IRDA May Online Issue

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May 2011

Volume IX, No. 5

Moving Towards Global Standards- IFRS in Insurance


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rior to globalization, each economy had itsown styles of reporting systems in theP

financial arena; and analysis of information usedto be a relatively simple task. Also, depending onthe exact domain of activity, there used to be adifferent set of papers and information that wouldfulfil the regulatory/statutory requirements. Itmeant that expertise in interpretation andanalysis of information was also required to belimited to the particular domain. In the aftermathof globalization, however, the need arose for a

uniform interpretation of various aspects of financial information; considering the cross-border nature of several businesses. Further, in themore recent times, there has been a spate of several corporate debacles owing to dilution inmanagement supervision either intentional orotherwise leading to added emphasis oncorporate governance. The need arose forestablishing certain standards and uniformity inreporting and analysis of information globally.

The International Financial Reporting Standards

(IFRS) envisage a reporting system that iscomprehensive in content, and meaningful. TheIFRS regime precludes the furnishing of information that is not relevant to the businessthereby obviating the possibility of dual ormultiple interpretation. In a domain wherecustomer service is the avowed objective, there isemphasis on reliability of information so thatdecisions can be taken based on the informationprovided. IFRS achieves this vital requirement

when fully in operation. The fruits of such adynamic regime are already being felt in moreadvanced marke ts where i t has beenimplemented. The convergence to the regime inIndia eventually is a foregone conclusion,although there remains a little uncertainty to theexact date from which it would take place.

For the insurance industry, it is essential tounderstand the various aspects of the standardsso that they are fully prepared for theconvergence, as and when it happens. Particularly,in light of the fact that IPOs and Mergers andAcquisitions are likely to occur in the not-too-distant future; convergence to IFRS will be a shotin the arm as the regime presupposesuncontaminated and total information.

'International Financial Reporting Standards(IFRS) in Insurance' is the focus of this issue of the Journal . Where there is a tendency on the part of one of the parties to indulge in a wilfulvictimisation of the other for a gain, it leads to the

occurrence of a fraud. 'Frauds in Insurance' will bethe focus of the next issue of the Journal.

From thePublisher

J. Hari Narayan


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Statistics - Life Insurance04

16 Vantage Point

U. Jawaharlal

48Statistics - Non-Life Insurance

42

06In the Air

issue focus17

23

26

32

IFRS in Insurance Industry Ashvin Parekh

Beyond Mere AccountingSandeep Bakhshi

Classification ofInvestmentsC. Subrahmanyam

Exposure Draft onInsurance ContractsRaj Kumar Sharma

49Statistical Supplement (Monthly)

thinking cap37

Protection againstProfessional NegligenceP. Umesh


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f

- IFRS and Insurance IndustryGoing with the Tide

Information has come to be the pedestal onwhich the success of an entity rests. The severalstakeholders and potential customers dependon the information that they manage to getabout a business house which they intend todeal with. There used to be a time when the merereputation of the corporate entity used tocommand unrestrained goodwill of theprospective stakeholder. However, in light of the

corporate failures that have been seen morerecently, there is increased emphasis oninformation being total and up-to-date. Further,the international nature of almost the entiretrade has also made it necessary for thepolicymakers to obtain and analyse severalreports before a formal sanction is accorded forbusiness activity.

Regulators and supervisors globally insist on abusiness house submitting detailed sets of financial information periodically, mainly toensure the soundness of the promoters, theirtrack record and to reasonably assess thesustenance of the outfit; in order that theprospective client is not faced with the prospectof falling into a financial abyss. Further, there arevarious formalities required to be fulfilled by theentities to ensure that their continuedsustenance is not questionable. Although thelogical requirements used to be more or less thesame, various markets had their own styles of calling for information; and submission of reports. In a world where the borders aredissolving and where there is an increaseddependence of nations on each other; a needwas felt for uniformity in the preparation andsubmission of these reports.

International Financial Reporting Standards(IFRSs) ensure that there is a certain uniformity asalso reliability attached with the submission of reports; and not merely fulfilling a formalityreligiously. The barriers of information that maybe possible on account of deviation in thesystems between several countries are sought tobe erased by the IFRS regime. It is more of a

principle-based system and the possible

resultant inconsistency that may crop up withthe regulatory requirements may have to beproperly tackled under the convergence. All thispresupposes a high level of sufficiently trainedpersonnel, and insurers will have to ensure thatthis aspect is taken care of in right earnest. At atime when the discussion on an eventualconvergence or adoption of the regime revolvesaround when rather than whether; it is essential

that there is a well-trained set of staff that isfamiliar with all the aspects of the globallyaccepted standards.

The focus of this issue of the Journal is on IFRS inInsurance. The first article in the series is by Mr.Ashvin Parekh who insists that adoption of IFRSby insurers in due course will bring in a galore of benefits, the most important ones being accessto international capital markets and reduction inthe cost of capital. Mr. Sandeep Bakshi is theauthor of the next article in which he mentionsthat the main objective of financial reporting isto provide a true and fair picture of the entitysaccounts to enable a complete analysis by itsusers. Some of the erstwhile standards haveculminated into new ones, and one suchprinciple deals with investments. Mr. C.Subrahmanyam brings in his vast experience inanalysing the principles and the refinementbrought in. In the last article on issue focus, Mr.Raj Kumar Sharma discusses the importance of the exposure draft on insurance contracts andhow it will be useful for the insurers tounderstand the impact of the varioustreatments. In the Thinking Cap section, Mr. P.Umesh writes about the importance of professional indemnity contracts for corporateentities; and the nuances associated with theunderwriting process.

Despite all the progress achieved on educatingthe customer and in the scientific approach totreating claims, insurance frauds continue toexist which lead to an avoidable drain onprecious resources. The focus of the next issue of the Journal will be on Frauds in Insurance.

U. Jawaharlal


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irda journal | may 2011 6

Renewal of Composite Broking License of M/s Willis India Ins. Brk. Pvt. Ltd.

O f T h e I n s u r a n c e R e g u l a t o r y A n dDevelopment Authority In The Matter of Renewal of Composite Broking License of M/s Willis India Insurance Brokes Private Ltd

In terms of Order dated 07.03.2011 in WP No.2468 of 2011, of the High Court of Judicature at

Bombay the Committee consisting of Mr. G. Prabhakara, Member (Life) andMr. M. Ramaprasad, Member (Non-Life)constituted to hear and decide the renewalapplication dated 16th February 2009 of WillisIndia Insurance Brokers Private Limited gave anopportunity of hearing to Willis India InsuranceBrokers Private Ltd (WIIBPL) represented byMr. Mitul Vora, Dy. Managing Director andPrincipal Officer of WIIBPL and Mr. Jayant Vora,Vice Chairman of WIIBPL on 1st April 2011 in thepremises of IRDA, Hyderabad.

2) The minutes of the said hearing are onrecords of the Authority and a copy dulysigned by all present was exchanged withthe representatives of the broking companyon the same day.

3) While giving such an opportunity of hearingto WIIBPL, the Committee kept in mind thefollowing observations/directions of theHonourable High Court of Bombay in theirOrder dated 07.03.2011 in WP no. 2468 of 2011.

i) The dispute between Bhaichand andE C G C m a y n o t b e t a k e n i n t oconsideration while deciding therenewal application afresh.

ii) If any additional ground on which theauthority wants to rely and if there is anylegal impediment in passing the order of renewal, the same may be brought to thenotice of the petitioners.

iii) Petitioners may submit appropriateexplanation regarding Regulation 23 bygiving written submission in writing.

iv) Decision may be taken within 4 weeksfrom today in accordance with law.Authority will not ask for furtherextension in this behalf.

Accordingly, the Authority vide letter no.

IRDA/CB131/03 dated 22nd March 2011 calledupon the Principal Officer, WIIBPL to submittheir written submissions within 4 days fromthe date of the letter in respect of the following:

a) Violation of Regulation 23 of Insurance(Brokers) Regulations 2002. The relevantdocuments as mentioned in the letterwere enclosed.

b) M/s Wilis Europe B.V. (Respondent No.6)in WP No. 2468 of 2010 has already filed awinding up petition against WIIBPL

c) The joint venture agreement dated20.3.2003 between you and M/s WillisEurope B.V (Respondent no. 6) hasalready been terminated by the said M/sWillis B.V. (Respondent no. 6) and

d) A suit/claim has also been filed by M/sWillis Europe B.V. (Respondent No.6) withregard to breach of trade mark and tradename.

4) The observations of the Committeeregarding the above points pursuant to thehearing are as under:

Regulation 23:A. WIIBPL took the stand that the letter dated

22.3.2011 by Mr Suresh Mathur is not that of this Committee/Authority as was requiredby Court order dated 07.03.2011.

