IRDA has penalised Birla Sun Life Insurance Company a paltry Rs6 lakh for a slew of violations, some serious including using unlicensed entities to sell insurance
The Insurance Regulatory Development Authority (IRDA) had detected 22 irregularities in the functioning of Birla Sun Life Insurance Company (BSLI) but penalised it a paltry Rs6 lakh for two of the violations. What is most pertinent is that it took the regulator around a year and a half, from the date of its first inspection letter (22 November 2010), to pass the judgement (13 April 2012).
IRDA levied Rs5 lakh for a major violation of using unlicensed entities to solicit insurance business, thus violating an IRDA circular which states, “No insurer shall distribute the product through any person who is not licensed as per the provisions of the Insurance Act, 1938, for the purpose of the soliciting and procuring insurance business.”
BSLI admitted to this misdeed but was fined just Rs5 lakh for this. This is pocket money for the insurer and makes a mockery of the regulatory system. We had covered the issue of unlicensed entities way back in 2010, over here (http://www.moneylife.in/article/8/5371.html).
The second and last indictment accused the company for flouting guidelines on Group Insurance Policies dated 14 July 2005, wherein it is the insurer’s responsibility to ensure that claims payments go directly to the beneficiary, or insured. However, the company had apparently been sending cheques, in event of claims, in favour of the master policy holder (for instance, any firm which has taken insurance on behalf of its employees) instead of the beneficiary (the employee), thus putting the onus on the policy holder to settle the cheque, and absolving itself of the responsibilities. For this violation, the company was fined just Rs1 lakh.
Thus a total of Rs 6 lakh was fined by BSLI for two out of 22 violations. This isn’t the first time that Moneylife has written about selling through illegal intermediaries. Insurance companies are merrily using the illegal multi-level marketing (MLM) system to push insurance. When caught they promptly disown any linkage and promise to “take action.”
It is pertinent to note that it took as much as eight months to issue a show-cause notice (27 July 2011) after BSLI replied to IRDA’s initial observation. And after the insurer had replied to the show-cause notice on 30 August 2011, IRDA then took more time, till 1 February 2012 before calling for a personal hearing. Only then, after the hearing, the final order (13 April 2012) was passed.
We cite a few important transgressions and IRDA’s decision on each of them:
• Violation of Section 40A of Insurance Act, 1938
(IRDA) Inspection Observation 30(d): Commission being paid to agents even when premiums are being funded by the company under premium waiver benefit.
(IRDA) Decision: Insurer has submitted that there could be policy servicing requests during the term of the policy to agent and the practice of payment of commission in such cases may motivate agents to continue promoting such waiver benefits wherever applicable which again is in the interest of policy holders. On examining the reply of the Insurer charges are not pressed. However insurer is hereby directed to stop paying the commission to agents in all such cases where premium is funded by the company as part of premium waiver benefit.
So, for the last two years, the company has been ‘motivating’ agents by paying commissions to them even though when it shouldn’t have. BSLI claims that this is in “the interest of the policy holders”. Really? Well, motivating agents to ram policies down consumers’ throats is most definitely NOT in consumers’ interests.
• Violation of Regulation 2(CC) of IRDA (Investment Regulations, 4th Amendment) 2008
Inspection Observation 2: Insurer has categorized the investments in mutual funds as “Money Market Instruments” for the purpose of public information. (Product Brochure of Titanium plus Plan)
Decision: The insurer states that BSLI invests in liquid mutual funds and they have included the mutual fund in the ‘Money Market and Cash’ segment in the product brochure to represent investments in short-term investment. The insurer has also submitted that now an alteration was made in the product brochures to show mutual fund separately.
This is a classic case of mis-selling by misrepresenting a product in flyers and brochures. Companies will window-dress their product to make it look ‘safe’.
• Violation of Section 5 of IRDA (Investment Regulations, Fourth Amendment), 2008
IRDA Inspection observation 1(d): Insurer has breached the prescribed limit of 5% of fund size while investing in Mutual Funds and categorizing them as “Approved Investments”.
