Regulatory challenges in insurance

The recent move to increase the FDI limit in insurance companies from 26 per cent to 49 per cent could be a game-changer for the insurance sector.

It will result in increased access to capital from global players in an investment-starved sector, leading to product innovation, improved distribution, better customer service as well as the introduction of leading practices in actuarial and claims management.

All these factors will help the consumer, which, in turn, should lead to increased insurance penetration.

However, the increase in stake by the global players will also mean adherence to more rigorous corporate governance and global compliance norms.

The anti-money laundering (AML) and know your customer (KYC) framework in insurance companies have been under the spotlight.

From an AML/KYC control framework perspective in the insurance sector, there are still vulnerable areasthat can be taken advantage of. One of them is the lack of a robust de-duplication mechanism in the insurance sector.

For instance, though there are regulations in place that prohibit a single customer from making a premium payment in cash above a limit of ₹50,000 per transaction, customers can bypass the regulations due to the lack of a unified view of the customer across multiple policies and products.

These rules can be evaded by an individual policyholder taking multiple policies and making premium payments in cash.

Since insurance companies also offer investment products, the cash paid as premium may end up getting invested in other financial products such as stocks, bonds, etc., thus getting integrated in the financial eco-system of the country — a clear case of money laundering.

For companies to combat this risk, they need to have a robust mechanism in place.

This can only be achieved through a control framework across multiple parameters such as name, address, date of birth, PAN card, address, telephone number, to name a few. Similar matches across any of the parameters are then flagged.

Another area of concern is the payment of premium in the form of demand drafts (DDs) — especially premium payments above the threshold of ₹ 50,000.

In such a scenario, the insurance company is completely reliant on the AML/KYC controls in place at the bank which issued the DDs.

Due diligence measures such as a confirmation from the policy holder, and complete details from the bank from which the DD was made should then be followed. This should especially be done for DDs made through smaller institutions such as cooperative banks. One more area that requires a close look is premium payments made by third parties i.e. persons other than the person insured. Companies need to put in measures to ensure that third party payments are flagged and subjected to greater scrutiny before they are cleared.

A common challenge that insurance companies tend to face, especially while issuing new policies, is fraudulent/forged documentation in the case of PAN cards, proof of residence, proof of date of birth, etc. Insurance companies need to put in place measures to validate the documents submitted by the customers, to the extent possible.

Specific parameters such as PAN cards and address can also, at times, be checked online. In cases where too many concerns on the authentication of the documents are raised, on ground validation checks should be carried out.

With increased regulatory focus and enhanced scrutiny by joint venture partners, insurance companies will have to work on strengthening their AML and KYC frameworks. As a popular saying goes, ‘if you thought compliance was difficult, try non-compliance’.

The writers are with Deloitte in India

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