B. In respect of Regulation 23, the PrincipalOfficer of WIIBPL have submitted a letter

OrderRef: IRDA/BRK/ORD/LC /54 /4/2011 Date: 04-04-2011


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dated 31st March 2011 written by theiradvocates M/s Bachubhai Munim & Co onbehalf of WIIBPL and that there is no further

submissions to be made by them orally.5) Regarding point A, the Committee notes

that Shri Suresh Mathur, Joint Director,heading the Intermediaries Departmentwas fully competent and authorized by theAuthority to write the said letter dated22.3.2011. As per the orders of the Membersof Committee, the said letter was sent by Mr.Suresh Mathur, Joint Director, IRDA.

6) Regarding point B, the Committee takes onrecord the letter dated 31st March 2011written by their advocates M/s BachubhaiMunim & Co on behalf of WIIBPL. In SheetNo. 4, the letter inter alia states as under:

Quote:Though all the records from 2003-04 to 2008-09 have been with the IRDA and were with IRDAwhen it made the order of 1st September 2010including the Companys response to the IRDAsletter dated 14th July 2010 (claimed to be ageneral letter sent to all licensed composite

insurance brokers) IRDA did not consider theinvestment in fixed deposits and earning of interest on the premium account as a breach of Regulation 23 (this practice was voluntarilystopped by Mitul Vora on his appointment asPrincipal Officer of the Company under IRDABrokers Regulations with effect from July 2006. This ground of earning interest on the premiumaccount was not made the ground for refusal of the license in IRDAs order dated 1st September2010, obviously because firstly there is noprohibition on earning interest in Regulation23 as more particularly averred hereafter, andsecondly and in the alternative and if reliance isplaced on Companys response dated 23rd July,2010 to IRDAs letter of 14th July 2010 as analleged

Admission of the alleged breach, then it issubmitted that IRDA has condoned the allegedbreach, by accepting the undertaking of theCompany submitted along with its responsedated 23rd July 2010.

Unquote7) The Committee on perusal of records notes

that from the date of response vide letter

dated 23rd July 2010 to Authoritys letterdated 14th July 2010 till Order of theAuthority vide letter no. IRDA/CB/131 dated1st September 2010, there has been nocommunication between the Authority andWIIBPL on Regulation 23. With regard toRegulation 23, the said order of theAuthority dated 1st September 2010 statesas under:

Quotethe broker was stated to have failed to

maintain the insurance bank account properlyas required to be provided in terms of theprovisions of Regulation 23 of the Regulations,in that there existed a huge difference betweenthe balances disclosed for the years 2007-08and 2008-09 and the respective balances asreflected in the respective financial statementsmaintained by the broker. Thus the funds in theinsurance bank account for payment to Re-insurer/Ceding Companies were being used toinvest in fixed deposits, which is a very seriousconcern and not a practice for the healthyregulation of the insurance sector and isagainst the interests of all policyholders. It isalso noted that the broker could not give anysatisfactory defence in respect of this anomaly.

Unquote8) The Committee notes, that though

Regulation 23 does not prohibit earning of interest, it mandates under Regulation 23(a) that the broker shall act as the trustee of the insurance money. Further, Regulation 23

(d) mandates that the broker shall ensurethat all monies received from or on behalf of an insured is paid into the Insurance Bank Account which remains in the InsuranceBank Account to remain in deposit until it istransferred on to the reinsurer or to thedirect insurer. The committee notes that thebrokers, against this express mandates of Regulation 23, had invested the money infixed deposits.


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9) At this juncture, the Committee keeps inmind the remarks of the honourable Courtas under:

Section 9 of the IRDA Act though gives widepowers to the regulatory authority but suchwide power has to be exercised in areasonable manner and only relevantaspects are required to be considered whiletaking decision.

10)It is not disputed by the WIIBPL in theircommunications that there is violation of Regulation 23 by WIIBPL. What remains tobe seen is the seriousness of the violation.Considering that the broker is required toact as the trustee of the insurance money,and considering that the said

money was expressly mandated to bemaintained in Insurance Bank Account toremain in deposit until it is transferred to thereinsurer or to the direct insurer, thecommittee opines that investing suchmoney in Fixed Deposit constitutes aserious breach of code of professionalconduct of the brokers. Under Regulation 9(2) (I) the Authority is required to take anopinion that the grant of license is in theinterest of policyholders. The Committeeopines the conduct of business by WIIBPL asregards adherence to Regulation 23 was notin the interest of the policyholders.

11)Additional ground on which theauthority wants to rely and if there is anylegal impediment in passing the order of renewal

The Committee wished to elicit information

on the three issues relating to:(i) Winding up petition filed by Willis BV,

Europe

(ii)Alleged termination of joint ventureagreement dated 20th March 2003.

(iii )Suit/claim filed by Willis BV, Europe withregard to the trademark/trade names asconveyed in the IRDAs letter dated 22ndMarch 2011.

12)WIIBPL submitted during the hearing that

their submission dated 31st March 2011 isonly in pursuance of Bombay High CourtsOrder dated 7th March 2011 and in their

view the letter dated 22.3.2011 by Mr SureshMathur is not that of this Committee/Authority as was required by court orderdated 7th March 2011, only the Committeeconstituted would raise any additionalgrounds that too after informing in advanceso that WIIBPL would effectively respond tothe same.

13)The Committee notes that Shri SureshMathur, Joint Director, heading theIntermediaries Department was fully

competent and authorized by the Authorityto write the said letter dated 22.3.2011.Further the approval to write the said letterand its contents was given by Member (NL)in consultation with the Committee of Members. The Committee membersconfirm that the queries raised by MrMathur are with the knowledge and consentof the Committee Members. As such videthe said letter the Authority had givenadvance notice to WIIBPL to make theirsubmission on the above points.

14)The written submissions on the abovepoints furnished through their advocates byWIIBPL vide letter dated 26th March 2011are taken into consideration by theCommittee.

15)The license of composite brokers was issuedto M/s WIIBPL in the year 2003 andsubsequently renewed in the year 2006 as a joint venture between M/s BhaichandAmoluk Consultancy Services Pvt Ltd and

Willis Europe BV taking into considerationthe capability, credibility and theexperience in the subject field of insuranceand reinsurance of the joint venture as awhole. Noting that the joint ventureagreement has been terminated as alsonoted in the honourable Courts Orderdated 07.03.2011, the very foundation of theentity as composite brokers has undergonematerial change. This is vital and relevant forconsidering granting licence and renewal of


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license of insurance brokers. The Committeenotes that this composition has undergonea material change owing to the termination

of the jointventure agreement between M/s BhaichandAmoluk Consultancy Services Pvt. Ltd andWillis Europe BV. At the time of earlierrenewal of licence in 2006 the compositionof Joint Venture remained same. TheCommittee is of the view that due to thetermination of the joint venture agreement,the entity for which renewal of license issought vide application dated 16thFebruary 2009 no longer exists today.

16)Under Regulation 9 (2) (I) the Authority isrequired to take an opinion that the grant of license is in the interest of policyholders.

17)The above mentioned violations of relevantRegulations and deficiencies reasonablylead the Authority to perceive that there isno financial discipline on the part of thebroker and that the licensed entity due totermination of the joint venture agreementis no more in the same status as it was whenthe Authority considered grant of its licenceearlier and its first renewal in 2006. Therefore, renewal of licence of the broker isnot conducive to policy holders interest.

18)In terms of Regulation 13(3) of the IRDA(Insurance Brokers) Regulations, 2002, theapplication seeking renewal is required to

be dealt with in the same manner as isspecified under Regulation 9 of the IRDA(Insurance Brokers) Regulations, 2002. Interms of Regulation 9(2)(I) of theR e g u l a t i o n s , t h e A u t h o r i t y w h i l econsidering an application for grant of license is required to take into account allmatters relevant to carrying out thefunctions by the broker and in particularwhether the grant of license would be in theinterest of the policyholders.

19) Accordingly, in exercise of the power vestedupon the Authority under section 14 of theIRDA Act, 1999 read with Regulation 14(1) of the IRDA (Insurance Brokers) Regulations,2002, the Authority refuses to grant renewalof license earlier granted to Willis IndiaInsurance Brokers Pvt. Ltd., to act as aComposite Broker.

Sd/-(M. Ramaprasad)Member(Non-Life)

Sd/-(G. Prabhakara)

Member(Life)

Members of the Committee

GuidelinesDate: 05-04-2011

Guidelines on Distance Marketing of Insurance Products

These Guidelines are issued in exercise of thepowers conferred upon the Authority underSection 14(1) of the IRDA Act, 1999 to protectthe interests of the policyholders and toregulate, promote and to ensure the orderlygrowth of the insurance industry.

