MI Regulations

8/3/2019 MI Regulations

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IRDA (Microinsurance) Regulations,2005

Regulations on micro-insurance were officially gazette by the IRDA on 30

November 2005. The salient features of the regulation are presented below

The regulation defines micro-insurance products

The regulation provides definitions of micro-insurance products covering life and

general insurance General micro insurance product means any health insurance

contract, any contract covering the belongings, such as, hut, livestock or tools or

instruments or any personal accident contract, either on individual or group basis,

as per terms stated in Schedule-I appended to these regulations. Life micro

insurance product means any term insurance contract with or without return ofpremium, and endowment insurance contract or health insurance contract, with our

without an accident benefit rider, either on individual or group basis, as per terms

stated in Schedule-II appended to these regulations.

(a) micro-insurance policy means an insurance policy sold under a plan which

has been specifically approved by the Authority as a micro insurance Product.

(b) micro-insurance product includes a general micro-insurance product or life

insurance product, proposal form and all marketing materials in respect thereof.

(c) Every insurer shall be subject to the file and use procedure with the IRDA.

(d) No one other than insurer be it a micro-insurance agent or anyone else can

underwrite a micro-insurance proposal.

(e) Rural business transacted under micro-insurance by an insurer will be counted

for quota fulfillment both for rural as well as social sector obligations.

It promotes the extensive use of intermediaries

The micro-insurance regulations promote extensive use of intermediaries by the

insurers for selling and servicing various micro-insurance products. The regulation

also creates a new intermediary called the micro-insurance agent. The regulationclearly defines MI agents and has imposed minima in terms of the number of years

of experience (at least 3) of working with low income groups. It also emphasises

the need for such agents to have appropriate aims and objectives, a good track

record, transparency and accountability stated in the bye-laws with demonstrated

involvement of committed people. This has been done in order to prevent the


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engagement of unscrupulous operators in the activity. However, the onus for the

selection of appropriate MI agents and their capacity building lies with the

insurance company.

Intermediary: The micro insurance agent, can be a Non-Governmental

Organization (NGO), MFI or other community organization such as Self HelpGroups (SHG) appointed by an insurer to distribute micro-insurance through

specified persons. Micro-insurance agents enter into a deed of agreement with

the insurer. They abide by the code of conduct defined by the IRDA and attend 25

hours of training (down from 100 hours originally required for conventional

insurance agents but now reduced to 50 hours) in the local language at the expense

of the insurer. There is no qualifying examination, unlike the case of ordinary

insurance agents.

According to the regulation,(a) Non-Government Organization (NGO) means a non-profit organization

registered as a society under any law, and has been working at least for three years

with marginalized groups, with proven track record, clearly stated aims and

objectives, transparency and accountability as outlined in its memorandum, rule,

by-laws or regulations as the case may be, and demonstrates involvement of

committed people.

(b) Self Help Groups (SHG) means any informal group consisting of ten to twenty

or more persons and has been working at least for three years with marginalized

groups, with proven track record, clearly stated aims and objectives, transparency

and accountability as outlined in its memorandum, rules, by-laws or regulations, as

the case may be, and demonstrates involvement of committed people.

(c) Micro-Finance Institutions (MFI) means any institution or entity or association

registered under any law for the registration of societies or co-operative societies,

as the case may be, inter alia, for sanctioning loan/finance to its members.

IRDA has recognized four categories of intermediaries: brokers, agents, corporate

agents, and Micro-insurance (MI) agents. Categories other than MI agents may sell

micro-insurance but they do not benefit from the concessions allowed for the MI

agents. However, a micro-insurance agent shall not distribute any product other

than a micro insurance product.

The regulation provides for MI agents to perform the following functions

(a) Collection of proposal forms

(b) Collection of self declaration from the proposer that he/she is in good health.


