Ref: IRDA/Enf/ord/ons/ 156 /09/2018

Orderin the matter of

M/SAON Global Insurance Brokers Ltd. (Now M/S GlobalInsurance Brokers Ltd)

(Based on theirreplyto the Show Cause Notice dated 10^thJanuary, 2018, and submissions made during Personal Hearing on 12^thJune, 2018 at 03.30 PM, taken by Chairman, IRDAI, at the office of InsuranceRegulatory and Development Authority of India, Financial District,Nanakramguda, Hyderabad, and the consent furnished by them vide their letterdated 6^th September, 2018, for passing this order (in relation toCharge No.1) by referring to the provisions of IRDA (Insurance Brokers)Regulations, 2002, in response to Authority’s letter dated 16^thAugust, 2018)

Background:

1.           M/S AON Global Insurance Brokers Ltd.(Now named as GlobalInsurance Brokers Ltd) was granted license by the Authority on 03^rdMarch, 2002 to carry out the functions of a composite Insurance broker vide itsoriginal license no CB 052/02 which was renewed in continuation till 2^ndMarch, 2021. The broker is subjected to the terms and conditions of the license/registrationand is required to abide by the Insurance Act, 1938, Insurance Regulatory andDevelopment Authority Act, 1999 and other regulations, circulars and guidelinesissued there under, by the Authority.

2.           Anon-site inspection of M/S Global InsuranceBrokers Ltd, (hereinafter referred to as “Insurance Broker” or “Company” or“AGIB”) was conducted by the officials of Insurance Regulatory and Development Authority(hereinafter referred to as “Authority”) during the period from 26/10/2015 to28/10/2015.The Inspection findings were communicated to the Insurancebroker for their comments on 04/01/2016. The Insurance broker submitted its response to the Authority by its letterdated 21/01/2016. Afterconsidering the response to the inspection findings and the supportingdocuments, Authority observed certain violations of the regulatoryrequirements, committed by the Insurance Broker and issued a notice dated10/01/2018 to the Insurance Broker, to show cause as to why appropriate action shouldnot be initiated. The InsuranceBroker submitted its reply to the Authority by itsletter dated 09/02/2018. In its reply to the show cause notice, the Insurancebroker had requested for a personal hearing.

3.           The Insurance Broker was granted personal hearing on 12/06/2018 atthe office of IRDAI. Onbehalf of Insurance Broker, the personal hearing was attended by Mr. PrabodhThakkar, Chairman; Ms. Rashmi Iyer, Principal Officer; Mr. Anant Pawar, ChiefBroking Officer; Mr. Sunil Pal, Director of Finance and Mr. Pranav Kapadia,Executive Finance. On behalf of the Authority Dr. Subhash Chandra Kunthia,Chairman, Mr. Randip Singh Jagpal, CGM, Intermediaries; Mr P.K. Maiti, GM,Enforcement; Mr. G. R. Surya Kumar, GM, Executive Assistant to Chairman and MrVikas Jain, AGM, Enforcement were present at the hearing.

Charges,Submissions in reply thereof and Decisions:

4.           Charge 1: From the payment vouchersannexed with the Inspection report, it is clear that the Indian Licensed Broker(AGIB) has shared 25% to 50% of the brokerage with other foreign broker of theAON group. Those foreign brokers did not have any infrastructures support toAGIB. Further the Insurance Broker submitted that in every country,multinational clients engage a multinational broker having a presence in allthe relevant countries to meet its global or regional broking requirement on aconsistent manner. By combining this submission with the payment tomultinational broker, it is clear that the AGIB has taken service of thoseforeign brokers in the capacity of a canvasser to bring business by leading toviolation of Para 3(b) of Schedule III under Regulation 21 of IRDA (InsuranceBrokers) Regulations, 2002

Submission of the Broker: Thebroker submitted that during the term of the joint venture with Aon, AGIB was apart of Aon’s international business as its Indian Partner and the trendamongst multinational corporations has consistently been to meet their brokingneeds from multinational brokers on a global or regional basis and thus, asopposed to engaging individual Brokers in every country, multinational clientsengage a multinational broker having a presence in all the relevant countriesto meet its global or regional broking requirement on a consistent manner. As amember of Aon’s international business, AGIB provided broking services in Indiaas a part of Aon’s multinational service offering. It further submitted thatsubstantial contributions are being made by Aon internationally towards suchofferings to clients, by bringing to bear research, technical analysis,expertise, technology, human resources, best practices and global relationshipswith multinational insurers. However broking services as such are only providedby the relevant licensed entity in each jurisdiction. In providing suchservices, such licensed entity benefits from the resources and efforts expendedby Aon’s international business in servicing, retaining, advising and managingsuch clients internationally, in keeping with global standards anddevelopments, to meet their global requirements.

It further submitted that ithas paid professional fees and expenses allocated towards the cost of suchservices in each case, which is in the best interest of the clients. AGIB inturn has also received advisory fees for its contributions towards accountsthat are services in other countries. It also submitted that the professionalfees paid by AGIB have been duly approved by the board and shareholders ofAGIB, and validated as meeting arm’s length requirements for transfer pricingpurposes and AGIB’s annual returns. Accounting for such fees on this basis hasbeen consistently accepted by Income tax authorities.

