Insurance Industry - Institute of Company Secretaries of India · PDF file8 Market Segments in the Insurance Industry Comparison Source: Annual report 2012-2013 IRDA • Share of Life

Insurance Industry

Risk and Compliance

Hyderabad, 26th April, 2014

CA P R RAMESH

Agenda

1. Introduction

2. Overview of the Insurance Sector in India

3. Key Risks for the Insurance Sector

4. Importance of Compliance

©2014 Deloitte Touche Tohmatsu India Pvt. Ltd. All rights reserved.

2

Introduction

3

4

What does it entail

Agreeing to the terms of an

insurance policy creates a contract

between the insured and the

insurer. In exchange for payments

from the insured (called premiums),

the insurer agrees to pay the

policy holder a sum of money

upon the occurrence of a specific

event.

Definition

A promise of compensation

for specific potential future

Risk in exchange for a

periodic payment, known as

premium

Types

Life Insurance: e.g. .Term,

Money back, endowment

etc.

General insurance: e.g..

Motor, Home, Medical etc

Role of Insurance

The insurance sector acts as a

mobilizer of savings, a financial

intermediary, a player along with

Bank & AMCs in investment

activities, a stabilizer of financial

markets and a risk manager

Insurance


Overview of the Insurance Sector in India

5 ©2014 Deloitte Touche Tohmatsu India Pvt. Ltd. All rights reserved.

6

Overview of Insurance Sector in India (1/2)

Insurance in

India

Life Insurance

Non-Life

Insurance

Reinsurance

• 24 Life insurance companies

‒ LIC is the sole state owned insurance

company which recorded 2.9% growth

in FY 2012-13

• 29 Non-Life Insurance companies

‒ Both public sector insurers registered

growth of 14.6% while private sector

registered growth of 25.6%

• General Insurance Corporation (GIC) is the

sole national reinsurer

• There are 53 insurance companies of which 24 are in the life insurance business and 29

are non-life insurers. In addition to them there is one reinsurer



Overview of Insurance Sector in India (2/2)

Source: Annual report 2012-2013 IRDA

• The life insurance segment contributes about 4 per cent to India’s gross domestic

product (GDP) in terms of total premiums underwritten annually

• It is grew at a healthy rate of 16.82% in 2012-13

• According to the IRDA annual report 2012-13, in the life insurance business India is

ranked 10th among 88 countries, for which data are published by Swiss Re

• The non-life insurance sector witnessed a 10.25% growth in 2012-13

• Services sector has the largest share in the GDP of the Indian economy (Economic

Survey). The Insurance sector contributes 17 per cent to the service sector

Snapshot

8

Market Segments in the Insurance Industry

Comparison


• Share of Life insurance has declined from year 2008-09 by almost 8%

• Though life insurance still accounts for about 80% of the market, demand for non-life products is also

growing due to

- Increasing demand for insurance of both residential and commercial assets

- Rising healthcare cost

- Increasing prevalence of chronic diseases

Key Observations


9

Pure

Pla

yer

• Insurance company without a partner

•Products are distributed via direct or intermediate channels only

•Advantages

•Highly skilled and dedicated employees / agents providing in-depth advice

• Independence

•Brand recognition

•Variety of products / Funds

•Agency network dominant channel

•Disadvantages

•No natural opportunities for cross selling insurance products

•More limited insight into financial situation of the customer

•Examples

•LIC and other Govt. Subsidiaries

•Reliance and Sahara

Non

-Bank J

V M

odel

•The insurance company distributes its products partly, through multi-banking channel under distribution agreements. JV Partner is a non-bank.

•Advantages

• Insurance Co. to have full role in production and a relatively smaller role in distribution

•Non-functional local presence may assist in distribution

•Leverage local brand

•Disadvantages

•Cultural differences

•Lack of best distribution practices

•Lack of control over quality of customer base

•Examples

•Bajaj Allianz, Birla Sunlife, Max-New York, Tata AIG, Chola-MS, Future Generali, etc.

