Document Detail

Title: FINAL ORDER

Reference No.: IRDA/LIFE/ORD/MISC/143/08/2015

Date: 07/08/2015

In the matter of M/s. Reliance Life Insurance Company Ltd.

Based on the Reply of M/s Reliance Life Insurance Co Ltd dated 19^th March 2015 to the Show Cause Notice Dated 18^th February, 2015 and Submissions made by them during Personal Hearing on 23^rd June, 2015 at 11:30 AM, Chaired by Sri T.S.Vijayan, Chairman, IRDAI, at the office of Insurance Regulatory and Development Authority of India, 3^rd Floor, Parishrama Bhavanam, BasheerBagh, Hyderabad.

On examination of the reports filed by the Reliance Life Insurance Co. Ltd., (hereinafter referred to as “the Life Insurer”) in ‘Form - A’ for the half year ended March, 2013 in compliance to the provisions stipulated under ‘Guidelines on Outsourcing of Activities by Insurance Companies’ bearing Ref. No. IRDA/Life/CIR/GLD/013/02/2011 dated 01^st February, 2011 (hereafter referred to as Outsourcing Guidelines), the Insurance Regulatory and Development Authority of India (hereinafter referred to as “the Authority”) observed that the Life Insurer is paying huge amounts to the outsourced entities (third parties) under the head “Customer Contactability Expenses”. Based on this observation, the Authority has carried out an onsite inspection of Corporate Office of the Life Insurer during May 6, 2014 to May 9, 2014 to examine the payments made by the Life Insurer under the head “Customer Contactability Expenses” and the procedures in place to comply with the Outsourcing Guidelines issued by the Authority. During the onsite inspection, the inspection team also visited few of the offices of outsourced entities of the Life Insurer.

The Authority forwarded a copy of the Inspection Report to the Life Insurer vide letter dated 2^nd July, 2014 seeking their comments. On examining the submissions made by the Life Insurer vide letter dated 18^th July, 2014, the Authority has issued a Show Cause Notice (SCN) on 18^thFebruary, 2015 which was responded to by the Life Insurer vide letter dated 19^th March, 2015. As requested therein, a personal hearing was given to the Life Insurer on 23^rd June, 2015.

Mr. Anup Rau, Chief Executive Officer, Ms. Shanai Ghosh, Chief Strategy Officer, Mr. Ashish Lakhtakia, Head Legal & Compliance and Company Secretary, Mr. S.V. Sunder Krishnan, Chief Risk Officer were present in the personal hearing on behalf of the Life Insurer. On behalf of the Authority, Mr. D.D. Singh, Member (Distribution), Mr. V. Jayanth Kumar, Joint Director (Life) and Ms. B. Aruna, AD (Life-Regulatory Actions) were present.

The submissions made by the Life Insurer in their written reply to the Show Cause Notice as also those made during the course of the personal hearing were taken into account.

The findings on the explanations offered by the Life Insurer to the issues raised in the Show Cause Notice dated 18^thFebruary, 2015 and the decisions are as follows.

Charge No.1

Four entities namely (a) Premier Training Pvt. Ltd. (b) CRP Technologies (I) Pvt. Ltd. (c) Skynet Teleservices Private Ltd. (d) Equifax Credit Information Services were hired to perform Customer Contactability Program with a very higher commercial terms @ Rs 500 per policy and the following significant payments were made under the accounting head "Customer Contactability":

(Rs. in Crore)

Outsourced Entities	2011-12	2012-13	2013-14
CRP Technologies (I) Pvt. Ltd.	24.53	41.34	65 .05
Premier Training Pvt. Ltd.	18.17	31.04	14.71
Skynet Teleservices Private ltd.	-	09.12	-
Equifax Credit Information Services	-	-	8.76
Grand Total	42.70	81.50	88.52

Violation of Clause 9.6 of Outsourcing Guidelines Ref. No. IRDA/LIFE/CIR/GLD/ 013/02/2011 dated 01/02/2011.

In response, the Life Insurer submitted that it has outsourced this activity to collect incremental contact details from the existing policyholders residing in the remote area where it is beneficial for the Life Insurer to outsource in spite of using its own resources which could be more expensive than the alternative option. It further submitted that these payments are on per “seat basis”/”enquiry basis”. The Life Insurer also submitted that before empanelment of third party service providers, it undertakes cost-benefit analysis.

