Final Order in the matter of Life Insurance Corporation of India

In Chair: Sri J Hari Narayan, Chairman, IRDA

The Authority has received a complaint on 16th April, 2012 alleging the fictitious individual Micro Insurance Business procured by various Divisional Offices under the Central Zone (Bhopal) of Life Insurance Corporation of India (hereafter referred as the Life insurer). The Authority has carried out a focused onsite inspection of the Micro Insurance Unit, Bhopal Divisional Office of the Life Insurer during 25th April, 2012 to 27th April, 2012 which interalia revealed certain violations to various provisions of the Insurance Act, 1938, the Regulations notified there under and the Guidelines/Circulars issued by the Authority from time to time.

The Authority has forwarded the inspection report to the Life Insurer under the cover letter dated 30th May, 2012 and sought the comments of the Life Insurer. On examining the submissions made by the Life Insurer vide letter dated 21st June, 2012, the Authority issued notice to Show Cause dated 12th November, 2012 which was responded by the Insurer vide letter dated 03rd December, 2012. The entire Inspection observations/Show Cause Notice relate to the Micro Insurance Unit, Bhopal Divisional Office.

As per the request of the Life Insurer, a personal hearing was given on 24th January, 2013 at 04.30 PM. On behalf of the Life Insurer, Sri Thomas Mathew.T, Managing Director of the Life Insurer and Sri V S Kumar, Executive Director (Micro Insurance) were present. On behalf of IRDA, Sri Sudhin Roy Chowdhury, Member (Life), Sri V Jayanth Kumar, Joint Director (Life), Sri D V S Ramesh, Deputy Director (Life – Coordination) and Sri K Sridhar Rao, Assistant Director (Life – Regulatory Actions) were present in the personal hearing. The submissions of the Life Insurer in their written reply to the following charges leveled in the Show Cause Notice as also those made during the course of personal hearing were taken into consideration and decision on each of the charges is issued hereunder.

1. Charge 1: On examination of details of policies procured by Micro Insurance Agents (M I Agents)M/s Abhinav Prayas (hereafter referred as Abhinav) and M/s VipinSwaroop Vasudha kalian Ashramam (hereafter referred as VIPIN), it is noticed that no proposal forms are available either with the Life Insurer or with the M I Agents. It was observed that the data received in soft copy is directly uploaded to their IT systems and policies are routinely generated for issuance without any underwriting. These are in violation of; Regulation 4(1) of Protection of Policyholders Interests Regulations, 2002, Point No 11 of File &Use application of respective MI products and also Regulation 13 of IRDA (Micro Insurance) Regulations, 2005.

Decision: The Life Insurer’s submission that there are well established procedures to underwrite the business only after matching the physical proposals with the electronic data, and that the instructions are in force to follow this system scrupulously and further submissions that the violations found pertain to only Bhopal Divisional Office are taken into consideration. It is observed that out of 1,07,273 policies procured by Micro Insurance Unit of Bhopal Divisional Office during the years 2009-10, 2010-11 and 2011-12, 93,995 policies were procured by two Micro Insurance Agents of Abhinav and Vipin and these policies are issued with no prior underwriting but based on soft data, which indicates absence of proper internal control systems to ensure compliance not only to the statutory and regulatory provisions but also to its own internal procedures. However, based on the submissions of the Life Insurer that the violations noticed are only from its Bhopal Divisional Office and based on the confirmation that such violations have not been committed by any of Life insurer’s other areas of operation, charges are not pressed. However, Insurer is hereby cautioned for violations mentioned herein and advised to strengthen its internal control systems to ensure non-recurrence of such violations in any of its operational offices.

2. Charge 2: It was observed that there is a variation between number of policies issued and number of lives covered (Abhinav No. of policies issued  60226 and No. of lives covered 31905 & Vipin No. of policies issued  33769 and No. of lives covered 21548). With this act, it may be possible that the business figures submitted distort the factual position with regard to level of compliance achieved in case of Rural and Social Sector Obligations, which constitutes the violation of Regulation 7 of IRDA (Obligations of Insurers to Rural and Social Sector) Regulations, 2002.

