Introduction
Vide an office memorandum dated November 29, 2022, the Department of Financial Services (Ministry of Finance), Government of India (“DFS”) has proposed extensive amendments to the Insurance Act, 1938 (“Act”) by way of the Insurance Laws (Amendment) Bill, 2022 (the “Amendment Bill”) in order to address the persistent demands of the insurance industry and to change some of the basic principles under the Act. The discussion on the overall nature of changes brought about by the Amendment Bill can be found in our blog post dated December 13, 2022.
Post the Amendment Bill and in order to undertake a comprehensive review of the insurance regulatory framework, the Regulation Review Committee set up by the two insurance industry bodies – the Life Insurance Council of India and General Insurance Council of India on September 6, 2022 has been involved in a detailed analysis of the extant regulatory framework to make suggested amendments from the perspective of removing redundancies in the existing regulations, introducing ease of doing business, improving efficiencies, and ultimately achieving a less prescriptive and a principle based regulatory framework for the Indian insurance sector.
A key change proposed in the Amendment Bill is an enabling provision for insurers to provide value added services and undertake distribution of financial products. A new clause is proposed to be inserted in the Act to prescribe that “an insurer may also provide services related or incidental to insurance business and may also distribute other financial products as specified by and subject to regulations”.[1]
The amendment goes beyond pure insurance contracts, potentially empowering insurers to expand their offerings to policyholders as well as tap into a new market segment. This paves the way for insurers to explore new channels to reach potential customers. They may provide high utility value added services which may not be necessarily related to insurance, distribute other financial products (through their wide distribution network) and gain access to prospective customers to whom they can further cross-sell the insurance product. Consequently, a deeper engagement with the existing customers and an opportunity to build a new customer segment will also help in increasing insurance penetration.
Current legal and regulatory framework
As per the current legal and regulatory regime, the insurers are allowed to solely carry on the business of life insurance or general insurance or re-insurance or health insurance. The Act defines an “Indian insurance company” and an “insurance co-operative society” respectively to mean “any insurer, being a company which is limited by shares or a co-operative society, and whose sole purpose is to carry on life insurance business or general insurance business or re-insurance business or health insurance business”.[2] The Act does not contemplate or provide for insurers to undertake businesses incidental to the business of insurance such as offering value added services or undertaking distribution of non-insurance third party financial products. Further, the Act provides that the Insurance Regulatory and Development Authority of India (“IRDAI”) may suspend or cancel the registration of an insurer, either wholly or in so far as it relates to a particular class of insurance business inter alia if the insurer carries on any business other than insurance business or any prescribed business.[3]
The Act defines the different kinds of insurance businesses to essentially mean the business of ‘effecting the contracts of insurance’ for certain assured payments, against certain losses and for certain benefits/covers, respectively. Given the above, it may be noted that in India, insurers currently can engage solely in issuance of insurance contracts for assured payments, indemnifying losses, and offering benefits/covers, and cannot offer value-added services and/or undertake distribution of non-insurance third party financial products.
In contrast, several other jurisdictions including Hong-Kong, Indonesia, South Korea, Malaysia, Japan and Australia encourage the holistic and the comprehensive role that the insurers can play, thereby providing for enabling provisions to allow them to provide ancillary services leading to increase in value for the policyholders. An analysis of the provision of the value-added services in the insurance industry in other jurisdictions reveals that globally, value-added services and cross-selling services by insurers is generally permitted.
- In Hong-Kong, insurers are permitted to carry out ancillary business subject to the condition that the business is not contrary to the interest of the existing and potential policy holders.[4]
- In South Korea, an insurer can carry out certain non-insurance business to the extent that conducting this business does not undermine the (i) soundness of its business; (ii) protection of its policyholders; and (iii) stability of the financial market.[5]
- Even the Australian law permits the conduct of business that is incidental to the insurance business of general insurers.[6]
- In Japan, insurers are allowed to engage in a limited set of non-insurance activities[7] on a representative basis including (a) representing businesses or carrying out specific services on behalf of other insurance companies, small amount and short term insurance providers, shipowners and mutual insurance associations and other businesses carrying out financial businesses; (b) guaranteeing obligations and (c)handling of private placement of securities.
