Two recent Irdai orders show why the regulator needs to be given more teeth

Between January 7 and 8 Irdai rapped an insurance firm and a broker for violating norms - one for parking money with related firms, and another for out-and-out reinsurance fraud

The insurance regulator has rapped an insurance firm and two major brokers in the past week for mis-selling car insurance, parking money with related companies violating corporate governance norms and finally for an out-and-out fraud in reinsurance. Despite the serious breaches of corporate governance, the orders issued between January 7 and 8 by the Insurance Regulatory and Development Authority of India (irdai) point to an urgent need to equip the regulator with more teeth. In all cases Irdai has only imposed a fine of Rs one to three crore each and stopping incentive payment to one CXO level officer. 

To come to the case of fraud, the victim was Tata-AIG. They had got a reinsurance done through one of India’s leading insurance broker, Unison lnsurance Broking Services to support crop reinsurance risks. Tata-AIG paid a reinsurance premium of Rs 7.3 crore through Unison to another Malaysia based broker  Confiance lnternational Reinsurance Broker L.L.C, only to discover it had been taken for a ride.

Tata-AIG got a receipt that its reinsurance cover was on. Except that the receipt was fake. “It appears that Unison were themselves cheated by Confiance. Confiance who could not place reinsurance for crop insurance, forged the reinsurance slip and submitted as original to Unison”. But the regulator has still thought it fit to slap a Rs one crore fine on the Indian broker. Primarily because the broker took more than the mandated time to inform Irdai of the fraud. In response to an email from Business Standard, Unison said Irdai had noted Unison were the victims of the fraud.

The entities are not rookies. These are companies with decades of experience among their top management. Unison claimed they had done business with Confiance for the first time. But as the details of the case (here and here) show, these officers were taken for a ride by as simple a stratagem as a non-existent cover note. Frauds of such types are possible and do happen in a car or a medical insurance premium when it is the public who are the victim. How did two companies fall for it? The Irdai orders offer no clue on it.  Once the case was reported last year it had added some more safeguards, but had made no move to address the failure of risk assessment. Unless those are addressed, new frauds will come up. Incidentally India is trying to position itself as a lead player in South Asia in reinsurance sector. 

The other case is against Cholamandalam MS General Insurance Company Limited. Based on an inspection of the company’s accounts Irdai found it had paid out vendor advances of Rs 118.66 crore in 2016-17. Prima facie it should be fine. What is not, is that of this sum Rs 114.43 was paid to parties who were corporate agents, related parties and OEM. The money paid out was meant to provide sales promotion services like advertising — putting up of banners, kiosks, highway service points and so on. The companies whom the money was paid include Ashok Leyland, Chola MS Risk Services Limited and DHFL Sales and Services Limited. This is where the problems emerge. The payments were not only to related parties the companies were not in the business of what they were contracted to do. 

In response to an email from Business Standard, Cholamandalam has said it would get back.  

The regulator has noted Ashok Leyland got paid Rs 22.98 crore for the business of advertisement and branding but, “it is not predominantly engaged in the business of advertisement and branding”. So  “these payments raise concerns of not being a genuine business transaction”.

Similarly Chola paid Rs 40.96 crore to provide manpower services to DHFL Sales and Services. The latter is a subsidiary of DHFL which is a corporate agent of the general insurer. Again, the regulator notes “it is observed that this entity is not primarily engaged in the business of advertising, branding or manpower supply. Hence these payments raise concerns of not being a genuine business transaction”.

The final case is that of Toyota Tsusho lnsurance Broker which has not not only been fined Rs three crore, but its Managing Director and CEO, Vijay Kumar Govada has been debarred from any offer of performance incentives for one year by the company, “from the date of this order”.

The one theme that comes up repeatedly is that at each of Toyota dealership, the company has offered a limited menu of insurance companies from only among whom its customers can buy insurance. Also it has made a practice of making every one of those insurance companies offer the same premium to the customers. According to Irdai since it has made clear that neither the insurance broker nor a motor insurance service provider i.e. dealer can create such a  panel of  insurers for selling motor insurance policies, Toyota Tsusho lnsurance Broker has contravened it.  “TTIBIL  being an  insurance Broker shall  have to enter  into service  level agreement with all the general insurers for providing better service to the policy holder.  The (company) was not  able to  establish the objective and transparent  criteria for entering into services level agreement with only 7 general insurers instead of all…which as a broker they ought to have”. 

According to Praveen Gupta, a top insurance sector professional and a former CEO of an insurance firm, “for all local broking entities, planning to attract foreign investment, corporate governance should be a high priority. Any potential slippages must seriously impact the promoters’ pricing powers”. 

Motor insurance is the most second most attractive line of business for general insurers, after health. The 25 general insurance companies try every trick in the business to get into the business, which is dominated by the top companies, which have tie ups with the largest motor dealers. In the efforts to make the dealers tie up, insurance companies have offered tax set offs on their marketing expenses and other inducements. This has led to tax surveys on both the dealers and insurance companies in the past. For instance the Irdai order observes that a dealer evaluation programme of the Toyota Kirloskar Motors (of which Toyota Tsusho lnsurance Broker is a member firm) offers rewards for retaining insurance policies contradicts Irdai circulars that no insurance intermediary “can enter into an agreement which has an influence or bearing on the sale of motor insurance policy”, since insurance is not supposed to be pushed as a a product. 

The orders, as Gupta said will have an impact beyond those immediately affected. In the past two years, the sector has been disrupted by several changes in the nature of motor insurance policies ordered by both the government and the Supreme Court, in the past two years. Last year, for instance, the Supreme Court has ordered that all cars must have a three year mandatory third party insurance cover.