Ba

nk J

V M

od

el •More or less balanced share-holding bet one or several banks and an insurance group

•Advantages

•Bank provides the brand, customers, and sales network

• Insurer provides the products, administration and customer service

•Possible use of shared service centers for back office activities

•Disadvantages

•Lack of control over the quality of the customer base/quality of sales effort (insurance manufacturer)

•Each shareholder must provide the appropriate support over the long term

•Cultural differences

•Examples

• ICICI, SBI, BoI, Canbank, Kotak Mahindra, IDBI, Universal, etc.

Captive M

odel

•Bank+ Insurance co.: An insurance company markets its products almost exclusively through the distribution channel of its own bank

•Advantages

• Increased control

•Alignment with business strategy

•Potential for full integration. May use shared service centers for back office activities

•Disadvantages

•Substantial investment

•May be exposed to inherent distribution weaknesses of the bank arm.

•Example

• ING Vysya

Prevalent Business Models


10

Insurance density

Insurance Density in the Life and Non-Life insurance Segment


• During the first decade of liberalization a steady

increase in insurance density was observed

• It reached a maximum of USD 64.4 in the year

2009-10

• Over the last three years the insurance density

has registered a declining trend, partly due to

decline in sales of investment linked products

• During the year 2012-13 the insurance density

was USD 53.2

• Life insurance density has gone up from USD 9.1

in 2001 to 55.7 in 2009-10. But registered a

decline to 42.7 in 2012-13

• Non-life insurance density has shown a steady

increase from USD 2.4 in 2001 to 10.5 in 2012-13

Key Observations

• The measure of insurance density reflects the level of development of the insurance sector

• It is measured as the ratio of Insurance premium to population


11

Insurance penetration

Insurance Penetration in the Life and Non-Life insurance Segment


• During the first decade of liberalization a steady

increase in insurance penetration was observed

• It reached a maximum of USD 5.2 in the year

2009-10

• Over the last three years the insurance

penetration has registered a declining trend

meaning the growth in Insurance premium is

lower than growth in GDP

• During the year 2012-13 the insurance density

was USD 3.9

• Life insurance density has gone up from USD 2.5

in 2001 to 4.6 in 2009-10. But registered a decline

to 3.17 in 2012-13

• Non-life insurance density has been around the

steady range of USD 0.5-0.7

Key Observations

• The measure of insurance penetration reflects the level of development of the insurance

sector

• It measured as the ratio of Insurance premium to GDP



Growth in Life Insurance Premium

Life Insurance Premiums in Billion $

• Over FY03–FY12, life insurance premiums expanded at a compound annual growth rate (CAGR) of

20.1 per cent.

• The Life insurance industry recorded a premium of Rs. 2,87,202 Cr which was a 0.05% decline from

the previous year

• Private insurers posted a 6.87% decline from 2011-12 while LIC recoded a 2.92% growth

Source: Indian Brand Equity Foundation

13

• The life insurance segment contributes about 4

per cent to India’s gross domestic product (GDP)

• There are 23 private companies in the segment

• The state-owned Life Insurance Corporation

(LIC) dominates the field, with about 72.7 per

cent of the market share (IRDA) which was a

marginal increase from 70.68% seen in the

previous FY

• The market share of private investors has

declined from 29.2% in 2011-12 to 27.3% in

2012-13

Market Share of Life Insurance companies in India



Growth in Non-Life Insurance Premium

Non-Life Insurance Premiums in Billion $


• Over FY03–FY12, non-life insurance premiums expanded at a compound annual growth

rate (CAGR) of 19.6 per cent.

• In FY 2012-13 the Non-Life insurance industry recorded growth of 19.10% in the total

underwritten premium

• Both the life and non-life insurers posted lower growth rates from year 2011-12


15

• The Motor business continued to be the largest

non-life insurance segment with 47.05% share

exhibiting a 1.5% increase from 2011-12

• The health segment registered a growth of

18.66% from 2011-12

• The share of the health segment has declined

marginally from 22.27 in 2011-12 to 22.19% in

2012-13 from

• The premium collected from Fire and Marine

segments increased by 22.63% and 5.36%

respectively

Market Share of Non-Life Insurance companies in

India

Source: Annual Report 2012-13 IRDA

Market Share


Key risks for the insurance sector


Key Risks facing the insurance industry

17

1 2 3 5 4

7 8 6

9 10

Macro-Economic Trends

Reputational Risk

Cyber-risk and Data Security

Talent Recruiting Skills

Operational Risk

Availability and cost of Capital Others – New Product Risk,

Underwriting risk, etc.

