Evaluating IRDA's orders

by Ashish Aggarwal and Rhythm Behl.

Regulators are mini-States, combining legislative, executive and quasi-judicial functions. In the quasi-judicial function, regulators write orders, which impose punishment. In each of the last three years, the insurance regulator (IRDAI) has issued orders against nearly thirty per cent of India's insurance companies. In the orders passed in January-May 2016, half of the life insurers companies were accused of more than ten violations each. In the same period, three out of seven general insurance companies were accused of over twenty violations each.

Moreover, the same companies have been repeatedly found to be involved in different violations. As an example, Future Generali India Life Insurance Company Limited, Tata AIA Life Insurance Company Limited, Sahara India Life Insurance Company Limited have been issued final orders for three consecutive years from 2014.

In this article, we evaluate IRDAI's orders against four principles of natural justice:

1. The accused party must be provided the evidence that is relied upon to decide the alleged violation.
2. The accused party must be provided with an opportunity to be heard.
3. An order should be reasoned and a speaking order.
4. The authority responsible for passing orders should deal with their case-load within a reasonable time.

To preview the results, we find that IRDAI passes muster on the first two principles but fails on the remaining two. These are important failures. A reasoned and speaking order safeguards against arbitrariness. It indicates whether the authority has applied its mind or not. It provides the aggrieved party an opportunity to demonstrate before the appellate court that the reasons, which persuaded the authority to reject his case were erroneous. The importance of disposing a case in a reasonable time frame is best summed up in the saying Justice delayed is justice denied.

This research helps us understand the extent to which State capacity has come about at IRDAI, and the areas where improvements are required. This work is particularly relevant as IRDAI orders can now be appealed at the Securities Appellate Tribunal, which is now the forum for appeals against orders by all financial regulators other than RBI. This research forms part of a recent literature that analyses the working of regulators in India.

Research Design

We analysed all the seventeen final orders published during January-May 2016 against life and general insurance companies. The earliest of these cases was instituted in 2010 and the last in 2013.

We captured:

• Information on accused entity and colluding agencies,
• Date of inspection,
• Date of first communication and first response,
• Show cause notice date along with the date of reply to the notice,
• Details of additional communications,
• Date of personal hearing and the date of final order.

In addition, our dataset includes:

• Every charge levied against the entity along-with details of the charges, regulations violated, violation amount, and violation description.
• Penalty against each charge, and any other regulatory action (If the insurer was held guilty).
• Rationale for the decision and details of the signing authority.

The research yielded 178 charges in seventeen orders or about ten charges per order. Interestingly, 120 of these charges were located in the eight orders against the general insurers with an average of fifteen charges per order as against six charges per life order. Charges, here, refer to the infringements the insurance companies have been booked for, by the IRDAI. For example, three life and six non-life insurance companies included in our analysis have been charged for using wrongful means and practices for solicitation of business. Further, three life and seven non-life insurance companies have been charged for making unnecessary and illegitimate payments to corporate agents or other intermediaries.

Further, we summarised some commonly repeated offences and the number of companies accused of the same, along with the form of penalty issued to reflect upon the difference in treatment of similar offences across companies and the resulting lack of effectiveness.

The dataset is released here.

Delays

Avoidable adjournments are a good proxy for delays in a court case. In the case of regulatory actions, the regulator and the accused entity drive the process and therefore it becomes easier to assess which party was responsible for each step of the delay. The process followed by IRDAI runs through the following steps:

1. IRDAI carries out an inspection of the insurer.
2. A copy of the inspection report is shared with the insurer.
3. In response, the insurer makes necessary explanations and submissions.
4. IRDAI raises further clarifications/queries, if any, at this stage.
5. A show cause notice is issued to the insurer.
6. After a response from the insurer is received, IRDAI grants a date for personal hearing.
7. Based on this, a final order is issued. This is signed by a whole time member of IRDAI.

We measure the delay by calculating the time taken by the regulator at each step of the whole process - from the date of inspection to the final decision. For all the seventeen orders issued in January-May 2016, we find that the related inspections were conducted at least three years before: either in 2013 or earlier.

