IRDA Regulations

) ByKrishan Srivastava

(Asst. Professor)(Jayoti Vidyapeeth Women’s University,

Jaipur)Krishan_11031985@yahoo.com

To be effective, regulation and supervision of health insurance must encompass the following objectives: Promoting public interest of ensuring equitable,

affordable and accessible healthcare to the people at large.

Establishing requisite procedures for intervention that safeguard the solvency and financial soundness of health insurers so that they are in a position to fulfill the promises they made to the insured and providing an environment to allow health insurers to continuously offer health insurance products and carry health risks on sustainable bases.

Establishing and promoting a level playing field amongthe carriers of health risk so as to encourageparticipation of an optimal number of health insurers inorder to provide most consumers with a variety ofproducts at reasonable benefits for affordablepremiums.

Ensuring order in the market through the promulgationand enforcement of laws and regulations that addressissues such as, the type or types of health policies orcovers that insurers can sell, the manner andmethodology of arriving at equitable product pricing,the prompt and orderly payment of claims, the contractterms and conditions including the specification ofstandardized definition of certain policy terms,mandatory minimum policy stipulations and settingmarket standards for transacting the business of healthinsurance.

Establishing similar safeguards and/or standardsfor the orderly functioning and financial soundnessof other programs that assume health expenditurerisks, such as subscription plans, HMOs, healthplans of mutual benefit associations, cooperatives,and other community plans. Prescribingappropriate authorization (registration) andoversight of entities that carry and manage theseplans in order that public policy objectives ofhealth insurance are realized and specific marketfailures are corrected. It is noteworthy that theseentities operate in the same market as dulyregistered, and thus regulated, health insurers

The Parliament (legislative branch) consisting oftwo houses, namely, Lok Sabha (Lower House),and Rajya Sabha (Upper House) enacts laws(Acts). An Act passed by the parliament requiresthe assent of the President of India and such Actcomes into full force following its notification inthe Official Gazette. Acts are referred to as“primary legislations”. For insurance, the broadlegal framework is the Insurance Act, 1938, asamended (Act).

The Executive Branch, comprising the variousministries and governmental entities under it, enforcescompliance with the Act. The Act, as recentlyamended by the Insurance Regulatory andDevelopment Authority Act, 1999 (IRDA Act) createdthe Insurance Regulatory and Development Authority(IRDA) and constituted it as the entity or body(executive) to enforce the provisions of the Act. Theexecutive (IRDA) is looked upon as possessing thetechnical expertise on insurance matters within theGOI to discharge its powers and obligations for theprudential oversight of the business of insurance.

Before the IRDA Act took effect, the Actauthorized the concerned Ministry (executive) toframe insurance rules and, on the basis of thatlegislative authority, the Controller of Insurance,then under the Ministry of Commerce until it wastransferred to Ministry of Finance, promulgatedthe Insurance Rules 1939. These Rules were theprincipal secondary legislation governing theconduct of insurance

The regulatory body (executive), created andempowered by the Act to do so, frames andpromulgates regulations. For insurance matters,the regulatory body is the IRDA. The Act specifiesthe areas where regulations can be made. Forinstance, where the Act grants power to the IRDAto make regulations on licensing of agents, suchregulations would describe the qualifications andpractical training required of an agent and specifythe corresponding fee, etc., for a license to begranted. No Regulation may override theprovisions of the Act.

The judiciary interprets the law, both primary andsecondary legislation. It hears and decidesdisputes between insurers and the policyholders,protects the insuring public by imposing civilfines or criminal penalties for violation of theinsurance laws and protects insurers, their agentsand intermediaries by overturning arbitrary orunconstitutional legislation, rules, regulations ororders promulgated by the insurance regulator.

To facilitate dispute resolution, India has alsoConsumer Courts (Fora), Insurance Ombudsmen,Lok Adalats, etc., that address consumergrievances in summary proceedings. Policyholdercomplaints against insurers are mostly dealt withat the Insurance Ombudsmen and ConsumerCourts. There are also various tribunals dealinggenerally with industrial or sector-specificmatters as appellate authorities exercisingspecific adjudicatory powers. While these entitiesdo not fall under the judiciary branch, they areconsidered a part of the court system.

To predicate discussion of the areas of regulation,it is worth considering whether health insuranceis a line of business included in both life and non-life business. BearingPoint considers healthinsurance a separate category, the third majorbranch of insurance business (life and non-lifebeing the other two). The major lines of healthinsurance include medical expense, disabilityincome protection, and long-term care. All ofthese products are included in the currentregulatory definition of health insurancebusiness.

Under the Insurance Act, 1938, insurance business is divided into two classes: (a) life insurance business and (b) general insurance business. Health insurance is common to both. Thus:

Section 3(2AA) of the Act states that: “The Authority shall give preference to register the applicant and grant him a certificate of registration if such applicant agrees, in the form and manner as may be specified by the regulation made by the Authority, to carry on the life insurance business or general insurance business for providing health cover to individuals or group of individuals”.