It further submitted thatimposing a substantial fixed service charge, regardless of the profitability ofthe relevant licensed entity (AGIB) would have placed a significant financialburden on the entity and based on the negotiations, a percentage of brokerageon the case to case basis was agreed in order to avoid overpayment and becominguncompetitive.

Decision:During personal hearing, the Insurance Broker agreed to furnish documentaryevidences in support of their claim that payments that were made to thesubsidiaries of the AON Holding B. V., under the head of commission/revenuesharing, were indeed the payment for availing professional services. Postpersonal hearing the Insurance Broker furnished a set of documents; whichindicates that the AGIB availed some services from the subsidiaries of the AONHolding B. V. However they failed to produce any mapping of the paymentsindicated in the inspection observation with that of any specific servicesavailed from the subsidiaries of the AON Holding B. V. Further, the Insurance Brokerfailed to produce any written agreement with those foreign brokers, withexplicit mention of any such services and basis of payment for availing suchservices. Hence they failed to justify that payments that were made under thehead of commission/revenue sharing, were not for employing foreign brokers inthe capacity of a canvasser to bring business. Hence the Insurance Broker hasviolated Para 3(b) of Schedule III under Regulation 21 of IRDA (InsuranceBrokers) Regulations, 2002. The inspection observation was supported by anannexure which comprised of a list of 61 (Sixty one) policies, where suchpayments were made to the foreign broker under the head of commission/revenuesharing during the period 01/01/2011 to 31/12/2011. Considering the fact thatthe violation was committed before promulgation of Insurance Laws (Amendment) Act,2015, the Authority by virtue of powers vested in it under Section 102(b) ofInsurance Act 1938, levies a penalty of Rs. 1,00,000 (Rupees One Lakh only) onthe Insurance Broker.

5.           Charge 2:The Insurance broker has violated 34(1) & 34(2) of the Brokers regulations,2013 by allowing the clients to remit premiums directly to offshore brokers,which prescribe that in case of any insurer/reinsurer licensed in Indiautilizes the services of a foreign broker for placement of reinsurance businesswith foreign Reinsurers, such placement shall be through an insurance brokerlicensed by the Authority which also shows the inability of the Insurancebroker to collect and remit the money, as per regulation 27 (schedule V) of theIRDA (Insurance Brokers) Regulations, 2013.

Submission of theBroker: The Insurance Brokersubmitted that regulation 27(2) of the broker’s regulation, 2013 would implythat it is not mandatory for the RI broker to collect and remit the premium andthe parties are free to determine how the payment of the premium may be routed.They further submitted that in all the cases AGIB has been engaged as theprimary broker for reinsurance placements overseas, as such placements havebeen made through AGIB in accordance with regulation 34 of the IRDAI (InsuranceBrokers) Regulation, 2013 and as the Broker, AGIB’s main responsibilities areto structure, solicit and advise on reinsurance cover for its client, whilehandling of premium is incidental to the above. Further it submitted that inthat this mechanism was followed only as an exception in 13.21% of AGIB’sreinsurance placements during FY 2014-15. Until recent times, ceding IndianInsurers were uncomfortable making such large payments through Indian Brokerson account of perceived credit risks. In other cases, there was delay inpayment by the ultimate clients at which point it was necessary for suchinsurers to credit the payments directly, offshore in order to avoid loss ofcoverage due to delays.

Decision: Intheir submission, the Insurance Broker sought to justify direct payment ofreinsurance premium by the ceding insurer to the foreign broker, by differentlyinterpreting regulation 27(2) of the IRDAI (Insurance Brokers) Regulations,2013 and also submitting that this is a market practice. On the other hand,they submitted that this mechanism was followed only as an exception in 13.21%of AGIB’s reinsurance placements during FY 2014-15. Further, by submitting thatin cases where premium was not routed through AGIB, the share of brokerage wasreceived by them, they sought to establish that they were following the correctbusiness model, which apparently looks like fronting of reinsurance business tothe foreign broker who is not having license to perform broking business inIndia. However, in view of the submission of the broker that since April 2017they are handling all the remittances on behalf of Indian cedant, charge is notpressed but the Insurance broker is advised to ensure compliance to theRegulations 38(1) & 38(2) of IRDAI (Insurance Brokers) Regulations, 2018.

Summaryof Decisions:

6.           Thefollowing is the summary of decisions in this order:

Conclusion:

7.           As directed under the respective charges, the penaltyof Rs. 1,00,000/- (Rupees One Lakh only) shall be remitted bythe Insurance broker within a period of 15 days from the date of receipt ofthis Order through NEFT/ RTGS (details for which will be communicatedseparately). An intimation of remittance may be sent to Mr.Prabhat Kumar Maiti,General Manager (Enforcement) at the Insurance Regulatory and DevelopmentAuthority of India, Sy. No. 115/1; Financial District;Nanakramguda; Gachibowli; Hyderabad – 500032.

8.           The Broker shall confirm compliance inrespect of all the directions referred to in Paras 4 and 5 of this Order,within 21 days from the date of receipt of this order. The order shall beplaced before the Audit committee of the broking firm and also in the nextimmediate Board meeting and the Insurance broker shall submit to the Authoritya copy of the minutes of the discussion.

9.           If the Insurance Broker feels aggrieved byany of the decisions in this order, an appeal may be preferred to theSecurities Appellate Tribunal as per Section 110 of the Insurance Act, 1938.

(Dr. Subhash Chandra Khuntia)

Chairman

Date: 19^th September, 2018