IRDA Decision: The insurer has submitted that he has acted as per the directions of the authority issued vide Regulation 3 (Investments) point 3, Investment Regulation 5 and The Asset Liability and Solvency Margin of Insurers Regulations, 2000, Schedule IIA 1(c). Insurer has also confirmed that in view of the IRDA Circular IRDA/F&I/CIR/INV/173/08/2011 dated 20th July, 2011, realigned its portfolio to come in compliance with the issued circular effective 1st October, 2011. Taking into account the submissions made by the insurer, the charges are not pressed.
• Violation of note 4 to Regulation 5 of IRDA (Investment Regulations, 4th Amendment) 2008
Inspection Observation 1(g): The company has taken blanket approval for raising the limit up to 15% in respect of industry/group exposure.
Decision: The insurer has submitted that the investment committee, as per the authority given to it by the board of directors, reviewed the exposure norms at group and industry level in its 41st meeting held on 28 January 2011 and has restricted the increased exposure to limited sectors only. The submissions of the insurer are taken into account. However, the delegation of authority, given to it by the board, by investment committee of the insurer is not proper and the insurer is advised to strictly follow henceforth the prescription of Note 4 to Regulation 5 of IRDA Investment Regulations.
IRDA is being too lenient, especially concerning investments which are a crucial part of an insurance company’s functional model.
• Violation of 4(6) of IRDA (Protection of policyholders’ interests) Regulations, 2002
Inspection Observation 16: Proper follow up is not done with the proposers to obtain pending requirements.
Decision: The insurer submitted that auto generated communication on pending requirements dispatched to proposers on the 10th, 20th, 30th and 38th day from the application receipt date with documentary proof. The insurer also informed the house that follow-up is being done through SMSs for all the pending proposals The submissions made by the insurer that proper follow up is indeed being done to obtain pending requirements from proposers is considered and the charges are not pressed.
• Violation of F&U Procedure
Inspection Observation 32: Top-up premium remitted along with the first premium was being accepted without minimum mandated additional risk coverage even when the top up premium is more than 25% of the first premium.
Decision: The insurer submitted that it has happened due to a system error which has been now rectified and assured that going forward such instances would not recur. Taking into account the submissions made by the insurer the charges are not pressed.
• Violation of provisions of Clause 27 of Licensing of Corporate Agents’ Guidelines, 14/07/2005
Inspection observation 33: It is observed that the company is not carrying out due diligence at the time of appointment of “Business Mentors”. The business mentors as mentioned in the report are working in different capacities with many insurers in contravention of the business mentor model as described by the company.
Decision: The insurer has submitted that they prohibit business mentor’s association with any other insurance company by taking self declaration on the same while recruiting. If they are found to be in association with any other life insurance company action against them is initiated. The insurer has also expressed that due to lack of central repository of corporate agents, due diligence could not be carried out while recruiting business mentors. They also submitted documentary proof of action taken on business mentors who are associated with more than one insurance company. Taking into account the submissions made by the insurer the charges are not pressed.
The remaining violations were ‘spared’ by IRDA.
Earlier, IRDA had admitted to industry-wide mis-selling (http://www.moneylife.in/article/irda-chairman-admits-pension-plans-were-mis-sold/21488.html). However, if a company can violate regulations and norms and get away with a paltry fine, it would set a poor precedent.
Earlier, Sahara Life Insurance had too committed a host of violations. We had written about it here. (http://www.moneylife.in/article/sahara-life-insurance-caught-for-multiple-violations-penalised-for-a-mere-rs12-lakh/24017.html). Sahara, too, was let off by IRDA in a similar fashion. A few months ago, HDFC Standard Life Insurance was slapped with a fine of just Rs5 lakh, for delaying a settlement claim (http://www.moneylife.in/article/irda-slaps-rs5-lakh-fine-on-hdfc-standard-life/20378.html).