1. Scope and applicability of these Guidelinesa) Distance marketing includes every activity

of solicitation (including lead generation)and sale of insurance products through thefollowing modes:

(i) Voice mode, which includes telephone-calling;

(ii) Short Messaging service (SMS);

(iii)Electronic mode which includes e-mail,internet and interactive television (DTH);

(iv)Physical mode which includes direct postalmail and newspaper & magazine inserts;and,

(v) Solicitation through any means of communication other than in person.

These Guidelines cover distance marketingactivities of insurers/brokers and corporate


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agents (with specific approval of insurers) at thestages including offer, negotiation as well asconclusion of sale.

b) These Guidelines are specifically applicablein case of the following activities in additionto other similar activities:

(i) Use of distance mode for ascertainingthe clients intent to purchase insurance.

(ii) Solicitation as well as sale over thedistance mode.

(iii)Lead Generation; and,

(iv) Requests by clients seeking informationor sale of insurance products.

2. Definitions:(i) Authority means the Insurance Regulatory

and Development Authority establishedunder the provisions of Section 3 of theInsurance Regulatory and DevelopmentAuthority Act, 1999 (41 of 1999)

(ii) Corporate Agent - as defined in Regulation2(f) of IRDA (Licensing of Corporate Agents)Regulations, 2002

(iii)Insurance Broker - as defined in Regulation

2 (i) of IRDA (Insurance Brokers) Regulations,2002

(iv)Insurer - as defined in Section 2 (9) of Insurance Act, 1938.

(v) Telemarketer means an entity registeredwith Telecom Regulatory Authority of Indiaunder Chapter I II of The TelecomCommercial Communications CustomerPreference Regulations, 2010 (as amendedfrom time to time) to conduct the businessof sending commercial communications onbehalf of Insurers, Corporate Agents orBrokers.

(vi)Specified Person - As defined in Regulation2 (n) of IRDA (Licensing of Corporate Agents)Regulations, 2002.

(vii) Tele caller - For the purpose of theseGuidelines, a Tele caller is a personengaged by a Telemarketer for the purposeof interacting with clients over distancemode.

(viii)Authorized Verifier - For the purpose of these Guidelines, an Authorized Verifier is aperson employed by a Telemarketer for thepurpose of solicitation or sale overtelephonic mode.

(ix) Designated Person - As defined inregulation 2 (f) of IRDA (Licensing of Insurance Agents) Regulations, 2000.

(x) Principal Officer - As defined in regulation2 (k) of IRDA (Insurance Brokers)Regulations, 2002.

(xi)Lead Generation - For the purpose of theseguidelines, lead generation is the process

of collecting the details of the clients orprospects in any fashion or approachingthe clients directly or in distant mode toascertain their intent to purchaseinsurance before proceeding withsolicitation of insurance products andincludes all the activities leading to thesolicitation.

(xii) Solicitation - For the purpose of theseguidelines, solicitation is defined as theapproach of a client by an insurer or anintermediary with a view to induce theclient to purchase an insurance policy.

3. ComplianceInsurers/brokers/telemarketers shall, inaddition to these Guidelines, comply with allthe applicable provisions of the InsuranceAct, 1938, the IRDA Act, 1999, IT Act, 2000, TRAI Act, 1997, The Telecom UnsolicitedC o m m e r c i a l C o m m u n i c a t i o n s(Amendment) Regulations, 2008 and therules, regulations, circulars or guidelines, asapplicable, to be issued from time to time.

4. Persons engaged for solicitation(a) For the purpose of solicitation of insurance

business through distance marketing,insurers/brokers may engage:

(i) Employees on their rolls (brokers shallengage only those employees who haveundergone statutory training);

(ii) Specified persons of corporate agents, or

(iii)Telemarketers



(b) Insurers or brokers as the case may be shallbe responsible for all acts of commissionand omission of the persons deployed on

their behalf.5. Agreements between Insurers/Brokers and

Telemarketers

The agreement between the insurer/brokerand Telemarketer, by whatever name called,shall interalia include the following clauses:

(i) The Telemarketer shall maintain/preserverecordings of all the calls in a manner that iscompliant with the provisions of theseGuidelines, till such records are transferredin satisfactory condition to the insurer.

(ii) The Telemarketer shall maintain records of all the tele callers and authorized verifiersemployed by them along with their trainingand assessment particulars.

(iii) The records under (i) & (ii) above shall beopen to inspection by the Authority.

6. Role of Authorized verifier:(i) Telemarketers shall employ either specified

persons (in case the telemarketer happensto be a corporate agency), the employees of

the insurer or authorized verifiers, whoalone are permitted for soliciting andconcluding the sale of insurance products indistant mode.

(ii) The authorized verifiers shall be tied to the Telemarketer in which they are employed.

(iii)Authorized verifiers are barred fromsoliciting insurance in their individualcapacity in any mode, or on behalf of anyorganization other than the Telemarketeremploying him.

7. Distance Marketing by Brokers(i) Insurance brokers shall not exclusively

promote the products of any particularinsurer, and shall suggest the best availableproduct in the market that fits the needs of the client.

(ii) The price comparison charts that aredisplayed shall be up to date and reflect atrue picture of all the available and suitableproducts under each category.

(iii)Insurers shall not pay the brokers anyremuneration other than brokerage. Nopayments by any name shall be made by

insurers to brokers or their related partiestowards infrastructure or any account otherthan brokerage on the policies solicited orprocured over distance mode.

(iv)Insurers shall specifically identify theproposals procured by brokers overdistance mode and obtain all relevantrecords pertaining to such policies. Insurersshall produce such records before theAuthority in case of dispute involvingalleged violation of breach of conduct bythe broker.

(v) Brokers may outsource tele-calling activitiesto Telemarketers.

8. Training of tele callers and AuthorizedVerifiers

(i) Every tele-caller shall be trained at aninstitute accredited for pre-license trainingof agents by the Authority in the mattersspecified in 4(ii).

(ii) The training shall be for duration of not lessthan 25 hours as per syllabus to beprescribed by the IRDA in matters related toregulations, disclosures, ethical conduct of business and specific instructions to becomplied with while making the calls.

(iii)The tele-callers shall clear the post-trainingassessment/test to be conducted by therespective insurers/brokers in mattersmentioned in 4 (ii).

(iv)Authorized Verifiers shall fulfill therequirements as for specified persons of

corporate agents such as qualification, 50-hour pre-license training at an accreditedagents training institute and passing theexamination. They would be certified asauthorized verifiers by the designatedperson or the principal officer concernedsubject to fulfillment of the specifiedqualifications/norms.

(v) Insurers/Brokers, and corporate agentswherever applicable, shall maintain aregister of all persons engaged by them or


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by the telemarketers hired by them for thepurpose of lead generation/solicitation of insurance business. The register shall, apartfrom the name and address of the Telecaller/Authorised Verifier, also containvalid copies of his proof of identification andother relevant credentials. Insurers shallallot a distinctive code number to everytelecaller/authorised verifier and record thesame in a register maintained for thepurpose.

9. Process of lead generation/SolicitationSolicitation of insurance as well as leadgeneration shall be in specific compliancewith the following norms:

9.1 Standardized Script(i) Insurers/Brokers shall prepare standardized

scripts for presentation of benefits, featuresand disclosures under each of the productsproposed to be sold over the distancemodes. Solicitation and lead generationunder distant mode shall be in line with thestandardized script.

(ii) The scripts shall be incorporating all the KeyFeatures of the product and shall be

approved by the compliance officers of therespective insurers. The scripts shall be filedwith the Authority under Use & Fileprocedure within 15 days of their approvalby the compliance officer.

9.2 Introduction(i) The communication shall clearly highlight

the name of the insurer.

(ii) The fact that the purpose of approach is leadgeneration/solicitation of insurance shall beclearly highlighted.

9.3 Consent of the client(i) The tele caller and the authorized verifier

shall ascertain if the client is interested incontinuing with the subject, and theprocess of solicitation shall proceed furtheronly on receiving the consent in explicitterms.

(ii) The client shall be given an option tocontinue with the subject or exit the page atevery stage in case of electronic modes. The

hours during which calls are made shall be inaccordance with orders issued by TRAI/DoTfrom time to time.

(iii)In case of telephonic solicitation the nameof the caller shall be disclosed and thelanguage options available must beindicated. The subsequent communicationshall continue only in the language chosenby the client.

(iv)Tele callers shall inform clients that the call isbeing recorded and that the client is entitledto a voice copy, if he so desires, at any timeduring the term of the policy or until asatisfactory settlement of claim, whichever

is later.

(v) No inconvenience, nuisance or harm shallbe caused to the clients in the course of solicitation or thereafter. Full disclosuresshall be made to the clients under all modesof distance marketing and the requirementsof confidentiality, privacy and non-disclosure shall be complied with.

9.4 Client InformationAll relevant information pertaining to theclient as well as the person/asset to beinsured shall be obtained, and solicitationshall be strictly on the basis of analysis of theclients needs as specified by the Authorityfrom time to time.

