OUTSOURCING OF ACTIVITIES BY INDIAN INSURERS
For outsourcing of insurance activities, the IRDAI has issued the Regulations called IRDAI (Outsourcing of Activities by Indian Insurers) Regulations, 2017. The regulations dated April 20, but put on the Gazette of India on May 5, are aimed at ensuring that insurers follow prudent practises on management of risks arising out of outsourcing so as to prevent negative systemic impact on one hand and to protect the interests of the policyholders on the other. Regulations are applicable to all Insurers registered with the Insurance Regulatory and Development Authority of India excluding those engaged in reinsurance business. If an Insurer is engaged in both direct Insurance as well as Reinsurance business, these regulations are applicable only in respect of direct Insurance business of such Insurers. These Regulations are applicable to outsourcing arrangements entered into by an Insurer with an outsourcing service provider located in India or outside India. The object is to ensure that insurers follow prudent practices on management of risks arising out of outsourcing with a view to preventing negative systemic impact, to protect the interests of the policyholders, to ensure sound and responsive management practices for effective oversight and adequate due diligence with regard to outsourcing of activities by Insurers. The rules are primarily targeted to ensure that insurance firms comply with prudent practices on management of risks arising from outsourcing engagements. Ultimately, the goal is to prevent a negative systemic impact and protect the interest of policyholders. Insurers are not allowed to outsource core activities like investment, fund management, compliance with AML and KYC, product designing and policyholder grievances redressal. But while policy servicing remains a core activity for the insurer responsible for the services rendered, activities that support may be outsourced. Insurers are likewise told to set up procedures for issuance of premium acknowledgments instantaneously.
India continues to remain the world’s favourite when it comes to outsourcing. It has gained global confidence with major players such as Cisco, Oracle and Hewlett-Packard opting for India because they are confident of gaining access to superior talent, quality results, fast turnaround times and low costs. India is the hub of the world where the ICT sector is concerned. India also holds 65% of the global offshore outsourcing BPO market, making it the dominant leader in providing outsourcing services. For insurance, now Insurers will find it tougher to outsource activities as the IRDAI has set the tighten norms. In addition to approval of the policy, the board will also be responsible for clearing a framework to evaluate the risks and materiality of all existing and prospective outsourcing. This will include assessing management competencies for handling the outsourcing arrangements, given the nature, scope and complexity. Undertaking periodical review of outsourcing strategies and arrangements, and establishing a comprehensive risk management programme to cover the risks associated with the outsourced activities will also be the responsibility of the board. Outsourcing activities have to be distributed amongst a reasonable number of outsourcing agencies to ensure there is no concentration of risks. The regulations are to give a more structured and better shape to outsourcing activities by clearly defining core and non-core activities. The new norms will “positively” impact business processes and customer interests. A host of activities such as processing, premium collection and claim verifications are generally outsourced in both life and non-life insurance. These norms should bring in more accountability as outsourcing relationships will be governed by written outsourcing agreements that are legally binding for a specified period that clearly describe all material aspects of the outsourcing arrangement, including the rights and responsibilities of all parties. This is for the first time that comprehensive regulations governing outsourcing are rolled out.
WHAT IS OUTSOURCING?
‘Outsourcing’ is defined as the use of third party services by the Insurer to perform activities that would normally be undertaken by the Insurer, either now or in future, but does not include services which are generally not expected to be carried out internally by the insurers such as Legal services, Banking Services, Courier services, medical examination, forensic analysis. ‘Outsourcing Service Provider’ means third party service provider who carry out the activities outsourced, for Insurers. ‘Outsourcing Agreement’ means a written agreement entered into between the Insurer and outsourcing service provider outlining the terms and conditions for services which may be rendered by the Outsourcing service provider. Given that a lot of outsourced activities in the insurance industry are risk based and complex, the Regulation is a step towards ensuring that vendors comply with the much needed high standards while delivering these activities. The outsourcing policy will tighten processes and make sure companies engage with organizations that come with the right qualification needed for the insurance industry. All core activities related to underwriting of policies, product design, actuarial functions and risk management should not be outsourced. Investment related functions should also be handled by the insurance company itself – and the advice of a fund or wealth manager should not be sought for policyholders’ money. These norms are not applicable to re-insurers but are applicable to all insurers registered with the Insurance Regulatory and Development Authority.
