The demand for insurance Brokers is growing steadily in the industry. Unlike insurance agents, who represent the insurer, an insurance broking firm is supposed to represent the customer; hence, they are allowed to sell products from any insurance company. But, instead of suggesting the product best suited for the customer, the broking firm’s decision may be influenced by an insurance company giving perks to the broker. There are real-life examples of intermediaries mis-selling by telling the customer to suppress their risk condition. The goal of the intermediary may be to ensure that the insurer underwrites the policy, earning him a commission. Insurance brokers are expected to infuse knowledge and expertise into insurance and reinsurance business in India. However, instead of supporting the Indian insurance industry and the Country, multinational brokers have started large-scale alleged cheating and looting the industry and finding ways and means to breach or circumvent Indian laws. Few years ago Marsh India had messed up with the reinsurance placement of Air India. This had cost Air India and additional Rs 20 Crores in premiums and could not recover the claim in full the unfortunate Mangalore air crash. Marsh India is responsible for the closure of JLT operations in India after a large Reliance Industries Limited SBM claim was not resolved due to incorrect reinsurance placement. The matter is in the courts and Oriental Insurance and New India have joint liability in excess of Rs.1000 Crores. Insurance brokers must make claim settlements more transparent by adopting technology and to improve insurance penetration across cities.
There was a serious fraud committed by Almonds re-insurance Brokers, in Aug 2014, to the tune of Rs.13 Crores. Interestingly, Swan Insurance Company, Singapore paid re-insurance premium to Willis, Singapore, who had to pay to the re-insurer, namely KILN Singapore, for a Trade Credit Insurance. Surprisingly Willis, Singapore chose to route the re-insurance premium through Almondz Brokers in India. The re-insurance money was required to be paid to KILN Singapore, but it never reached KILN. Almondz opened a fictitious Bank Account in the name of KILN Global Pte Limited and transferred the money in to that account by using forged documents and siphoned the funds. Technically there is no re-insurance cover since the re-insurance premium was never paid and the client and the insurance company were fooled. IRDAI is taking serious action against such grave violation of the law by these large multinational brokers, who seem to simply want to take advantage of the Government regulations for their benefits and urgent action is required to stop this blatant plundering of the country at cost of domestic insurance. Recently the Insurance Regulatory and Development Authority of India carried out an onsite inspection of an Insurance Broking Company in July 2016. The Authority issued Show Cause Notice on 25th October 2017 showing following charges and consequent violations of the Code of Conduct and IRDAI regulations:
- The broker was accounting the brokerage on receipt (cash) basis which was further confirmed vide a letter that the accounting of Broking commission was done on receipt basis only. This violates Regulation 29 (1) of IRDA (Insurance Brokers) Regulations, 2013 which mandates that Broker shall maintain account on accrual basis.
- The insurance broker was not in the habit of obtaining written mandates from their clients. On examination of their records, it was found that except in two cases, the broker has not obtained any mandate from their client. It is a violation of Clause 2(h) of Code of Conduct under Schedule VIA read with Regulation 28 of the IRDA (Insurance Brokers) Regulations, 2013 which makes it incumbent upon the Broker to strictly obtain the written mandate from their clients.
- The insurance broker was using services of unqualified persons for the purpose of solicitation of insurance business. Also, on perusal of records and documents available with the insurance broker, it was noticed that the broker used persons for the purpose of solicitation of insurance business who were not part of the employee list of the Broker. Further, Broker did not maintain important documents pertaining to appointment of senior level people properly and the Designation name as well as the salary and allowances of the employees, especially of the senior cadre, are fixed arbitrarily. The manner in which the actions were carried out by the broker for soliciting business by involving unqualified persons is, inter alia, as follows:
- a) Persons not possessing certificate of qualification
- b) Sharing of brokerage to some persons whom the broker has shown as their employees without providing proof to the inspection team about their possessing the qualification to solicit business.
(a) Regulation 8(2)(xiv) of the IRDA(Insurance Brokers) Regulations, 2013 by using unqualified persons who have not fulfilled the requirements mentioned in Schedule-II of the regulations for solicitation
(b) Clause 3(b) of Schedule VI-A read with Regulation 28 of the IRDA(Insurance Brokers) Regulations, 2013 by using agents and canvassers for bringing the business.