Decision: The Life Insurer has submitted that splitting the policies has been strictly prohibited and Divisional Offices are expected to take credit for only number of lives. It further submitted that to discourage splitting every new business competition floated is based only on number of lives and not on policies. Taking into consideration the submissions of the Life Insurer and the fact that Life Insurer complied with IRDA (Obligations of Insurers to Rural and Social Sectors) Regulations, 2002 during preceding three financial years with large margin, the charges are not pressed.

3. Charge 3. On examination of data it was observed that out of total number of policies procured through the above referred two MI agents, only an insignificant number of policies are in force as on 31.03.2012 (i.e., Abhinav out of 60,226 only 19 and Vipin out of 33,769, only 1,241) owing to non receipt of premiums. It is also observed that Renewal Premiums are not received for almost all policies. Further, multiple policies were issued on the same life with slightly different dates of birth. These transactions reveal absence of attention on the quality of business there by violating the provisions of Regulations 23 (a) and (e) of IRDA (Registration of Companies) Regulations, 2000.

Decision: The life insurer submitted that it has terminated one of the Micro Insurance Agents (Abhinav) for poor quality of business. The Life Insurer has further submitted that out of total policies procured by Bhopal Micro Insurance Unit during the financial years 2009-10, 2010-11 and 2011-12 (1,07,273 policies) only 26 death claims were reported out of which no claim was reported from the business procured by the two Micro Insurance Agents Abhinav and Vipin.

On examining the above submissions, the Life Insurer is cautioned for not periodically reviewing the quality of business procured. The Life Insurer is also advised to put in place procedures to periodically review the quality of the business of all its operational offices.

4.  Charge 4: It was observed that a large number of policy documents were not handed over to respective M I agents for distributing the same to their respective policy holders. It was also noticed that more than nine thousand policy documents pertaining to Abhinav and more than two thousand policy documents pertaining to Vipin were taken into custody by joint team of LIC of India, Vigilance and CBI from the Micro Insurance Unit, Bhopal. This is in violation of Regulation 4(6) of IRDA (Protection of Policyholders Interest) Regulations, 2002 and Regulation 9 of IRDA (Micro Insurance) Regulations, 2005.

Decision: The Life Insurer has submitted that there are well established procedures to hand over the policy documents to Micro Insurance Agents for onward distribution to the policy holders under acknowledgment in all its operational offices. And it also further admitted that in spite of these instructions, Bhopal Micro Insurance Unit does not appear to have followed the procedure. On examining the submissions of the life insurer as also the inspection observations, it is noticed that there are no effective internal periodical monitoring procedures to arrest such gaps/violations. The Life Insurer may note that by not ensuring the dispatch of the policy documents, the policy holders are deprived of the evidence of contract. Taking into consideration the submissions, the Life Insurer is hereby warned for these gaps / violations and advised to scrupulously adhere to Regulation 4(6) of IRDA (Protection of Policyholders Interests) Regulations, 2002 and Regulation 9 of IRDA (Micro Insurance) Regulations, 2005.

5. Charge 5: It is observed that the MI Unit is not complying with AML norms with regard to documenting Identity Proof of the policy holders. This is in violation of point no.3.1.1 (iii) of Master AML Guidelines, 24.9.2010.

Decision: The Life Insurer contended that point No. 3.1.1.(viii) of IRDA AML master circular dated 24/09/2010 exempted Micro Insurance policies up to a total annual premium of Rs.10, 000 held by a single individual from the KYC norms. However, it is to clarify to the Life Insurer, that the said clause has exempted documenting the photograph and the address proof. The violation mentioned herein is with regard to documenting the ID proof. No exemption is provided for documenting the ID proof in the AML Circular referred herein. Considering the nature of business i.e., Micro Insurance, charges are not pressed for this violation. However, the Life Insurer is hereby directed to ensure strict adherence to the Guidelines issued by the Authority in this regard.

