Life insurers to move Irda against Section 45 on claims

Say they want some safeguard against fake claims

Life insurers are in the process of sending a proposal to the Insurance Regulatory and Development Authority of India (Irdai) about the issue of payment of claims within three years. The insurers will seek clarifications on whether all claims received will be payable after three years.

Under Section 45 of the Insurance Laws (Amendment) Ordinance, no claim can be rejected after three years for any reason. This means, the insurer has a three-year window to reject claims on grounds of any mis-statement or fraud.

In the original insurance amendment Bill of 2008, it was proposed that no life insurance policy could be challenged on grounds of mis-statement or wrong disclosure after five years of the policy coming into force. In the Ordinance, this has been revised to three years. Insurers fear this might lead to a rise in litigations, because there could be different interpretations according to the legal system.

“Several organised cartels operate in the insurance space that file fake claims. As an industry, we do not want to pay claims that are not genuine and, hence, are approaching the regulator with our concerns,” says the chief risk officer with a bank-promoted life insurance company, who did not wish to be named.

According to industry estimates, several hundreds of thousands of claims are getting fraudulently passed by these cartels, which operate in gangs in select pockets across India. They pose as relatives of customers and get a policy issued. Usually, they also have a doctor as part of the group who gives out fake death certificates.

The concept of insurance works on the principle of pooling. This means, the money paid as premiums by the policyholders are pooled together to pay for any claim received by one or more members. If there are fraudulent claims, which are mandated to be paid by the insurer, these will impact all the other policyholders, as the claim amount goes out of their pool.

According to a senior life insurance executive, industry-wide losses due to fake claims being filed has been growing by 20-25 per cent annually.

Industry sources say they would seek some safeguards against such claimants. “If we are forced to pay such claims, it will only lead to increase in overall premiums as we also take into account the claims experience before fixing prices for any product,” said the chief actuary of a large private life insurer.