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Workshop On Financial Sector Assessment Programme Hyderabad 29 th December, 2010 DVS Ramesh. Objectives. ICP – 14 – Preventive and Corrective Measures Regulators are adequately backed by comprehensive legal structure with powers to safeguard the public interest.

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Financial Sector Assessment Programme


29th December, 2010

DVS Ramesh

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  • 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 Criteria

  • 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.

  • 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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  • Authority shall have capacity and standing to communicate

    • From formal communications to Directions u/s 34, 110 C;

  • 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)

  • 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

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Essential Criteria

  • Issue formal directions and failure to comply has serious consequences

    • Advices / Formal communications

    • Directions u/s 27 D (3), 33 (6), 34, 14 (1)

  • 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

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  • Compulsory Transfer of obligations from failing insurers

    • Sec 37 A empowers to prepare a scheme of amalgamation

  • 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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  • 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

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  • Periodical checks to determine the compliance

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

  • 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

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  • Sanctions for withholding the information or misleading information

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

  • Barring individuals from acting in responsible positions

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

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  • Process of Sanctions do not delay preventive and corrective measures

    • Procedures in place to independently review these respective lines

  • Powers to withdraw the license

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

  • 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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  • 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

  • Ensuring consistency in imposing sanctions

    • Procedures are in place

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  • 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 years