Corporate Governance for Insurance Companies – Insurance Law and Practice Important Questions
Question 1.
What is the role of actuary in life insurance companies?
Answer:
Actuarial profession in the world is about 150 years old. The traditional field of actuary was life insurance but actuaries gradually entered into wide field such as pension, general insurance, health insurance and investment. While the main function of actuaries in life insurance remains of the same viz., assessment of an valuation of mortality risk, the other aspects viz., risk selection, method of guarding agent anti-selection has became a subject of heated debate amongst life insurance actuaries in developed economies.
What lies at the centre of this discussion is the vast advances in medical sciences. This issue of insurance selection or rather insurance denial hand on generic data becomes even more sensitive in health and disability insurance.
Question 2.
Explain the concept of ‘treating customers fairly with respect to policy servicing in insurance business.
Answer:
- Policy servicing is an significant parameter to judge the insurance company’s philosophy with respect to maintaining customer relationship in a long run.
- Policy servicing refers to the response given by the insurance company to any communication received from its policyholders.
- The Treating Customers Fairly (TCF) principle aims to raise standards in the way financial institutions cry on their business by introducing changes that will benefit consumers and increase their confidence in the financial services industry.
- This is a customer-centric initiative aimed at improving the image and reputation of financial institutions by recognising the customers as one of the key stakeholders carefully and giving them the deserved treatment.
Question 3.
What is the role of actuary in life insurance companies?
Answer:
Actuarial profession in the world is about 150 years old. The traditional field of actuary was life insurance but actuaries gradually entered into wide field such as pension, general insurance, health insurance and investment.
While the main function of actuaries in life insurance remains of the same viz., assessment of an valuation of mortality risk, the other aspects viz., risk selection, method of guarding agent anti-selection has become a subject of heated debate amongst life insurance actuaries in developed economies.
What lies at the centre of this discussion is the vast advances in medical sciences. This issue of insurance selection or rather insurance denial hand on generic data becomes even more sensitive in health and disability insurance.
Question 4.
Explain the concept of ‘treating customers fairly with respect to policy servicing in insurance business.
Answer:
- Policy servicing is an significant parameter to judge the insurance company’s philosophy with respect to maintaining customer relationships in a long run.
- Policy servicing refers to the response given by the insurance company to any communication received from its policyholders.
- The Treating Customers Fairly (TCF) principle aims to raise standards in the way financial institutions cry on their business by introducing changes that will benefit consumers and increase their confidence in the financial services industry.
- This is a customer-centric initiative aimed at improving the image and reputation of financial institutions by recognising the customers as one of the key stakeholders carefully and giving them the deserved treatment.
- This assumes most importance in the financial services industry keeping in mind that the customers park their hard-earned money with them and depend on them based on the expected level of servicing.
- Likewise, a small dissatisfaction could lead to an irreparable damage to the institutions as well.
- Financial Services Authority (‘FSA’), UK, has introduced this as a Code for compliance by the financial institutions.
Specifically, TCF aims to:
1. Help Customers fully understand the features, benefits, risks and costs of the financial products they buy.
2. Minimise the sale of unsuitable products by encouraging best practices before, during and after a sale.
In fact, Treating Customers Fairly is an integral part of Principle 6 of “Principles of Business” published by FSA, which states that a firm must pay due regard to the interests of the customers and treat them fairly.
The retail regulatory agenda of FSA aims to achieve an effective and efficient market by treating the customers fairly. This is aimed to be achieved through a focus on capable and confident consumers, providing simple and understandable information to consumers, well managed and adequately capitalised firms which treat the customers fairly, and risk-based and proportionate regulation.
Question 5.
What are the disclosure requirements that have been prescribed by IRDAI for insurance companies under the corporate governance guidelines?
Answer:
The disclosure requirements specified under IRDAI along with Annual Financial Statements for Insurance Company under corporate governance guidelines are under:
- Quantitative and qualitative information on the insurer’s financial and operating ratios- namely incurred claim, commission and expenses ratios.
- Actual solvency Margin details vis-a-vis the required margin.
- Insurers engaged in life insurance business shall disclose persistency ratio of policies sold by them.
- Policy lapse ratio for life insurers.
- Financial performance including growth and current financial position of the insurer.
- Description of risk management architecture.
- Details of number of claims initiated, disposed of and pending with details of duration.