9.5 Product benefits & Features The standardized script shall cover thefollowing items in the course of productpresentation:

(i) The specific responses of the client in theform of agree/disagree, yes/no, accept/

reject, understand/dont understand, asapplicable, against each of the items below,under all modes of distance solicitation.

(ii) Name of the product suggested and itsnature and parameters.

(iii)Insurance cover available under the productfor a specified amount of annual premium,or, conversely, premium chargeabletowards a specified amount of insurancecover.



(iv)The scope of cover, perils covered and notcovered, exclusions, deductibles orfranchise, co-payments, loading/discounts

on premiums, add-on covers, conditions,other terms and benefits, mid-terminclusions, short period scales, basis of sumi n s u r e d , w a r r a n t i e s , c l a u s e s a n dendorsements, compliance with Section64VB of the Insurance Act, 1938 paymentof premium before commencement of risk,etc, as applicable.

(v) The contents of the key features documentas and when specified by the Authority.

(vi)The right to cancel the policy within 30 days

of receipt of the policy in case of disagreement with the terms of the policyunder all life contracts and covers tied tocredit/debit/other cards, and for all personalaccident and health insurance policycontracts with a term of 3 years or moreoffered by insurers over distance mode,provided no claim has already been madeon the policy.

(vii) Disclosure of rates of commission availableon the product solicited upon the request of the client.

9.6 Premium Ceilings in case of sale of ULIPsand prohibition of sale of Universal LifeProducts over telephonic mode

(i) Insurers shall not solicit ULIPs of non-singlepremium type for annualized premiumsexceeding R 50,000/- over telephonic mode(voice as well as SMS).

(ii) Single premium ULIPs shall not be solicitedfor a premium of more than R 1,00,000/- overtelephonic mode.

(iii)No variable insurance product shall besolicited or sold over distance marketingmode.

10. Post-Solicitation ProcessOnce the client agrees to purchase a policy,the proposal form and premium acceptances h a l l c o m p l y w i t h t h e f o l l o w i n grequirements:

(i) The premium towards the policy may bedebited online or interactive voice response

medium or through a manual collectionsubject to compliance with the proceduresand controls prescribed by the RBI.

(ii) The norms applicable to insurers as regardsAML and PAN need to be complied with inthe process of selling a policy over distancemarketing mode.

(iii)In all instances where a policy is issuedwithout obtaining a proposal in physicalform, insurers shall forward a verbaltranscript of the voice/electronic record of the queries raised and answers thereto onthe basis of which the policy has beenunderwritten, along with the policy bond.

(iv)For policies solicited/sold over distancemode, insurers shall issue policies in exactlythe same format and medium as in case of sale through physical interface, dulyenclosed by the requisite annexures.

(v) The address and toll-free number of theoffice to be contacted by the policyholder incase of a servicing need or grievance shall beinformed to the client.

(vi)Before conclusion of sale the authorized

verifier/specified person/employee (as thecase may be) shall divulge his name anddistinctive code number/license/employeenumber to the prospect and this shall formpart of the recorded conversation for thesake of future verification.

(vii) The records pertaining to every call madeand SMS sent by a Telemarketer/CorporateAgent/Broker that materializes into a policyshall be transferred to the insurers locationwithin 30 days of conclusion of sale. In case

of telephone calls the records transferredshall be the recordings of the entireconversation.

11. No Unfair Denial of Insurance CoverWhen a client approaches an insurer orbroker over distance mode proposing forinsurance cover, the latter are duty-boundto consider the case on merits and inaccordance with regulatory directions andtheir own norms. In no case shall they resortto an unfair denial of cover to a client whoseeks insurance.


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12. Preservation of Records The insurer shall preserve, in an inalterableand easily retrievable form, a voice/

electronic/physical record, as applicable, of the entire process beginning with leadgeneration/solicitation and concluding insale of insurance, for a period of six monthsbeyond the term of the policy or untilsatisfactory settlement of claim, whicheveris later. Voice and electronic records shall bedigitized and encrypted for storage toensure reliability and security of the data.

13.Verification Process(i) Insurers/Brokers shall monitor the calls live

by arranging for listening to at least 1% of the calls as they happen.

(ii) Insurers shall verify at least 3% of callsleading to sales for compliance with theguidelines, by engaging a team of dedicatedemployees to listen to the call recordings. The observations made in the course of verification shall be preserved in aretrievable form for a period of not less thanthree years.

(iii)Insurers shall make verification calls, to

monitor the quality of sales, to a minimum of 3% of the policyholders who purchaseinsurance over distance marketing mode,every month. The purpose of verificationcalls is to ascertain whether the client hasunderstood the benefits, features anddisclosures of the product purchasedcorrectly. Verification calls shall also bear astandardized script and the records of calls

shall be preserved for a period (a) not lessthan 15 months from the date of policy oruntil satisfactory claim settlement,

whichever is later, in case of non-lifecontracts (b) not less than 3 years in case of life insurance policies.

(iv)The policies under (ii) and (iii) above shall beselected according to a random pattern,making sure to cover each product categoryand mode of sale.

14. Certification of Compliance The compliance officer of each insurer shallsubmit to the Authority, at the end of eachfinancial year, a certificate confirming thatthe insurer has complied with all theprovisions of these Guidelines during thefinancial year.

15. DisputesFor the purpose of these guidelines thecontract of insurance shall be deemed toinclude the contents of KFD and the recordsof calls to the client pertaining to theproduct. In case of disputes involvingspecific wordings of the policy, the clientshall have the right to give primacy to the

wordings of the KFD and the calls over thespecific wordings of the policy.

The above guidelines shall be applicablefrom 1st October, 2011.

Sd/-(J. Hari Narayan)

Chairman

All Insurers and ReinsurerRef: IRDA/F&A/CIR/ACT/069/04/2011 Date:18-04-2011

Accounting Treatment of EnhancedProvision of Gratuity The pay revision of the officers and employeeshas been carried out by the Public SectorInsurance companies in the year 2010-11 andGovernment by Gazette, Notification datedMay 24, 2010 has revised upward maximumlimit for Gratuity under Payment of Gratuity

Act 1972 from R 3,50,000/- to R 10,00,000. Theabove factors will lead to the increase in liabilityon account of gratuity which in turn will impactthe insurers profitability significantly as theyneed to provide the same in the financial year2010-11. This will cause a strain on theirsolvency as well as on their performanceresults.



In view of the above, Authority hereby permitsthe insurers to amortize the additional liabilityon account of gratuity over a period of fiveyears starting from financial year 2010-11subject to compliance of the followingconditions

i. The additional liability on account of enhancement in gratuity limits may be fullyrecognized and charged to RevenueAccount and/or Profit and Loss Account forthe financial year 2010-11.The expenditureindicated above, may, if not fully charged tothe Revenue Account and/or Profit and LossAccount during the financial year 2010-11,be amortized over a period of five years(subject to (ii) below) beginning with the

financial year ending March 31, 2011subject to a minimum of 1/5th of the totalamount involved every year.

ii. The unamortized expenditure carriedforward should not include any amountsrelating to separated/retired employees.

iii. A complete disclosure in the notes of accounts to this effect giving the totalamount of liability on this account, amountalready recognized to revenue / profit & LossAccount and the remaining amount shouldbe made in the Notes to Accounts to thefinancial statements.

Sd/-(R. K. Nair)

OrderRef: IRDA/BRK/ORD/LC/068/04/2011 Date:20-04-2011

Cancellation of Broker License No.132M/S. IMPERIAL INSURANCE BROKERS PVT. LTD.having its Registered Office at B-1/15, HauzKhas, New Delhi 110016 has been grantedrenewal license by the Authority to act as aDirect Broker vide License No.132 w.e.f. 11-03-2006 valid for a period of three years pursuantto the provisions of the IRDA (InsuranceBrokers) Regulations, 2002.

WHEREAS, the Broker vide letter dated 26thFebruary, 2009 submitted their application forrenewal of direct broking license to the

Authority.

WHEREAS, during the scrutiny of the renewalapplication, the Broker vide letter dated 31stMarch, 2010 communicated to the Authoritytheir desire to surrender the Direct InsuranceBroking License.

WHEREAS, the Broker vide letter dated 12thFebruary, 2011 submitted all the requisitedocuments/explanations with regard to

surrender of their license including the BoardResolution of the Company and the originalLicense No.132.

WHEREAS, the Broker has given an undertakingto service the existing clients whose policies arein force for a period of six months from date of cancellation of license as required underRegulation 40 of the IRDA (Insurance Brokers)Regulations, 2002, within which it has to makesuitable arrangements with another licensedbroker to service the contracts alreadyconcluded.

