s Director, Insurance, Licensing & Authorisations said, “The ability to establish SPI’s here within our insurance classification system is another option for the market to use Bermuda's extensive alternative risk transfer expertise.”

An SPI assumes insurance or reinsurance risks and typically fully funds its exposure to such risks through debt issuance or some other financing. The repayment rights of the debt or other financing mechanisms are subordinated to the insurance or reinsurance obligations of that vehicle.

Mr. Weldon continued, “Since SPI’s are fully funded, the Authority also applies a proportionate level of supervision to such entities, which appropriately is different from what we would apply to say, a large Class 4 commercial insurer. Therefore, this fee adjustment also recognises that distinction, since our fees are directly related to the cost of supervision, further reinforcing Bermuda’s competitive position to support SPI’s.”

Bermuda has recorded significant growth in SPI formations in the last two years. A total of 23 new SPI’s were licensed in 2011, up from eight in 2010 and one in 2009 when the Authority established the regulatory framework to accommodate SPI’s. During January and February 2012, three SPI’s had already licenced in Bermuda.

The move to reduce the fees has been well received by industry, including Bermuda-based law firm,
Appleby.  Accordance to Press Release Brad Adderley, Partner, Corporate & Commercial at Appleby said, “The fee reduction epitomises the proactive approach of the Authority, which was reinforced by the very senior Bermuda contingent that attended the recent Insurance- & Risk-Linked Securities Conference held annually by the Securities Industry and Financial Markets Association (SIFMA). The BMA's attendance at the conference reaffirms to the market place that Bermuda wants to be the preeminent player in this space.”

Accordance to Press Release Greg Wojciechowski, President and CEO of the Bermuda Stock Exchange said, “Since the coming into force of the new licensing regime for Special Purpose Insurers, the BSX has seen a significant increase in interest from the market for the creation of Bermuda based SPI’s which are used for the issuance of Insurance Linked Securities (ILS). This development has led to a record number of listed ILS issues on the BSX.”

SPI’s are often used to issue catastrophe bonds. The BSX has reported that $3.4 billion worth of
catastrophe bonds, or ILS was listed on the exchange by the end of 2011. To date, 25 ILS structures have been listed on the BSX.

Mr. Adderley continued, “Bermuda has made significant inroads into the cat bond market – the reduction of fees will help the island continue to grow this business which will have a positive impact on the Bermuda economy.”

Mr. Wojciechowski added, “The announcement by the BMA to reduce registration fees for SPI structures is a significant development and underscores Bermuda's firm commitment to provide regulatory and commercially sensible support to the global reinsurance industry. Bermuda has been a partner to the global reinsurance industry for over three decades, a healthy partnership which has resulted in the jurisdiction exhibiting a "silicon valley" effect for specialty insurance. Bermuda is a global leader in the reinsurance industry and developments such as this reduction of fees highlight Bermuda stakeholders’ resolve in providing the environment for that partnership to continue for decades to come.”

Accordance to Press Release Arthur Wightman, Partner, Assurance and Business Advisory Services, Insurance/Reinsurance at PricewaterhouseCoopers said, “Bermuda's established funds and reinsurance marketplaces make it the optimal jurisdiction for structuring Insurance Linked Securities and other convergence structures. This move by Bermuda's forward-looking regulator is just one example of how seriously Bermuda is committed to further developing these markets and represents another proactive move by the BMA to commercially practicable regulation. It also reinforces a commitment by the regulator to facilitate speed to market.”

Indian Insurance Regulator Proposed Exposure Draft on Servicing of Orphan Policies

Insurance Regulatory and Development Authority (IRDA), insurance market watchdog has issued draft regulations for Orphan Policies.

Introduction: Insurance agents are the most important channel of intermediation in the insurance business in India. Recognizing the importance of the agents in the procurement and servicing of insurance policies, the Insurance Act has two specific provisions, namely Section 40(2A) and Section 44 which protect the long term interests of agents. In brief, under provisions of Section 40(2A), lapsed policies which require medical examination prior to revival can be assigned to another agent after giving due notice to the existing agent to revive such policies. In such cases, new agent is entitled to commission of only 50% of what the procuring agent would have been entitled had the policy continued to be in force. Under Section 44, except on grounds of fraud, an agent who has served an insurance company for a period of 5 years shall be entitled, subject to certain conditions, to renewal commission on such policies if he discontinues his agency. However, agents who have completed 10 years of service with a given insurance company and stops for any reason his/her agency business but does not join another company are entitled to renewal commission on all such policies which they had placed. The commission on policies covered under Section 44 is inheritable and entitled to be passed on to the legal heirs of that agent.

2.     In the evolving Indian insurance context, it is noticed that a large number of agents discontinue services with a given insurance company before completing the minimum service prescribed. During the period of their service with a company they would have placed some policies and on the discontinuance of an agent such policies are left “orphan” and the policyholder suffers from lack of proper assistance in the servicing of the policy. The insurance company also suffers because of the drop of persistency which might occur in such cases. Given this pattern, IRDA believes it is important and in the interest of such policy holders to provide for a system where they are not denied the benefit of having an agent to look after their policy service issues in the best interest of policyholders.

