Penalty for unapproved policy changes allegedly reduced from Rs 17,500 crore to Rs 20 lakh
The Central Bureau of
Investigation (CBI) has started a preliminary enquiry into allegations that the
former chairman of the Insurance Regulatory and Development Authority (Irda), J
Hari Narayan (bottom left)unduly favoured Reliance General Insurance
Company more than five years ago.
The investigating agency is
inquiring into whether there was any mala fide intent in a decision taken in
July 2009 by Narayan to reduce from Rs 17,500 crore (Rs 175 billion) to Rs 20
lakh (Rs 2 million) the potential penalty that could have been levied on the
insurance company in the Anil Dhirubhai Ambani Group for violating provisions
of the Insurance Act, 1938.
CBI spokesperson Kanchan Prasad
confirmed the agency had registered a preliminary enquiry against "unknown
officials" of the Irda and "a private firm" to look into
"the allegation that a penalty of Rs 20 lakh was imposed on the said firm
instead of Rs 17,500 crore (approximately) for 3.5 lakh instances of violation
of the Irda guidelines".
Reliance General Insurance
Company, when contacted, declined to provide an official comment.
Narayan confirmed CBI officials
had questioned him at his residence in Hyderabad and recorded his statement.
He, however, said the insinuation that he had favoured Reliance General
Insurance Company was unfounded.
After retiring from the Indian
Administrative Service as chief secretary of Andhra Pradesh on June 11, 2008,
Narayan joined the Irda as its chairman, from which post he retired on February
20, 2013.
The CBI has also questioned other
serving and retired officers of the Irda, including a former member (non-life)
of the authority. A preliminary enquiry is initiated when a complaint is
received or information obtained by the CBI which does not contain enough
material to file a regular case. It is not known if and when the preliminary
enquiry [No. (8)(A)2014ACU-vi-New Delhi] relating to the episode involving the
IRDA, its former chairman and Reliance General Insurance Company, will be
converted into a regular case.
Sources said in late September
and early October, the CBI sought information from Reliance General Insurance
Company about the circumstances that led to the IRDA imposing a penalty on the
company in 2009.
On August 8, replying to an
unstarred question raised in the Lok Sabha by BJP Member of Parliament Dr Udit
Raj whether the Irda had reduced the penalty of any private insurance company
and whether the government had conducted any inquiry in this regard, Minister
of State for Finance Nirmala Sitharaman confirmed the imposition of the penalty
on Reliance General Insurance Company but added that the "penalty imposed
by the competent authority was not reduced" and hence, the question of
conducting an inquiry "does not arise".
Soon after this reply was
furnished by the government, the CBI decided to commence a preliminary enquiry
against the former Irda chairman.
The episode goes back to December
2005 when Reliance General Insurance Company filed a healthcare insurance
scheme called Reliance Health Care Policy before the Irda for its approval.
This policy, which was approved in February 2006, sought to provide insurance
cover under various health conditions subject to certain exclusions at a
specified range of prices.
In September 2006, the Irda
issued revised guidelines and procedural requirements for "file and
use" of insurance products. These required the prior approval of the Irda
in case there were changes in the name or price of insurance products or other
terms and conditions.
Different strokes
|
The Irda
apparently believes in different strokes for different folks. The Irda has
been adopting different yardsticks for penalising different insurance
companies for the same purported offence.
In 2011, the public sector United India Insurance
Company was fined Rs 5 lakh under the provisions of Section 64VC of the
Insurance Act for opening 35 new branches across the country without
permission from the authority. The IRDA, however, fined Bajaj Allianz Life
Insurance Company the same amount for opening 582 offices without its
permission. The fine was imposed on Bajaj Allianz under the same provisions
that had been invoked in the case of United India Insurance. According to an
order dated March 14, 2011, it was observed that United India Insurance had
opened 35 "new places of business" in 2009 and 2010. The insurer
was issued a show-cause notice on December 27, 2010. United India Insurance
contended that the error had been "inadvertent" and that such
future action would be undertaken only with prior approval of the authority.