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(c) Collection and remittance of premium

(d) Distribution of policy documents

(e) Maintenance of registers of all those insured and their dependants covered

under the micro insurance scheme, together with details of name, sex, age, address,

nominees and thumb impression/signature of the policyholder.(f) Assistance in the settlement of claims

(g) Ensuring nomination to be made by the insured

(h) Any policy administration service

The regulations attempt to manage the cost of intermediation

A cap has been put on commission, between 10 and 20% of premiums per year

according to type and mode of insurance payment, which is in excess of what

conventional agents would normally earn. The rates of commission applicable toMI agents are

Life insurance business General insurance business

Single Premium policies 15% of the

single premium

Non-single premium policies 20% of

the premium for all the years of the

premium paying term

15% of the premium

The commission rates prescribed above are more liberal than the 60% (of a single

years premium) payable under ordinary business in the case of life insurance and

10% in the case of general insurance. This is based on the logic that an MI agent

has to perform a number of functions which mainstream agents do not have to

undertake. MI agents may thus receive commission at different rates from those

applicable to other intermediaries. The commission structure is, however, changed

to remove up-front payments in favour of payments upon the performance of

certain functions. For group insurance products, the insurer may decide the

commission subject to the overall limits specified by IRDA.

MI agents may route premiums and claims payments through their books (such as

receive individual premiums and pay it over as one amount). This is not allowed

for other intermediaries and is considered important in managing the cost of

intermediation.


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Collaborations between life insurers and non-life insurers

The regulations allow for the bundling of life and non-life elements in one single

product provided there is clear separation of premium and risk at the insurers

level. Where an insurer carrying on life insurance business offers any generalmicro-insurance product, he shall have a tie-up with the insurer carrying on general

insurance business for this purpose, and subject to the provisions of section 64 VB

of the Insurance Act (governing the remittance of the premium amount to the

insurance company), the premium attributable to the general micro-insurance

product may be collected from the prospect (proposer) by the insurer carrying on

life insurance business, either directly or through any of the distributing entities of

micro-insurance products. In the event of any claim in regard to general micro-

insurance, the insurer carrying on life business or the agent shall forward the claimto the insurer carrying on general insurance business. The same arrangement holds

true for life claims faced by non-life vendors of a micro-insurance product. In both

cases, the respective primary first insurer would render all assistance in claim

settlement by coordinating with his opposite number.

The limitations of the micro-insurance regulations

The impact of the MI regulations is likely to be limited for a number of reasons

Definition of MI agents: The regulations define MI agents to include NGOs SHGs

and MFIs. The definition of MFI is, however, limited to societies, trusts and

cooperatives societies and thus excludes a large proportion of MFIs operating

through other legal forms (like for-profit and not-forprofit companies). The result

is that all profit-driven corporate intermediaries as well as some of the largest

aggregators in micro-insurance are currently excluded from benefiting from the MI

regulations. Though the formalisation of MI agents as a type has been welcomed

by the insurance companies as a positive beginning, the exclusion of MFIs

registered under the Companies Act10 is viewed with concern

Limitation on the number of insurance companies an MFI can work with: The MI

Regulations restrict a MI agent to working with one life and/or one general insurer

respectively. This is problematic and does not accommodate models currently used

in the MI market. Most insurers do not want to underwrite all risks and tend to

specialize in particular types of risk. For example if a MI agent is tied to


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specialized health insurer, they cannot work with another general insurer to sell

other asset insurance products.

IRDA (Microinsurance) Regulations,2005

Regulations on micro-insurance were officially gazette by the IRDA on 30

November 2005. The salient features of the regulation are presented below

The regulation defines micro-insurance products

The regulation provides definitions of micro-insurance products covering life and

general insurance General micro insurance product means any health insurance

contract, any contract covering the belongings, such as, hut, livestock or tools or

instruments or any personal accident contract, either on individual or group basis,

as per terms stated in Schedule-I appended to these regulations. Life micro

insurance product means any term insurance contract with or without return of

premium, and endowment insurance contract or health insurance contract, with our

without an accident benefit rider, either on individual or group basis, as per terms

stated in Schedule-II appended to these regulations.

