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Market Conduct examination - A Case Study on Key Man Insurance Policies Conference on Regulatory Issues for Sr Officers of Insurance Regulatory Agencies,

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Presentation on theme: "Market Conduct examination - A Case Study on Key Man Insurance Policies Conference on Regulatory Issues for Sr Officers of Insurance Regulatory Agencies,"— Presentation transcript:

1 Market Conduct examination - A Case Study on Key Man Insurance Policies Conference on Regulatory Issues for Sr Officers of Insurance Regulatory Agencies, Hyderabad. 15 th November, 2005

2 Market Conduct Exams Policy Services, Claims Settlement Underwriting Standards Distribution Channels File & Use Adherence Grievance Redressal

3 Market Conduct Off site Monitoring Off site Monitoring On site Examination On site Examination (Target Exam) (Target Exam)

4 Off Site Monitoring – Key Man Insurance Policies New Business Analysis New Business Analysis Analysis of Premium Income Analysis of Premium Income Spurt in the Premium Income Spurt in the Premium Income Higher Average Premium Income Higher Average Premium Income Market Intelligence Market Intelligence Feedback from industry Feedback from industry Media reports Media reports

5 Off site monitoring Noticing the Aberrations Noticing the Aberrations Detailed Target Exams Detailed Target Exams Self Regulatory measure Self Regulatory measure Deliberations in Life Council Deliberations in Life Council Recommendations to IRDA Recommendations to IRDA Restrictions on type of Key Man Policies Restrictions on type of Key Man Policies

6 What is Key Man Insurance? Meets the business needs of a business concern. Meets the business needs of a business concern. Definition of Key Man: Definition of Key Man: Key man is an employee who contributes significantly to the business of the firm. Key man is an employee who contributes significantly to the business of the firm.

7 Objectives – Key Man Insurance Indemnify the loss of business earnings Indemnify the loss of business earnings Meet the costs of replacements Meet the costs of replacements Time to fill the vacuum – cover the monitory losses Time to fill the vacuum – cover the monitory losses Premiums paid allowable business expenses U/S 37 (1) of I T Act. Premiums paid allowable business expenses U/S 37 (1) of I T Act.

8 Tax Implications Insurance Premiums are allowed Business Expenditures Insurance Premiums are allowed Business Expenditures Proceeds received by the employer taxed as business profits Proceeds received by the employer taxed as business profits If assigned to key man proceeds considered as Income in his hands. If assigned to key man proceeds considered as Income in his hands.

9 Onsite Examination - Methodology Examine List of High worth Policies Issued List of High worth Policies Issued List of Single Premium Policies List of Single Premium Policies List of Key Man Insurance Policies List of Key Man Insurance Policies Details of Assignment Register Details of Assignment Register Contd.. Contd..

10 Methodology Examine List of Policy Withdrawals List of Policy Withdrawals List of Policy Loans List of Policy Loans List of Policy Surrenders List of Policy Surrenders Source of First Premium deposited Source of First Premium deposited

11 Onsite Examination - Observations Higher proportion of Key Man Policies amongst Single Premiums Higher proportion of Key Man Policies amongst Single Premiums Major % of Premium in the last quarter Major % of Premium in the last quarter More Plans of Flexible Nature More Plans of Flexible Nature

12 Assignment - Observations Simultaneous assignment in favour of Life Assured Simultaneous assignment in favour of Life Assured Alternate way of Deferred Compensation (?) Alternate way of Deferred Compensation (?) Assignment in favour of Banks Assignment in favour of Banks A lead to verify the source of Finance A lead to verify the source of Finance In consideration of the Corporate Loan In consideration of the Corporate Loan Policy as Security where Surrender Value is zero Policy as Security where Surrender Value is zero Assignments defeating the Objective Assignments defeating the Objective

13 Other Observations No evidence of Direct Finance by Bank No evidence of Direct Finance by Bank Withdrawal option exercised by Banks being absolute assignees Withdrawal option exercised by Banks being absolute assignees Endorsement on Policies for surrendering by employer or assigning to Key Man in case of Key man's exit from the company Endorsement on Policies for surrendering by employer or assigning to Key Man in case of Key man's exit from the company

14 Concomitant Observations Deviations from the File & Use Norms Deviations from the File & Use Norms Higher allocations tantamount to rebating under ULIPs Higher allocations tantamount to rebating under ULIPs Errors in levying the charges under ULIPs Errors in levying the charges under ULIPs

15 Thank you D V S Ramesh Assistant Director IRDAHyderabad


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