The Irda said in its order that United India Insurance was well aware of the
requirements and asked the company to remit the fine of Rs 5 lakh within 15
days of the order. The authority had issued a similar show-cause against
Bajaj Allianz Life Insurance in 2007 over what it called "alleged"
violation of the Insurance Act by opening 582 branches across the country
with only the approval of its own board, and not that of the Irda. The same
order had pointed out that the company had been issued a show-cause notice
earlier as well in 2006 for opening 28 branches and 189 satellite offices
without the prior sanction of the authority. The insurer was subsequently
fined the same amount of Rs 5 lakh for opening 15 times the number of
branches that United India Insurance had!
|
In January 2008, it was brought to
the notice of the Irda that Reliance General Insurance Company was selling an
insurance policy called Reliance Health Wise Policy, which had not been
approved by it.
On being asked, the insurer
admitted that it had introduced the policy earlier as Reliance Health Care
Policy and that in 2007 it had reintroduced the product with a new name and at
new prices.
A notice was issued to Reliance
General Insurance Company by the Irda on April 13, 2009. After hearing what the
company had to say, the authority found the insurer had violated Clauses 4 and
9 of the Irda "file- and-use" guidelines.
According to Section 102(b) of
the Insurance Act, the Irda could levy a penalty not exceeding Rs 5 lakh for
each violation. Since Reliance General Insurance Company had already sold
350,000-odd policies by that time, each policy sold constituted a violation.
The full fine could potentially have added up to Rs 17,500 crore (Rs 175
billion).
On July 23, 2009, Narayan ordered
that the penalty be brought down to a relatively paltry Rs 20 lakh by the
"the judicious exercise and discretion vested with the authority"
under Section 14 of the Irda Act, 1999, read with Section 102(b) of the
Insurance Act.
News about the imposition of the
fine on Reliance General Insurance Company was publicised in various media
(websites and financial newspapers) on different occasions between July and
December 2010, but what was not known was the company had been allowed to get
away paying only Rs 20 lakh or Rs 174,998,000,000 less than what the maximum
potential fine could have been.
Calculated differently, the
penalty per violation amounted to Rs 5.70 instead of Rs 500,000.
In its defence, Reliance General
Insurance Company had argued before the Irda that the company had reverted to
the original approved rate of 2005 and that it had refunded Rs 1.07 crore to
its policy-holders.
The Irda order of July 23, 2009,
however, stated the claim made by the company had not been supported by
documentary evidence.
Sources said all necessary
documents establishing proof of the refund had been subsequently provided to
the Irda.
The sources added that over the
span of roughly a year in 2008-09, the Irda had penalised a number of insurance
companies for not following the regulator's procedures and processes.
In a recorded telephonic
interview, Narayan said the April 2009 notice issued by the Irda to Reliance
General Insurance Company had demanded Rs 25 lakh (Rs 2.5 million) from the
company for violations or "failures" on five counts, each attracting
a maximum penalty of Rs 500,000.
He claimed he had given the
"benefit of doubt" to the company for its submission that certain
changes in the new policy were in favour of the policy-holder.
Asked why he could not have
issued an additional show-cause notice to Reliance General Insurance Company,
he claimed: "Not on the same matter, I cannot."
Narayan explained in detail that
in another case relating to a different insurer, HDFC Ergo, which he had heard
in June the same year, he wanted to create a "deterrent" by imposing
the maximum penalty of ·6.85 crore on the firm.
However, the Irda chairman used
his discretion and imposed a penalty of Rs 5 lakh on HDFC Ergo as well, for not
fulfilling its rural sector coverage quota by 137 policies.
In this instance too, the penalty
was a maximum of Rs 5 lakh for each violation, implying that a total maximum
penalty of Rs 6.85 crore could have been imposed on HDFC Ergo.
The wide variance in these two
instances is revealing - a maximum penalty of Rs 17,500 crore whittled down to
Rs 20 lakh in the case of Reliance General Insurance Company and Rs 6.85 crore
coming down to Rs 5 lakh for HDFC Ergo - suggesting that the scope of
discretion of the IRDA and its chairman and its proportionality in connection
with the transgression needs greater transparency. This is a verbatim
transcript of what Mr Hari Narayan said: "…with respect to HDFC Ergo, by
then my understanding of the insurance business was better...so I said an
instance of failure is not just the factum of failure of a certain kind ... but
each time it has occurred... in the (HDFC) Ergo case, they were short of some
150 numbers or so in the obligation to be discharged....... so I said 150 into
(Rs )5 lakh will be (Rs )7.5 crore ... my idea was, you know, the penalty is
very low … I interpreted it like this. You know I wanted to put in a deterrent
here, in the industry. I made it a point to put it there, that the penalty
could be Rs 7.5 crore, but in the instant case, I'm putting it at (Rs ) 5
lakhs. I wanted to send a message that you cannot get away with small fines and
penalties..."
