Document Detail

Title: Final Order
Reference No.: IRDA/LIFE/ORD/MISC/267/12/2014
Date: 02/12/2014
in the matter of M/s. Future Generali India Life Insurance Company Limited
Based on Reply to Show Cause Notice Dated 07thAugust, 2014 and Submissions made during Personal Hearing Chaired by Sri T.S.Vijayan, Chairman, IRDA on 05th November, 2014 at 11:30 AM at the Office of Insurance Regulatory and Development Authority, 3rd Floor, Parishrama Bhavanam, Basheer Bagh, Hyderabad.
On examination of the reports filed in ‘Form – A’ for the half year ended March, 2013 and September, 2013 in compliance to the norms prescribed in the provisions of Guidelines on Outsourcing of Activities by Insurance Companies issued vide Ref. No. IRDA/Life/CIR/GLD/013/02/2011 dated 01st February, 2011(hereafter referred as Guidelines) and subsequent information furnished vide letter dated 18thApril, 2014 by M/s. Future Generali India Life Insurance Company Limited (hereinafter referred to as “the Life Insurer”) it was noticed by the Insurance Regulatory and Development Authority (hereinafter referred to as “the Authority”) that the Life Insurer has violated the provisions of various Regulations and Guidelines.
On examining the matter, the Authority issued a Show Cause Notice vide letter No. IRDA/LF/515/OSR/FGLIC/2012 dated 07th August, 2014. The Life Insurer has submitted response to Show Cause Notice vide its letter Ref: FGLIC/113/IRDA/2014-15 dated 27th August, 2014. As requested therein, a Personal Hearing was accorded to the Life Insurer on 05th November, 2014. 
Mr. Munish Sharda, Managing Director and Chief Executive Officer, Mr. Gorakhnath Agarwal, Chief Actuary, Mr. Anup Chandak, Chief Financial Officer and Mr.Madangopal Jalan, Sr. Vice President – Legal, Compliance & Company Secretary were present in the hearing onbehalf of the Insurer. On behalf of the Authority, Mr. V Jayanth Kumar, Joint Director (Life), Mr.G.R.Surya Kumar, Deputy Director (Executive Assistant to Chairman), Mr. DVS Ramesh, Deputy Director (Life-Coordination) and Ms.Jyoti Bhagat, Assistant Director (Life-Regulatory Actions) were present in the personal hearing. 
The submissions made by the Life Insurer in their written reply to Show Cause Notice as also those made during the course of the personal hearing were taken into account.
The findings on the explanations offered by the Life Insurer to the issues raised in the Show Cause Notice and the decisions are as follows:
Charge–1: On review of the agreements entered with / payments made to various entities and individuals, it is noticed that the life insurer agreed to outsource the following activities in violation of the various regulatory provisions referred hereunder;
 
a)    Outsourcingthe activity of ‘endorsement of “FGILIC” and its products’- Violation of Regulation 10(vi)of IRDA (Insurance Advertisements) Regulations, 2000.
b)    Outsourcing the activity of ‘Provision of membership database of the service provider to “FGILIC” for the purpose of distribution of “FGILIC” products’ -Violation of IRDA (Sharing of Database for Distribution of Insurance Products) Regulations, 2010.
c)    Outsourcing the activity of Cash Management services namely; (i) Receive cheque and cash representing initial payment and renewal premium collected by the Corporate Agent (ii) deposit the collections made by the agents and marketing personnel of the company into designated bank accounts of the company (iii) Do Bank reconciliation -Violation of Clause (5) and (6) of the Outsourcing Guidelines.
d)    Outsourcing the activity of carrying out ‘proper after sales services as required by the policy holders in respect of policies and attending to concerns / queries of the policyholders as per the service standards and norm prescribed by the company; Issue of Duplicate Policy’ -Violation of Clause 2.3 of the guidelines dated 01st February, 2011 (the activities are considered as the integral components of the core activities as outlined in Clause 2.1 (xii) of the Outsourcing Guidelines).
 
In response the Life Insurer submitted that (a) the agreements do not put any condition on the third party members to invest in the Company’s products and therefore there is no violation to Regulation (10) of IRDA (Advertisement and Disclosure) Regulations, 2000. (b) On outsourcing the activity of ‘Provision of membership database of the service provider to “FGILIC” for the purpose of distribution of “FGILIC” products’ the life insurer submitted that it has hired the services of the service providers subject to and in accordance with the Regulations. (c) On the activity of Cash Management services it was submitted that though the said clause is included, owing to the restrictions in the outsourcing guidelines the company has not actually outsourced these activities to such entities which do not qualify for the same in accordance to the provisions of Outsourcing Guidelines. (d) On the activity of after sales services to policy holders, it is submitted that, though these services were made part of the written agreement but owing to various stipulations of the guidelines, the company has not actually outsourced these activities and has not made any payments towards the same. 
 