- The Broker did not have two qualified persons as mandated in the Regulations which were also confirmed on perusal of details of the Directors from the Ministry of Corporate Affairs (MCA) website. Further, though the appointment of one person as Principal Officer was approved by the Board, even prior to that date, he signed a letter as Principal Officer on 11thMay 2013 addressed to another Broker. The Broker could not provide any appointment letter issued to an employee and they have also confirmed in writing that they have formally not issued appointment letters. Thus the Broker violated Regulation 8(2)(iii) of the IRDA(Insurance Brokers) Regulations, 2013 which mandates that Insurance Broker should have in employment a minimum of two persons who have the necessary qualifications as specified in Schedule II of the Regulations.
- The Broker had in place a rental agreement for a period of 11 months and that too the agreement was only in force at the time of filing application for licence and also at the time of renewal. During the interim there was no proper rental agreement in place. It was also observed that the broker paid the rent without any rent agreement. The office space used by the Promoter and Director of the company, for practice as a Chartered Accountant. It is also seen from his visiting/business card, the address of the broking company is prominently mentioned as his office. Further, the registered office of a company held by the promoters of the broking company is also same as Broker’s registered office. The insurance broker as part of the equipment was required to have IT Software for their insurance broking activities. During the inspection it was found that the insurance broker has no software in place for their broking activities. All the above instances point to absence of minimum necessary infrastructure to function as a Broker which is violation of Regulation 8(2)(ii) of the IRDA(Insurance Brokers) Regulations, 2013.
- In the case of change of principal officer it is necessary to obtain approval of the Authority before appointing any person as principal officer. However, the insurance broker could not provide to the inspection team copy of the approval taken from the Authority. It establishes that the company functioned without a Principal Officer for a certain period of time. Similarly, in case of opening/closing of a branch an insurance broker is required to inform the Authority of such opening/closing of a branch. The insurance broker has failed to inform the Authority both the opening of the branch and its subsequent closure. In addition to the above, an insurance broker is required to furnish the information pertaining to the list of qualified persons to the Authority as and when there is a change. It can be seen that the number increased and the same was not informed to the Authority. Similarly, appointment of a person has also not been informed to the Authority. The Broker, by not taking prior approval from the Authority for appointment of new Principal officer, has violated Regulation 38(3)(i) of the IRDA(Insurance Brokers) Regulations, 2013 which mandates that “an insurance broker shall have to take prior approval of the Authority in case of change of principal officer”. Also there is violation of Regulation 38(4)(i) of the IRDA(Insurance Brokers) Regulations, 2013 which envisages that “an insurance broker shall inform to the Authority as and when there is a change/addition to the information already furnished to the Authority in case of any opening/closing of branch” as the Broker did not inform the Authority about opening/closure of Branch. The Broker did not inform about appointments in the company to the Authority which is a gross violation of Regulation 38(4)(ii) of the IRDA(Insurance Brokers) Regulations, 2013 which mandates that “an insurance broker shall furnish to the Authority list of qualified persons as and when there is change in the information already furnished.”
- The insurance broker has at the time of filing of application for licence and also at the time of renewal submitted that one of the shareholders and directors of the company is a key management personnel responsible for Finance & Accounts of the insurance broker whereas, it was found that she is not even an employee of the company. This can be evidenced from the salary details of the employees provided by the insurance broker. Similarly in another case, the insurance broker in their renewal application submitted that he is key management personnel in charge of Administration. However, it was found that he is designated as Vice President (Marketing) and soliciting the insurance business. Further, the insurance broker in their revised application furnished the particulars of key management personnel. However, on perusal of the salary statements of the employees, their names were not present. Similarly, the insurance broker in their renewal application mentioned one person as one of the employees responsible for soliciting and procuring insurance business. However, he is not an employee of the insurance broker and is a practicing chartered accountant. The above instances indicate that the Broker has been time and again furnishing false information about the existence of employees or their position in the company which is a violation of Regulation41 (1) (d) of the IRDA (Insurance Brokers) Regulations, 2013 which prescribes that the insurance broker shall not furnish wrong or false information or conceal any material facts at the time of filing their application or during the validity of licence.