He added that the Rs 17,500 crore
amount in the case of Reliance General Insurance Company was not really a
"liability" and the proposal to levy a penalty of Rs 500,000 per
policy that had been issued in an irregular manner was, in the opinion of the
insurance industry, an "untested hypothesis".
Narayan repeatedly said that
during his tenure as chairman of the Irda, the authority would at the most
issue a warning to errant insurers or impose penalties amounting to Rs
100,000-200,000 for violations.
He said that after his order
against Reliance General Insurance Company, there were hardly any instances of
companies changing terms of insurance policies without approval.
Asked why he thought the CBI had
commenced investigations against him, he said a question on this subject had
been raised by an MP and a complaint "may" have been sent to the ministry
of finance which, in turn, "may" have forwarded it to the CBI.
According to the Irda's own
published figures, during 2009-10, in the list of complaints registered
directly by non-life insurers, Reliance General Insurance Company topped the
chart of 24 companies with 65,160 complaints reported out of a total of 186,615
complaints.
The same year, Reliance General
Insurance Company disposed off 68,159 complaints (including pending complaints
received before the beginning of the financial year) in favour of the insured,
against a industry total of 172,854.
On 4 January 2013, during a
Supreme Court hearing in a case relating to Heritage Insurance Solutions of
Kolkata, Justice R M Lodha (who recently retired as Chief Justice of India)
questioned the counsel for the Irda as to why the insurance sector regulator
had sought to initiate penal action against the company for apparently
diverting funds belonging to policy-holders when it had not acted against other
insurers like Reliance General Insurance and Aon Global Insurance Brokers that
had allegedly committed similar or greater violations.
The writers are freelance
journalists
Paranjoy Guha Thakurta & Pranati Mehra
Source: 
Reliance Insurance and the
Rs 18 cr windfall from IRDA ex-chief
April 21,
2015 16:55 IST
The CBI is probing whether the
former IRDA chief J Hari Narayan had misused his discretionary powers to favour
Reliance General Insurance Company, which has admitted that the extra amount
collected by it way of premium was not Rs 1.07 crore, as originally believed,
but 20 times as much, report Paranjoy Guha Thakurta and Pranati B Mehra.
After the Central Bureau of
Investigation started inquiring into whether the former chairman of the
Insurance Regulatory and Development Authority J Hari Narayan favoured Reliance
General Insurance Company, the company in the Anil Dhirubhai Ambani Group has
acknowledged that it had collected an extra Rs 19.25 crore from its
policy-holders.
The CBI's investigations, which
began in September, relate to whether or not the former IRDA chief had misused
his discretionary powers more than five years earlier, in July 2009, to reduce
the penalty that could have been imposed on RGIC for violation of regulatory
guidelines from Rs 17,500 crore to only Rs 20 lakh.
IRDA asked the company to
identify all the policy-holders who had been charged extra amounts of money by
way of premium and to keep this money in a separate bank account. RGIC revealed
to IRDA that the total amount that would have to be refunded to policy-holders
would be Rs 1.07 crore.
Documents available with the
writers of this article now indicate that the total amount to be refunded is Rs
19.25 crore (Rs 192.5 million), almost 20 times what Hari Narayan had recorded
in his order but which had not been challenged.
The CBI initiated a preliminary
enquiry into the alleged favour shown by the former IRDA chairman in penalising
RGIC in an order he had passed on July 23, 2009. The regulatory authority had
earlier issued a show-cause notice to the company for violating 'File and Use
Guidelines' of the IRDA in respect of issuance of new insurance products.
The company had floated a policy
called Reliance Health Care Policy for which it had obtained the necessary
clearances in 2006. Subsequently, RGIC changed the name of the policy to
Reliance Health Wise Policy and marketed it at a different price from that
approved by IRDA.
It was recorded in Hari Narayan’s
order that for this violation of IRDA guidelines, the company could have been
fined Rs 17,500 crore (Rs 175 billion) considering it had sold around 350,000
policies. The penalty in each instance could be Rs 500,000. The then IRDA
chairman reduced this penalty to Rs 20 lakh (Rs 2 million).
