Based on Reply to Show Cause Notice Dated 3^rd July, 2014 and Submissions made during Personal Hearing Chaired by Sri D.D.Singh, Member (Distribution), IRDA on 22^nd September, 2014 at 2.30PM at the office of Insurance Regulatory and Development Authority, 3^rd Floor, Parishrama Bhavanam, Basheer Bagh, Hyderabad

The Insurance Regulatory and Development Authority (hereinafter referred to as “the Authority”) is in receipt of a letter dated 17^th February, 2014 from Max Life Insurance Company Ltd (hereinafter referred to as “the Life Insurer”) requesting for approval to renew an agreement that it entered with a service provider viz., Diganta Multi Services Pvt. Ltd. On examination of the contents of the letter it was noticed that the Life Insurer has entered into an agreement for outsourcing with an entity (Diganta Multi Services Pvt. Ltd, hereafter referred as Service Provider). On observing certain violations to the Authority’s Guidelines Ref: IRDA/Life/CIR/GLD/013/02/2011 dated 01^st February, 2011 on ‘Outsourcing of Activities by Insurance Companies’ (hereafter referred as the Guidelines) the Authority vide letter dated 07^th April, 2014 directed the insurer to immediately terminate the services outsourced to the service provider which are not in compliance with the outsourcing guidelines. On further examination of the matter a Show Cause Notice vide letter ref: IRDA/LIFE/236/OSR/Max Life/2012 dated 3^rd July, 2014 was issued to the Life Insurer, which was responded vide letter dated 23^rd July, 2014. As requested therein, a personal hearing was given to the Life Insurer on 22^nd September, 2014.  

Mr. Rajesh Sud, Managing Director and Chief Executive Officer, Mr. Ashish Vohra, Chief Distribution Officer, Mr. Amitabh Lal Das, Director  & Head – Legal, Compliance and Regulatory were present in the hearing on behalf of the Insurer. On behalf of the Authority, Mr V. Jayanth Kumar JD(Life), Mr DVS Ramesh, DD (Life-Coordination) and Mr. V.Chandra Sekhar, OSD (Life) 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 in to 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: The Collection of the renewal premium is outsourced even though the service provider did not comply with the norms prescribed in the guidelines for the same and also the activity is outsourced without specific mention in written agreement. These are in violation of Clause (5) (Annexure – 1, Point No. 2, Row 4) of Guidelines and Clause 9.9 of the Guidelines on Outsourcing.

In response, the Life Insurer informed that the agreement with Diganta Multi Services Pvt. Ltd (the Service Provider) was entered on 15^th April, 2009, prior to issuance of the Guidelines by the Authority and that it has initiated search for alternate service providers for collection of premiums as per the prescribed requirements, but no alternative service provider could be found. It was further submitted that the service provider was serving around 2.50 lakhs policyholders spread over remote rural and semi urban areas and that no complaints are received about the services of the Diganta from the policyholders. 

Decision: The submissions of the life insurer that it has entered into the agreement prior to the issuance of the guidelines and that it could not find an alternate service provider is not acceptable. Clause 19 of the Guidelines is specific in mandating the insurers to terminate all the existing outsourcing contracts entered into, that are in contravention of the Guidelines. The submissions of the life insurer that it received no complaints is also not acceptable as non receipt of the complaints cannot be considered the basis for continuation of the outsourcing agreements with the service provider in contravention to the guidelines. From the submissions of the life insurer, it is observed that during 2011-12 to 2013-14, the service provider collected premiums in respect of 1,61,586 polices for renewal of the policies.

The Life Insurer did not submit any reasons for not having the specific mention in the written agreement with the Service Provider for this activity of collecting the premiums. Allowing the service provider who is not complying with the prescribed requirements to collect the premiums is in violation of Clause (5) (Annexure – 1, Point No. 2, Row 4) of Guidelines. Therefore, under the powers vested in Section 102 of the Insurance Act, 1938, a penalty of       Rs 500000 (Rupees Five Lacs only) is levied on the life insurer for the violation.

By not including this specific activity in written agreement the life insurer also violated the provisions of Clause 9.9 of the Guidelines. The Life Insurer shall while outsourcing sensitive activities like collection of premiums shall bind the service provider with certain requirements like remitting the premiums collected within the stipulated time frame, for which the complete compliance to the requirements of Clause 9.9 of the Guidelines is an essential pre-requisite. It is also observed that the life insurer continued outsourcing the activities even after issuance of the Guidelines in violation of Clause 19. However, keeping in view the submissions of the life insurer that there are no complaints against the service provider, the Life Insurer is warned for violation of Clause 9.9 and Clause 19 of the Guidelines and is advised to ensure compliance to the provisions of Clause 9.9 of the Guidelines hereafter, in respect of all the outsourcing agreements.              