NOW THEREFORE, pursuant to the requestmade by the Broker for surrender of Brokerlicense, the Authority hereby cancels the DirectBroker License No.132 granted to M/s. ImperialInsurance Brokers Pvt. Ltd.

Sd/-(Suresh Mathur)

Joint Director


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Undoing the Errant Environment- Insurance Frauds

U. Jawaharlal emphasizes that there is need to quickly put an end to the hit-and-misstrends in insurance claims through a steady and progressive consumer educationabout the ills of such fraudulent tendencies.

a a e o i

v n t g p n t

Frauds in Insurancein the next issue...

It has been a long time since we touched upon thesensitive topic of Frauds in Insurance. The industrythen was still at a stage when it was getting used tothe rigours of competition in the open market; andthe players were largely driven by goals of achievinga major top-line growth. On the other hand,consumer education was still at low ebb; and ingeneral, the awareness levels of the common peoplein the domain of insurance were certainly below par.During the period in consideration i.e. the last fiveyears or so there have been several measures thatwere taken to improve the awareness levels; in theform of seminars, workshops, exposure in the massmedia etc. The priorities for the players alsoseemingly shifted to more mature and strongerareas. All this should have led to a stronger insurancemarket, driven by an erudite and satisfied consumer. The hallmark of such a market would be a vibrantbusiness activity devoid of large scale frauds; and alargely satisfied clientele.

However, in a recent survey conducted over severalbusiness sectors in the country, insurance scored thedubious distinction of being among the least trustedsectors! It sounds paradoxical that in a domain wherethe players continuously report operating losses, thecustomer is not happy about the performance of theplayers; which leads us to the question whether we

are in a no-win deal. It certainly needs a great deal of introspection as to where the problem areas existand to go about meticulously in overcoming them. There is absolutely no doubt that despite all theefforts taken, the average levels of understandingthe insurance contracts is still way behind what isdesirable. Even among the highly literate sections of

the society, it is difficult sometimes to convince thatthe premium they pay in insurance contracts is tocover the contingent happening of an event.

It boils down to the fact that there is need forexplaining upfront to the prospect the terms of thecontract and under what circumstances theinsurance money would be payable. There is a greatrole to play for the distribution personnel in thisregard. Sincere efforts taken in this aspect would alsooffset the often-heard complaint of mis-selling bythe distributors. Enough has been said and writtenabout the wording in the insurance contracts havingto be simple and comprehensible. Insurers shouldquickly attend to this vital area and ensure that the

policy conditions are clearly understood by thep o l i c y h o l d e r . G o i n g a b o u t o b t a i n i n gacknowledgements religiously would only partiallyfulfill this function.

There is a role for all the stakeholders in achievinghigher success in this regard. Policyholders shouldrealize that their claims are strictly in accordancewith the terms of the contract and help to enable anenvironment where the insurer settles the claimswith a high degree of confidence. Policyholdersshould also ensure not to get carried away by the lureof better coverage by service providers in someclasses which will only lead to perpetuation of frauds

indirectly; and leads to a huge drain on preciousresources.

Frauds in Insurance will be the focus of the nextissue of the Journal . We will look forward to a healthydebate on the issue and the problem areas indifferent classes of the industry.



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IFRS in Insurance Industry- The Indian Perspective

Ashvin Parekh emphasizes that the convergence of IFRS in the Indianinsurance industry will be a challenge to the players, considering the shorttime at their disposal and the several changes that have to be brought in.

ue f i s s oc u s

irda journal | may 201117

Background:

International Financial Reporting Standards th(IFRS) convergence is on its way in India. On 25February, 2010, the Ministry of CorporateAffairs (MCA) has notified 35 Indian IFRSstandards (known as Ind-AS') which includesInd-AS 104 Insurance Contracts. As per theroadmap approved in March 2010, insurancecompanies will have converted their openingbalance sheet as at 1st April 2012 in compliancewith converged Indian Accounting Standards. Therefore it would seem timely to consider thechallenges and impact that IFRS would have onthe sector, and more significantly examine thebenefits arising out of implementing IFRS.

Benefits of IFRS: The past few decades have seen the advent of globalization whereby many entities have andare expanding or making significantacquisitions in the global arena, for which hugecapital is required. One of the key challengesfaced by all such entities is the compliancerequirements imposed by various stock

exchanges across the world for financialinformation. Today majority of stock exchangesacross the world will accept or require financialstatements to be prepared under IFRS. Indiabeing one of the key global players, migrationto IFRS will enable Indian entities to have accessto international capital markets without havingto go through the cumbersome conversion andfiling process that is currently required.Migration to IFRS will lower the cost of raisingfunds, as it will eliminate the need for preparinga dual set of financial statements.

IFRS by bringing in a global language for

accounting, that is understood by all reducesthe risk premiums charged by markets oncapital raising, as information barriers areremoved. Consequently, adoption of IFRS byIndia will allow Indian entities to raise capitalwithout the risk premium involved in IndianGAAP financial statements.

Adoption of IFRS will also enable Indian entitiesto gain a broader and deeper understanding of the entity's relative standing by lookingbeyond country and regional milestones.Further, adoption of IFRS will facilitatecompanies to set targets and milestones basedon global business environment, rather thanmerely local ones.

Convergence to IFRS, by all group entities, willenable company managements to get allcomponents of the group on one financialreporting platform. This will eliminate the needfor multiple reports and significant adjustmentfor preparing consol idated f inancial

statements or filing financial statements indifferent stock exchanges.

Accounting impact: The convergence with IFRS will result infundamental changes to how Indian insurancecompanies currently account for their businessoperations. The complexity is further increasedby the fact that the IFRS standards mostrelevant for the insurance companies are alsogetting revised significantly. Thereforecurrently it is a case of moving goal posts for the

IFRS by bringing

in a global

language for

accounting, that

is understood by

all reduces the

risk premiumscharged by

markets on

capital raising,

as information

barriers are

removed.


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s ue f i s oc u s

irda journal | may 2011 14irda journal | may 2011 18

Indian insurance companies as they makesignificant investments in convergence withIFRS, they will have to go through anotherround of significant accounting changes oncethe revised accounting standards arepromulgated.

A key accounting impact area for insurancecompanies is accounting for investmenttransactions. Currently, insurance companiesaccount for their investments in accordancewith IRDA regulations. Under IFRS theinvestment transactions can be classified inthree categories, namely held-to-maturity(HTM), available-for-sale (AFS), and Held for

Trading (HFT), as laid out in IAS 39 FinancialInstruments: Recognition and Measurement.Only investments that qualify as HTM can becarried at amortized cost, the rest are measuredat fair value. However, a company has to hold itsHTM investments till their maturity there areno sales or reclassifications permitted. In caseany HTM investment is sold or reclassifiedbefore maturity, all HTM investments getreclassified as AFS or HFT and have toremeasured to their fair value. Therefore any

insurance company seeking to classify itsinvestments as HTM should be careful inmaking such choice and ensure that no sales orreclassification from these investments will benecessary in future.

However, this goal post is moving. Whilst thecompanies will have to convert to IAS 39 for the2012 conversion date, a new standard 'IFRS 9:Financial Instruments' which deals withinvestment classification and measurementwill become effective 1 January 2013. Theaccounting requirements for IFRS 9 could resultin a significant change from the classificationand measurement rules that an insurancecompany would have applied under IAS 39.

The other critical area of impact is theaccounting for insurance contracts. Until 2005there was no IFRS standard which dealtspecifically with insurance contracts. The staff of the IASB was working to develop a fair valuetype standard for insurance contracts, but

conceded that, it would be too complex tofinalise and implement such a standard by2005, the year when IFRS were adopted in theEuropean Union. Recognising the difficultyinherent in formulating a high quality globalstandard for insurance contracts, the IASB splitthe insurance accounting project in two phasesand released IFRS 4 Insurance Contracts inMarch 2004 to apply as an interim standard andto be a stepping stone from Phase I to Phase II.

The key requirement of the IFRS 4 is to performa product classification exercise. This is toensure that insurance contracts meet thedefinition of insurance under IFRS (i.e. they

contain significant insurance risk). For contractsdetermined to be insurance contracts, IFRS 4permits companies to continue to use theirexisting accounting policies for insurancecontracts subject to certain modifications.Companies may also adopt revised insurancecontract accounting policies where theseprovide more reliable and relevant informationand do not include certain prohibited practices.All insurance contracts that are determined tobe investment contracts will be accounted for

at their fair value under IAS 39 as discussedpreviously.

For Indian life insurers, this implies thecontinued use of the Solvency Marginguidelines in measuring policy liabilities forcontracts determined to be insurance contractand changes for policy liabilities in practice willbe expected only for investment contractsunder the existing IFRS 4.

Among the other major modifications are the

elimination of any catastrophe or claimsequalisation provisions and testing for liabilityadequacy. Some existing practices are allowedto continue, such as undiscounted claimsreserves and excessive prudence.

