Order in the matter of MAGMA HDI GIC Ltd.

Based on the

(i) Show Cause Notice (hereinafter referred to as “SCN”) referenceNo.IRDA/Enf/ SCN/2019/NL/Magma_Insp.rpt dated 24^th February, 2020 inconnection with the on-site inspection conducted by the Insurance Regulatoryand Development Authority of India (‘the Authority’ or ‘IRDAI’) during 18^thto 29^th December,2017.

(ii) Magma HDI General Insurance Co Ltd’s(“Magma HDI” or “theinsurer”) response dated 13^th March,2020 to the aforesaid SCN.

(iii) The submissions made by the insurer during the Personal Hearingheld on 2^nd June, 2020 at 4.00 PM, taken by the Chairman of theAuthority at its office at Hyderabad.

Background:

2. The IRDAI hadconducted an onsite inspection of Magma HDI GIC Ltd during 18^th to29^th December, 2017. The inspection report, inter alia, revealedcertain violations of provisions of the Insurance Act, 1938, Regulations,Guidelines and various circulars issued thereunder.

3. A copy of the inspection report was forwarded to Magma HDIGIC Ltd on 13^th June, 2018 seeking their response. On examining thesubmissions made by the insurer vide letters dated 2^nd August, 2018and 8^th March, 2019, a Show Cause Notice was issued on 24^thFebruary,2020. The insurer sent a reply vide letter dated 13^th March,2020. 

4.  As requested by the insurer, an opportunity for personal hearingwas granted on 2^nd June, 2020. Mr. Rajive Kumaraswami, MD & CEO, Mr.Amit Bhandari,CTO,Mr Gaurav Parasrampuriya, CFO and Mr. Anand Roop Choudhary, CCO were present inthe personal hearing on behalf of the insurer. On behalf of the Authority,Mr. Suresh Mathur, ED (Surveyors), Mr. Prabhat Kumar Maiti, GM (Enforcement)and Mr. K.Sridhar, AGM (Enforcement)were present.

5. The submissions made by the insurer in reply to the SCN and those made during thepersonal hearing on 2^nd June, 2020 and submissions made postpersonal hearing vide letter dated 15^th June, 2020 have been carefullyexamined.

6. Charge

-      Violationof Regulation 12(1 & 2) read with Regulation 3 and 4 of the IRDAI(Insurance Surveyors and Loss Assessors) Regulations, 2015.

-      Violationof Para 6 (c) of the Corporate Governance guidelines issued by the Authorityvide circular No. IRDA/F&A/GDL/CG/100/05/2016 Dt.18^th May, 2016on not having proper internal control mechanism by continuing engagingunlicensed individuals for survey jobs even after confirmation of the insurer videletter dated 12^th December, 2016.

7. Inspection observation:

The insurer used employees withouthaving a valid licence issued by the Authority, for the purpose of survey undermotor claims in excess of Rs.50,000/-.

The insurer vide their e-mail dated 26^thDecember, 2017 submitted that “in-house surveyors are being used so thatthere is transparent, efficient & fast claim settlement which in turnimproves the service level & increases customer satisfaction. All claimsabove Rs.50000/- initially assessed by in-house surveyors are duly scrutinizedby licensed surveyors (in-house or external) for confirmation of loss assessed.The existing team of licensed surveyors additionally supervises such claims sothat proper assessment of these losses is done to avoid any undue inconvenienceto our customers.”

It was noticed that a similar issuewas observed during the previous on-site inspection of the Authority during 17-26June, 2014.

As per the inspectionreport, the insurer has utilized the services of unlicensed surveyors for motorclaims assessment in respect of 196 settled claims above Rs.50,000/-, duringthe period of 12^th December, 2016 to 31^st March, 2017.

8.Summary of the submission of the Insurer:

The insurer submittedthat its exposure in rural & semi urban areas is high and is serving claimsin 486 locations out of which 75% falls in rural & semi urban areas whereavailability of independent licensed surveyors is comparatively lower. Hence,to ensure better customer servicing the company created a network of in-housesurveyors in those areas which were supervised by 9 licensed surveyors.

The insurer submittedthat during FY 15-16 & FY 16-17, only 1777 claims were surveyed by unlicensedin house surveyors which were only 3% of the total claims. It further statedthat it has taken necessary steps to ensure that all motor claims above Rs.50,000/- are initially assessed by in-house surveyors and are duly scrutinizedby licensed surveyors (in-house or external).

The insurerinformed that in its response dated 12th Dec-2016 to the earlier inspectionshow cause notice; it had assured the Authority that the company had takensuitable steps to rectify this and accordingly the Company had implemented thesame w.e.f. January 01, 2017. Further, it stated that it has put in necessarysystem controls w.e.f. June 01, 2018 where no unlicensed surveyor will be ableto undertake motor survey job in case of motor own damage claim above Rs50,000/-.

Regarding the196 claims referred in the show cause notice, the insurer stated that thecompany has an internal process of appointing Claim Officers in every claim itreceives, so that the claim officer can co-ordinate with the insured, repairerand the surveyor for smooth settlement of claim. The insurer further statedthat‘in all cases above Rs.50,000, the assessment of the loss was done bythe licensed surveyor and the survey report has been obtained and duly signedand verified from a licensed surveyor’.

The companyreiterated that it has duly complied with Section 64UM by obtaining a report,on the loss that has occurred, from a person who holds a licence, which isfurther affirmed by the stamp and seal by the respective licensed surveyor oneach of the survey report. The insurer stated that the names recorded in the 48claim cases referred in the mail post personal hearing are the names of theClaim Officers who have been assigned these particular claims and capturing thename of the Claim officer as surveyors might have given rise to the confusionresulting into this observation by the Authority.

