Workshop On

Financial Sector Assessment Programme

Hyderabad29th December, 2010

DVS Ramesh

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Objectives

ICP – 14 – Preventive and Corrective Measures Regulators are adequately backed by

comprehensive legal structure with powers to safeguard the public interest.

ICP – 15 – Enforcement or Sanctions Regulators are legally empowered to

take action, where necessary, to ensure compliance to the Act and Regulations.

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Preventive and Corrective Measures

Core Principle: “Supervisory authority takes preventive and corrective measures that are ‘timely’, ‘suitable’ and ‘necessary’ to achieve the objectives of insurance supervision”. Regulatory intervention to protect

policyholders Regulatory Response is based on problem

detected Overall Enabling Tools: Insurance Act, 1938;

IRDA Act, 1999 adequately equipped IRDA. Section 14 (2) – An Omnibus Provision

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Essential Criteriaa. Availability of Adequate Instruments for timely preventive and

corrective measures Specified returns within 6 months from the end of FY (Sec

15), Qly Accounts & Investment Returns, Solvency Margin returns, Monthly Business / Other Returns etc.

b. Progressive Escalation of action or remedial measures Call for Information, Inspection, Examine Books / Accounts /

Officers on oath Investigation into the affairs of Insurer (Sec 33) and Search and seizure (Sec 34 H); Penalties (Sec 102) , Suspension / Cancellation of License (Sec 3 (4))

Formal Advise to Warning Letters / Letters of Caution Proposed Insurance legislation makes individuals jointly and

severally liable to make good the loss for contravening investment provisions

Enhances certain penalties to Rs 25 Crores

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Contd....c. Authority shall have capacity and standing to communicate

From formal communications to Directions u/s 34, 110 C; d. Require insurers to develop an acceptable plan for correction

of problems, if necessary Financial Plan (Sec 64VA (2A); Modification of rates, terms

and conditions of life policies (Sec 3B); requires insurer to take action (Sec 33(6)); directions regarding reinsurance treaties (Sec 34 F)

e. Measures to prevent breach of law and promptly and effectively deals with non – compliance with regulation

Call for further information (Sec 21); Order the revaluation (Sec 22) Review of Returns, Examination of Grievances

Areas to Strengthen Risk Based Supervision Powers to prescribe higher initial capital requirements in

specific cases

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Enforcement and Sanctions

Core Principle: “The Supervisory authority enforces corrective action and where needed imposes sanctions based on clear and objective criteria that are publicly disclosed. “ Decision making lines for remedial actions

to be structured A range of actions available say from

withholding approval for expansion to revoking the license

Overall Enabling Tools: Fines and Penalties & Suspension and Cancellation of Licenses

Essential Criteria

a. Issue formal directions and failure to comply has serious consequences

Advices / Formal communications Directions u/s 27 D (3), 33 (6), 34, 14 (1)

b. Power to prevent issuing new policies Sec 34 E (a) empowers IRDA to prohibit

Insurers / any Insurer entering a particular transaction / Class of transactions

Reg 27 Cease to transact new business 7

Contd…c. Compulsory Transfer of obligations from

failing insurers Sec 37 A empowers to prepare a scheme of

amalgamation

d. Requiring Capital levels to increase, restrict or suspend dividend or other payments to shareholders, restrict share transfer

Capital Levels not insurer specific, Prior approval for share transfer beyond a percentage and restriction on dividend (on Par Fund)

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Contd…e. Effective means to address Management

Problems and powers to impose conservatorship

Sec 34 A prior approval for appointment of CEOs/whole time directors; Sec 34 B empowers to remove managerial personnel; 34 C additional directors and 34 E (b) call for meeting of directors or depute its officers to watch the proceedings; Approval for Appointed Actuary

Sec 52 A Power to recommend appointment of Administrator for Life Insurance Business

Sec 52 H Power of Central Government to acquire undertakings of Insurers 9

Contd…f. Periodical checks to determine the compliance

Regular Reviews, additional returns or a follow up inspection (where necessary)

g. Fines against Individuals and Insurers Fine on individuals for acting as insurance

intermediaries and for rebating Rs 500, proposed to be escalated to Rs

10000 and to Rs 500000 respectively Fine on Insurers for accepting business from

other than licensed intermediaries Rs 5000, proposed to be increased to

Rs 1 Crores 10

Contd…

h. Sanctions for withholding the information or misleading information

Sec 104 Empowers to penalize for false statements in the investment returns

i. Barring individuals from acting in responsible positions

Part of overall due diligence – Scope for strengthening the procedures by disclosures

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Contd…j. Process of Sanctions do not delay preventive and

corrective measures Procedures in place to independently review these

respective linesk. Powers to withdraw the license

Reg 23 Suspension of Certificate, Section 3 (4) empowers

l. Powers to protect one or more insurers from financial difficulties of other parts of the group

Insurance business is relatively insulated and Policyholder’s funds are maintained separately

Abilities to infuse additional capital / Solvency Margin Review an ongoing process

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Contd…

m. Authority enforces the sanctions Section 110 AA of the proposed Bill

classifies the penalty imposed is recoverable as arrears of land revenue

Escalation Provisions ensure the compliance to sanctions

n. Ensuring consistency in imposing sanctions

Procedures are in place13

Contd…

o. Authority takes action against individuals / entities operating insurance business without a licence.

Section 103 – Rs 5 lakhs penalty or with imprisonment up to 3 years

Issues Public Statements cautioning the public

In the Proposed Bill the penalty was escalated to Rs 25 Crores with imprisonment up to 10 years18/04/23 14

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