IRDA stops insurers from providing credit default insurance

The Insurance Regulatory and Development Authority (IRDA) has asked the general insurers to stop giving credit default insurance, a cover which is provided to banks against payment default by borrowers.

IRDA has ordered "all general insurers to stop selling these policies (credit default insurance) till such time the Authority comes with detailed guideline in this regard."

The sector regulator has sought details of the total exposure of the insurer under the credit insurance policies issued by them to banks offering credit facilities to debtors.

The IRDA has found that the credit insurance cover being marketed by general insurers to banks appears to be in the nature of credit default insurance.

A credit insurance cover provides for a cover against losses resulting from the inability to repay a loan. A credit insurance policy usually provides a security cover for a specific reason for which a borrower defaults.

"The Authority, after examining the credit default insurance contracts has come to the conclusion that the insurers are underwriting risks which do not have proper regulatory framework or sanction," IRDA said in a circular to all general insurance companies.

Therefore, such covers necessarily need to have a different regulatory treatment, it added.