IRDA imposes Rs 55 lakh penalty on Max Life Insurance for violation of rules

IRDA has imposed penalty of Rs 55 lakh on Max Life Insurance Company Limited for violating outsourcing guidelines “Ref: IRDA/Life/CIR/GLD/013/02/2011 dated 01st February, 2011 on ‘Outsourcing of Activities by Insurance Companies’”.

“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” – IRDA said in an order

max life insurance company

image source credit to www.maxlifeinsurance.com

On observing certain violations to the Authority’s Guidelines on ‘Outsourcing of Activities by Insurance Companies’ the Authority vide letter dated 07th 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 3rd July, 2014 was issued to the Life Insurer, which was responded vide letter dated 23rd July, 2014.

As requested therein, a personal hearing was given to the Life Insurer on 22nd 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.

In two cases IRDA has imposed penalty of Rs 500000 and Rs 5000000 on Max Life Insurance Company Limited.

Penalty of Rs 50, 00,000 on Max Life Insurance Company limited

As per IRDA “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.

After hearing the case IRDA has taken following decisions;

“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.”

Penalty of Rs 5, 00,000 on Max Life Insurance Company limited

As per IRDA “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 15th 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.

After hearing the case IRDA has taken following decisions;

“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.”

In other cases Max Life Insurance Company Limited is 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.

IRDA also warned Max Life Insurance Company Limited to insert the clause in agreement and advised to examine existing agreements and ensure they are in compliance with guidelines.

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