Charge 2: There is a clause in the agreement which states that the ‘service provider shall not be subject to the direction and control’ of the insurer which is in violation of Clause 9.8 and Clause 9.9 (ii) of the Guidelines. 

In response to the Charge the Life Insurer submitted that the agreement ensures that both the parties to the Service Agreement are independent of each other and do not act as an agent or principal of other. The Life Insurer further submitted that it has ensured that there was no risk of loss of supervision, by putting in place reasonable controls on the Service Provider through various other clauses in the Service Agreement and that it did not abdicate the effective supervision on the service provider at any point in time. It is also submitted that a senior personnel from the life insurer monitored and coordinated the services provided by the Service Provider.

Decision: While considering submissions of the life insurer that there are various other clauses that enable the life insurer to have an effective control and supervision, attention of the Life Insurer is drawn to various stipulations of the guidelines, namely, Clause 8.2 of the Guidelines which stipulates that insurer shall be responsible for all acts of omission and commission of its third party service providers and Clause 9.14 that prescribes that Insurer shall ensure that there is no risk of loss of control over outsourced activity. Therefore, it is clarified that a specific clause that absolves the life insurer from direction and control is completely avoidable. Therefore, the life insurer is warned for inserting the said clause in the agreement. The Life Insurer is also hereby advised to enter into agreements with any of the service providers by complying with the norms of the guidelines hereafter. The Life Insurer is also advised to comprehensively examine all the existing agreements and ensure that they are in compliance with the Guidelines and submit a report within 45 days from the date of this order.     

Charge 3:  A flat service fee is fixed for certain activities, irrespective of the premium size, without adopting the risk management principles which is in violation of Clause 9.6 (ii) of Outsourcing Guidelines.

The insurer submitted that the service provider was servicing the policyholders spread over rural and semi urban locations. The service fee was agreed considering geographical and infrastructural limitations and the ability of the service provider to reach out to the policyholders in the remote areas. It was further submitted that the costs of the services are considered appropriate when compared with the cost of setting up own infrastructure in such locations.

Decision: The submissions of the Life Insurer that the service fee is based on the location vis-à-vis the ability of the service provider is not acceptable, as these factors alone cannot determine the consideration amount. The Life Insurer shall note that the Cost – Benefit Analysis shall be also one of the determinants before deciding the service fee payable to any Service Provider. It is observed that the Life Insurer paid the following to the Service Provider during the periods referred hereunder.

From the above, it is noticed that payment of Rs 600 per transaction for processing the renewal of the policies and Rs 1700 / Rs 2800 per transaction for processing the proposal forms irrespective of the premium amount lead to significant payouts. On an examination of the fee paid vis-à-vis the services outsourced, it is considered that Service Fee agreed  and paid to the service provider is disproportionate to the nature of services and the life insurer did not carry out any cost – benefit analysis as envisaged in Clause 9.6 (ii) of the Guidelines, thereby violating these provisions of the Guidelines. By above, there are ten instances of the violation to Clause 9.6 (ii) of the Guidelines. Under powers vested in Section 102 of the Act, the Life Insurer is levied a penalty of Rs 50,00,000 (Rupees Fifty lacs only) for these violations.

The Life Insurer is directed to comprehensively examine the consideration amount agreed towards various services in respect of all the outsourcing agreements and shall carry out the cost – benefit analysis. An action taken report on this shall be submitted within 45 days from the date of this order.     

Charge 4: it is noticed that the office of the service provider is located at 16, R N Mukherjee Road, which was also the address of M/s ABIRA Insurance Services Ltd., the Corporate Agent of the Life Insurer, whose licenses were terminated by the Authority vide Order no. Ref: IRDA/AGTS/ORD/CAN/094/04/2012 dated 27^th April, 2012 and that Mr Amitabha Sengupta one of the directors of the Service Provider is a shareholder in M/s Abira Insurance Services Ltd. Based on these factors, it is considered that the conduct of the life insurer in entering into and continuing the agreement with M/s Diganta is questionable and in violation of Clause (10) of outsourcing guidelines.