That said, historically, both in the insurance sector and other financial services, companies have actively offered value added services – related or unrelated to their primary businesses. This phenomenon also applies to sectors dealing with public money, such as the banking sector.
Within the Insurance Sector
By virtue of regulations framed by the IRDAI, the insurance intermediaries such as insurance brokers are allowed to offer value added services such as risk management and claims consultancy services and other similar services for which they are entitled to payment from the policyholders, which is not a percentage of premium or claim amount.
In Other Sectors
In other financial services sector, a banking company (as per the provisions of the Banking Regulation Act 1949), is allowed to engage in such other things that are incidental or conducive to the promotion or advancement of the business. One of the oldest non-banking services provided by a banking entity is insurance services. Banks undertake advanced data processing, which they gain access to as part of their banking activities and personalise the insurance offers as per the needs of their customers. In addition to that, banks also monetise on other value-added services such as providing investment advisory to its customers and advising customers on financial planning for a fee. In addition banks also offer value-added services that go beyond traditional banking transactions such as providing complimentary entertainment or lounge access at the airports through usage of credit cards, vouchers, etc. Through such offerings, banks gain access to a wealth of data which they further analyse, utilise and monetise to customise and personalise their principal offerings and sell more effectively.
A game changer for the insurance industry?
Traditionally, insurers in India have been restricted from undertaking businesses other than insurance given the involvement of policyholder funds and the possibility of mixing shareholder funds with the policyholder funds. It was also to avoid any possible conflict of interest with a third-party service provider, which may affect the interests of the policyholders.
However, given the increasing expectations of the customer base along with their daily changing preferences and the need to innovate in terms of product offerings, the industry has forever been rooting for facilitating legal provisions to allow the insurers to provide services ancillary to the business of insurance. In the insurance industry, there is a compelling need for insurers to be customer-driven in their approach around products and services and offer a range of value-added services to their customers in addition to the core insurance product. These services may include but are not limited to providing concierge services, day-to-day electrical repair assistance, home nursing services, access to health applications and health plans. Insurers may also partner with third party manufacturers and provide services in relation to providing customers with home sensors that can alert customers of any danger in advance so that property damage can be prevented and minimised. Along with travel insurance, insurers may also offer hotel and flight booking services and itinerary services to the customers. Insurers can also provide services in relation to financial education and leverage their investment expertise to advise customers on financial planning.
While these activities are only indicative of what insurers may be allowed to engage in and are not directly related to insurance risk, these provide an opportunity to the insurers to have better engagement with the customers and can become an additional source of revenue for the insurers. This amendment will open up a material revenue opportunity for insurers and the insurers with strong distribution franchise will be able to tap into this opportunity of distribution of other financial products who may further be remunerated by financial institutions for selling banks and other financial products.
In the event the insurers are allowed to undertake distribution of third-party financial products, they will gain a wealth of customer data, which can be used in an effective manner by the insurers to design, price the insurance products and personalise the insurance offerings for their existing and prospective customers. This data can also be factored in by the insurers to undertake risk assessment.
Given that the IRDAI is bringing about reforms and amendments on a regular basis, it will be interesting to see when the Amendment Bill comes into effect. Once the Amendment Bill is effective, the IRDAI will need to come up with the regulations/circulars/notifications to define the ambit of value-added services and distribution of financial products that the insurers can engage in.
[1] Regulation 3AB, Amendment Bill.
[2] Sub-clause (c) of clause (7A) and sub-clause (d) of clause (8A) of section 2, Insurance Act 1938.
[3] Section 3(4)(f), Insurance Act, 1938.
[4] Section 8(3)(g), Hong Kong Insurance Ordinance: “…..“that in the case of a company which carries on, or proposes to carry on, some other form of business in addition to insurance business, the carrying on of that other form of business in addition to insurance business is not contrary to the interest of existing and potential policy holders;”
[5] Article 11.2, Insurance Business Act 2003.
[6] Insurance Act, 1973 permits the grant of licenses to carry out an insurance business which is defined in Section 3(1) as follows: “insurance business means the business of undertaking liability, by way of insurance (including reinsurance), in respect of any loss or damage, including liability to pay damages or compensation, contingent upon the happening of a specified event, and includes any business incidental to insurance business as so defined, but does not include: [….]”
[7] Article 98 and Article 99, Insurance Business Act, 1995.