(a) micro-insurance policy means an insurance policy sold under a plan which

has been specifically approved by the Authority as a micro insurance Product.

(b) micro-insurance product includes a general micro-insurance product or life

insurance product, proposal form and all marketing materials in respect thereof.

(c) Every insurer shall be subject to the file and use procedure with the IRDA.

(d) No one other than insurer be it a micro-insurance agent or anyone else can

underwrite a micro-insurance proposal.

(e) Rural business transacted under micro-insurance by an insurer will be counted

for quota fulfillment both for rural as well as social sector obligations.

It promotes the extensive use of intermediaries

The micro-insurance regulations promote extensive use of intermediaries by theinsurers for selling and servicing various micro-insurance products. The regulation

also creates a new intermediary called the micro-insurance agent. The regulation

clearly defines MI agents and has imposed minima in terms of the number of years

of experience (at least 3) of working with low income groups. It also emphasises

the need for such agents to have appropriate aims and objectives, a good track


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record, transparency and accountability stated in the bye-laws with demonstrated

involvement of committed people. This has been done in order to prevent the

engagement of unscrupulous operators in the activity. However, the onus for the

selection of appropriate MI agents and their capacity building lies with the

insurance company.Intermediary: The micro insurance agent, can be a Non-Governmental

Organization (NGO), MFI or other community organization such as Self Help

Groups (SHG) appointed by an insurer to distribute micro-insurance through

specified persons. Micro-insurance agents enter into a deed of agreement with

the insurer. They abide by the code of conduct defined by the IRDA and attend 25

hours of training (down from 100 hours originally required for conventional

insurance agents but now reduced to 50 hours) in the local language at the expense

of the insurer. There is no qualifying examination, unlike the case of ordinaryinsurance agents.

According to the regulation,

(a) Non-Government Organization (NGO) means a non-profit organization

registered as a society under any law, and has been working at least for three years

with marginalized groups, with proven track record, clearly stated aims and

objectives, transparency and accountability as outlined in its memorandum, rule,

by-laws or regulations as the case may be, and demonstrates involvement of

committed people.

(b) Self Help Groups (SHG) means any informal group consisting of ten to twenty

or more persons and has been working at least for three years with marginalized

groups, with proven track record, clearly stated aims and objectives, transparency

and accountability as outlined in its memorandum, rules, by-laws or regulations, as

the case may be, and demonstrates involvement of committed people.

(c) Micro-Finance Institutions (MFI) means any institution or entity or association

registered under any law for the registration of societies or co-operative societies,

as the case may be, inter alia, for sanctioning loan/finance to its members.

IRDA has recognized four categories of intermediaries: brokers, agents, corporate

agents, and Micro-insurance (MI) agents. Categories other than MI agents may sell

micro-insurance but they do not benefit from the concessions allowed for the MI

agents. However, a micro-insurance agent shall not distribute any product other

than a micro insurance product.

The regulation provides for MI agents to perform the following functions


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(a) Collection of proposal forms

(b) Collection of self declaration from the proposer that he/she is in good health.

(c) Collection and remittance of premium

(d) Distribution of policy documents

(e) Maintenance of registers of all those insured and their dependants coveredunder the micro insurance scheme, together with details of name, sex, age, address,

nominees and thumb impression/signature of the policyholder.

(f) Assistance in the settlement of claims

(g) Ensuring nomination to be made by the insured

(h) Any policy administration service

The regulations attempt to manage the cost of intermediation

A cap has been put on commission, between 10 and 20% of premiums per yearaccording to type and mode of insurance payment, which is in excess of what

conventional agents would normally earn. The rates of commission applicable to

MI agents are

Life insurance business General insurance business

Single Premium policies 15% of the

single premium

Non-single premium policies 20% of

the premium for all the years of the

premium paying term

15% of the premium

The commission rates prescribed above are more liberal than the 60% (of a single

years premium) payable under ordinary business in the case of life insurance and

10% in the case of general insurance. This is based on the logic that an MI agent

has to perform a number of functions which mainstream agents do not have to

undertake. MI agents may thus receive commission at different rates from those

applicable to other intermediaries. The commission structure is, however, changed

to remove up-front payments in favour of payments upon the performance of

certain functions. For group insurance products, the insurer may decide the

commission subject to the overall limits specified by IRDA.