In the same order, Hari Narayan
recorded that RGIC has refunded Rs 1.07 crore to policy-holders which was the
excess premium collected when the company changed the terms and name of the
policy. The order stated: 'This refund is not supported by any documentary evidence.'
Thereafter, it added: 'However, the Authority is inclined to accept their
contention of having refunded Rs 1.07 crore to the various policy holders of
this product on good faith.'
The basis for reposing "good
faith" in RGIC was never explained by Hari Narayan. What has now become
evident is that the excess amount collected by the company from policy holders
is at least Rs 19.25 crore.
A letter by Yegnapriya Bharath,
joint director (health), IRDA, to RGIC dated October 16, 2014 (a copy of which
is available with the writers of this article) refers to a discussion and
e-mail communication with officials of RGIC who acknowledge that the refund to
be made to policy holders is of the order of Rs 19.25 crore.
It appears that the IRDA, after
having discovered in January 2008 that the company had floated the new Reliance
Health Wise Policy without clearance from the regulator, forgot about the issue
after the July 2009 order of Hari Narayan.
Bharath's letter to RGIC, written
more than five years after the IRDA order, now seeks explanations from the
company as to why it had not refunded the full amount to policy holders that it
should have.
She wrote: '… The amount of
refund now indicated had never been informed to IRDA. Kindly explain. Also you
are now stating that the premium of Rs 32.53 crore under Reliance Health-Wise
for the year 2007-08 submitted by you at the material time was the Earned
Premium and that in fact the Gross Written Premium was Rs 79 crore. This fact
was not given to IRDA earlier. Please explain.'
(Gross written premium is the
premium counted in a year and accounted for without reflecting deductibles like
administrative charges, etc, while earned premium is the actual premium
collected by the company.)
In a letter dated November 5,
2014, Rakesh Jain, executive director and CEO of Reliance General Insurance,
replied to Bharath's letter. He wrote that his company made "all the
effort" it could to identify policy holders who were to be refunded the
excess amounts collected and that RGIC had parked Rs 19.25 crore in a separate
bank account as directed by IRDA.
Explaining the methodology
adopted by the company to arrive at the figures of excess premium collected,
Jain said RGIC had considered the period between December 1, 2007, and November
17, 2008, to identify those policy holders who may be entitled to the refund.
He added that his company will place an advertisement in the media as directed
by IRDA so that more policy holders get to know the refund process.
The RGIC CEO asked the regulator
to relook its direction to the company to pay two per cent extra interest (over
the normal bank rate) when refunding money to policy holders. He quoted
Regulation 8(5) of the IRDA Protection of Policyholders’ Interests Regulation,
2002, to argue that the extra interest was applicable only to "claim"
amounts.
Jain concluded his letter by
stating: 'Since the matter is very old and persons who were handling the matter
at that time are no longer with the company, we can perhaps presume today that
the variance in premium number was inadvertent and unintended omission. The
figure of earned premium was quoted to indicate the claims ratio…'
In the list of complaints by
policy holders for the year 2009-10 put out by IRDA, Reliance General Insurance
tops the chart among 24 insurance companies with a total of 65,160 complaints
against it. The following year's list indicates that the "subject
matter" of the majority of complaints of policy holders related to the
hike in the premium of Reliance Health Wise Policy.
On January 4, 2013, Justice
R M Lodha (now retired) of the Supreme Court of India had remarked in a case
relating to the Kolkata-based Heritage Insurance that the insurance regulator
seemed to be using different yardsticks for different companies.
A report in January 5, 2013,
edition of the Financial Express said: 'A bench headed by Justice R M
Lodha questioned IRDA’s rationale behind not taking action against other
insurers and brokers like Reliance General Insurance, Aon Global Insurance
Brokers and others who have committed similar violations.'
The report added that IRDA’s
argument that these violations were not as grave as those allegedly
committed by Heritage Insurance, was not agreed to by the Supreme Court bench.
Our queries to the current IRDA
chairman T S Vijayan and a spokesperson of Reliance General Insurance Company
went unanswered.
We had broken the story on the
CBI initiating investigations into the alleged favours granted by former IRDA
chairman Hari Narayan to RGIC in October 2014. (See: CBI probing former Irda
chairman).
The writers are independent
journalists.
Paranjoy Guha Thakurta and Pranati B
Mehra in Mumbai