Distribution and New

Product Risk

Corporate Governance

Failures

Regulation


Macro-Economic Trends

18

• Environmental uncertainties will continue to

challenge firms

• Ongoing uncertainty in the macroeconomic

environment, as well as future regulatory changes,

will continue to challenge firms’ risk management.

• Low interest rates and volatile equity markets are

challenging for many insurers, who have to balance

maintaining adequate solvency levels with giving

their consumers a fair deal

• Annuity providers typically use corporate bonds to

match their liabilities and so are particularly exposed

to renewed widening of credit spreads on those

bonds which would cause asset values to fall by

more than liability values

• Opportunities for returns on investments are likely to

remain limited until 2015, which will pressure

insurers to improve their underwriting margins

• Another popular measure is to expand or buy into

new markets, or develop products that either cover

insurable risk or improve current offerings

Macro-Economic

Trends


Regulation

19

• While Solvency II was intended to standardize the

European insurance market by aligning

regulations across national boundaries of EU

Member States, the effect of the regime has been

far reaching

• It today aims to provide greater coordination of

insurance regulation on a global scale, but at the

same time also presents a potentially difficult

transition period as companies implement the

substantial changes necessary to meet new

regulatory requirements

• IRDA has been considering migrating from a factor

based solvency regime to a risk based solvency

regime. While this has not been implemented yet,

its only a matter of time, when insurers would be

required to develop models and assess risk

internally

• While non-compliance would result in penalties

and censures, usage of statistical models would

open the insurers to other risks such as model risk

Regulation


Reputational Risk

20

• With increased regulation comes a greater

chance of failing to comply with aspects of each

new requirement

• This may lead not only to fines and other

sanctions, but also to the perception of failing to

adhere to a crucial ethical corporate standard

• For an insurance company, the consequence

can be severe: a loss of trust among its

customers

• Many damaged reputations have been directly

linked to specific instances of unpopular

corporate practices or management failure.

• Furthermore, there is the reputational impact of

potential job losses and their effect on

corporate image in terms of reliability, solvency

and empathy among customers

• With the growing role of internet usage and

social media in the day to day life, one bad

tweet can dramatically affect the perception of

the insurer

Reputational Risk


Corporate Governance Failures

21

• The fallout from the financial crisis has led to a rise

in shareholder activism and increased emphasis on

executive compensation and the role of the board

• The role of the Board has changed from ‘acting

primarily as a source of outside advice to senior

management in developing and implementing

corporate strategy’ to the Board ‘becoming an

important check on the aspirations and expectations

of senior management — intended to ensure that

the shareholders’ interests are paramount’

• The regulator sets out the broad guidelines and

frameworks for corporate governance including the

minimum requirements of committees and roles of

independent / non-executive directors

• Combined with greater transparency requirements,

this can limit the chances of failure in corporate

governance and oversight.

• This is particularly important for an industry that

relies heavily on cultivating and retaining the trust of

its customers.

Corporate

Governance

Failures


Cyber-risk and Data Security

22

• The availability of sophisticated hacking tools on the

internet has greatly expanded the pool of people

capable of seriously breaching corporate security

• With a deepening focus on customer experience,

cyber-risk is complicated by the multitude of online

interactions with customers and the need to protect,

as well as analyze, the personal nature of data

collected digitally.

• With many firms becoming leaner and opting to use

cloud computing, off shoring data and processes to

third party firms exposing them to greater technology

risk like cyber attacks

• A cloud service provider concentration could become

a second order risk if such providers were subject to

multiple cyber-attacks causing a failure of services.