For general insurance companies, after IRDAI received the first response to the inspection report (step three in the process above), there was no communication from its side for three to four years (six years in some cases) before a show cause notice was finally issued.

For life insurance companies, where clarifications to the submissions made by insurer were demanded, the same was done only after a period of two years.

There is inconsistency in the treatment of life versus general insurance cases. For instance, no further queries were raised in general insurance cases on submissions made by the insurers. But with life insurance, IRDAI took over two years to raise further queries. Further, in the case of life insurers, IRDAI took about four months to issue a show cause notice but in the case of general insurance companies it took an average of four years for the same step. This twelve times delay may be inconsistent with equal treatment.

On the basis of our analysis, we constructed a timeline of the investigation process based on the average time taken at each step for both life and general insurance companies. The table below established long spells of hibernation at IRDAI's end in raising queries to insurer's submissions. Similarly, the time taken by IRDAI to forward the inspection report to the insurer and issue show cause notice appear to be well beyond a reasonable time frame. The reasons, if any, which explain the time taken have not been explained in the orders and remain unclear. In addition, IRDAI has not provided any guidance or regulation of what it benchmarks as reasonable time for each stage of the process.

Delays in Investigation Process and Glaring Inconsistencies
This table shows the average time taken at each step of the investigation process till the issue of a final order by IRDAI
Particulars	Life	General
Inspection	10 Days	7 Days
Report forwarded to the Insurer	3.5 months	4 Months
Insurer's Reply	1 month	1 Month
Further Queries to Insurers' Submissions	2.5 years	No Clarifications raised
Insurer's Reply	1 month	NA
Issue of Show Cause Notice	4.5 months	4 Years
Insurer's Reply	1 month	1 Month
Date of Personal Hearing	1.5 month	2 Months
Final Order	1 month	5 Months

Some explanations that are offered for these delays are:

• Inadequate staff capacity,
• The evolving enforcement and inspection mechanism at IRDAI in recent years, and
• The seven year delay in the enactment of the Insurance Laws (Amendment) Act, 2015.

These superficial explanations do not change the fact that the State is not permitted to violate the rule of law.

Lack of speaking orders

Important details in the IRDAI's orders were absent. For example, the monetary loss in question was not specified, wherever required. As an example, the quantum of payouts made to corporate agents, master policyholders and other intermediaries remains unspecified. The monetary value of business solicited through wrongful means, the monetary value of claims repudiated due to non-disclosure or non-submission of documents and so on, finds no mention in the orders. Further, the names of colluding agencies, details of the documents examined during inspection and the features of the regulations violated were missing in more than half the orders. This violates the principle of natural justice which requires that the accused should be given all relevant documents that have been relied on, and any exculpatory evidence.

IRDAI provides the investigation reports to insurance companies. However, it is not evident if exculpatory evidence is included in these investigation reports. It is possible to have clarity on these aspects if IRDAI publishes its norms around investigation and contents of the report.

There was a noticeable difference between the orders issued against life insurance companies and those issued against general insurance companies. The above details were more frequently revealed in the orders issued against general insurance companies. Interestingly, the orders for both life and general were signed by the same authority.

Details Specified in the Orders
Particulars	Amount of Violation	Names of Colluding Agencies	Features of Regulations Violated	Details of Documents examined
Life Insurance Orders	No	No	No	No
General Insurance Orders	No	Yes	Yes	Yes

Inconsistency of punishment

There is some evidence that IRDAI has issued different penalties for similar offences. In 2016, M/s. Kotak Mahindra Old Mutual Life Insurance Company Limited and M/s. Exide Life Insurance Company Limited both settled claims in the favour of master policyholders. While the former was issued a warning, the latter had to pay a fine of Rs.100,000.

However, in case of general insurance companies, the penalties with respect to violations were relatively consistent across firms. M/s. Future Generali India Insurance Company Limited and M/s. Royal Sundaram Alliance Insurance Company Limited both offered discount on premium beyond specified limits and both were penalised with an amount of Rs.500,000. In cases where there was a difference, the justification was provided in orders related with general insurance companies.

Another point of difference between orders against life and general insurance companies was that life insurance companies were in many instances let off with warnings, whereas the general insurance companies usually faced penalties.