9.Analysis of the Case:

During theon-site inspection of the insurer between 17th to 26th June, 2014, transactionsfor the years 2012-13 and 2013-14 were analysed and it was found that theinsurer’s employees not holding surveyor licence were being employed forassessment of motor own damage claims in contravention of Section 64UM of the InsuranceAct, 1938.

The insurer wasissued SCN dated 2^nd December, 2016.As per Section 64UM (4) of the InsuranceAct, no claim shall be admitted for payment or settled by an insurer unless hehas obtained a report, on the loss that has occurred, from an approvedsurveyor/loss assessor holding valid licence.

The insurer inits response dated 12^th Dec, 2016 to the show cause notice had submittedthat ‘the company has taken necessary steps and has streamlined the processto ensure that all claims having assessed loss exceeding Rs.50,000/- are beingsettled by a Licensed Surveyor in compliance of Section 64UM’.

The Authorityin its order dated 5^th April, 2017 on charge 12 of the show cause noticehad directed the insurer to ensure compliance to Regulation 12 of IRDAI(Insurance Surveyors and Loss Assessors) Regulations, 2015 to be read withSection 64UM (4) of the Insurance Act, 1938.

However, duringthe on-site inspection held during 18-29 December, 2017, it was noticed thatthe insurer has continued the practice of employing unlicensed in-houseemployees for assessment of motor own damage claims of above Rs.50,000.

The insurer duringthe on-site inspection clarified(vide e-mail dated 26^th December, 2017) that “All claims aboveRs.50000/-initially assessed byin-house surveyors are duly scrutinized by licensed surveyors (in-house orexternal) for confirmation of loss assessed. The existing team of licensedsurveyors additionally supervises such claims so that proper assessment ofthese losses is done to avoid any undue inconvenience to our customers.”

On examiningthe information submitted by the insurer to the inspection team, it was noticed that the insurerhad utilized the services of 27in-house employees who were not licensedsurveyors, for motor claim assessment job in respect of 196 settled claims of lossesabove Rs.50,000/-, during the period 12^th December, 2016 to 31^stMarch, 2017.

The insurer inits submissions dated 2^nd August, 2018, stated as below:

‘We wouldalso like to mention that in our response dated ….Dec-2016 to earlierInspection show cause notice, we had assured the Authority that the Company hadtaken suitable steps to rectify this and accordingly the Company hadimplemented the same w.e.f. January 01, 2017. Further, we have put in necessarysystem controls w.e.f. June 01, 2018 where no unlicensed surveyor will be ableto undertake survey job above Rs 50,000/-.’

‘We wish tosubmit that the company has settled more than Rs.50,000 claims during FY 15-16& FY 16-17. Out of this only 1777 claims are surveyed by unlicensed inhouse surveyors which is only 3% of the total claims.’

Thus, despite the insurer’searlier submission dated 12th Dec, 2016that it has streamlined the process, itadmitted in its submission dated 2nd August, 2018 that it had not followedprocedure in 3% of cases.

On examining 196 claim surveydocuments provided by the insurer along with its response dated 13^thMarch, 2020 to the SCN issued by the Authority, it is found that in 48finalclaim survey reports, the employees of the insurer not having surveyor’slicense have signed the report in their capacity as a surveyor. The 48 referredclaims were settled during the period of 12^th December, 2016 to 31^stMarch, 2017. Out of these 48, in 41casesthe report was first signed byunlicensed employees as “Surveyor” and then countersigned by a licensedsurveyor for having as “checked and verified”. In the remaining 7 cases, thereports are signed only by unlicensed employees.

Thus, theinsurer has engaged employees that are not licensed surveyors for assessment ofmotor own damage claims above Rs.50,000 and has hence failed to comply withRegulation 12(1& 2) read with Regulation 3 and 4 of the IRDAI (Insurance Surveyors andLoss Assessors) Regulations, 2015. This has happeneddespite the insurer having undertaken in an earlier occasion not to repeat suchirregularity.

On analyzingthe dates of claim settlement in respect of 48 final survey reports, it is foundthat the claims have been settled by the insurer based on the reports which weresigned by unlicensed individuals as surveyors, as given below:

The violation of relevantRegulations by the insurer has occurred on 28 differentdays as referred to above and is repetitive in nature. Therefore, inexercise of the powers vested in the Authority as per the provisions of Section102(b) of the Insurance Act, 1938, the Authority hereby imposes a penalty of Rs.28,00,000/-(Rupees Twenty Eight lakh only)for violation of Regulation 12(1 & 2) read with Regulation3 and 4 of the IRDAI (Insurance Surveyors and Loss Assessors) Regulations, 2015.

Further, theinsurer is directed to ensure that all claims are settled in accordance with the provisions ofSection 64UM of the Insurance Act, 1938 and IRDAI (Insurance Surveyorsand Loss Assessors) Regulations, 2015.

10.  Summary of Decisions:

11.  i. The penalty of Rs28,00,000 (Rupees twenty eightlakh only) shall be remitted by the insurer through NEFT / RTGS (bank accountdetails will be communicated separately) within a period of 15 days from thedate of receipt of this Order. An intimation of remittance of penalty shall besent to Shri Prabhat Kumar Maiti, General Manager (Enforcement), IRDAI,Sy.no.115/1, Financial District, Nanakramguda, Hyderabad-500032.

ii.This Order shall be placed before the Board of the insurer in the upcomingBoard Meeting and the insurer shall provide a copy of the minutes of Boardmeeting to the Authority.

12. If the insurer feels aggrieved by this Order, an appeal may bepreferred to the Securities Appellate Tribunal as per the provisions of Section110 of the Insurance Act, 1938.

Place:  Hyderabad                                                             (Dr.Subhash C. Khuntia)

Date:01-09-2020                                                            Chairman