A Review on Insurance Broker Compliance under IRDAI

Ashish M. Shaji

23 Nov, 2020

In these times that we are living in reporting of the information to the authorities is an essential function for any organization. In case of the insurance business world the need for compliance with the regulations is highly critical due to the risks involved with it. In order to ensure better transparency and accountability in the insurance business insurance broker compliance is vital. In this article we shall take a close look at insurance broker compliance.

Who are the Insurance Brokers? Why is Insurance Broker Compliance required?

Insurance brokers are persons who sell insurance products of different companies to customers. They assist the customers in finding the best-suited insurance policy for them and earn a commission based on the number of insurance products sold. Unlike insurance agents insurance brokers have a huge volume of business as they deal with the products of various companies and not a particular company.

Insurance Broker Compliance for Grant of Registration

For insurance broker registration:

• The insurance broker is required to act exclusively as allowed in the regulations for carrying on his business.
•  The insurance broker is required to comply with the provisions of the IRDA (Insurance Regulatory and Development Authority) Act, 1999, and any other guidelines issued by the authority.
• It is the responsibility of the insurance broker to inform the authority in case of any change in the information submitted or if any information submitted is false or misleading.
• The insurance broker must address the grievance of its customer within 14 days of receipt of such grievance and must also inform the authorities about it.
• The insurance broker is not allowed to undertake multi-level marketing for solicitation and procuring insurance products.
• The insurance broker must comply with the code of conduct and is required to maintain books of accounts as well.

Capital requirement: Insurance broker compliance

An applicant intending to become an insurance broker is required to have a minimum paid-up capital of–

1. In case of direct broker- Rs. 75 lakhs
2. In case of reinsurance broker- Rs. 4 crore
3. In case of composite broker- Rs. 5 crore

In case of a company limited by shares and cooperative society the capital will be in the form of equity shares. In case of LLP, the contribution from partners would be in cash only and insurance broker’s shares held as capital/contribution shall not be pledged in any way in case of an LLP or equivalent.

Risk Management Services: Insurance Broker Compliance

• Insurance brokers can charge client fees in lieu of its service to the client for risk management service or other identical services as per the regulations and the broker may undertake the activity for commercial risks only upon a written confirmation from the client.
• The insurance brokers are not permitted to receive remuneration and reward under IRDAI regulations 2016 and fees for the same risk management services.
• The insurance broker must keep all the details related to risk management services offered.
• In case of lack of resources and skills from insurance brokers for risk management services then it may engage external experts for the same.
• The insurance broker would be responsible for all acts on the part of external experts.

Internal Control and System: Insurance Broker Compliance

It is the responsibility of the insurance broker to ensure in place a proper internal audit system and that it is adequate for the business. In case of reinsurance and composite brokers the insurance brokers must mandatorily have industrial audit systems. The insurance broker who earns more than 5 crore in remuneration in a financial year must mandatorily have a designated compliance officer.

Insurance Broker Compliance with respect to maintenance of books of account, records, etc.

The insurance broker is required to maintain the following for each financial year:

• A balance sheet or statement of affairs at the culmination of each accounting period.
• Profit and loss account.
• A statement on cash or fund flow- direct method.
• Any additional statement on the business of broking as per the need of the authority.

According to the regulations, the accounts may be maintained on the basis of accrual and the financial period shall be for 12 months.

The insurance broker is required to submit a copy of the financial audited statement along with the auditor’s report to the authority. The time period for such submission shall be within 30 days after holding of an annual general meeting or by 30^th September of every year. In case there is any deficiency in the auditor’s report then the insurance broker may within 90 days from the date of the auditor report, correct those deficiencies.

The books of accounts, statements and documents will be maintained at the insurance broker’s head office or such other branch offices. These documents shall be available on all working days to the officers of the authority for inspection. These documents shall be retained for a period of seven years but in cases wherein claims are reported and where the decision of the court is pending, such documents must be maintained till the completion of cases.

The insurance brokers shall provide their financial statements regarding the transactions made by it or to it. The auditor is required to provide a certificate affirming compliance regulations in the format provided in schedule II- Form UA. The insurance brokers are required to submit statutory auditor’s details and the audited accounts as per schedule II- Form V. The insurance broker’s statutory auditors will be appointed for a continuous period of maximum 5 years.

In case the remuneration and any other payments made to the broker go beyond the prescribed limit then the insurer can file a certificate as provided in schedule II- Form W with the authority. It must be signed by the insurer’s CEO and CFO. Another similar certificate from the broker’s CFO and principal officer must be filed certifying it in the same format as provided above.

Conclusion for Insurance Broker compliance

These regulations under the IRDAI set the plan for insurance broker compliance that must be complied with strictly by the insurance brokers. Non-compliance with it may invite penalties.