6. Charge 6: No procedures are in place to monitor the turnaround time for complying with the provisions of Section 64VB of the Insurance Act while adjusting the premiums remitted by the M I Agents. Whatever the premium data that is being forwarded by the M I agent is being uploaded to LICIs IT system in a routine manner. Instances were found, where turnaround time between premium receipt date at M I agent and premium adjustment date at LICs Office is significantly high. This is in violation of the provisions of Section 64VB of Insurance Act, 1938. It is also in violation of the Internal circular dated November 27, 2011 issued by the Corporation.

Decision: The Life Insurer submitted that instructions were given to all its operational offices to adjust the premium amount in time bound manner. The Life Insurer also submitted that in some cases the premiums are unadjusted due to technical problems. However, the Life Insurer confirmed that the benefits accrued to the policy holders are never withheld even when the premiums received were not adjusted. The Life Insurer has also submitted that it is trying to improve the collection mechanism through sophisticated IT initiatives and exploring every possibility for a cost-effective online premium collection through premium points, hand-held devices and mobile technologies.

Considering the submissions of the Life Insurer, it is clarified that the premium collections are to be in accordance with Section 64VB of Insurance act, 1938. Noting the fact that the Life Insurer has issued internal instructions to all its internal operational offices, for remitting the premiums within 24 hours of collection, the charges are not pressed. However, the Life Insurer is directed to put in place measures for monitoring the premium collection / remittances procedures in all its operational offices, so as to comply with the provisions of Section 64 VB of the Act.

7.  Charge 7: While appointing some of M I Agents, it was observed that no due diligence is carried out with respect to their standing experience. It was also observed that Life Insurance Agents Federation of India is appointed as M I agent and 34 of its specified persons are licensed individual agents soliciting insurance business. These are in violation of the provisions of Regulations 2(f) (i) of IRDA (Micro Insurance) Regulations, 2005.

Decision: The Life Insurer admitted to the violations noticed and submitted that these violations are noticed only in the Micro Insurance Unit, Bhopal Divisional Office and that disciplinary action on the erring officials responsible are in the process. On considering the submissions of Life Insurer that the violations found are confined to Bhopal Micro Insurance Unit, the Authority cautions the Life Insurer for not having monitored the activity of appointment of Micro Insurance Agents in its operational offices. The Life Insurer is hereby directed to conduct the examination of the appointment of Micro Insurance Agents in all its operational offices across the country and submit the confirmation report as to the compliance of the appointment to the relevant regulations notified by IRDA.

8. Charge 8: On examination of the 2010-11 and 2011-12 records of internal audit and inspection reports of Bhopal Micro Insurance unit, it was observed that the issue of non-availability of proposal forms under significant part of the business being procured was not addressed to. This is in violation of Clause no.6 of Annexure II of Corporate Governance guidelines dated 05.08.2009.

Decision: The Life Insurer has submitted that necessary systems and procedures were put in place to comply with the Regulations of the Authority. It further admitted that the violations are noticed in the Micro Insurance Unit of Bhopal Divisional office. The Life Insurer has also assured that it will take every step to scrupulously comply with the directives and rules framed by the Authority. Taking into account the Life Insurer’s undertaking, the charges are not pressed and the life insurer is hereby directed to put in place the internal checks to avoid the recurrence of violations of this nature.

On comprehensively examining the charges and the submissions of the life insurer taking into account the spread of operational offices of the L I C of India, the Authority directs the Life Insurer to carry out an internal inspection of all its Micro Insurance Units and submit the compliance report before December, 2013 as to the adherence of these units to all statutory and regulatory guidelines governing the business of Micro Insurance.

Hyderabad,

Date: 19th February, 2013

J.Hari Narayan

Chairman