IRDA/ENF/ORD/ONS/123/05/2021

Order in the matterof M/s. Shriram General Insurance Company Limited

Based on the

a)   ShowCause Notice (SCN) ReferenceNo.IRDA/Enforcement/2020/417 dated 3^rdFebruary, 2021 in connection with the onsite inspection conducted by InsuranceRegulatory and Development Authority of India (the Authority/IRDAI) during 02.12.2019to 06.12.2019

b)   M/s.Shriram General Insurance Company Limited (insurer/company/SGI) letter dated 7^thMarch, 2021

c)   Submissionsof the Insurer during Personal Hearing held on 20^th April, 2021

Background

The Authority hadconducted an onsite inspection of the insurer during 02.12.2019 to 06.12.2019. The inspection report, inter alia, revealed certain violations of provisions ofthe Insurance Act, 1938, IRDAI’s Regulations, Guidelines and various circularsissued there under.

2. A copy of thereport was forwarded to the insurer on 20.02.2020 and the reply was received bythe Authority vide letters dated05.03.2020.

3.On examining thesubmissions made in the above referred letter to each of the inspectionobservations, it was observed that the insurer has not complied with theapplicable provisions of the IRDAI’s Regulations, guidelines framed there under,in case of certain observations.

4.Consequently, anSCN was issued by the Authority on 03.02.2021 to the insurer in this regard andthe insurer replied to the SCN on 07.03.2021. While replying to the SCN, the Insurerrequested for personal hearing and the same was granted. The personal hearingwas held on 20.04.2019. On behalf of the insurer, Mr. Anil Kumar Agarwal,MD&CEO, Mr. Ashwani Dhanawat, CIO, Mr. Shashikant Dahuja, ChiefUnderwriting Officer, Ms.Mona Mathur, Whole Time Director and CFO attended themeeting. On behalf of the Authority, Mr.Prabhat Kumar Maiti, General Manager (Enforcement),Vijayanand Naik Porika, OSD, V Satish, OSD, Rahul Kumar Aggarwal, OSD and Mr.K. Sridhar Rao, AGM (Enforcement) were also present. The charges and thedecisions made by the Authority are as under: -

Charge No.1

5. Violation ofRegulation 15(c) of IRDAI (Outsourcing ofActivities by Indian Insurers) Regulations, 2017- “where it isconsidered necessary to outsource any activity to the related parties or groupentities of the Insurers or related parties or group entities of the InsuranceIntermediaries registered with the Authority who are working either with theInsurer who is proposing to outsource or with any other Insurers, there shallbe a complete due diligence and the insurer shall be bound by the conflictmanagement policy that is part of its outsourcing policy that ensuresmaintaining arm’s length distance” and Para 3A.1 of Circular No.IRDA/F&A/GDL/CG/100/05/2016 dated 18.05.2016, which requires the insurer tohave Adequate systems, policies and procedures toaddress potential conflicts of interest .... ……. These include Board levelreview of key transactions, disclosure of any conflicts of interest to manageand control such issues”.

Theinsurer has a service agreement dated 23rd May, 2017 with M/s. Shriram CapitalLimited (SCL), a related party, for providing certain services including groupstrategy, new ventures and business development, MIS, synergy, group HR, brandbuilding and corporate communication, taxation, regulatory, secretarial, groupIT, external relations, investor relations and policy advocacy. The Insurerpaid an aggregate amount of Rs. 3.63 Crores per quarter during year 2018-19;towards such services. The services rendered by SCL were not stated in theinvoices raised by them. The due diligence exercise conducted for SCL for2018-19 didn~t look at:

·        thecomparison of pricing with other entities,

·        howarm~s length pricing was maintained and,

·        thatengaging the services of SCL will not lead to any potential conflict ofinterest.

Further,the Outsourcing policy of the insurer does not contain conflict managementpolicy to ensure arm~s length distance with respect to related parties. Theinsurer has failed to maintain arm~s length distance while dealing with theirrelated parties.

Summary of the insurer’s submissions:

6. The insurer submitted thatthe services are wholly, exclusively and necessarily incurred for the purposeof business and the payment is in the ordinary course of business. Suchservices are paid for in Group business model which has got its unique featuresfrom the rest of Corporate ecosystem. The entire dynamics of group businessrevolves around shared resources, strategies, action plan etc. and by its verynature it encompasses amplitude of such proportions that it cannot be measuredon the specifics of outsourced services, which lend to evaluation on standalonebasis. Such services can be tangibles and intangibles not amenable to any pricetag, as they are not divisible by metes and bounds, as each component givesvalue and derives value from the other.