The Life Insurer further stated that there is an inadvertent error in the payments mentioned in the charge under Skynet Teleservices Pvt. Ltd., and Equifax Credit Information Services. The actual payments are 0.09 crores for the period 2012-13 in the case of Skynet Teleservices Pvt. Ltd., and 0.13 crores for the period 2013-14 in the case of Equifax Credit Information Services. The Authority has noted these corrections.

Decision:

Agreeing to pay @ Rs. 500 per policy towards customer contactability from the existing policyholders in the remote area irrespective of the underlying premium is on a higher side. The Life Insurer has not substantiated how the Company has derived benefits in terms of renewing the business (policy or premium).

As the subsequent charges also deal with these observations, the regulatory action is detailed there under in the subsequent decisions for Charges No. 2 and 3.

Charge No.2

On-site inspection of Premier Training Pvt. Ltd., Mumbai (one of the four entities referred under Charge above) revealed that the entity was not engaged in any such activities shown by the insurer under outsourcing arrangement. It was also observed that the entity was passing on the amount received from the Life Insurer to India lnfoline Media and Research Services Ltd., Mumbai, a wholly owned subsidiary of India lnfoline Ltd. which also owns India lnfoline Insurance Services Ltd. and India lnfoline Insurance Brokers Ltd. The following are the detail of amounts passed on by the service provider:

Financial Year	(Rs.inCrore)
2011-12	41.35
2012-13	71.19
2013-14	22.29

Violation of Clause 9.6 and Clause 10 of Outsourcing Guidelines Ref. No. IRDA/LIFE/CIR/GLD/013/02/2011 dated 01/02/2011.

In response, the Life Insurer stated the following:

(a) They have outsourced this activity to collect incremental contact details from the existing policyholders residing in the remote area where it is beneficial for the Life Insurer to outsource in spite of using its own resources which could be more expensive than the alternative option. RLIC further submitted that these payments are on per “seat basis”/”enquiry basis”. The Life Insurer also submitted that before empanelment of third party service providers, they undertake due diligence and cost-benefit analysis.

(b) As a part of due diligence, they make independent market review, verification of documents like MOA and AOA of the Company, financial statements, declaration from Directors, evaluation of the risk associated, etc. Based upon the nature and size of activities being outsourced, due diligence processes are undertaken. Reliance Life has evolved standardized processes and template to record such evaluation.

(c) Section 31 B (2) or forms designed and circulated by IRDAI do not apply in the circumstances and services hired by RLIC as none of the services hired were for procurement of business.

(d) The Life Insurer has engaged the services of the Premier Training Pvt. Ltd. (PTPL) for call center (inbound and outbound call management) of the Company.

(e) PTPL is responsible for the agreed service to the Life Insurer. PTPL had sub contracted some of the activities to India Infoline Media and Research Services Ltd which has been in the business of rendering support services such as research, training, administration and providing manpower support, data entry and processing, etc. to various companies in the financial services.

(f) PTPL and India Infoline Media and Research Ltd., are separate legal and it is coincidental that India Infoline Media and Research Services Limited is a subsidiary of India Infoline Ltd., which is the holding company of India Infoline Insurance Brokers Limited.

(g) The Life Insurer on its own had already terminated its services of PTPL at least two months before the inspection based upon internal review. However, the Life Insurer had continued to deal with India Infoline Insurance Brokers Ltd., the insurance broking company, post March 2014 and the payments made to them are within the limits stipulated in Section 42 (E) of the Insurance Act and the Section 40 A is not applicable to Brokers.

Decision:

The Life Insurer’s reference to the Sections of the Insurance Act are not relevant as the charge framed here is for violation of Clause 9.6 and Clause 10 of the Outsourcing Guidelines.

Clause 9.6 of the Guidelines broadly mentions the factors that could help in considering materiality in a risk management programme and the Life Insurer has failed to have a proper risk management programme on a continuous basis to ensure whether the service provider is indeed capable of providing the services agreed to or whether the service provider is passing on the payments to other entities by way of sub-contracting the same. Moreover, in the present case, the Life Insurer has paid the amount for which the service provider PTPL itself has not performed the activities as specified in the agreement.