Cyber-risk and

data security


Talent Recruiting Skills

23

• Dual challenge - Acquisition of new skills

(example: for tacking cyber-security) and

Retaining existing expertise.

• New levels of transparency that are central to

emerging regulatory regimes also apply to

compensation and bonuses, making senior

executives potential targets of unwelcome

shareholder scrutiny and thereby a tougher

attitude towards them leading to a greater

exodus from the C-suite

• Outside the C-suite, there is a need for the

insurance industry to look at retention strategies

for skilled and experienced professionals.

• At the specialist level, the need for mathematics

and software experts to maximize advances in

sophisticated modeling is creating a seller’s

market for those with the requisite skills.

• Additionally, the shortage of actuaries is also

expected to be a source of great concern

Talent recruiting

skills


Distribution and New Product Risk

24

• The distribution channels used for marketing and

sale of insurance policies could lead to varied types

of risks for the insurer such as:

• Failure to maintain strong distribution

relationships

• Failure to diversify distribution

• Lack of controls over distribution channels

leading to mis-selling

• Even IRDA has issued several guidelines on

distribution channels to prevent frauds /mis-selling

• New types of product pose additional risks to firms

and consumers

• Due to high competition firms may consider moving

into new, higher margin products such as variable

annuities which can be costly to provide and often

require long-term active management of hedging

programmes to deliver the guarantees and prevent

erosion of the provider’s capital.

• Could give rise to increased compliance and

operational risks

Distribution and

New Product Risk


Operational Risk

25

• Operational risk may arise from the following sub-

categories:

• Fraud: Any act or omission, by any person, made

with dishonest or potentially illegal intent, to obtain

a benefit or advantage, for one’s self or any other

person.

• Project & Change Management: Failure to deliver

the expected benefit of an initiative, or inadequate

implementation of a project initiative.

• Process Management: Human or system failure to

deliver intended objectives.

• Business Continuity Management: Any event that

disrupts the insurer’s business operations and/or

performance.

• System Integrity / Security & Information

Management: Inadequate system design or

capabilities to maintain business functionality,

information security or information management.

Operational risk


Availability and Cost of Capital

26

• The industry’s enforced shift away from asset-

based income streams has had a considerable

impact on attracting investors

• While IRDA has issued draft guidelines for

Solvency II in February 2013, in March 2014 it

has stated that insurers in India are not ready

for the risk based solvency regime – the

uncertainty over the implementation date

continues

• It is not clear what capital requirements will be

in uncertain financial conditions, which makes it

difficult to determine how much capital a

company will need to access

• An additional aspect of the renewed emphasis

on capital requirements is the amount of time

and effort that is spent by insurers to convince

regulators and communicate to investors that

they have sufficient capital for both now and the

future

Availability and

Cost of Capital


Other Risks

27

Investment

Risk;

Underwriting

Risk;

New Product

Risk; Strategic

Risk; etc.

• Underwriting risk is the risk that the premiums

and investments collected will not be enough to

cover the expenses from paying for claims on the

policy

• For companies, understanding the underwriting

process and the requirements at each stage of

the process will allow a company to prepare and

present itself accordingly.

• Strategic risk may arise from flawed strategy or

the failure to meet strategic initiatives; poor

business decisions or business environment

changes

• New types of product could give rise to increased

compliance and operational risks

• There is also a potential risk of poor returns for

consumers if, for instance, product pricing (which

includes the cost of guarantees) leads to charges

exceeding potential investment returns.

• Other risks such as investment risk, liquidity risk,

etc.

Other Risks


Importance of Compliance


Need for Regulations

29

Trustees of Policyholders Insurance companies act as Trustees to the whole

body of Policyholders. Large payouts are guaranteed

in relation to the premium paid, hence there is

incentive for fraudulent elements to indulge in misuse.