7. Theinsurer further stated that the services rendered by SCL are not the activitiesthat would normally be undertaken by SGI in its ordinary course of its businessand the services can only be provided by the holding company of the promotergroup because in order to provide these services, the service provider isaccessible to internal sensitive data and information of the respectivecompanies of the Group. Thus, the said services cannot be availed from anyoneelse other than the promoters and therefore arm’s length pricing cannot be ascertained.As the services availed by SGI are not the services which are normallyundertaken by SGI in its ordinary course of business and due to sensitivity ofthe information involved arm’s length pricing also cannot be established, theBoard of directors of the Company in compliance with section 188 of theCompanies Act 2013 in its meeting held on 8th May 2017 passed a resolution andaccorded its approval to enter the agreement with SCL. As the services renderedby SCL to SGI do not exceed 10% of its net worth approval from the shareholdersof the Company was not required under Rule 15 of Companies (Meetings of Board& its Powers) Rules, 2014.

Decision

8. Onscrutiny of the agreement between SGI and SCL, it is noted that the servicesbeing provided include New Ventures and Business Development, Taxation,Secretarial, Investor Relations, Regulatory, Brand Building and CorporateCommunication, MIS etc. It was also observed thatquarterly payment as peragreement, was made without any reference to the specific support/ servicesavailed from SCL during the quarter.

SCL beingthe major shareholder (76.63%) and promoter, has responsibility to ensureproper governance of the insurer and thesupport provided by them is part oftheir duty as promoter for which no payments other than in form of dividend iswarranted. However, there is a possibility of sharing commonfacilities/resources like building, IT systems, human resources which isexpected to be handled in a transparent manner with appropriate cost sharingmethods. It is noted that the current approach lacks transparency as to thesupport/services availed and to assess whether payment made is on arm’s lengthbasis.

In viewof the above, the Insurer is directed to discontinue the current practice withina period of three months and adopt a transparent approach to avail of support/services,if needed, from their group company on arm’s length basis and to ensurecompliance of the provisions of CircularNo. IRDA/F&A/GDL/CG/100/05/2016 dated 18.05.2016 and other applicable norms.

ChargeNo.2

9. Violation of of the provision ofPara 3A.1 of Circular No. IRDA/F&A/GDL/CG/100/05/2016 dated 18th May 2016; ....ln the case of insurance cover given by the insurance company to the groupcompanies, price / premium quoted by the companies under F&U guidelinesshould be considered as arm~s length. .... and provisions of Circular No.IRDAI/NL/GDL/F&U/030/02/2016 dated 18th February 2016 on procedure ofproduct filing.

Theinsurer has not adhered to the Board approved underwriting guidelines and hasnot followed the rate allowed under product filing for the group policiesissued.

Summaryof the submission by the insurer

10. The insurersubmitted that as per IRDAI Circular IRDA/NL/MISC/246/11/2014 dated 12thNovember 2014, the insurance company before giving any insurance cover canaccept the proposal / risk either on IIB rates or insurer’s own burning cost.

Decision

11. The 2014 circularprovides some guiding principles for product design and pricing. Once aproduct is filed and approved, the insurer needs to adhere to the Terms andUnderwriting guidelines approved under product filing. If any change is needed,the insurer needs to file for product modification, if modification iswarranted due to emerging experience. In the following sample cases, theinsurer has deviated from the limits of discounts allowed under the productfiling.

12. Considering theviolations noticed in case of 6 sample cases detailed above,as per Section102(b) of Insurance Act, 1938; the Authority levies a penalty of Rs.6,00,000(Rs.Six Lakh). The Authority also directs the insurer to ensurecontinuous compliance with applicable product filing procedure.

13.Summary ofDecisions:

14.Summary:

In conclusion, asdirected under the respective charges, the penalty of Rs.6,00,000 (Rupees sixLakhs only)should be remitted bythe insurer by debiting shareholders’ account within a period of 45 days fromthe date of receipt of this Order through NEFT/ RTGS (details for which will becommunicated separately). An intimation of remittance may be sent to Mr. PrabhatKumar Maiti, General Manager (Enforcement) at the Insurance Regulatory andDevelopment Authority of India, Hyderabad.

Further

a)    The insurer shallconfirm compliance in respect of all the directions referred to in this Order,within 21 days from the date of issuance of this order.

b)    The Order shall beplaced before the Audit committee of the Insurer and also in the next immediateBoard meeting and to provide a copy of the minutes of the discussion.

c)    If the insurer feelsaggrieved by any of the decisions in this order, an appeal may be preferred tothe Securities Appellate Tribunal as per Section 110 of the Insurance Act,1938.

Place:  Hyderabad 

Date: 4^th May, 2021                                                        .

Sd/-

(Dr. Subhash C. Khuntia)

Chairman