Clause 9.6 (ii) of the Guidelines requires the Life Insurer to carry out cost-benefit-analysis which is an essential pre-requisite before outsourcing any activity and the Life Insurer has failed to comply with these provisions in general and paid huge amounts under this activity without carrying out effective cost-benefit analysis. Hence, this is a clear violation of Clause 9.6 of the Outsourcing Guidelines.

The Life Insurer did not give any substantiating response that it has complied with Clause 10 of the Guidelines especially in the back drop of the charge framed that the outsourced entity did not carry out the activities outsourced by the Life Insurer. The evaluation form submitted by the Life Insurer only reveals that the Life Insurer seem to have done the due diligence only on paper.

The Life Insurer in its reply dated 19^th March, 2015 stated that they leveraged the wide reach of PTPL and its infrastructure. The Life Insurer also stated that they terminated the agreement with PTPL in the month of March, 2014 because PTPL was unable to retain its staff and infrastructure to render the required services effectively to them. This also indicates that the Life Insurer has not exercised proper due diligence and violated the provisions of Clause 10 of the Guidelines.

The Authority by exercising the powers vested under Section 102(b) of the Insurance Act, imposes a penalty of Rs.30,00,000 (Rupees Thirty Lakhs only) for making payments to PTPL which are in violation of Clause 9.6 and Clause 10 of Outsourcing Guidelines (Rs. 5,00,000/- for each violation and for the payments made in each Financial Years 2011-12, 2012-13 and 2013-14).

Charge No.3

On-site inspection of Payments to CRP Technologies (I) ltd. was also carried out by the Authority. On examination of the financial statements of the entity, it was observed that the entity paid Rs. 54.85 Crore in the financial year 2012-13 as vendor charges. Though, as per clause 12 of the agreement between the insurer and the outsource entity the insurer has complete right to Audit the entity, the entity during on-site inspection refused to share complete information towards its payments to various vendors .

Violation of Clause 8.2, 9.8 and 9.9 (ii) of Outsourcing Guidelines Ref. No. IRDA/LIFE/CIR/GLD/ 013/02/2011dated 01/02/2011

In response, the Life Insurer stated that it ensures that all the outsourced contract necessarily have stringent clause towards access of all books, records and information relevant to the outsourced activity available with the service provider. The outsourcing arrangements entered into by the Life Insurer provide the rights to conduct audits on the service provider.

The Life Insurer stated that CRP Technologies submitted all the required information/documents including Annual Reports of FY 2011-12 and 2012-13. The Life Insurer also stated that CRP Technologies alleges that the IRDAI inspectors sought sensitive and core business details which are against Vendor’s client confidentiality policy. The service provider was reluctant to furnish the details to the Life Insurer as it would mean divulgence of their trade secrets/costing. Therefore, the Life Insurer requested the service provider to directly submit the details to the Authority. The Life Insurer also confirmed that the CRP Technologies directly submitted the details as sought by the Authority on 3^rd June, 2014.

Decision:

The Charge here is that the CRP Technologies has paid an amount of Rs. 54.85 crores as vendor charges to various vendors and during the inspection, when the inspection team sought the vendor details, CRP Technologies has not provided the same. After inspection, vide email dated 3^rd June, 2014, CRP Technologies submitted the expense-head wise details of payments and not the vendor details as sought by the Authority.

It was categorically mentioned in the inspection observation that the service provider refused to share the complete information towards its payments to various vendors as sought by the Inspection team. This was also part of the SCN. Therefore, subsequent sharing of the information by the Service Provider that too which is not as per the details sought by the Authority, cannot be the basis to exonerate the Life Insurer. It is envisaged that when a service provider is examined by the Authority, the Life Insurer shall take all such necessary measures to see that the inspection is carried out smoothly. Therefore, the submissions of the Life Insurer that the service provider has submitted the details to the Authority on June 3, 2014, which are not as per the requirement of the Authority, cannot be accepted now. The Life Insurer further confirmed that the agreement with CRP Technologies is still continuing as in their opinion, it is a good company.