Decision: While noting the submissions of the Life Insurer, it is clarified that the Authority issued the guidelines to ensure that insurers adopt sound and responsible risk management practices for an effective oversight onto the outsourced activities. When the Guidelines were issued on 01stFebruary, 2011 it is the responsibility of the Life Insurer to put in place the systems so as to ensure that the activities outsourced and the agreements executed after the said date with the service providers are in compliance with the outsourcing guidelines. From Form – A reported to the Authority and the subsequent information furnished vide e-mail dated 12th August, 2014 it is observed that the Life Insurer entered into the agreement and made the payments referred hereunder to various service providers.
 
Sl
No
Name of the Service Provider
Date of Agreement
Amount paid for the period (in INR)
2012-2013
2013-14
1.
Mr. Shankar Singh
(individual)
23.02.2012
35,13,090
-
2.
M/s. Sandhya Entertainment
27.07.2012
12,28,095
-
3.
M/s.Saturn Insurance Solutions Pvt. Ltd.
01.03.2012
11,99,981
-
4.
M/s. Star Manpower Services
08.08.2012
76,406
-
5.
M/s. Amit Multiplex Pvt. Ltd.
28.02.2012
1,85,540
-
6.
M/s. Phoenix Consultancy
03.03.2012
27,44,836
-
7.
M/s. Reach Enterprises India Pvt. Ltd.
23.02.2012
18,73,674
-
8.
Apex Financial Services
30.03.2012
9,487
-
9.
Guru Bio-Tech
04.06.2012
22,39,760
-
10
Harvic Management Services
25.02.2012
2,15,191
-
11
JanglaImpex Pvt. Ltd.
20.12.2012
7,00,985
6,92,337
12
Kunal Air Cool
20.09.2012
2,60,338
-
13
YS-e Commerce Pvt. Ltd.
26.03.2012
4,49,392
-
 
TOTAL
 
1,46,96,775
 
6,92,337
 
 
It is noticed that all the above agreements were entered into after issuance of the Guidelines; therefore, mentioning certain services that are in contravention to the extant regulations and guidelines is not acceptable is a violation of the Guidelines referred there under. The submissions of the Life Insurer that the service providers were not actually engaged for the services referred under the charge and that no payments were made towards the said services are considered. However, it is observed that in all the agreements the service providers were engaged for a range of 12 – 17 services, but the entire consideration amount referred in the table above were stated to have been paid towards the activity of ‘Direct Campaigning and Mass Marketing’. As the subsequent charges also relate to the issues concerning the Guidelines, the regulatory action is detailed hereunder in the subsequent decisions under Charge 3 & 4.
 
However, the life insurer is warned for entering into agreement for such services which are in violation of the Regulations and Guidelines issued by the Authority and is advised to ensure compliance to the Regulations and Guidelines while entering into the agreements.
 
The Life Insurer is also directed to comprehensively examine all the existing agreements and ensure that any of the services outsourced are in compliance to the extant Regulations and Guidelines. The Life Insurer shall submit an action taken report within 30 days from the date of this order.
 
Charge 2: Agreement was entered into with one individual, outsourcing certain services like; (i) providing infrastructure viz. space for the visiting of the company agents / insurance intermediaries; display of the company sales literature and promotional material at their premises (ii) providing space for display of signage highlighting the name of the company – raising questions on the ability of an individual to deliver these services -Violation of Clause(10) and Clause 9.9(vi) of the Outsourcing Guidelines.
 
In response the life insurer submitted that Clause 9.9 of the Guidelines are suggestive in nature and as such there is no violation of any of the clauses of the Guidelines and that the Company has terminated the said relationship and no payment has been made to the said service provider in second half of the financial year 2013.
 
Decision: The submissions of the life insurer that the Guidelines are suggestive in nature bespeak the casual approach accorded by the Life Insurer in adhering to the guidelines issued by the Authority. It is clarified that the guidelines are issued under the provisions of Section 14(2) of the IRDA Act, 1999. The Life Insurer shall note that Clause 9.9 of the guidelines requires the outsourcing relationships to be governed by certain material aspects such as expectations of the parties. Specifically, Clause 9.9 (vi) requires Insurers to address the material issues unique to the outsourcing arrangement. Clause 10 of the Guidelines requires the insurers to assess the capability of the service provider to comply with the obligations of the outsourcing agreement. It is observed that the Life Insurer has entered into an agreement on 23rd February, 2012 with the service provider, who is an individual, for providing a range of services. From the table referred under Charge – 1 it is noticed that Rs 35,13,090 were paid to the said individual service provider during 2012-13 towards ‘direct campaigning and mass marketing related activity’.
 
