Robust legal framework key for development of surety bonds market: IRDAI

 

An IRDAI working group has made a case for a robust legislation and ecosystem keeping in view the best international practices for promoting development of the surety bonds markets in the country.

Surety bonds protect the beneficiary against acts or events that impair the underlying obligations of the principal. Surety bonds guarantee the performance of a variety of obligations, from construction or service contracts, to licensing and commercial undertakings.

The working group, set up by the Insurance Regulatory and Development Authority of India (IRDAI) to study the suitability of offering surety bonds by Indian insurance industry, suggested that the exposure of an insurer under surety bond insurance may be regulated through a cap on its exposure under this business as a proportion of its net worth.

"For surety market to develop in India and keeping in mind best practices observed in other markets, a robust legislation requiring surety bonds and other non-fund based guarantees would be a necessary condition," said the report on which the IRDAI has invited comments from stakeholders by November 9.

Surety bonds are different from corporate bonds and financial guarantees. While surety bonds refer to the performance or delivery obligations to complete the insured project, the corporate bonds refer to financial obligations to repay the debts or loans.

The report notes that surety bonds are proven risk management mechanisms with a long history that help ensure public and private owners execute their construction projects in accordance with the plans and specifications and ensure subcontractors and suppliers are paid.

Surety bonds help provide owners of construction projects with guarantees of success and enhanced reputations.

The working group further said the surety bonds should be accepted as an alternative form of guarantee by the Reserve Bank of India (RBI) and government departments and accordingly reflect in the appropriate contract documents.

The Ministry of Micro, Small, and Medium Enterprises runs various schemes to aid the smaller businesses in development, such as, the credit guarantee scheme, where the businesses eligible for these schemes can approach approved banks and can get collateral-free loans up to Rs 50 lakh.

"This can be extended for issuance of surety bonds also and in such cases, surety bonds and government guarantees can work more efficiently than banks to secure and promote the MSME sector within India," it said.

Further, the surety bonds business may be revived with offering of surety bonds to construction companies in India that covers road projects, housing/commercial buildings and other projects of government as well as private sector.

"The contract bonds may include bid bonds, performance bonds, advance payment bonds and retention money. The limit of guarantee may be limited to maximum 30 per cent of project value," the report said.

The working group has also suggested that the database of the bonds issued by all the insurance companies may be centralised at designated body to be decided by IRDAI. Every insurer should furnish the details of clients and exposures periodically to the designated body.

Irdai rejects general insurers' call for blanket easing of solvency margins

The Insurance Regulatory and Development Authority of India (Irdai) has turned down a request made by general insurance companies for a blanket relaxation of solvency margins due to Covid-19. However, it said specific cases would be considered on merit.

Last month, the General Insurance Council (GI Council), in a letter to the Irdai had sought relaxations in certain regulatory requirements, such as those related to solvency ratio.

The Council, which is the representative body of general insurance firms, had asked for relaxation in calculating available solvency margins (ASM) on account of delays in tenders related to government schemes and delays in receiving subsidy.

“The authority doesn’t see the need for general relaxation. However, any specific issues would be considered on merit,” Irdai said in its response.

The GI Council had also said that given the huge mark-to-market (MTM) losses in equity investments during March, Irdai should allow firms not to account for diminution in the value of equity investments while finalising accounts for the financial year ended March 31, 2020.

“Insurers are required to adhere to the applicable accounting standards framed by ICAI and the authority’s regulations/circulars on preparation of financial statements and valuation of investment,” the regulator said in its response.

While insurance firms ignore MTM gains, they are required to regard MTM losses as expenses.

“Though the outbreak was relatively delayed in India, the scare, the preventive shutdown, and the economic fall are unprecedented, with the impact on markets quite telling. Without exception, the non-life insurance sector is severely burdened and we fear difficulties in meeting regulatory requirements,” M N Sarma, general secretary of the GI Council, stated in the letter.

The GI Council had also requested that firms be allowed to consider MTM position as on February 29, 2020 as the basis of computing solvency.