Assurance Due to the trust inherent in the insurance industry, it is

important to provide assurance to not only

policyholders but to the shareholders and other

stakeholders

Promotion of Transparency It is imperative to promote fairness, transparency and

orderly conduct in financial markets dealing with

insurance and build a reliable MIS to enforce high

standards of financial soundness

Prevention of Fraud / Misuse Insurance Company is a Financial Institution and

dealing in Financial Assets thus is Susceptible to

Fraud & Misuse

Standardization In order to create a level-playing field for all insurers, it

is important to have a standardized set of rules and

regulations in the industry

Need for

Regulations

Prevention of

Fraud / Misuse Assurance

Promotion of

Transparency


Importance of Compliance

30

An effective

Compliance function is

the key to identifying

and mitigating risks

and protecting the

business from

regulatory censure and

protecting brand and

reputation

Customer Confidence Brand Perception

Regulatory

Comfort

Preferential

Treatment in

expansion,

product

approvals

Reduction in Risk Increase in

Market Share

Can drive new

regulations or

ability to

Influence

Regulations

Lower cost of

operations


Cost of Non-Compliance

31

Could range from

reprimanding the firm to

demanding changes in

Board and governance to

public censuring of the

firm

Regulatory

Action

IRDA has issued warnings and imposed

severe monetary penalties in the past to

deter insurers from straying from their

responsibilities

Penalties

Loss of

Brand Image

Any adverse action

by the regulator

results in dilution of

brand equity of the

insurance firm

Closure of

Business In an extreme case of non-

compliance IRDA may

require the insurer to change

their business model, stop a

product or close their

business altogether


Compliance Mechanism in Insurance Industry


M A N A G I N G I N S U R A N C E A S S E T S – I R DA & I C A I - E F F O R T

Inv. Reg

Transactions

Systems

HW, SW

&

Interfaces

Inv Risk Mgmt Guidelines

Technical

Guide for

Certification

Internal /

Concurrent

Audit

Technical

Guide for

Trans Audit

CA Certificate +

Audit Report (Checklist )

CA Certificate +

Exception Report

FORM 4 certified by CEO / CIO/

CFO

IRDA Issues of Non Compliance

Certified by Mgmt

ICAI

1

2

-ve Feedback on Policy / Reg. issues

ICAI

IRDA

SO

P

STAGE - 1

STAGE - 2

SCAI

A B

.

Board

Audit Committee

Investment Committee

CEO / CIO / CFO

Inv Dept (FO / MO/ BO)

Custodian

Int. / Concurrent Auditor

IRDA Board

Ins Advisory Comm.

Regulations

Circulars, Guidelines

Working Group

COBIP & IT Committee,

ASB , AASB, FRRB

Tech Guide on RM Systems

Tech Guide on I/C Audit

Br.

Front End Sys

Bank

Pre. A/c

A/c Dept

HQ

Proposal

Deposit Rcpt

Deposit /

Policy

Details

Accounting

System

Under

Writing

Trd. Policy

(Life, Pen)

ULIP

(Less Chg)

Investment

Addl. Inv made

as per Res. Req

(Trd & Non

Unit Res.)

ULIP Units

Created

Through System E-tfr

Proposal Deposit & Collection Reconciliation Fund Info

BRS (thro’ Sys)

Reserves (Monthly)

Units

(Daily)

Surplus

Tfr

Reserves

(Monthly)

Inv. Reg

PREMIUM INFLOW & INVESTMENT

Act Reg

A/c Reg

End

2

1 3

Mkt Conduct

4

INVESTMENT & REPORTING

Underwriting

Charges Units

Fund Wise

Actuarial

Dept

Accounts

Dept

Investment

Dept

1

Non UL

& Trd

Fund

ULFund 1 ULFund 2 ULFund ‘n’

A. FORM 3A (Part A)

PH [Non UL Res]

& Trd Funds

C. FORM 3A (Part A)

PH - (Non-Par)

FORM 3A (Part B) for Pattern

2

(Non UL Res)

(Unit Fund (Non Par))

3 Net of Chgs. (Units) - Daily

Non-UL Res - Monthly

Tfr. of Surplus

Act Reg A/c Reg

Inv. Reg

Addl Res. for TRD

Policies TRD

Policies

REPORTING – INVESTMENT OPERATIONS

Front Office Mid Office Back Office

1. Fund Mgr (Debt / Equity)

2. Dealers

3. Placing Investments

1. Risk Management

2. Tracking of Limits

(Regulatory & Co level)