On examining the services referred in the agreement vis-à-vis the payments made, it is observed that the matter deserves further examination. The regulatory decision referred under Charge – 1 above and the regulatory decision under Charge – 3&4 shall cover the issues raised under this Charge too.
 
 
Charge 3& 4: From various outsourcing agreements entered into, it is noticed that the agreements are towards event management and that the agreed payment of consideration is based on the number / volume of the individuals attended. - Violation of Clause 9.6 (ii) read with 9(5) of Outsourcing Guidelines.
 
In response it was submitted that the financials and other abilities of service providers were evaluated and considered along with the cost-benefit analysis before agreement is executed and that clause 9.6 of the Outsourcing of Guidelines is suggestive in nature and that the company believes that amount of Rs.100-200 per person for organizing any event is quite reasonable.
 
During the personal hearing it is submitted that the payments made to various entities towards the outsourced activity of mass marketing and direct campaign is around 8-11% of the operating expenses. The Life Insurer further submitted that it has further strengthened the risk management program for evaluation of the outsourced vendors.
 
Decision: The Life Insurer’s submissions that the Guidelines are suggestive in nature are not acceptable and that Clause 9.6 (ii) of Outsourcing Guidelines requires the life insurer to carry out the cost benefit analysis, an essential pre-requisite before outsourcing any activity. It is observed that the Life Insurer made substantial payments to the following entities.
 
 
Sl No
Name of the Entity
Date of Agreement
Payments made for the period (in INR)
2012-2013
2013-2014
1
A-One Financial Services
18.09.2012
97,000
 -
2
Apex Management Solutions
30.03.2012
63,95,196
30,31,212
3
EquiFacs
04.06.2012
15,112
 -
4
Archers Marketing & Brand Solutions
16.08.2012
6,46,070
50,562
5
I One Solutions
04.06.2012
17,303
-
6
Frontward Global Edu Services & Solutions Pvt. Ltd.
24.02.2012
75,004
-
7
Ideal Care
11.06.2012
67,71,936
42,67,712
8
MSK Marketing Resource
23.02.2012
10,57,426
 -
9
Orient Advisory Services Pvt. Ltd.
13.07.2012
6,91,98,823
7,95,87,830
10
Monarch Advisory Services
01.02.2011
2,85,44,497
 -
11
Real & Royal Multi Services
14.09.2012
68,315
23,35,235
12
SinaPharma Pvt. Ltd.
11.09.2012
85,200
 -
13
Tripace Marketing Services Pvt. Ltd.
15.09.2012
19,09,658
3,57,297
14
Vishwasuja
28.05.2012
16,10,171
 -
15
Aadhar Enterprises
09.04.2012
1,39,94,418
-
TOTAL
13,04,86,129
8,96,29,848
 
During the course of personal hearing, in addition to the above service agreements, the following service agreements and the payments made there under are also taken to the notice of the Life Insurer.
Sl No.
Name of entity
Date of agreement
Payments made upto September, 2013 (in INR)
1.
Sterling Insurance Consultants Pvt. Ltd.
21.02.2014
9,76,31,900
2.
Prarabdh Solutions
03.08.2013
25,28,100
 
The submissions of the Life Insurer that it believes that amount of Rs.100-200 per person for organizing any event are considered. However, on examining the extent of payments made to various entities, which said to have been constituting 8-11% of the operating expenses it is observed that the purpose and objective of these agreements deserves to be analytically examined.
 
Therefore, under the powers vested in Section 14 (2) (h) of the IRDA Act, 1999,I direct the Life Insurer to cause an audit by an independent Chartered Accountant firm into the entire transactions of payments made to the service providers referred under Charge – 1 and Charge – 3&4 and the structure / shareholding pattern / composition and the existence of all these entities and submit the Authority a copy of the audit report submitted by the CA firm soon after the completion of the audit referred herein.
 
The Chartered Accountant firm chosen by the Life Insurer shall have a standing service of 10 years in conducting audit of reputed firms of Financial Services and the particulars of the audit firm shall be notified to the Authority soon after its appointment, but within 30 days from the date of issue of this order. The audit referred herein shall be completed within 90 days from the date of appointment. The Audit firm chosen shall not have been engaged by the Life Insurer or its promoters towards any activities in the preceding five financial years. The issues that are to be specifically examined / covered under the said audit, if any, will be notified to the Life Insurer separately.
 
The Life Insurer is also directed to be prudent while making payments towards any of the outsourced activities.
 
The Life Insurer is directed to submit the action taken reports as referred under the respective charges.
 
 
 
Place: Hyderabad                                                                                                                                                           T. S. Vijayan
Date: 01 December, 2014                                                                                                                                            CHAIRMAN
 
 
 
 

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