“Alternatively, Irdai may relax the minimum solvency requirement of 1.5x for the time being,” the letter had said. Many firms may see their solvency ratio fall below 1.5 due to the crisis.

On the issue of giving additional time for the launch of Arogya Sanjeevani, up to June 1, Irdai has said, “All the general and health insurers have received UIN. In the present Covid-19 crisis, rolling out the standard health product expeditiously would be in public interest.”

Further, on the request to condone a break of up to 60 days for continuity of benefits in case of delay in renewal of health insurance, the regulator said, “Thirty days are already available for this, which is sufficient. Further, if the renewal date falls during the lockdown period, the authority has also allowed for continuation of policy without break.”

GI Council urges IRDAI for easier MTM rules to take on Covid-19 disruption

With Covid-19 severely impacting the operations of non-life insurers, the General Insurance Council (GIC), the representative body of firms in this space, has urged the Insurance Regulatory and Development Authority of India (IRDAI) to relax certain regulatory requirements, particularly those related to solvency ratio.

In a letter to the insurance regulator, GIC has said that given the huge mark-to-market loss in equity investments in the current month, IRDAI should allow companies not to account for diminution in value in equity investments while finalising the accounts for the year ending March 31, 2020.

While insurance companies ignore mark to-market-gains, they are required to recognise mark-to-market losses as an expense in their profit and loss accounts.

“Though the virus made a relatively delayed entry into India, the scare, the preventive shutdowns and economic fall are unprecedented and the adverse impact on financial markets is quite telling. Without exception, the non-life insurance sector is severely burdened and we are afraid we will have difficulty in meeting certain regulatory requirement,” M N Sarma, general secretary, GIC, wrote in the letter.

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GIC has also said that companies might be allowed to consider mark-to market position as on February 29, 2020 as the basis of computing solvency.

“Alternatively, the IRDAI may relax the minimum solvency requirement of 1.5 times for the time being on the same lines as the regulator had relaxed at the time of dismantling motor third party pool,” the letter said.

Many companies may see their solvency ratio fall below 1.5 due to the ongoing crisis.

Rating agency Icra in its note on the impact of Covid-19 on the insurance sector had said non-life insurers with a large share of health covers in their portfolio will see hospitalisation claims rise substantially if the rate at which the infection is spreading accelerates. “If the claims ratio for the health segment increases by about 30-40 percentage points in the event to a net loss ratio of 130-140 per cent (net loss ratio at 97 per cent as of FY19), the total increase in claims could be Rs 6,000-8,000 crore higher claims compared to March 2019 in the health segment”, Icra said.

Apart from that, non-life insurance companies will also be impacted by mark-to-market (MTM) losses on its equity investment portfolio, and may need to reflect that in the solvency parameters in case the MTM is negative. The four state-owned non-life insurers will see a greater impact on their capitalisation, as they are using a part of the fair value gain on the equity portfolio for solvency requirements, said the rating agency.

While equity investments of general insurers have taken a hit, their businesses have nosedived as operations in sectors such as marine cargo, aviation and travel and tourism have come to a halt. According to a senior official one one such firm, many companies are likely to default on their premium obligation on April 1, 2020. Also, factories and other establishments are unlikely to renew non-mandatory insurance cover.

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The GIC has asked the regulator to relax the period of determining solvency disallowance to 90 days for outstanding balance of agents and intermediaries, among others, against the present 30 days.

Also, in the present year, the industry needs to provide for stressed debt investments as the same is not allowed for income tax assessment till the account is written off.

“In view of the huge provisions made by the industry and the same disallowed for the purpose of income tax purpose, DTA (Deferred Tax Assets) created for such differences need to be allowed for solvency computation,” GIC has said.

On March 23, 2020, IRDAI extended the deadline in filing monthly and quarterly returns by 15 days and one month, respectively. The insurers have asked for a relaxation of another 60 days from the respective due dates and 90 days from annual requirement.

Further, GIC has also sought forbearance in the compliance requirement of limits on rural and social sector obligations.

Insurers also have asked the regulator for easier dealing room guidelines and allow insurance companies to continue to work from home till normalcy.

