STATEMENT OF THE UNION FINANCE SHRI P.
CHIDAMBARAM ON ISSUES CONCERNING THE LIFE INSURANCE INDUSTRY
FOLLOWING IS THE TEXT OF THE
STATEMENT ON ISSUES CONCERNING THE LIFE INSURANCE INDUSTRY MADE BY THE UNION FINANCE MINISTER SHRI P. CHIDAMBARAM WHILE ADDRESSING
THE MEDIA PERSONS on 01st OCT, 2012:
“On September 4, 2012, I met the
CMDs/CEOs of insurance companies who are engaged in the life insurance
business, including Life Insurance Corporation of India. Chairman, IRDA was present at the meeting.
A number
of issues were raised by the life insurance industry. After taking careful notes of the issues
raised, I requested Chairman, IRDA to examine these issues and invited him to
discuss them with me on a suitable date.
Accordingly, discussions were held on September 26 and 27, 2012.
A number
of steps that would be necessary and desirable to give a fillip to the life
insurance industry and expand the spread and penetration of life insurance were
identified and agreed upon during the discussions. I am happy to state that IRDA, as the
Regulator, has agreed to examine the following steps and take appropriate
action.
Among the
steps that were agreed upon are:
(i) In a country with low spread and penetration of life insurance, the objective
should be to sell simple and easily understood products. At present, IRDA approves all insurance
products on ‘File & Use’ basis. “Use & File” system may be introduced.
IRDA, in consultation with insurers, will identify/design certain standard products
which can be used by the industry under “use and file’ system, if the insurance
company complies with the conditions attached to the standard product. Such
products will automatically be deemed to have been approved after 15 days of
its intimation to IRDA unless IRDA finds non-compliance within the period of 15
days. IRDA shall take necessary action against the company in case any
violations are noticed. IRDA shall expand such list of standard products on a
continual basis.
(ii) IRDA will lay down
guidelines on the principles underlying the design of any insurance
product. Based on the recommendations of
the Working Group that has been set up, IRDA will issue draft guidelines and,
after consultations, final guidelines will be issued by the end of November,
2012. Once the guidelines are in place,
it would be possible to observe the 30-day norm mandated for clearance of
products.
(iii) IRDA will evolve
and notify guidelines in order to reduce the arbitrage between “units” and
“traditional products”.
(iv) IRDA will
accept the KYC check done by the banks while a person opens an account. Only
additional information that is required for the purpose of insurance policy
will be asked from the intended policy-holder. This will bring down the ‘onboarding
cost’.
(v) At present, the
policy on Bancassurance is “one bank one insurance company (one life and one
non-life)”. In this arrangement, the
Bank acts as the agent of the insurance company. It is desirable that banks may act as
“Brokers” where the fiduciary responsibility of the bank will be to the
policy-holder. IRDA will consider
notifying banks as “Brokers” under Regulation 2(j)(v) of the Insurance
Regulatory and Development Authority (Insurance Brokers) Regulations,
2002. As insurance broker, the bank may
sell the products of more than one insurance company. This will provide the intended policy-holder
a bouquet of products from which he/she may chose the appropriate product based
on his/her needs and will also prevent mis-selling.
(vi) All categories of Banking
Correspondents may be allowed to sell micro insurance products. This facility will apply only to micro
insurance products and IRDA will make regulations for this purpose. This will
ensure availability of micro insurance products in all parts of the country.
(vii) At present, only the
employer-employee groups are recognized for group business. It is desirable that non-employer-employee
groups, which are homogenous and have a commonality of interest, are permitted
by IRDA to offer group savings products. These could include Self Help Groups,
professional groups such as teachers in a school or nurses in a hospital, auto
drivers’ associations, domestic workers’ associations etc.
(viii) Under group business, the master
policy-holder may be compensated for discharging the responsibilities cast upon
him/her. IRDA will issue guidelines in
this regard shortly.