ACTIVITIES PROHIBITED FROM OUTSOURCING:
One area of emerging concern is online issuance/payment of premium. Net banking services or an e-wallet are sometimes employed and there have been instances of delays or transaction failure with online payment. In such online payments, the generation of receipts should be instantaneous. With the growth of the online medium for insurance, the regulator is trying to ensure the policyholder’s rights. The Insurers are prohibited from outsourcing any of the following activities mentioned under (i to viii) in any manner:
References:
- Investment and related functions
- Fund Management Including NAV calculations
- Product designing, all actuarial functions and enterprise-wide risk management;
- Decision making in Underwriting and Claims functions excluding procedural activities related to payment of Survival Benefit claims in Life Insurance;
- Policyholders Grievances Redressal;
- a) Where the outsourcing service provider is a Company registered under the Companies Act, 2013, the objects of the Memorandum of Association of the company shall include the activities outsourced.
- b) In case of other outsourcing service provider, there shall be a clause in the deeds or bye -laws enabling it to undertake the activities outsourced.
- c) Existence of the outsourcing service provider as projected, its competence and experience to perform the activity proposed to be outsourced to it.
- d) Assessing the capability of the outsourcing Service Provider to employ standards envisaged, while performing outsourced activities.
- e) Its security and internal controls;
- f) Business continuity management;
- g) Where considered necessary, insurers shall obtain independent reviews and market feedback on the service provider to supplement its own findings;
- Due diligence undertaken during the selection process should be documented and evaluated at least annually as part of the monitoring and control process of outsourcing.
- The insurer shall satisfy itself that the outsourcing service provider’s security policies, procedures and controls will enable the insurer to protect confidentiality and security of policyholders’ information even after the contract terminates.
- It shall be the responsibility of the insurer to ensure that the data or information parted to any outsourcing service provider under the outsourcing agreements remains confidential.
- Significance of the activity being outsourced (e.g. in terms of contribution to revenue, capital allocations or importance to overall achievement of strategic and business objectives);
- Financial, reputational and operational impact on the Insurer of an Outsourcing Service provider’s failure to adequately perform the outsourced activity;
- Potential impact on the Insurer`s continuing ability to meet its obligations to its Policyholders in the event of disruption of services of an outsourcing Service Provider;
- Consequences of outsourcing the activity on the ability and capacity of the Insurer to maintain internal controls and meet current as well as future changes to regulatory requirements;
- Cost of the outsourcing arrangement in terms of contractual expenditures relative to the
- Interrelationship of the outsourced activity with other activities within the Insurer;
- Aggregate exposure to a particular outsourcing service provider where the Insurer outsources multiple activities to the same outsourcing service provider;
- Degree of difficulty and time required to replace the Outsourcing Service provider or if necessary to bring the activity in-house
- Availability of alternative outsourcing service provider in the market for the same service
- Any other factor
- Activities carried out by outsourcing service provider on its own behalf that are inconsistent with the overall strategic goals of the Insurer:
- Failure to implement appropriate oversight of outsourcing service provider
- Inadequate expertise to oversee outsourcing service provider
- Customer interaction that is inconsistent with Insurer’s standards
- Unethical practices of outsourcing service provider
- Breach of obligation to preserve customer data confidentiality
- Changes in regulations not communicated to outsourcing service provider in a timely manner
- Technology failure
- Inadequate financial capacity of outsourcing service provider to fulfil obligations or provide remedies/restitution
- Fraud or error
- Failure of insurers to undertake inspections of outsourcing service provider (e.g. due to practical difficulty or cost considerations)
- Over-reliance on one outsourcing service provider
- Loss of relevant skills or resources in the Insurer, preventing it from bringing an outsourced activity back in-house
- Contracts which make a speedy exit prohibitively expensive
- Inability to enforce contract
About the Author
JAGENDRA KUMAR
Ex. CEO, Pearl Insurance Brokers 71/143, “Ramashram” Paramhans Marg, Mansarovar, JAIPUR-302020
References:
- IRDA Annual Report 2015-16 ( Data contents)
- https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo3149&flag=1
- http://celent.com/reports/insurance-business-process-outsourcing-global-view
- Outsourcing in Insurance Industry: Chetan Goenka
- Outsourcing introduction & issues: Nishant_ns
- http://www.thehindubusinessline.com/money-and-banking/outsourcing-norms-for-insurers
- http://indiatoday.intoday.in/story/irdai-issues-new-outsourcing-guidelines-for-insurers/1/947620.html
- Newspapers & Journals
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