Irdai chief warns firms against unfair trade practises, predatory pricing

The insurance industry may meet the fate of aviation and telecom sectors if product prices are kept low, warned Insurance Regulatory and Development Authority of India (Irdai) Chairman Subhash C Khuntia on Friday.

Khuntia said insurance brokers account for around 43 per cent of the premium collected in the case of group health insurance products. “But, I need to give a word of caution here. Though the share is very high, the loss ratio is also high. It’s not sustainable at present. Insurance companies, intermediaries and policyholders need to unite to create a sustainable atmosphere,” Khuntia said in New Delhi at an event organised by the Insurance Brokers Association of India.

He said in the case of “unfair competition”, other industries, particularly aviation and telecom, have suffered but their customers have not. “But we cannot afford such a situation in the insurance industry as it protects customers. If the insurance industry suffers, the clientele will also suffer and as a regulator, we would not like that to happen.”

Aviation is a highly competitive sector where a low-fare regime has been a cause of concern for some airlines. The government has often termed it as “predatory pricing” and cautioned industry against keeping airfares too low in a bid to elbow out competition.

Similarly, the telecom industry is reeling under stress because of fierce competition, especially after Reliance Jio entered the market three years ago. Bharti Airtel and Vodafone Idea posted their biggest losses ever recently.

Asked if companies are engaging in predatory pricing to raise their volume, Khuntia acknowledged it, saying “of course, of course”. “The regulator will have to ensure industry runs sustainably. There will be a host of actions, not one kind of action (to check predatory pricing) but we will ensure that the health of insurance industry does not deteriorate,” he said.

The regulator also told insurance brokers to be more disciplined in filing their returns and said it is working on consolidating regulations related to insurance intermediaries in a bid to do away with multiplicity of rules.

“I have told officers that there is multiplicity of regulations for intermediaries and there should be common norms to the extent possible and specific norms for different categories. We need to bring all intermediaries in one regulation,” he said.

Irdai introduced a Business Analytics Project portal six years ago, automating the process of registration and other connected activities of insurers, brokers, among others. Khuntia said of the 459 brokers, 364, or about 80 per cent, filed return for the financial year 2018-19.

“Some brokers are not submitting the annual returns in time and some are not following the process at all. We should be more disciplined,” he said.

Asked about his view on raising foreign investment in the insurance sector from the current 49 per cent, he said Irdai had sought opinions of stakeholders on raising foreign holding to 74 per cent and comments received have been forwarded to the government.

“Now, according to the Insurance Act, 49 per cent is the maximum limit for foreign direct investment. If it goes to 74 per cent, naturally, the Act has to be amended,” he said. However, he was non-committal on ownership and control. No decision has been taken, he added.

Irdai asks insurers to give details on exposure to DHFL, IL&FS, ADAG

The Insurance Regulatory and Development Authority of India (Irdai) has sought data from companies on their exposure to Infrastructure Leasing & Financial Services (IL&FS), Dewan Housing Finance Corporation (DHFL), Indiabulls, and Anil Dhirbubhai Ambani group companies, sources aware of the development said.

“The regulator perhaps wants to see the strength of the insurance companies," said the chief executive officer of a life insurance company. All the four entities, for which data was sought by Irdai on October 9, have been downgraded by credit rating agencies recently.

“Usually, it is left to the insurers on how they deal with downgraded entities. But this may have been done to find if there is any over exposure the insurers have against their asset base," said a former member of Irdai.

When an entity is downgraded, insures' investment in such entities is clubbed under the unapproved investment kitty and the insurers are allowed to have 10 per cent of their investment in the unapproved investment.

“If the 10 per cent is breached, there might be some problem, but so far the 10 per cent threshold has not been breached by any insurer," experts said.

There might be concern on the solvency of insurers having exposure to the four entities, the former member of Irdai quoted above said. If such a situation arises wherein the rating downgrade of an entity threatens the solvency margin of an insurer, the insurer has to infuse fresh capital to maintain a solvency margin of 1.5.

The Irdai had in the past asked insurers with exposure to IL&FS to provide for their exposure. A lot of insurers including the state-owned behemoth Life Insurance Corporation have exposure to IL&FS.