Penalty Charged for Common Offences
This table shows the inconsistency in penalties charged to different companies for the same offence.
Charge	Regulation Violated	Number of Companies Accused	Number of cases in which penalty is imposed	Number of cases in which warnings have been issued	Number of cases in which no charges have been pressed
Life Insurance Orders
Settlement of Death Claims in favour of Master Policy Holders	Clause C-4 of Group Insurance Guidelines 015/IRDA/Life/Circular/GI Guidelines/2005 dated 14/07/2005	3	2	Nil	1
Payout made to Master Policyholders for advertising purposes	Clause B-2 and C-4 of Group Insurance Guidelines 015/IRDA/Life/Circular/GI Guidelines/2005 dated 14/07/2005	3	1	2	Nil
Use of Wrongful Practices in Solicitation of Business	Regulation 9(ii)(a) of IRDAI (Licensing of Corporate Agents) Regulations, 2002 and IRDAI circular no. IRDA/CIR/010/2003 dated 27.03.2003	4	1	1	2
General Insurance Orders
Issues with respect to solicitation of business	Authority's circular IRDA/CIR/011/2003, dated 27-03-2003	6	5	Nil	1
Payments made to intermediaries above the commission amount	clause 21 of Corporate Agents Guidelines ref.no.017/IRDA/Circular/CA guidelines/2005	3	2	Nil	1
Discount offered on Premium beyond permissible limits	Circular No. 021/IRDA/F&U/Sep. 06, dated 28-9-2006 and Circular No. IRDA/NL/Cir/F&U/003/01/2011 dated 6th Jan, 2011	4	3	Nil	1

At times, operational factors lead to levy of varying penalties for similar violations by IRDAI. For example:

• The extent of documents in support of violation varies in different cases; and
• Non-submission of necessary documents by insurers is construed by IRDAI as a suppression of material fact, resulting in a higher penalty.

However, the orders do not explain these factors as the reasons. Therefore, it is not possible to link these reasons with variations in penalties.

In addition to cases of repeat offenders illustrated in the beginning of this article, we find similar kind of infringements across insurance companies. For example, four out of eight life insurance companies were charged for being non-compliant with the specified limits on expenses on management. All seven general insurance companies were charged for making payments to corporate agents, individual agents or other intermediaries over and above the commission amount. Ten out of twelve insurance companies, which were issued orders in 2016 on the basis of inspection conducted in the past, were charged for using wrongful practices in solicitation of business.

This suggests a need for IRDAI to strengthen its internal feedback loop, whereby the experience of cases goes back into improving the regulations, strengthening the investigation and enforcement functions of the regulator and creating effective deterrence.

Key Violations and Number of Insurers Accused
Charge	Number of Companies accused in 2016
Life Insurance
Use of wrongful practices for solicitation of business	4
Non-compliance with the expenses on management	4
Settlement of claims in favour of Master Policy Holders	3
General Insurance
Payments made to corporate agents/individual agents/other intermediaries	7
Use of wrongful practices for solicitation of business	6
Outsourcing of core Activities	5

Summary

Our analysis establishes three things:

1. There are large and unexplained delays in the process from investigation to passing of a decision order.
2. The orders do not specify important details and fall short of being speaking orders.
3. The reasons for imposing different penalties for similar offences are not clearly established in the orders. This places them open to be challenged as being arbitrary.

Conclusion

There is room for improvement in IRDAI's investigation-decision order process.

India has many regulators. The present article is one building block of knowledge towards understanding IRDAI. This is part of an emerging literature which is exploring similar questions. Prashant and Sane (2016) have identified failures of enforcement at IRDA. Burman and Zaveri (2016) have evaluated regulatory responsiveness at TRAI and SEBI. There is a need for more research towards the objective of better understanding India's regulators, and building State capacity in them.

Acknowledgements

We thank Anirudh Burman, Monika Halan, Renuka Sane, Suyash Rai and Smriti Parsheera for useful conversations.

Ashish Aggarwal is a researcher at NIPFP. Rhythm Behl was an intern at NIPFP in Summer 2016.