One of the most persuasive arguments for theadoption of IFRS throughout the world was thatit would improve comparability betweendifferent reporting entities. However, the Phase1 of IFRS 4 failed to achieve this for insurance

companies as it allowed companies to continue

The accounting

requirements for

IFRS 9 could

result in a

significant

change from the

classification

and

measurement

rules that aninsurance

company would

have applied

under IAS 39.



to apply their previous GAAP accountingpolicies for the recognition and measurementof insurance contracts. Indeed, the adoption of IFRS has heightened awareness of the lack of comparability and consistency of financialstatements within the industry.

Transition to Phase II30 July 2010 was an important milestone for theIASB as it issued the Exposure Draft (ED) onPhase II, intended to result in a single consistentrecognition and measurement standard forinsurance contracts internationally. The scopeof ED includes (i) contracts that meet thedefinition of insurance that an insurer issues, (ii)

reinsurance contracts that an insurer holds and(iii) participating investment contracts that aninsurer issues and that share in theperformance of the same pool of assets asparticipating insurance contracts. The IASBdecided to continue to use the definition of aninsurance contract set out in IFRS 4 but theyclarified how significant insurance risk in thatdefinition should be evaluated.

Insurance contracts may include multiple

elements such as insurance coverage,investment (or financial) components andembedded derivatives. A key question invaluing insurance contracts is whether andhow to separately identify and measure thecomponents of the contract. The ED introducesmandatory unbundling requirements forcomponents of a contract that are not closelyrelated to the insurance coverage specified inthe contract. In the present scenario, unit-linked insurance plans (ULIPs) are insurance

contracts likely to meet definitions underunbundling.

For insurance contracts, the ED indicates thatcontracts are measured using the present valueof the fulfilment cash flows. However, forcertain contracts, a simplified model can beused for the pre-claim period. The presentvalue of the fulfilment cash flows is made up of:(i) unbiased, probability-weighted average of future cash flows expected to arise as insurerfulfils the obligation, (ii) incorporation of time

value of money (discount rate) and (iii) a risk adjustment.

The first component in valuing insurance

contracts is the unbiased, probability-weightedaverage of future cash flows. The future cashflows should represent the net rights andobligations present in the contract as opposedto separately identifying the gross obligationsand presenting separate gross assets andliabilities. The cash flows should reflect themanner in which the insurer expects to fulfil thecontract. The ED requires that an entityincorporate, in an unbiased way, all availableinformation about the amount, timing and

uncertainty of all cash flows that will arise as theinsurer fulfils the insurance contract. Availableinformation includes, but is not limited to,industry data, historical data of an entity's costs,and market inputs when those inputs arerelevant to the fulfilment of the contract. To theextent that the inputs used to calculate theestimated cash flows relate to observablemarket variables (for example, interest rates)the IASB requires these to be consistent withcurrent observed market prices. However, for

most insurance contracts, many significantvariables (for example, mortality and specificexpenses) will not be observable in the market. The IASB recognises that , for theseassumptions, insurers will usually use internaldata for estimation.

The ED requires that the cash flows be re-measured in each reporting period. Therefore,the information used to estimate the futurecash flows should be current and correspond toconditions at the end of the reporting period.Any movements as a result of re-measurementshould be recorded in profit or loss.

The second component is the discount rate. The ED states that the discount rate shouldconceptually adjust estimated future cashflows for the time value of money in a way thatcaptures the characteristics of that liability. TheED implies that the discount rate is based on therisk-free rate and adjusted for characteristicsunique to the liability, for example, an

The future cash

flows should

represent thenet rights and

obligations

present in the

contract as

opposed to

separately

identifying

the gross

obligations and

presenting

separate gross

assets and

liabilities.


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adjustment for illiquidity. However, if theamount, timing or uncertainty of the cash flowsdepends, wholly or partly, on the performanceof specific assets then the measurement of theinsurance contract should reflect that fact. Thediscount rate should be re-measured in eachreporting period and changes should berecorded in profit or loss.

The third component is the risk adjustment. This is an adjustment to capture the effects of uncertainty associated with the cash flowsarising from the contract. The risk adjustmentshould be the maximum amount that theinsurer would rationally pay to be relieved of

the risk that the ultimate fulfilment cash flowsmay exceed the expected cash flows.

In addition to the present value of thefulfilment cash flows, the ED requires that themeasurement of an insurance contract includea residual margin that eliminates any gain at theinception of the contract. The residual marginrepresents a calibration that eliminates thepositive day-one difference between: a) theexpected premiums, and b) the expectedclaims, benefits and claims handling expensesand incremental acquisition costs. If theexpected claims, benefits and claims handlingexpenses and incremental acquisition costsresults in a negative day-one difference, thenthe insurer should recognise that differenceimmediately in the profit or loss.

The residual margin is to be released over thecoverage period (during which the insurerprovides insurance coverage) based on eitherthe passage of time or the timing of expected

claims and benefits incurred if the insurerexpects to incur claims and benefits in a patternthat is significantly different than the passageof time. Also, an insurer should accrete intereston the carrying amount of the residual margin. The ED indicates that an insurer should notadjust the residual margin in subsequentreporting periods for changes in cash flowestimates. Therefore, the residual margin is onlyadjusted for amortisation.

Notwithstanding the fact that the ED has ameasurement model based on the presentvalue of the fulfilment cash flows plus a residualmargin, it provides for a simplified approach forshort duration contracts, which is similar butnot identical to the unearned premiummethodology currently used for non-lifeinsurance liabilities. Whilst this represents adifferent measurement approach from theproposed building block methodology, it hasthe benefit of being similar to existingreporting for non-life contracts.

Other significant aspects of the ED are:A cedant measures the reinsurance contract

initially at the present value of the fulfilmentcash flows including the risk of non-performance by the reinsurer. The cedantshould estimate the present value of thefulfilment cash flows for the reinsurancecontract in the same manner as thecorresponding part of the present value of the fulfilment cash flows for the underlyinginsurance contract. If the present value of thereinsurance recoverable exceeds the futurecash outflows, then a gain should be

recognised in the profit or loss. However, if the present value of the reinsurance contractis less than the future cash outflows, then thecedant should record the difference as aresidual margin.

Acquisition costs that are incremental at theindividual contract level are included in thepresent value of the fulfilment cash flows.Incremental acquisition costs are the costs of selling, underwriting and initiating an

insurance contract that the insurer wouldnot have incurred if it had not issued theinsurance contract. All non-incrementalcosts are expensed in the profit and losswhen the insurer incurs them.

A presentation model is one that focuses onmargins and other key performanceinformation. This presentation requiresinsurers to treat all premiums as deposits andall claims and benefits as repayments to thepolicyholder. For contracts measured using

l

l

l

Incremental

acquisition costs

are the costs

of selling,

underwriting

and initiating

an insurance

contract that

the insurer

would not have

incurred if it had

not issued the

insurance

contract.



the simplified measurement a differentpresentation model is provided. An insurerapplying the simplified measurement modelis expected to present at a minimum: thepremium revenue, claims incurred, expensesincurred and incremental acquisition costsincurred.

Disclosures including the confidenceintervals used for the calculation of risk margin, reconciliations of contract balancesfor insurance liabilities, claims developmenttables, sensitivity testing and gains or losseson buying reinsurance. These provide adetailed analysis of changes and methods, as

well as inputs used to develop themeasurements to estimate the liability.

The IASB Is currently considering thecomments received in respect of theproposals in the ED and the final standard isexpected by 30 June 2011. However, theimplementation date for the new standard isnot expected to be before 2013.

The impact on business processes andsystems will be significant, requiring carefulcons idera t ion and comprehens iveimplementation programs to first convergewith IFRS and, then implement the newstandards including IFRS9 and Phase II. Inmany instances, the insurers will be facingother current finance transformation andchange programs such as Solvency II. Therefore insurers will need to take astrategic view of the impact of these changesand build in flexibility in their conversionprograms to ensure that they are able tocope with the multiple changes.

Industry experience indicates that it can take18 to 24 months or longer to adopt a newbasis of reporting, which was the experienceof U.S. mutuals and non-U.S. companies inimplementing U.S. GAAP. And that was in thecontext of a relatively stable set of rules, withwell-understood requirements andsubstantial industry experience. Accordinglyit is important that the Indian insurers starton their conversion program without anyfurther delay.

l

The key business process, system and otherimplications for Indian insurers arising fromthe convergence with IFRS and evolvingstandards like IFRS9 and Phase II are:

The earnings of insurance companies willexhibit higher volatility under IFRS thanunder Indian GAAP. This is mainly due toDAC, income deferment, fair valuations, etc. The insurance companies will also need topay closer attention to their investmentstrategies to measure asset -liability match.