3.     In order to address this gap created by exit of insurance agents well before attaining qualifying criterion as stipulated in Section 44, the Authority proposes to issue the following guidelines:

Guidelines on Servicing of Orphan Policies

1.       ‘Orphan life insurance policies’ for the purpose of these Guidelines, means the policies initially effected by an insurance agent whose services were subsequently terminated or removed from the rolls of the insurer excluding those policies to which the effecting agent is entitled to renewal commission under provisions of Section 44 of the Insurance Act. The policies that are considered eligible under proviso to section 40(2A) of Insurance Act also do not fall under the purview of this definition.

2.        “Allottee Agent” for the purpose of these guidelines is an individual insurance agent who is on the rolls of the life insurance company to whom the orphan, lapsed life insurance policies are allotted for the purpose of conservation and rendering the policy services. 

3.       ‘A lapsed life insurance policy’ for the purpose of these guidelines is a policy on which premium that is due and remained unpaid even after six months from the date of first unpaid premium.

4.       Insurance companies are allowed to allot any of the lapsed and orphan life insurance policies to individual insurance agents whose license is in force for the purpose of conservation and rendering effective policy service to the policyholders. Only a life insurance policy that is in lapsed condition on the date of allotment is eligible for allotment.

5.       Single Premium Life Insurance policies or life insurance policies on which no further premiums are due for payment (Limited Premium Payment Policies after the expiry of Premium Paying Term) are not eligible for allotment under these guidelines. Life Insurance Products designed with specific marketing features, inter alia, say direct / online marketing where no commission outgo is projected under respective File and Use are also not eligible for allotment. 

6.       The Life Insurers shall notify the particulars of ‘Allottee agent’to the concerned policy holders.

7.       The ‘Allottee agents’ shall be provided a list of such allotted life insurance policies along with the addresses for policy servicing. While submitting the list, it shall be stipulated that the purpose of submitting the said list is for rendering required policy services and any details thereof shall neither be parted with to any third party / entity nor be used for any other business purposes. However there is no bar in an ‘Allottee agent’canvassing new policies to the policyholder after reviving the lapsed allotted policies.

8.       It shall be specified to the ‘Allottee agent’ that the objective of the allotment is the conservation/revival and further servicing of the policies. 

9.       Regulation 8 of IRDA (Licensing of Individual Agents) Regulations, 2000 (Code of Conduct) applies to the ‘Allottee agent’ in respect of all the allotted policies. It shall be disclosed upfront to the Allottee agent.

10.   While allotting the policies for servicing, the life insurers shall direct the Allottee agents that all policy services shall be rendered similar to how an insurance agent would render to those policies that were otherwise effected by him / her. 

11.   The insurers are allowed to pay the following remuneration to the Allottee agent towards policy service in respect of the policies allotted to him/her

a.       Equivalent to the commission rates mentioned in the respective File & Use.

b.      The remuneration referred in 11 (a) above is payable only on revival of a lapsed orphan policy on account of arrears premiums received on or after the date of allotment and also on subsequent renewal premiums paid under the policy.

c.       No upfront / advance payments are allowed on account of the policy allotments referred herein.

d.      The payment of remuneration shall cease with the exit of an Allottee agent by any means and such Allottee agent will not be eligible for the benefits accorded by 44 of the Insurance Act.

12.   The policies that are allotted for servicing shall not be counted for persistency of the Policy allotted agent.

13.   The allotment of lapsed policies shall be done judiciously by the life insurers keeping in view the ability / feasibility of the insurance agents to service the policies allotted.

14.   Insurers shall also take in to account the track record of the agent and complaints registered against an agent etc. while allotting the orphan policies.

15.   The Life Insurers shall take an undertaking from the agents regarding their willingness for the proposed allotment and their consent for rendering the required policy services.

16.   Where a lapsed policy allotted is not revived / reinstated within 3 months from the date of such allotment, life insurers shall have the discretion to undo the allotment by issuing a formal notice to the Allottee agent and re-allot to any other agent as per the norms prescribed herein.

17.   An allotted policy which was revived or reinstated but lapsed subsequently may also be allotted in accordance to the provisions of the within referred stipulations. 

18.   Allotting the lapsed policies by a life insurance company is only an option.

19.   The Insurers shall put in place procedures for capturing the details of the Policy allotted agents who are servicing the allotted policies, in order to ensure that the objectives of allotment are met.

Comments if any on the above exposure draft may be forwarded to the following before 31^st March, 2012.

IRDA Exposure Draft on Health Insurance Policies for People Living HIV/AIDS (PLHA)

Insurance Regulatory and Development Authority, an insurance market regulator in India has issued Exposure Draft to discuss on various issues involved in, to provide insurance cover to the people living with HIV and to people in general including doctors and nurses etc who are vulnerable to HIV/ AIDS, in Health Insurance policies of both Life and Non Life insurance companies.

The Authority proposes implementation of these orders to be effective from 1st october, 2012 and requests comments on the Exposure Draft within 30 days.