Insurance Regulatory and Development Authority (IRDA) is undergoing through second phase of regulatory reforms. In this phase IRDA is not only serious in offering customer friendly products but it is also increasing vigilance and imposing heavy penalties on insurance companies. This will help in cleaning up many bad practices of the industry.
In last seven months there have been indications that regulatory gaze has gone beyond products to insurers.
Since January 2012, about ten insurance companies have been penalized. Not only the number of firms has increased but quantum of penalty has also increased.
Take for instance in June 2012, IRDA imposed a fine of Rs 1.47 crore on HDFC Standard Life for various counts, which is highest so far.
Earlier in most cases fine did not cross Rs 5 lakh mark, maximum fine that a regulator can levy per incidence of violations.
Not only IRDA is inspecting more companies but it is also imposing stricter penalties. Earlier IRDA didn’t have the capacity to segregate the violations but now it has begun segregating violations and penalizing insurers for each violation.
In the past there had been incidences where IRDA has not segregated violations and imposed a collective penalty of Rs 5 lakh. Take for instance, in 2008; Max Life was penalized on two counts i.e. for allowing display material offering a rebate of 2% by their corporate agent and for offering loans on three Unit-Linked Insurance Plan (ULIPs). However, for both violations IRDA imposed collective penalty of Rs 5 lakh on the company. For a company that wrote new business of around Rs 1,842.91 crore in FY’09, this penalty hardly seems a deterrent.
As per IRDA earlier they didn’t have wherewithal and capacity to locate default because regulatory scrutiny and inspection had not developed. IRDA also said that in the first phase they were more concern with getting the architecture in place, but now it has entered the second phase.
Though IRDA was incorporated twelve years ago, but it has taken time to settle down into its regulatory duties, taking its development roll more seriously in the earlier phase. As per IRDA the delay in polishing the industry, is due to lack of inspecting team.
In 2010 IRDA did fine lot of insurers, but in recent times it was largely based on customer’s complaints.
As these decisions can be challenged in court of law, hence, IRDA is becoming more elaborate. This can be seen from the recent penalty order that ran into several sheets pointing out each issue and IRDA’s verdict on the matter. Earlier the penalty orders were mostly wrapped up in a page and typically didn’t go beyond the fine of Rs 5 lakh.
However, the segregation is not smooth still. In FY’11, ING Vysya life insurance paid 135 referral partners in excess of the allowed limits, but they had to pay a penalty of just Rs 5 lakh since the IRDA took over payment to 135 partners as a single instance of wrongdoing.
In June 2012, HDFC Standard Life had to pay a fine of Rs 35 lakh for seven instances of over paying to corporate agents in FY’09, FY’10 and FY’11. Each instance here meant overpaying one corporate agent and not clubbing of corporate agents.
The average time taken to inspect each company is around one month, and there are around 51 companies in both life and non-life sectors. Hence, it is impossible to inspect each of them in one year. And therefore, IRDA is targeting to inspect each company at least once in two years or twice in the span of five years.
Going forward, IRDA will also focus on inspecting entities such as corporate agents. So far IRDA has penalized two corporate agents, Central bank of India and IndusInd bank for trying to be a corporate agent of more than one non-life insurance company and charging more than the permissible limits, respectively.
Further, quantum of violation will also count, a practice the regulator may not have follow strictly till now.