The presentation of internal and external keyperformance indicators will need to changeto clearly communicate the levers availablet o m a n a g e a n d c o n t r o l b u s i n e s sperformance. Many aspects of the Phase IIapproach to measuring performance(including the margin based earningspresentation and the treatment of variancesbetween actual and expected experience onthe in force book) will be familiar to insurersalready using embedded value approaches.

In addition, the insurance companies willalso have to do considerable changes in IT

Systems that requires careful planning, datagathering and use of judgments. Insurerswill need to define solutions to supportparallel reporting of IFRS results during thetransitional period and provide local GAAPand local regulatory reporting on anongoing basis as required. This willnecessitate an assessment of the capabilityof corporate and business unit generalledgers to support multiple GAAPconversions.

Actuarial departments of insurancecompanies are under tremendous pressureto cope with numerous regulatory reportingrequirements as well as risk and capitalmanagement. Due to new reportingrequirement, there is a need to changedesign and build robust controls aroundprocesses and systems to minimize the risk of errors.

Significant work will be required to revise

l

l

l

l

l

Insurers will

need to definesolutions to

support parallel

reporting of IFRS

results during

the transitional

period and

provide local

GAAP and localregulatory

reporting on an

ongoing basis

as required.


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and update policies and promulgateguidance for implementation. This willinclude policies for setting discount ratesand risk margins and any deviations fromPhase I. Accounting policies and manualsmust be updated to reflect the newstandard. The processes developed to reportunder the new insurance accountingstandard will also need to be auditable.

In addition to the change in accountingpolicies and practices, the proposals alsomay significantly impact systems, data, taxreporting, and control processes. Earlyassessment of accounting and actuarial

resources and training requirements will beessential in order for insurers to be properlyprepared for implementation.

Informing and educat ing externalstakeholders, including the analystcommunity, will be a major challenge duringthe transition. For example, the requirementto adjust in force future profits throughretained earnings at transition will clearlyi m p a c t a n i n s u r e r ' s s u b s e q u e n tperformance under IFRS. Clear andtransparent communications that helpstakeholders navigate their way through thechanges to regulatory and statutoryreporting will create confidence and helpmanage any potential adverse impacts oncompany's valuation which are planning togo for IPO in near future.

Educating finance staff and management onthe key changes from Phase I and thesimilarities between Phase I and Phase II will

require a major investment in training. Withthe release of the ED, initial awarenesssessions should begin immediately. Even inP h a s e I , e x e c u t i v e s w i l l h a v e t ofundamentally change the way they think about the business and assess itsperformance. And in Phase II, the challengewill only be magnified by the requirementfor fair value reporting of insuranceliabilities.

l

l

l

Resource management is going to be criticalfor Indian insurers. There will be a significantdraw on many of the same core resources toinput into developing IFRS requirements,whilst balancing ongoing demands of business as usual processes and potentiallyother in-flight projects. The importance of retaining and effectively leveragingknowledgeable and valuable resourcesshould not be underestimated.

ConclusionIn summary, the implementation of IFRSrequires a considerable change-managementeffort, particularly in training financial

personnel and enhancing non-financialpersonnel's understanding of reportednumbers. As the timelines for convergenceapproach, all insurance companies will have toconsider their respective roadmaps and ensurethat their convergence plans are designed in amanner that achieves the desired objectives. Time is certainly short to accomplish thisprofound change, and the task is complicatedby the continually shifting requirements andguidance. But IFRS will come, and with it will

come the market's demand and fullexpectation that management be able to runtheir companies effectively in the newmeasurement framework. This is themonumental challenge facing the industry aswe look to the future.

Article Developed at Ernst & Young by AshvinParekh - Partner, National Leader GlobalFinancial Services; with assistance from Shrawan

Jalan - Partner, Assurance and Amit Kabra - Associate Director, Global Financial Services

Assurance.

The importance

of retaining

and effectively

leveraging

knowledgeable

and valuable

resources

should not be

underestimated.


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Beyond Mere Accounting- International Financial Reporting Standards

Sandeep Bakhshi writes that IFRS is essentially principles-based; and as such,it is for the industry participants to demonstrate sufficient maturity to ensurethat the regime is eventually successful.

s ue f i s oc u s

irda journal | may 201123

Making profit is

one of the key

economic

objectives for

proprietary

companies.

Methods of

measurementof profit

therefore are

always watched

with

considerable

interest.

IFRS has been one of the most discussed topics

internationally over the past few years. Withover a hundred countries having convergenceplans with or allowing the use of IFRS, it hasbeen gaining considerable momentum. India isno except ion, having committed toconvergence.

Making profit is one of the key economicobjectives for proprietary companies. Methodsof measurement of profit therefore are alwayswatched with considerable interest. Theendeavour in setting profit measurement

standards is to represent an appropriate pictureof the economic value created during aparticular time period. It is undeniable thatthere are peculiarities in every industry. Thiscreates a situation where the financial resultsacross industries are not directly comparable.An additional complexity is that differentcountries have adopted different accountingmethodologies which give rise to a lack of comparability across countries even within thesame industry. In the pre globalization era,dissimilar accounting standards didn't havethat much of an impact as the flow of capitalwas largely restricted to domestic investors.However, with geographical boundariescrumbling, the flow of capital is relatively freeb e t w e e n c o u n t r i e s a n d i n v e s t m e n topportunities existing therein. For an emergingeconomy such as India adopting IFRS willprovide the necessary fillip for encouragingincreased levels of inbound and outbound flowof capital, provide the necessary thrust formaintaining the economic growth rate.

IFRS has been a significant international

initiative to narrow some of these gaps, bothacross industries and across countries. It alsobrings on some challenges and complexitiesthat we as industry participants will have tocome to grips with. As an accounting regime,IFRS is principles based and not prescriptive. The key principle that forms the bedrock of IFRSis that of fair value, both for assets andliabilities. It therefore needs significant judgment in application. It also requires thatmarket participants demonstrate a degree of maturity to make any principles based regimesuccessful.

It should however be noted that the objectiveof any financial reporting regime is to provide atrue and fair accounting representation and notfit any regulatory purpose. The regulatoryperspective is primarily focussed on protectingthe policyholder interests and as such maynecessitate a separate representation of financial position on a more conservative basis.In the Indian context, the existing financialreporting regime has been with regulatoryobjectives as the primary focus. Moving from alargely rule based system to one based onprinciples would need to be journey over time.Given how young the industry is in India, itmight be desirable for the regulator to givesignificant guidance on the application of theseprinciples to facilitate this transition.

It is also worthwhile to note that accountingregimes by themselves do not change theprofit over the life of the business but only


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IFRS seeks to

differentiate

between

contracts with

significant

insurance

component and

those without.

It also seeks to

differentiatebetween

contracts that

can be

separated into

distinct

insurance and

investment

componentsand those that

cannot be

separated.

impact the timing of emergence of this profit. This difference in pattern of profits driven byaccounting norms and the fact that typicallyprofits in insurance emerge over the life of along term contract has meant that insurancehas for a long time had multiple mechanisms tomeasure value. Accounting profits have notalways been considered as a suitableevaluation parameter due to the inherentchallenges in measuring the economic value. This has seen the use of the Embedded Valuemetric being employed as a supplementaryreporting tool to communicate to stakeholdersthe economic value of the business.

The conversion or transition to IFRS is ac o m p l e x p r o c e s s a n d w i l l r e q u i r etransformation at multiple levels. At the verycore, companies will have to make significantchanges to their accounting and financialreporting processes. Apart from this, IFRS mayalso have an extended impact on the coreprocesses of actuarial, finance/ treasury,investment management, risk and controls.Finally, any effort to improve the performanceof any of the core or extended impact areas willrequire consideration of the impact of key

enablers such as people, process andtechnology. Therefore, the use of IFRS will affectmore than just the accounting and financialreporting functions. It will ultimately lead tochanges in every aspect of a company'sbusiness. By taking a proactive approach tounderstanding how the implementation of IFRS will impact key areas of insurers' businessstrategies, management can avoid the risks of being blind-sided and seize the newopportunities IFRS presents for differentiationand competition.

A lot has been written about the specific areasof accounting that will be impacted and whatthe change could mean to measurement of profits. This article will attempt to capture someof the wider implications of the transition toIFRS and conclude with discussing thechallenges that still remain. This discussion willnot just focus on the existing standards but alsobring in the implications of change in directionthat is under consideration for most keystandards.

Product design and pricingIFRS seeks to differentiate between contractswith significant insurance component andthose without. It also seeks to differentiatebetween contracts that can be separated intodistinct insurance and investment componentsand those that cannot be separated.

This will determine what is recognized asincome, premium or charges, as well aswhether acquisition costs can be deferred. Italso seeks to recognize the cost of features of the product such as guarantees that wouldneed to be valued separately akin to derivativeinstruments. All of these can have a materialimpact on company's strategy to offer differenttypes of products as well as bring about agreater focus on pricing such features right asopposed to an accounting regime where theymay not have been recognised as an explicitcost.