3. Review, Monitoring

1. Data input error checking

2. Settlement

3. NAV / Fund Accounting

4. Portfolio Valuation

5. Reconciliation

FO Manager MO Manager BO Manager

Chief Inv Officer Chief Financial Officer

Chief Executive Officer

COMPLIANCE CYCLE

Surplus

Premium

Exposure

Check

(FO)

Invested

As per

Regulations

(FO)

Investment

Accounting

(BO)

Risk

Management

(MO)

Internal /

Regulatory

Reporting

feedback

Compliance

Chk for

Pattern

Un-resolved

Observations

Compiled

INSURER

Inspection

Done

With

Contracted

CAs

Qtly. Comp

Concurrently

Audited by CAs

Compliance Certified by CEO / CIO / CFO

Form 4

Filed

Within

Insurance

Company

Within

IRDA

Thank You


Annexure


41

Regulatory Climate in India

41

41

Sector

Penetration

Customers

and

Channels

Business

Profile

• Insurance Regulator in India:

Insurance Regulatory and

Development Authority

• Statutory guidelines applicable:

• The Insurance Act – 1938

• The IRDA Act – 1999

• Changing regulatory guidelines and

IRDA regulations have had far

reaching impact on the growth of

the insurance industry

• Impacts of IRDA on insurance

sector beyond regulation:

• Policyholders interest protection

• Development of sector /

products / distribution channels

• Governance

• Customers education

• Technology / Workforce

• Others

Areas of regulatory impact


42


42

42

Business

Profile

• IRDA has issued Linked Insurance and Non-Linked Insurance Products

Regulations, 2013 stating new product guidelines. All the existing group

products have been withdrawn from October 1, 2013 and individual products

from January 1, 2014 which are not complying with the new regulations

• IRDA has laid down guidelines / framework on detection, classification,

monitoring, reporting and mitigation of frauds that mandate insurers to put in

place, as part of their corporate governance structure, fraud detection and

mitigation measures

• Insurers would need to develop fraud control and reporting system

• Applicability of service tax on services provided by IRDA to Insurance

Companies, TPA’s , brokers, agents, repositories, web aggregators, referral

entities and surveyors relating to grant of registration, licenses, renewals etc.

with effect from January 1, 2014.

• The premium on life insurance products is likely to go up because of this

Product

Profile

Corporate

Governance

Applicability

of Taxes


43


43

43

Sector

Penetration

• IRDA has issued draft guidelines proposing life cover for people living with

HIV/AIDS (PLHA), that were previously considered among common exclusions

by life insurers

• IRDA has released guidelines on the distribution of insurance policies (both life

and non-life) through the Common Service Centers (CSCs) which are planned

to be set-up across the country as a part of the national e-governance plan. The

main purpose of these guidelines is to enhance insurance penetration in rural

areas. This is as per an IRDA circular released in September 2013

Coverage

Insurance

Inclusion



44

Customers

and

Channels

• IRDA has released new draft micro insurance regulations that require all micro

insurance products to have a lock-in period of five years from the date of

inception of the policy. For the distribution of micro-insurance products, regional

rural banks, micro-finance institutions, district cooperative banks, non-

governmental organizations, self-help groups, urban cooperative banks, banking

correspondents, among others, could be allowed. This will need robust and

secure mobility based solutions for sales and servicing of such policies

• IRDA to accept KYC done by banks leading to need for tighter integration of

core PMS with banc assurance partners

• IRDA has published a paper to allow banks to sell policies of more than one

insurer. Insurance companies will need to build flexible and service enabled IT

solutions to enable seamless integration across partners

• The trend of using technology and mobile-based applications to make the sales

process more efficient continues.

• Various data mining tools and predictive models are also leveraged to increase

persistency rates

Distribution

Channels

KYC

Technology


Documents

Insurance Industry - Institute of Company Secretaries of India · PDF file8 Market Segments in the Insurance Industry Comparison Source: Annual report 2012-2013 IRDA • Share of Life