- All pecuniary relationships or transactions of the non-executive directors vis-a-vis the insurer.
- Elements of remuneration package(including incentives) of MD & CEO and all other directors and Key Management Persons.
- Payments made to group entities from the Policyholders Funds.
- Any other matters, which have material impact on the insurer’s financial position.
Where finalization of annual accounts extends beyond 90 days from the end of the Financial Year, the status on disclosure in the financial statements required under this clause may be made within 15 days of adoption of annual accounts by the Board of Directors of the Insurers.
Question 6.
Outline the areas on which the Statutory Auditor is required to express his opinion during Certification of Financial Statements of Insurance Companies.
Answer:
The Statutory Auditor of an insurance company is required to express his opinion on:
1.
- Whether the balance sheet gives a true and fair view of the insurer’s affairs as the end of the financial year/period.
- Whether the revenue account gives a true and fair view of surplus or the deficit for the Financial year/period.
- Whether the Profit and Loss Account gives a true and fair view of the profit or loss for the financial year/period.
- Whether the receipts and payments, account gives a true and fair view of the receipts and payments for the financial year/period.
2. The financial statements are prepared in accordance with the requirements of the Insurance Act 1938, the Insurance Regulatory and Development Authority Act,1999 and the Companies Act, 2013, to the extent applicable and in the manner son required.
3. Investments have been valued in accordance with the provisions of the act and regulations.
4. The accounting policies are appropriate and are in compliance with the applicable Accounting Standards and the Accounting Principles.
5. Certify the management report and that there is no apparent mistake or material inconsistencies with the financial statement.
6. He has to certify that he has verified the cash balances and securities relating to the insurer’s loans reversions and life interest and investments.
7. Certify that the insurer has complied with the terms and conditions of the registration stipulated by the Authority.
A certificate signed by the Auditors (which is in addition to any other certificate or report which is required by law to be given with respect to the balance sheet) certifying that:
1. They have verified the cash balances and the securities relating to the insurer’s loans, reversion and life interests (in the case of life insurers) and investments;
2. The extent, if any, to which they have verified the investments and transactions relating to any trusts undertaken by the insurer as trustee; and
3. No part of the assets of the policyholders’ funds has been directly or indirectly applied in contravention of the provisions of the Insurance Act, 1938 (4 of 1938) relating to the application and investments of the policyholders’ funds.”
Question 7.
Write short notes on:
(a) Duties and obligations of appointed actuary
(b) Duties and responsibilities of a surveyor and loss assessor
(c) Disclosure norms in websites of insurance companies
Answer:
(a) Duties and obligations of Appointed Actuary:
In particular and without prejudice to the generality of the foregoing matters, and in the interests of the insurance industry and the policyholders, the duties and obligations of an appointed actuary of an insurer shall include:
- rendering actuarial advice to the management of the insurer, in particular in the areas of product design and pricing, insurance contract wording, investments and reinsurance;
- ensuring the solvency of the insurer at all times;
- complying with the provisions of the Section 64V of the Act in regard to certification of the assets and liabilities that have been valued in the manner required under the said section;
- complying with the provisions of the Section 64 VA of the Act in regard to maintenance of required solvency margin in the manner required under the said section;
drawing the attention of management of the insurer, to any matter on which he or she thinks that action is required to be taken by the insurer to avoid-
any contravention of the Act; or
prejudice to the interests of policyholders;
complying with the Authority’s directions from time to time;
in the case of the insurer carrying on life insurance business-
to certify the actuarial report and abstract and other returns as required under Section 13 of the Act;
to comply with the provisions of Section 21 of the Act in regard to further information required by the Authority;
to comply with the provisions of Section 40-B of the act in regard to the bases of premium;
to ensure that all the requisite records have been made available to him or her for the purpose of conducting actuarial valuation of liability and assets of the insurer;
to ensure that the premium rates of the insurance products are fair.
(b) Duties and Responsibilities of a Surveyor and Loss Assessor:
A surveyor and loss assessor shall, for a major part of the working time, investigate, manage, quantify, validate and deal with losses (whether insured or not) arising from any contingency, and report thereon, and carry out the work with competence, objectivity and professional integrity by strictly adhering to the code of conduct expected of such surveyor and loss assessor.