Make sure insurance ads are clear, fair and not misleading: Irdai to firms

Regulator Irdai has asked insurers to ensure that advertisements of insurance products are clear and do not convey a fabricated sense of security to prospective customers.

The Insurance Regulatory and Development Authority of India (Irdai) in a circular on 'insurance advertisements' has prescribed dos and don'ts for insurance companies to comply with.

All insurance advertisements should ensure that "communications are clear, fair and not misleading whatever be the mode of communication", it said.

They should use material and design (including paper size, colour, font type and font size, tone and volume) to present the information legibly and in an accessible manner, Irdai said.

Also, the mandatory disclosures should be in the same language as that of the whole advertisement.

"Names of insurance products or benefits" must not use terms or phrases that convey a fabricated sense of security, the circular said.

It further said that in case of communications through internet, an "insurer should ensure that the recipients/viewers have the opportunity to view the full text of the relevant key features; terms and conditions; any other applicable risk information...they shall not be hidden away in the body of the text".

Irdai said the success of insurance sales communication depends on public confidence and the faith they repose in the insurers, when they receive a communication from companies promoting their products.

"As it may be difficult for the public to understand and evaluate the inherent details in the various insurance products, it is of paramount importance that the publicity material is relevant, fair and in simple language enabling informed decision making about whether or not to buy a specific insurance product," it said.

The circular also said all licensed entities soliciting insurance business should mention their identity and contact details.

Any person found to be guilty of misleading the prospect on any insurance product will be liable for regulatory actions, it added.

Irdai to revisit motor third party obligation regulations for insurers

The Insurance Regulatory and Development Authority of India (Irdai) has constituted a working committee for reviewing the current motor third party obligation regulations for insurers and make recommendations to modify the current framework.

In June 2015, the insurance regulator had specified a formula for calculating motor third party obligations for insurers. But, after the apex court decision on issuance of long term motor third party policies as well as concerns raised by various insurers on the formula used for calculation of motor third party obligations, the insurance regulator felt that a review of the whole process is required.

According to the insurance act, every general insurer has to underwrite a minimum percentage of insurance business in third party risks of motor vehicles.

The committee constituted by the IRDAI will be headed by J Anita, General Manager, Irdai and other members of the committee include Basudev Sanyal, Chief Manager, United India Insurance, K B Mehra, Chief Manager, National Insurance, Loknath Kar from ICICI Lombard and others. A Srihari, IRDAI non-life member is also a part of the committee.

The committee has been asked to submit its report within three months.

Insurers to make available standalone 'own damage' motor policy from Sep 1

Regulator Irdai has asked general insurance companies to make available standalone annual Own Damage (OD) covers for both new and old cars and two-wheelers from September 1.

Consequently, the issuance of bundled policies for cars and two-wheelers will not be compulsory from September 1, the Insurance Regulatory and Development Authority of India (Irdai) said while making changes in an earlier order in the wake of a Supreme Court ruling.

Buying OD vehicle insurance is optional. OD covers natural calamities, like earthquakes and floods, and also disasters such as vandalism and riots.

"Effective, September 1, 2019, insurers shall make available stand-alone annual Own Damage covers (including stand-alone OD cover for fire and/or theft if opted for by the policyholder) for cars and two-wheelers, both new and old," the new circular said.

Further, insurers will have the option to offer package policies, in addition to standalone OD and third-party policies.

However, long term standalone OD policy will not be permitted for the present.

"Policyholders have the option to renew the Own Damage component of a bundled cover falling due on or after September 1, 2019, with the same insurer or different insurer, on an annual basis," Irdai said.

For issuance of standalone OD annual cover as well as for renewal of the OD component of a bundled cover, insurers will have to ensure that the cover is offered only if a motor third-party (TP) cover is already in existence or is taken simultaneously.

Also, the pricing of a stand-alone OD policy should continue to be that being offered for the OD component of a package policy (the same was followed for the OD component of a bundled product as well).

Commenting on Irdai's order, Onkar Kothari, Company Secretary and Compliance Officer, Bajaj Allianz General Insurance said the circular has provided much needed clarity in terms of insurer's approach for standalone motor OD policy, its pricing and duration.