MI agents may route premiums and claims payments through their books (such as

receive individual premiums and pay it over as one amount). This is not allowed


8/14

for other intermediaries and is considered important in managing the cost of

intermediation.

Collaborations between life insurers and non-life insurersThe regulations allow for the bundling of life and non-life elements in one single

product provided there is clear separation of premium and risk at the insurers

level. Where an insurer carrying on life insurance business offers any general

micro-insurance product, he shall have a tie-up with the insurer carrying on general

insurance business for this purpose, and subject to the provisions of section 64 VB

of the Insurance Act (governing the remittance of the premium amount to the

insurance company), the premium attributable to the general micro-insurance

product may be collected from the prospect (proposer) by the insurer carrying onlife insurance business, either directly or through any of the distributing entities of

micro-insurance products. In the event of any claim in regard to general micro-

insurance, the insurer carrying on life business or the agent shall forward the claim

to the insurer carrying on general insurance business. The same arrangement holds

true for life claims faced by non-life vendors of a micro-insurance product. In both

cases, the respective primary first insurer would render all assistance in claim

settlement by coordinating with his opposite number.

The limitations of the micro-insurance regulations

The impact of the MI regulations is likely to be limited for a number of reasons

Definition of MI agents: The regulations define MI agents to include NGOs SHGs

and MFIs. The definition of MFI is, however, limited to societies, trusts and

cooperatives societies and thus excludes a large proportion of MFIs operating

through other legal forms (like for-profit and not-forprofit companies). The result

is that all profit-driven corporate intermediaries as well as some of the largest

aggregators in micro-insurance are currently excluded from benefiting from the MI

regulations. Though the formalisation of MI agents as a type has been welcomed

by the insurance companies as a positive beginning, the exclusion of MFIs

registered under the Companies Act10 is viewed with concern

Limitation on the number of insurance companies an MFI can work with: The MI

Regulations restrict a MI agent to working with one life and/or one general insurer

respectively. This is problematic and does not accommodate models currently used


9/14

in the MI market. Most insurers do not want to underwrite all risks and tend to

specialize in particular types of risk. For example if a MI agent is tied to

specialized health insurer, they cannot work with another general insurer to sell

other asset insurance products.

Know Your Customer (KYC) / Anti Money Laundering (AML) Norms: Microinsurance agents have expressed their concern at the difficulties faced by them in

accessing KYC documents from proposers in rural areas, such as electoral identity

card or ration card or electricity bill which are generally accepted as proves of

residence.

Commission capping: MI commissions are capped at 20% per annum for life

across the term of the policy. Non-MI products typically pay commission on a

front-loaded basis with 30-35% in year one with 7% in year 2. The up-front

structure provides little incentive for renewals, particularly as premiums have to becollected in cash/ cheque. At the same time 20% may not be enough to incentivize

sales. It is a common (but illegal under Section 48 of the Insurance Act) practice

for agents to use the higher first year commission to give a discount to

policyholders in the first year. Some thought would need to be given to the

minimum absolute cost to sell a policy and the commission structures needed to

ensure that this could be covered. Lapse rates of 30-40% are much higher for MI

than traditional policies. This is because the cost/effort of premium

collection/renewal exceeds the commission. Besides, the incidence of the service

tax of 12.36% payable by the agents is a further point of dissatisfaction for the MI

agents, especially considering the long distance travel they have to make in rural

areas to procure and service business.