The Life Insurer submitted that the agreement with the service provider is based on reasonable due diligence and however, the fact that two legal entities had the same registered office address did not amount to them being related parties. It is also submitted that from the perspective of shareholding pattern and common directorship the entities are not related parties going by the definition as per AS-18. It was also submitted that it has obtained a declaration from the Service Provider basis which the Service Provider and M/s ABIRA Insurance Services Ltd. were not related parties. During the course of personal hearing the Life Insurer submitted that both Abira and Diganta Multi Services Pvt. Ltd have their infrastructure in the same geographical areas. The Life Insurer also confirmed having terminated the services of M/s ABIRA Insurance Service Ltd in the year 2012 based on directions of the Authority.

Decision: The submissions of the life insurer that the Service Provider is not a related party to M/s ABIRA Insurance Services Ltd. as per the norms of AS – 18 is taken into consideration. However, attention of the life insurer is drawn to the provisions of Clause 9.12 which stipulates that in case of existence of conflict of interest among group entities, the insurer shall avoid outsourcing to such entities and a group entity is to be read in conjunction with the provisions of IRDA (Investment) Regulations, 2000 as per Clause 9.2 of the Guidelines. In response to the clarifications sought, the life insurer informed that some portion of the policies sourced by M/s ABIRA Insurance Services Ltd. are also serviced by the Service Provider. The Life Insurer furnished that Rs 7.16 Crores were paid to M/s ABIRA Insurance Services Ltd. towards renewal commission. From the payments made to M/s ABIRA towards renewal commission and payments made to the Service Provider towards the service fee, it is observed that hefty payouts are made towards various services to both these entities under the same set of policies, thereby defying the logic of the business prudence of the life insurance. Based on the charges and the submissions it is concluded that the Life Insurer did not carry out the effective due diligence as outlined in Clause 10.1 of the Guidelines and violated the same. Therefore, the Life Insurer is warned for violating these provisions. In light of penalty levied under Charge – 3 above, the charges are not pressed again under this charge and the Life Insurer is warned for this violation. The Life Insurer is also directed to ensure compliance to the Guidelines by duly carrying out the due diligence while entering into service agreements with any of the Service Providers while outsourcing any of the activities.     

Charge - 5: The continuation of the agreement even after issuing the outsourcing guidelines is a violation of Clause 19 of the outsourcing guidelines.

In response the Life Insurer informed that they were not able to find a service provider, meeting the criteria mentioned under the outsourcing guidelines and that they kept the interests of the policyholders on priority to ensure that policyholders pay the premiums. The Life Insurer also submitted that it sought the specific approval of the Authority and has terminated the agreement with Diganta on the directions of the Authority.

Decision: The submissions of the life insurer that due to their inability to find a service provider meeting the criteria of the Outsourcing Guidelines dated 1^st February 2011 and keeping in view the interests of policy holders it continued the agreement are not acceptable. In fact, the Authority framed and issued these Guidelines under the provisions of Section 14(2) of Insurance Regulatory and Development Authority Act, 1999 keeping in view the overall interests of policy holders and business of life insurance. As per the provisions of Clause 19 of the Guidelines the life insurer is supposed to disallow the service provider from collecting the renewal premium from   01^st July, 2011 onwards and is also supposed to review the agreements in accordance to the norms of Outsourcing Guidelines. Therefore no allowance can be given for the submissions that specific approval was sought from the Authority as the same has been sought only in February , 2014. It is observed that the life insurer continued in allowing the Service Provider collect the premiums and allowed the significant flat service fee in violation of the Outsourcing Guidelines. In light of regulatory action taken in the preceding charges, the charges are not pressed here again.   

Hence, the penalty of Rs­­ 55,00,000 (Rupees Fifty Five lacs only) shall be remitted by the Life Insurer by debiting the Shareholder’s fund within a period of 15 days from the date of issuance of this Order through a crossed Demand Draft drawn in favour of Insurance Regulatory and Development Authority and payable at Hyderabad.  The Demand Draft may be sent to Mr. V. Jayanth Kumar, Joint Director (Life) at the Insurance Regulatory and Development Authority, 3^rd Floor, Parishram Bhavan, Basheer Bagh, Hyderabad 500004. OR the penalty may be remitted through the NEFT as per details being intimated to the Insurer through a separate e-mail, under intimation to Joint Director (Life) on email id life@irda.gov.in.  

Place: Hyderabad                                                                                                    

Date:  18^th December, 2014                                                                                                          

D D Singh

Member (Distribution)