- The insurance broker does not have proper internal controls and systems commensurate with their size, nature and complexity of their business. It is found that the insurance broker is paying salaries to some of their employees in cash. In the case of the person who is designated as Vice President, the salary is being paid in cash. The insurance broker has no system of issuing appointment letters to their employees, even for senior functionaries like Principal Officer, Executive Director and Vice Presidents. They have confirmed that they do not have practice of issuing appointment letters. In the absence of such, there is no evidence that they are full time employees of the insurance broker. The insurance broker accepted the appointment and agreed to be the broker for RICBL Thimpu, Bhutan in placing their outward business and at the same time willing to offer business to RICB. The insurance broker is licensed as a Direct Broker for General Insurance Category only and they are not authorized/ licensed to accept or place any reinsurance broking business. This shows that the insurance broker has little/no idea about the regulations governing the insurance brokers and their role and limitations as an insurance broker. The insurance broker not only misrepresented to the other broker, but also failed to understand the provisions governing co-broking. Further, they have also shown their interest to provide services as third party service providers to the other broker. This is also not permitted under the regulations. Thus there is a clear violation of Regulation 31(1) of the IRDA (Insurance Brokers) Regulations, 2013 which envisages that “every insurance broker shall ensure that a proper system of internal audit is in place and that their internal controls and systems are adequate for the size, nature and complexity of its business. Further by attempting to undertake Reinsurance broking business, the broker overstepped the role and function which they were ordained to perform as Direct broker under Regulation 4 of the IRDA (Insurance Brokers) Regulations, 2013 which defines the functions of a direct and Reinsurance Broker.
- No BAP returns are filed by the Broker as on the date of inspection, despite the warning issued by the Authority vide its letter Dt.11.9.15 for not filing online returns. This is violation of the provisions of Authority’s circular Ref No. : IRDA/BROKER/ MISC/ CIR/23210/2014 dated 21stOctober 2014 which specifies the timelines for filing the returns by the Broker.
Stressing that monetary penalty is not the solution to ensure compliance, IRDAI revised regulations relating to insurance brokering firms, under which repeat offences could lead to cancellation of licences. The reworked graded approach to be followed in the case of non-compliance of Broker Regulations is based on the experience gained over the last six years. The Insurance Broker Regulations were amended in December 2013 and new rules were notified in January 2014, which were aimed at encouraging good behaviour among insurance brokers and foster better compliance. The Authority in January 2018, notified the revised IRDAI (Insurance Brokers) Regulations, 2018. The revised rules are intended to simplify the application of penalties in the case of non-compliance or violation of regulations. In order to achieve the objective, Imposition of monetary penalties is not the solution to encourage good behaviour and foster compliance. Further, IRDAI will initiate steps for suspension or cancellation of the licence. If the regulator considers the violation committed by the insurance broker is grave, then it may initiate steps for suspension/cancellation of a licence at the first stage itself.
The Authority has also revised the required capital for all applicable categories of Insurance Brokers. The role of the broker is increasing in a range of transactions in the insurance market. The Insurance Regulatory and Development Authority of India (Insurance Brokers) Regulations, 2013, had provisions that allowed insurance brokers to offer claim consultancy to policyholders for claims up to Rs 1 crore, provided such claims did not emanate from a policy which had been placed by any other broker. Similarly brokers must make claim settlements more transparent by adopting technology and asked them to improve insurance penetration across cities The non-life insurance premium crossed Rs 1,27,129 crore in FY17 with a growth of 32.9 per cent over FY16. Of this, Rs 30,442 crore was placed by the brokers. The demand for insurance broking has been growing with 428 brokers in the industry as of today. The redrafted regulations will help in governing the brokers and maximize value for the policy holders. It is expected that insurance broking will contribute close to 40 per cent of gross direct premium in the non-life insurance market by 2025. The non-life insurance market in 2025 is expected to be at Rs 4,00,000 crore, and the brokers’ market share is likely to be around Rs 1,60,000 crore, according to EY Vision Report 2025. A strict check and control is required over Insurance Brokers to prevent regulatory violations.
About the Author
Ex. CEO, Pearl Insurance Brokers
- Newspapers & Journals.