Health insurance business or health cover is defined as “theeffecting of contracts which provide sickness benefits ormedical, surgical or hospital expense benefits, whether in-patient or out-patient on an indemnity, reimbursement,service, prepaid, hospital or other plan basis, includingassured benefits and long term care”.

However, Section 4, (2) of IRDA Regulations 2002, Registration of Indian Insurance Companies creates some ambiguity where it prescribes that “The classes of business of insurance for which a requisition for registration application may be made are: (a) life insurance business consisting of linked business, non-linked business or both; or (b) general insurance business including health insurance business.” The mention of health insurance as included in the general insurance business, while silent as to life insurance business, is an ambiguity that needs to be clarified by the IRDA, particularly in light of Section 3(2AA) of the Act, cited above.

For insurance matters, India has broad laws onconsumer protection including, but not limitedto, those enunciated in the Insurance Act 1938,Consumer Protection Act 1986, Arbitration andConciliation Act 1996 and, to a certain extent, theIndian Contracts Act 1872. Secondary legislation,particularly the Insurance Rules 1939, theOmbudsman Rules 1998 and regulations issued bythe IRDA provide detailed guidelines that furtherstrengthen consumer protection.

Broadly, consumer protection is provided throughsound and prudential regulatory oversight ofmarket conduct; solvency of insurers inestablishing fair and transparent businesspractices in the solicitation, servicing and claimssettlement and in providing assurance that healthinsurers are able to fulfill their contractualpromises; and effective functioning of adequatemechanisms for handling and resolving consumergrievances, complaints and industry relateddisputes.

Section 43 of the Act ensures that agents possesslegal competence and trustworthiness byrequiring that they have capacity to contract, arefree of any criminal conviction with respect tomisappropriation, breach of trust or cheating,forgery or abatement or attempt to commit anysuch offense and have not knowingly participatedor connived at any fraud, dishonesty ormisrepresentation against any insurer or insured,etc.

Regulation 2000 on Licensing of Insurance Agentsreinforces Section 43 by prescribing, amongothers, minimum educational attainment,number of hours of practical training, successfulpassing of the licensing examination andadherence to a set code of conduct, all of whichstrengthen market confidence and consumerprotection. In similar fashion, such requirementsand codes of conduct are also prescribedspecifically for brokers and corporate agents.

This regulation requires certain disclosures to beincluded in every advertisement to further informconsumers of the insurance product. It alsorequires every insurer and intermediary todesignate its compliance officer as well as thefiling and retention of advertising materials.However, while defining “unfair or misleadingadvertisement” with specificity and clarity, theregulation does not include a provisionspecifically prohibiting the use of “unfair ormisleading advertisement”.

To date, this is the only IRDA regulation specificto health insurance. This regulation establishedthird party administrators (TPA) and the rules fortheir licensing as intermediaries in renderinghealthcare for insured beneficiaries andpromoting a “cashless system” with easier accessto and faster settlement of covered benefits ofmedical expense covers. The regulation prescribeshigh educational and practice standards ofindividuals operating and managing a TPA andrequires adherence to a prescribed Code ofConduct.

This regulation provides comprehensive standards onconsumer protection describing materials (includingproduct prospectus) and explanatory statements thatare to be provided at the point of sale, the necessityand importance of the proposal form, matters to bestated in a life or general insurance policy, claimsprocedures in respect to life and general policies, andcertain standards for the proper discharge ofpolicyholder services. Except for the absence of a 15-day period within which a general insurancepolicyholder may obtain a return of premium (asrequired for life insurance policies), this regulationmay be deemed complete as to life and generalinsurance

The IRDA issued Guidelines on “File and Use” forGeneral Insurance effective as of 1st November2006. The guidelines are salutary for property andcasualty (non life) insurance in that they clearlydefine and prescribe the requirements andprocedures for the regulatory filing and approvalof general insurance rates and forms, includingemphasis on corporate governance relating tounderwriting, product design and rating, amongothers.

However, to ensure fulfillment of the broad policyobjectives of “creating a health care system that is nottoo costly, of good quality and with equitablydistributed burden of health care spending,intervention through heightened regulation is bothjustified and necessary for health insurance.

The most important standard for approval of healthinsurance policy forms is to ensure that premiumcharged under the policy is reasonable in relation tothe benefit provided. This standard is oftenimplemented by requiring a minimum loss ratiounder a particular policy form. “Rate to loss ratio”guidelines could be prescribed as a regulatory meansof monitoring and controlling pricing activities ofhealth insurance

In the European Union there has been a move towardssolvency regulation and less emphasis on policyterms, conditions and prices. This philosophy looksmore to ensuring that there is adequate capitalmeasured against risk underwritten and the presenceof strong management control of risk, appropriateboard oversight and transparency. Ensuring thesolvency of health insurers is an indispensablerequirement to adequate protection of policyholders.However, regulations that are designed to preventinsurer insolvencies must be balanced with publicpolicy goals of providing accessible and affordablehealth care.

