Guidelines on Outsourcing of Activities by Insurance Companies

Insurers in India are increasingly using outsourcing, as a means of both reducing cost and accessing expertise, not available internally and achieving strategic aims. ‘Outsourcing’ may be defined as “Insurer’s use of a third party (either an affiliated entity within a corporate group or an entity that is external to the corporate group) to perform activities on a continuing basis that would normally be undertaken by the Insurer itself, now or in the future”. These outsourcing arrangements are becoming increasingly complex.

Joint Forum set up by Basel Committee on Banking Supervision, International Organization of Securities Commissions and International Association of Insurance Supervisors has devised high-level principles on outsourcing in financial firms which gives guidance to firms, and to regulators, in effectively managing risks involved in outsourcing without hindering the efficiency and effectiveness of firms.

Reserve Bank of India also brought out Guidelines on Managing Risk and Code of Conduct in outsourcing of financial services vide reference 3 cited above. This circular is issued based on best practices adopted internationally as outlined in above document. These instructions are intended to provide direction and guidance to insurers to adopt sound and responsible risk management practices for effective oversight.

Regulation 7 (c) of IRDA (Registration of Companies) Regulations, 2000, clearly sates “The applicant will carry on “all functions” in respect of insurance business including “management of Investment” within its own organization”. It has been observed that certain insurers are outsourcing even core activities such as Investment, Underwriting and Policy servicing. It is not desirable to outsource the core and important activities which will affect corporate governance, protection of policy holders, solvency and revenue flows of insurer.

In order to ensure proper corporate and regulatory oversight over the outsourcing of activities of insurers, the Authority has decided to issue following instructions under Section 14(2) of Insurance Regulatory and Development Authority Act, 1999. These guidelines apply in addition to the instructions given vide reference 2 cited above.

However this circular supercedes the provisions of para 3 of reference 2 cited above.

The insurer shall ensure that outsourcing arrangements neither diminish its ability to fulfill its obligations to Policyholders nor impede effective supervision by IRDA. Insurers therefore have to take steps to ensure that the service provider employs the same standards in performing the services as would be employed by them if the activities were conducted in house. Accordingly, insurers should not engage in outsourcing that would result in their internal control, business conduct or reputation being compromised or weakened.

Activities of insurers are broadly classified into two categories namely ‘Core’ and ‘Non-Core’, in accordance with Regulation 7(c) of IRDA (Registration of companies) Regulation, 2000.

All activities relating to:-
ii.Product design and all Actuarial functions and Enterprise wide Risk Management
iii.Investment and related functions
iv.Fund Accounting including NAV calculations
v.Admitting or Repudiation of all Claims
vi.Bank Reconciliation
vii.Policyholder Grievances Redressal
viii.Approving Advertisements
ix.Market Conduct issues
x.Appointment of Surveyors and Loss Assessors
xi.Compliance with AML, KYC etc.
xii.All integral components of the above activities shall be treated as Core Activities
2.2Policy Servicing and related activities
2.3 Insurers shall not outsource any of the core activities listed in para 2.1.

i.Facility management i.e. Housekeeping, Security, Catering, etc.
ii.PF Trust
iii.Internal audit, Internal / branch /concurrent audit etc. (Note: However, the Board of Directors shall appoint the internal /branch / concurrent auditor based on the recommendation of the Audit Committee / Investment Committee respectively as mandated by the Authority in Corporate Governance Guidelines. The report of internal auditor / concurrent auditor shall be placed before the Audit Committee / Investment Committee / Board Meeting for their information and necessary action)
iv.Website Development and Management / Software and other IT Support
v.Pay Roll Management
vi.HR Services
vii.Service Tax Consultancy and Support
viii.TDS filing
ix.Compliance with labour laws
x.Data entry Including Scanning, Indexing Services
xi.Printing and posting of reminders and other documents
xii.Pre employment medical checkups
xiii.Reminders for Premium Payment
xiv.Call Centre and outbound calling for registering complaints or answering enquiries
xv.Claim Processing for Overseas Medical Insurance Contracts
xvii.Consultancy Services pertaining to Service Tax, Income Tax and any other taxes payable by insurer
xviii.Other Employee Benefits
xix.Deployment of personnel within the premises / offices of the Insurer on a contract basis

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