(ix) Regarding management expenses,
insurance companies are free to manage overall management expenses within the
overall limits prescribed under sections 40B and 40C of the Insurance Act,
without any granular stipulations, except the maximum commissions as prescribed
by the Act.
(x) An Insurance company
may appoint a Mentor for ‘mentoring’ agents.
The functions performed by the Mentor will be distinct from the
functions performed by the agents and the Mentor may be given a fixed fee (not
commission) for mentoring agents.
(xi) At present, investments
are permitted in an infrastructure SPV floated by a Public Sector Enterprise
(PSE) subject to the condition that the parent company (PSE) meets the rating
criteria. In order to encourage investments in infrastructure, IRDA will allow
investments in an infrastructure SPV floated by any company where the SPV is a
wholly-owned subsidiary (WOS) of the parent company and the debt instrument
issued by the SPV is guaranteed by the parent company, having due regard to
rating criteria.
(xii) At present, there is a
stipulation that 75% of investments in debt, (excluding investments in
Government Securities/Other Approved Securities) should be in AAA rated
instruments. IRDA will consider relaxing
the stipulation and provide that the minimum requirement of 75 per cent in AAA
instruments would apply to debt investments including Government Securities and
Other Investments as provided in Sr No. (iii) of the table under Regulation 3(i)
of the Insurance Regulatory and Development Authority (Investment) Regulations,
2000. This is expected to release a
space of about 12.5 per cent for investments in less than AAA rated debt
instruments.
In addition to the
above, discussions were held on matters relating to indirect taxes and direct
taxes. It was agreed that the following
issues will be taken up with the CBDT and CBEC, as the case may be, and
appropriate decisions arrived at:
(a) Reduction
in service tax on first year regular premium as well as single premium
policies.
(b) Treating
annuity policy on par with subscriptions to the National Pension Scheme (NPS)
and to be exempted from Rule 6(7A) of the Service Tax Rules.
(c) To
examine whether the first year premium and subsequent premiums of social
security insurance schemes such as Janashri Bima Yojana (JBY) and Aam Aadmi Bima
Yojana (AABY), which are intended to benefit the weaker and vulnerable sections
of the society, may be exempted from service tax. A similar exemption to be
examined in the case of Micro Insurance policies.
(d) At
present, service tax is levied on premium on accrual basis. The CBEC will be
requested to examine whether service tax may be assessed on realization basis.
(e) Department
of Revenue will examine whether, in addition to NPS, some insurance pension
products as approved by IRDA may be included in the separate limit over and
above the limit of Rs.1,00,000 under section 80C of the Income tax Act for the
purpose of income tax deduction on the premium paid.
(f) CBDT
will examine whether existing policies can be grandfathered whenever changes
are made to direct tax laws, so that changes will apply only to policies issued
prospectively.
(g)
CBDT will examine whether contribution made to post retirement medical scheme
offered by insurance companies may be included in Section 36(1)(iv) of the
Income tax Act and the sum paid allowed as a deduction.
(h) At
present, TDS applies on every payment of commission to an agent above Rs
20,000. CBDT will examine whether the
exemption can be shifted from every payment of commission to a cumulative
commission payment exceeding, say, Rs.50,000 or any other suitable threshold in
a year.
I have
asked Department of Revenue and the CBDT/CBEC to complete the examination of
the above suggestions by October 10, 2012 so that appropriate decisions may be
announced shortly thereafter.
The
proposed amendments to the insurance laws were also discussed with IRDA. Some of the issues raised by the insurance
companies have already been addressed in the Insurance Laws (Amendment) Bill,
2008 that is pending before the Parliament.
In respect of some other issues, further amendments, if necessary, will
be introduced as official amendments to the pending Amendment Bill.
It is
proposed to schedule, shortly, a similar meeting with the General Insurance
sector to sort out issues in the non-life insurance sector. Chairman, IRDA will be invited to attend the
meeting.”
With Regards
Prakash Verma
E Id: Prkverma@gmail.com
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