The following, shall, inter alia, by the duties and responsibilities of a surveyor and loss assessor:
- declaring whether he has any interest in the subject matter in question or whether it pertains to any of his relatives, business partners or through material shareholding;
- maintaining confidentiality and neutrality without jeopardising the liability of the insurer and claim of the insured;
- conducting inspection and re-inspection of the property in question suffering a loss;
- examining, inquiring, investigating, verifying and checking upon the causes and the circumstances of the loss in question including extent of loss, nature of ownership and insurable interest;
- conducting spot and final surveys, as and when necessary and comment upon franchise, excess/under insurance and any other related matter;
- estimating, measuring and determining the quantum and description of the subject under loss;
- advising the insurer and the insured about loss minimisation, loss control, security and safety measures, wherever appropriate, to avoid further losses;
- commenting on the admissibility of the loss as also observance of warranty conditions under the policy contract;
- surveying and assessing the loss on behalf of insurer or insured;
- assessing liability under the contract of insurance;
- pointing out discrepancy, if any, in the policy wordings;
- satisfying queries of the insured/insurer and of persons connected thereto in respect of the claim/loss;
(c) Disclosure Norms in Websites of Insurance Companies:
IRDA requires insurance companies to publish the following in their websites periodically.
- Financial statements, viz., Revenue Account, Profit & Loss Account, Balance Sheet, Premium, Commission, Operating Expenses, Benefits paid
- Share Capital and shareholding pattern
- Investments
- Fixed Assets
- Analytical ratios
- Valuation of net liabilities and main parameters of valuation
- Geographical distribution of business
- Related party transactions
- Board of Directors and Key persons
- Solvency margins
- Claims data
- Grievances data.
Question 8.
What are the corporate governance guidelines issued by IRDA for insurance companies?
Answer:
Corporate Governance:
Corporate Governance may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability. Corporate Governance involves regulatory and market mechanisms and the roles and relationships between a company’s management, its board, its shareholders and other stakeholders and the goals for which the Company is governed.
Principles of Corporate Governance:
(a) Rights and equitable treatment of shareholders:
Companies must encourage values and systems that respect rights of shareholders and help shareholders exercise those rights. Communicating the rights and encouraging shareholders to participate in meetings is very important.
(b) Interests of other stakeholders:
Other stakeholders include Customers, Employers, Investors, Creditors, Suppliers, Regulators, Communities, Policymakers etc. The Governance must ensure that the Company grows after taking care of the interests of the stakeholders.
(c) Roles and responsibilities of the Board:
The Board needs to be segregated from the management and the roles and responsibilities of the members of the management team including the CEO must be clearly defined. Management must be required to be accountable to the Board who must monitor their performance.
(d) Disclosure and transparency:
This is a cardinal principle of Corporate governance and includes public disclosures as appropriate, internal communications, other external communications etc. Such a disclosure mechanism must enable all stakeholders to take an informed decision.
Question 9.
Explain the desired outcomes expected upon adoption of TCF.
Answer:
Desired Outcomes expected upon adoption of TCF:
The firms which have adopted TCF are expected to deliver the following outcomes:
Outcome 1:
Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture (Right Culture).
Outcome 2:
Product and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly (Right Target).
Outcome 3:
Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale (Right Information).
Outcome 4:
Where consumers receive advice, the advice is suitable and takes account of their circumstances (Right Advice).
Outcome 5:
Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect (Right Guidance).
Outcome 6:
Consumers do not face unreasonable post-sale barriers imposed by firms to change products, switch providers, submit a claim or make a complaint (Right After Sales Service).
Question 10.
Protection of Policyholders is a very important aspect in the insurance business. Explain the provisions for protection of the interest of policyholders provided by IRDA.
Answer:
General Measures providing for Policyholders’ Protection:
1. The requirements of disclosure of “material information” regarding a proposal or policy apply, under these regulations, both to the insurer and the insured.
2. The policyholder shall assist the insurer, if the latter so requires, in the prosecution of a proceeding or in the matter of recovery of claims which the insurer has against third parties.
3. The policyholder shall furnish all information that is sought from him by the insurer and also any other information which the insurer considers as having a bearing on the risk to enable the latter to assess properly the risk sought to be covered by a policy.
4. Any breaches of the obligations cast on an insurer or insurance agent or insurance intermediary in terms of these regulations may enable the Authority to initiate action against each or all of them, jointly or severally, under the Act and/or the Insurance Regulatory and Development Authority Act, 1999.