ReinsuranceIFRS is expected to bring in guidance onrecording of financial reinsurance contracts.Financial reinsurance is not yet a topical matterin the Indian context, but the implications of

how it will be accounted will become animportant consideration in building aregulatory and implementation framework.

Investment Strategy and Asset LiabilityManagementInsurers manage assets and liabilities and theinteraction between them based on theirappetite for risk and availability of capital, whilekeeping in mind the underlying commitmentsin the liabilities. IFRS expects detaileddisclosure on the nature of assets and liabilities

and any potential mismatches between them. The readers of the statements would then beable to estimate the impact of the investmentstrategies of insurers in the specific context of their liabilities.

Risk Management The transition to IFRS is likely to encourageinsurance companies to improve thesophistication of their risk managementpractices. First, as described earlier, IFRSintends to help companies arrive at a better



economic view of their business portfolio,which will likely lead to improved managementof the business. Second, IFRS provides anopportunity for firms to introspect on theircurrent risk management practices and look atsubstantially improving internal controls.Finally, above all, greater transparency will leadto greater levels of accountability for risk management pract ices . IFRS expectssignificant detail with respect to disclosures onrisks inherent in the business. This would focusthe attention of readers on the differences inrisk management practices of insurers and notonly have them focusing on profit as a metric.

It is also worthwhile to note that provision of regulatory capital is also rapidly movingtowards recognising risks specifically faced byeach insurer.

Reading the financial statementsIFRS Phase II for insurance proposes to bringa b o u t s i g n i f i c a n t c h a n g e s t o t h erepresentation of results. It seeks to move fromthe 'income minus expenditure' view to onethat shows the various sources of earnings suchas mortality profit, investment profit, expense

profit etc. This will call for a complete re-orientation in the minds of the stakeholdersand investors to understand what the resultsmean. This could also prove to be a significantchallenge for some insurance companiesexploring the possibility of going public in thenear future. While this has been the primarymethod of representing profits under anEmbedded Value framework, it is a completelydifferent view from an accounting perspective.It may well necessitate a supplementarydisclosure on an income minus expenditurebasis to achieve a smooth transition.

Closing the Systems Gap The implementation of IFRS is likely tonecessitate redesigned accounting, reporting,consolidation and reconciliation processes.Additionally, IFRS entails more extensivedisclosure requirements, requiring regularreporting and usage of financial data that maynot be standardized in the insurers' existing

data models. IFRS may also increase the needfor documented assumptions and sensitivityanalyses, factors that may expand the scope of information managed by the insurancefinancial systems. From an actuarialperspective, the requirement that insurersestimate cash flows and liabilities on a fair valuebasis will demand significant changes tomodels, data and processing capability. Fromthe perspective of accounting of assets, IFRSwould entail a significant change arising fromclassification of investments into variouscategories and the resulting accountingtreatment for each such category.

Filling the Talent Gap To conform to the new reporting requirements,insurers will need to have strong knowledge of IFRS across actuarial, accounting, finance, tax, IT(information technology) and productdevelopment functions. In acquiring this talent,insurance companies will face stiff competitionfrom firms in other financial services sectors.

In conclusion, it would be worthwhile to notethat no accounting regime can offer a perfectrepresentation and it would be idealistic to

expect it to be so. The fact that IFRS makessignificant strides in bringing about greatercomparabi l i ty across businesses andgeographies is a positive move.

From a life insurance perspective, it would alsobe worthwhile to note that IFRS will bring withit a need to align both taxation systems andregulatory reporting and solvency regimes toit. However, there is still a considerable amountof work to be done in these areas.

IFRS may alsoincrease the

need for

documented

assumptions

and sensitivity

analyses, factors

that may expand

the scope of information

managed by

the insurance

financial

systems.The author is MD & CEO, ICICI Prudential LifeInsurance Company Ltd.


28/100irda journal may 2011| 26

IFRS 9 lays down

the new

principles of

recognition,

de-recognition,

measurement,

subsequent

measurementsand

reclassification

of financial

instruments.

This standard is

to be effective

from 1st January

2013.

Classification of Investments- Achieving Consistency with IFRS

C. Subrahmanyam suggests that aligning the Regulations to be consistentwith the International Financial Reporting Standards will be the priority forIndian regulators, especially in the insurance industry.

s ue f i s oc u s

Introduction

The insurance companies both life and generalwill have a significant challenge in recognizingand accounting the investments under newregime of IFRS. Though the date for adoptionof the IFRS for the Indian companies andparticularly to insurance companies is yet to benotified with certainty, the change is bound tohappen. It is only a matter of time before theRegulator and the Ministry of Corporate Affairspave way for convergence for IndianAccounting Standards to InternationalFinancial Reporting Standards. The followingsections of the article capture some of thesignificant trends in recognizing andmeasuring the investments of insurancecompanies.

The recognition, measurement and disclosureprinciples of investments are addressed byInternational Accounting Standard (IAS) 32,39 and International Financial ReportingStandards (IFRS) 9. The principles under thesestandards are fairly complex and demandextensive research and are subjective inapplication. IFRS 9 as it exists today is the resultof the first phase of refinement to IAS 32 and 39. The complexity of application of thesestandards had resulted in a widespreadhesitation and resistance all over the world.Several business and professional bodies hadrequested for simplification of these principles.International Accounting Standards Board(IASB) inherited IAS 32 and 39 from itspredecessor International AccountingStandards Committee and realized the

practical difficulties in the application of IAS 32

and 39 and drew up a plan to refine thesestandards in three phases. The result of thePhase 1 of such refinement is the IFRS 9 whichbrings in simplification in the classification andreclassification of financial instruments. IFRS 9lays down the new principles of recognition,de-recognition, measurement, subsequentmeasurements and reclassification of financialinstruments. This standard is to be effective

stfrom 1 January 2013.

The recognition and valuation principles of

insurance companies in India are governed by The Insurance Regulatory and DevelopmentAuthority (Preparation of financial statementsand Auditors report of insurance companies)Regulations, 2002. These regulations prescribethe principles of measurement and recognitionof investments under the insurance laws.

Currently the Indian Accounting Standard 13on investments is not applicable to insurancecompanies as per the above said regulation.

We in India have decided convergence to IFRSduring a period when these initial internationalstandards have already been subjected toapplication and experiences from suchapplication are being incorporated as furtherrefinements or modification to the existingstandards. Though this process of refiningstandards is continuous, current period iswitnessing series of big and substantialchanges being incorporated into thestandards. Hence, the biggest challenge beforethe agencies charged with convergence to IFRS



is to determine the cut-off date of convergenceto IFRS. Given the above background of diversepractices of accounting of investments andevolving principles of simplification, in thisarticle, an attempt is made to examine inrelation to life insurance companies theprinciples of classification of investmentsunder the Regulations, under the InternationalAccounting Standard 32 and 39 and therefinement that is proposed to be brought in asper IFRS 9. Classification of investmentsdetermines the principles of initial andsubsequent measurement. The classificationprinciples of IAS 39 have been subjected topractical application and the experience from

the same has already been incorporated intoIFRS 9. I found this examination is essential inorder to orient the Indian insurance companiesto move towards IFRS in course of time.

( T h e w o r d s I F R S a n d I A S a r e u s e dinterchangeably in this article)

Investment accounting under Regulation The above said regulation prescribes theprinciples of measurement of investmentsboth for life insurance and non-life insurance

companies.Life insurance companies The investment within the life insurancecompanies are caterogirsed as linkedinvestments, non-linked and shareholdersinvestments. The Unit Linked Policies are issuedwith a condition to repurchase such units at NetAsset Value (NAV) as on the date of repurchase.As the liability under these contracts at anypoint of time is to be settled at fair market value,the investments representing such liability are

measured at fair value / market value as perregulation. Non linked policies containobligations to pay the sum assured togetherwith bonus, if any, to the policyholder upon thehappening of the event or upon the expiry of the period of the contract. The assets/investments representing discharge of thisobligation should equal to the liability by theend of the period of the contract. Hence, theregulation prescribes a combination of measuring investments at market value andamortised cost. The fair value gains/losses onthese investments are not taken to thepolicyholders' account till such time theinvestments are de-recognised. Such fair value

changes during the period of the insurancecontract are reflected in the balance sheet.

A similar method of measuring theshareholders investments is prescribed underregulation.

Accounting of Investments IAS 32 and 39International Financial Reporting Standards(IFRS) follow a structured methodology of addressing the subject of financial instruments.Generally speaking all contracts which are

either realized or settled by receipt or paymentof cash are called financial instruments. Hence,these contracts either give rise to financial assetor financial liability.

IFRS classifies financi

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