"It's going to be an annual policy. It has also made it mandatory for insurers to ensure that no vehicle should be insured only for OD cover and the insurer needs to mention start and end date of TP policy and name of its issuer while giving standalone OD policy," he said.

Kothari further said Irdai's circular provides clarity to the customers who have opted for bundled cover.

Now they have an option to renew their OD part from an insurer of their choice rather than continuing with the one they had for TP.

Mental, genetic ailments eligible for health cover under new Irdai norms

In a move that could bring substantial relief to patients, the Insurance Regulatory and Development Authority of India (Irdai) has told insurers that neuro development disorders, mental illness problems, psychological disorders, genetic diseases, puberty and menopause related disorders can no longer be excluded from health insurance policies.

The insurance regulator has come out with new guidelines to rationalise and standardise the exclusions in health Insurance contracts so that every insurer complies with the guidelines.

The regulator has also said that all health covers filed and cleared after April 1, 2019, have to adhere to the guidelines issued. Moreover, all existing health covers which are not in adherence with the current guidelines issued by the regulator shall not be offered and promoted April 1, 2020 onwards.

The reason the regulator has taken such a step is because, with the rise in the number of health insurers and products in the market, it will be beneficial if the industry adopts a uniform approach while incorporating exclusions in health insurance products.

Also, any expense incurred by the policyholder for any illness within 30 days from the commencement of the policy will not be covered by the health policy except for claims arising due to an accident. However, this will not be applicable for a policyholder who has continuous coverage for more than twelve months.

Moreover, the regulator has directed that no health policy can be contested after completion of eight years, which is called the moratorium period of health covers, except for cases like frauds or permanent exclusions specified in the policy contract.

The insurance regulator has said insurers have to cover patients on artificial life maintenance, including those on life support machines where there are no chances of the patient recovering and not getting back to his /her previous health condition. However, expenses shall only be covered up to the date of confirmation by the treating doctor.

The regulator has also come up with a list of diseases that health insurers were covering under their products which can be permanently excluded. The list consists of diseases like Alzheimer's, Parkinson's, malignant neoplasms, epilepsy, pancreatic diseases, chronic kidney disease, HIV and AIDS, among others.

Irdai has also said insurers can incorporate waiting periods for any specific diseases but only up to four years. However, subject to product design, insurers can also impose sub limits or annual policy limits for specific diseases in terms of amount, percentage of sum insured or number of days of hospitalisation/ treatment in the policy.

Soon, you may have the option to settle insurance claims in installments

Regulator Irdai is mulling giving policy holders an option to receive payment of claims in installments under certain policies like personal accident (PA) and benefit-based health insurance.

The Insurance Regulatory and Development Authority of India (Irdai) had set up a working group to study a proposal in this regard and the panel had submitted its report in January this year after examining the concept of settlement of personal accident and benefit-based health insurance claims in installments.

Now, the insurance regulator has come out with draft guidelines and sought comments from stakeholders.

Irdai is of the view that the option of settlement of claims in installments will ensure that claimants have regular income for a reasonable period of time upon happening of a contingent event.

The draft guidelines said the policyholders may be provided an option of choosing either settlement of claim in lump-sum or in equated installments, or both in parts.

Further, insurers should put in place a procedure to capture the option exercised by the policyholder at the point of sale and at various stages of the policy.

"A combination of both the options i.e. a percentage of the sum assured as a lump-sum payment at the time of claim and the balance sum insured in installments for a definite period of not exceeding the time limits...may also be offered as a part of product design," the draft said.

As per the draft guidelines, the claim payment period of the product could be maximum of five years and "the claim installments shall be spread during claim payment period".

Also, the premium rate for the both the options should be same, Irdai said, adding "the total claim amount payable in installment option shall always be higher than the lump-sum option".

To safeguard the policyholders' interests and to enable them in taking an informed decision, the draft said the policy wordings relating to the benefit stricture should be in simple language and clearly defined.

Stakeholders can offer comment on the draft guidelines by April 17, 2019.