Conflicting regulations: Enabling provisions introduced in the MI regulations are

undermined by restrictions in RBI regulations. For example, the insurance

regulation allows receipt of premiums in the form of money instruments (not cash),

which must be remitted within 24 hours. RBI in 2002, however, issued regulations

stating that certain types of NBFCs (including most MFIs) may not route any

premiums through their books. The implication is that the NBFC intermediary

must make out demand drafts for individual transactions and send them to the

insurer. Significant efficiencies can be gained if these intermediaries were to be

allowed to process all the payments through their systems and make a single

payment to insurers.


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Rural Regional Banks (RR B) and Cooperative Banks: It is worth further

examination as to whether RRB who have been given the status of corporate agents

and the cooperative banks can be brought into the ambit of MI agents in view of

their outreach in rural areas.

However the micro-insurance regulation has been facilitative in

Reducing the mandatory training requirements for insurance agents from 50 hours

to just 25 hours in the case of MI. Most insurance companies have welcomed this

move but feel that the technological innovations in developing better systems at the

level of the MI agent and real awareness creation amongst potential clients/policy

holders are a much larger challenge that would go a long way in developing the

micro-insurance market.

Allowing MI agents to take greater responsibilities: The regulator has allowed MIagents to take up greater responsibilities than are permitted to mainstream agents,

for example, the collection of premiums on behalf of the insurance companies and

the servicing of claims. IRDA believes that if the MI agents are able to carry out

these functions effectively, it will help in minimizing the transaction costs that the

insurance companies have to incur, thereby leading to lower premiums for the

clients in the long run.

Treating benignly apparent infringements of the regulations by community-based

organisations: There are restrictive entry norms for organizations that are

explicitly licensed to provide insurance to the general public. Insurance companies

need a large amount of start-up capital of Rs100 crore to get a license from the

IRDA. This entry norm is applicable for community based insurance as well if they

want to underwrite risk. IRDA has treated the existing cases of in-house insurance

with benign neglect. Essentially, this approach is dictated by the relatively limited

experience and low supervisory capacity of the IRDA. Compared to the vast

numbers of people in need of social protection in India, the coverage provided by

both formal and, even more so, by community insurance programmes is so low that

the role of regulation seems fairly limited. The creation of a two-tier space where

the insurance companies are regulated and supervised and community insurance is

not is de facto recognition of this fact.

The IRDAs approach is that it is pointless to have regulations that are not properly

enforced as long as community insurance agencies provide cover to a limited

population that is clearly defined (either geographically or socially or through other


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forms of association), they can be allowed to function without being regulated. It is

here that the regulations are not very clear for MFIs or NGOs, where the

membership cannot be clearly defined. Although generally limited within a

geographical territory, the scale of some MFIs or NGOs is significant and spans

across several states.Taxation issues

By a notification of 16 July 2001, the Government of India brought insurance

auxiliary services under the ambit of Service Tax. The following important

definitions and references are relevant in this context.

As per section 65(31), insurance auxiliary service means any service provided by

an actuary, an intermediary or insurance intermediary or an insurance agent in

relation to general insurance business and includes risk assessment, claim

settlement, survey and loss assessment. Taxable event and scope of servicemeans any service provided to a policyholder or insurer by an actuary or

intermediary or insurance intermediary or insurance agent, in relation to the

insurance auxiliary service.

The service providers are insurance agents, insurance surveyors and loss adjusters,

actuaries and insurance consultants. In the case of insurance surveyors and loss

adjusters, actuaries and insurance consultants, the service is provided mainly to the

insurance companies (insurer) while in the case of insurance agents, the service is

provided to both the insurer and the policy holder. Service Tax is liable to be paid

by the insurance auxiliary service provider except in case of insurance agents.

Insurance agents normally do not charge the policyholder. However, the insurance

company pays the agent a commission (usually as a percentage of the insurance

premium) on a periodic basis. In the case of an insurance agent, it has been

provided in the Service Tax Rules that the person liable to pay Service Tax will be

the concerned insurance company who has appointed the agent However as

practised by the companies, no service tax is paid by the agents. The service tax is

payable by the person whose life is assured and the current rate is 12.36 % on the

premium paid to the life insurance companies. If an agents accumulated

commission for the year reaches Rs 20,000 tax is deducted (at source) by the

company at the rate of 11.33% (as prescribed by the income tax rules) from the

commission of the agent. The service tax on premiums adds to the price of

insurance. An assessment of the impact of this tax on the cost of micro-insurance is

needed. From the perspective of inclusion, enabling the penetration of insurance


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services to low income people and in rural areas, there could be a case for

exempting micro-insurance from the payment of service tax.