This is a challenge for regulators the world overand particularly in India where IRDA is both theregulator and developer of insurance.

The Act prescribes minimum paid up equity capital for insurers, the maintenance of required solvency margin (RSM), and the detailed manner by which RSM is determined under IRDA regulation Margin of solvency is the excess of an insurer’s assets over its liabilities. In some jurisdictions this is referred to as “surplus”. However, the amount of the required margin of solvency is restricted (appropriated) surplus, thus not available for policyholders’ dividends or profit distribution. As an added “control” (intervention level), “IRDA has set a working Solvency Margin Ratio (ratio of actual solvency margin to the required solvency margin) of 1.5 for all insurers

The above provisions of the Act and theimplementing IRDA regulations are conservativemeasures to make sure that no insurer operatingin the market is financially distressed. It is awholesome assurance of public protection.However, the RSM relates directly to the policyliabilities of an insurer and as its business growsits policy liabilities grow. So also does thecorresponding RSM, which may ultimately strainthe financial resources of the insurer and itsshareholders, leading to inefficient use and/orimmobilization of capital.

For health insurance business, the determination ofpolicy liabilities (reserves) follows the systematicformulae prescribed under IRDA Regulations, 2000 onAssets, Liabilities and Solvency Margin of Insurers Asnoted earlier, standards could be implemented thatrequire a minimum loss ratio under the policy formand loss ratio guidelines could be prescribed as ameans of monitoring and controlling the pricingactivities of health insurers. However, since lossexperiences are factored into the determination offair, reasonable and adequate premium ratesapplicable to the various types of health insuranceproducts, a regulation prescribing different reservingrules to apply to specific categories of healthinsurance may be necessary.

In addition, claims characteristics and lossdevelopment of different health insuranceproducts vary. For example, the determination ofadequate reserves for policy liabilities for theshort-term but renewable nature of medicalexpense covers differ from those of the long-termand permanent nature of contracts for disabilityincome protection and long-term care.

Prudential insurance oversight requires that allinsurers file financial reports reflecting theirfinancial condition and results of operations at leastannually or as frequently as necessary when an insureris deemed to have a financial problem. The filing offinancial reports is primarily to determine that thereporting insurer is at all times maintaining assetsthat are enough to cover its current and estimatedprospective liabilities plus the required solvencymargin. These areas are adequately covered under thecurrent legal and regulatory Framework. In addition,the IRDA regulations on Appointed Actuaries furtherstrengthens credibility of the insurer’s financialstatements.

Laws relating to the handling, resolution andsettlement of disputes and the machinerythrough which complaints and disputes can beaddressed are plentiful in India.

Recourse to the courts is a guaranteed right ofevery citizen and for insurance matters, this rightis further emphasized in the Act by givingpolicyholders the right to sue for any relief inrespect to his or her policy in any court ofcompetent jurisdiction. However, judicialproceedings are normally cumbersome, expensiveand time consuming.

The Directive Principle of State Policy of the Indianconstitution lays down the principle that the stateshould encourage settlement of disputes byarbitration. Thus the Arbitration and Conciliation Act1996 established the process of arbitration throughwhich parties to a dispute present their cases at ahearing before a mutually agreed upon panel ofdisinterested persons (arbitrators) to render decision.Arbitration provision in insurance policies typicallystipulates that any dispute with regard to thequantum of claim, liability having been admitted,shall be referred to arbitration conducted inaccordance with the provisions of the Arbitration andConciliation Act 1996. Decisions arrived througharbitration can be challenged, by way of appeal, byeither or both parties in a proper civil court based on(limited) grounds specified under the Act.

The Consumer Protection Act created the consumercommissions comprised of consumer courts asaccessible forums for inexpensive and speedy redressof consumer grievances. It is a comprehensivelegislation containing, among others, the definitionand meaning of terms such as “consumer”,“complainant”, “deficiency in service”, “negligence”and “unfair and restrictive trade practices” that applyto all goods and services of all types of companies andorganizations. Insurance is a type of service that fallsunder the jurisdiction of the consumer courts. Theconsumer protection machinery consists of a three-tiered jurisdictional system comprised of DistrictCommission, State Commission and NationalCommission.

Because the (overwhelming) majority ofinsurance disputes are handled and resolvedthrough the ombudsman system, this sectionfocuses on the ombudsman system and the Rulespromulgated in 1998 on grievance redressal anddispute resolution and suggests certain measuresto further strengthen it.