PROPOSED MICRO-INSURANCE REGULATIONS

In order to introduce the concept micro-insurance it is necessary to draft suitable bring in suitable

regulations to enable insurers to design and distribute and service micro-insurance products and

discharge their obligations to the rural and social sectors as per provisions of the Insurance Act,

1938.

h It is proposed that an insurer transacting life insurance business shall be permitted toprovide life micro-insurance products as well as general micro-insurance products

provided it ties up with an insurer transacting general insurance business for the general

micro-insurance products, and vice versa.

h In addition to an insurance agent or corporate agent or insurance broker who areauthorized to solicit and procure insurance business, including micro-insurance business

with an insurer in accordance with the provisions of the Insurance Act, 1938 and the

regulations made there under it is also proposed to introduce the concepts of micro-

insurance product and micro-insurance agent .

TIE-UP BETWEEN LIFE INSURER AND NON-LIFE INSURER

h An insurer carrying on insurance business may offer life micro-insurance productsas also general micro-insurance products, as provided herein.

Provided that where an insurer carrying on life insurance business offers any


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general micro-insurance product, he shall have a tie-up With an insurer carrying

on general insurance business tor this purpose, and subject to the provisions of

section 64VB of the. Act, the premium attributable to the general micro

insurance product may be collected from the prospect (proposer) by the insurer

carrying on life insurance business, either directly Or through any of the

distributing entities of micro-insurance products as specified in regulation 4, and

made over to the insurer on general insurance business. Provided further that

in the event of any claim in regard to general micro-insurance products, the

insurer carving on life insurance business or the distributing entities of micro-

insurance products, as the case may be, as may be specified in the tie-up referred

to in the first proviso, shall forward the claim to the insurer carrying on general

insurance business and offer all assistance for the expeditious disposal of the

claim.

h An insurer carrying on general insurance business may offer general micro-insurance products as also life micro-insurance products, as provided herein.

Provided that where an insurer carrying on general insurance business offers any

life micro- insurance product, he shall have a tie-up with an insurer carrying on

life insurance business for this purpose, and subject to the provisions of section

64VB of the Act, the premium attributable to the life micro insurance product

may he collected from the prospect (proposer) by the insurer carrying on

general insurance business, either directly or through any of the distributing

entities of micro-insurance products as specified in regulation 4, and made over

to the insurer carrying on life insurance business.

Provided further that in the event of any claim in regard to life micro-insurance

products, the insurer carrying on general insurance business or the distributing

entities of micro- insurance products, as the case may be, as may be specified in


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the tie-up referred to in the first proviso, shall forward the claim to the insurer

carrying on life insurance business and offer all assistance for the expeditious

disposal of the claim.

CODE OF CONDUCT OF MICRO INSURANCE AGENTS

h Every micro-insurance agent and specified person employed by him shall abide bythe code of conduct as laid down in Regulation 8 of the Insurance Regulatory and

Development Authority (Licensing of Insurance Agents) Regulations, 2000, and

the relevant provisions of Insurance Regulatory and Development Authority

(Insurance Advertisements and Disclosure) Regulations, 2000.

Provided that the insurer shall ensure compliance of the code of conduct,

advertisements and disclosure norms by every micro-insurance agent.

h Any violation by a micro-insurance agent of the code of conduct and/oradvertisement or disclosure norms as aforesaid shall lead to termination of his

appointment. in addition to penal consequences for breach of code of conduct

and/or advertisement or disclosure norms pursuant to the provisions of sub-regulation

(1).

Documents

MI Regulations