The Life Insurer vide email dated 15/7/2015 also confirmed that they have paid a total amount of Rs. 44,99,94,292 during the FY 2014-15 towards three activities viz. Claims Investigation, Risk Investigation and Customer Contactability to CRP Risk Management Ltd (formerly known as CRP Technologies (India) Private Ltd). It is noticed that out of the total amount, the Life Insurer has paid an amount of Rs. 44,66,17,736 towards Customer Contactability itself which is almost 99% to the total amount paid. Moreover, when CRP Technologies has not shared the information with the Authority, the Life Insurer has failed to initiate the process of termination as per the terms and conditions laid down in the outsourcing agreement and paid an amount of Rs. 44,99,94,292 during the FY 2014-15.

The Life Insurer, by not ensuring the support of the service provider during the course of Authority’s inspection, has violated Clause 8.2, 9.8 and 9.9 (ii) of Outsourcing Guidelines. The Authority by exercising the powers vested under Section 102 (b) of the Insurance Act imposes a penalty of Rs.15,00,000 (Rupees Fifteen lakhs only) (Rs. 5,00,000/- for each violation) for violating the said Clause 8.2, 9.8 and 9.9 (ii) of Outsourcing Guidelines.

The Authority hereby directs the Life Insurer to terminate all the outsourcing agreements with CRP Technologies immediately and submit the Action Taken Report thereafter to the Authority within 30 days from the date of this Order.

With regard to the payments made to CRP Technologies as stated under Charge No.1, the following is the decision:

Clause 9.6 of the Guidelines mentions the factors that could help in considering materiality in a risk management programme and the Life Insurer has failed to have a proper risk management programme on a continuous basis to ensure whether the service provider is indeed capable of providing the services agreed to or whether the service provider is passing on the payments to other entities by way of sub-contracting the same.

The Authority by exercising the powers vested under Section 102(b) of the Insurance Act, imposes a penalty of Rs.20,00,000 (Rupees Twenty Lakhs only) (Rs.5,00,000 each for FYs 2011-12, 2012-13, 2013-14 and 2014-15) for making payments to CRP Technologies which are in violation of Clause 9.6 (ii) of Outsourcing Guidelines.

Charge No.4:

No due diligence of outsourced entity is carried out before entering into agreement with the outsourced entities. No yearly appraisal of outsourced entities is carried out as envisaged in the Outsourcing Guidelines.

Violation of Clauses 9.3 and 10 of Outsourcing Guidelines, IRDA/ LIFE/ CIR / GLD/ 013/02/2011 dated 01/02/2011.

In response, the Life Insurer stated that RLIC as a part of due diligence makes independent market review, verification of documents like MOA and AOA of the company, financial statements, declaration from Directors, evaluation of the risk associated, etc. RLIC monitors and reviews the performance of all the third party service providers and a comprehensive note is also placed before the Board for their review.

Decision:

The submissions of the Life Insurer that it has complied with Clause 9.3 and Clause 10 of the Outsourcing Guidelines are not found acceptable on the grounds that the inspection report brought out the fact that PTPL has not performed on its own the activities that were outsourced (which is referred in Charge (2) above and not disputed by the Life Insurer) and CRP Technologies did not share the information with the Authority during inspection (which is referred in Charge (3) above). The inspection observation categorically mentioned that the Life Insurer did not perform the due diligence but carried out only the paper work and the annual performance appraisal was also not carried out. Hence, it is a clear violation of Clause 9.3 and Clause 10 of Outsourcing Guidelines. The Authority by exercising the powers vested under Section 102(b) of the Insurance Act imposes a penalty of Rs. 5,00,000 (Rupees Five Lakhs only) for violation of Clause 9.3. For Clause 10 violations, the regulatory action is already taken under Charge No.2.

The Authority hereby directs the Board of the Life Insurer to review the performance of all third party service providers every year as required under the provisions stipulated under the Outsourcing Guidelines.

Charge No.5:

Certain outsourcing activities are not reported and it was observed that there were significant payments on account of "Building awareness and distribution of promotional material for Reliance Life Insurance" made at the rate of Rs 100 per person covered under such promotions and meetings.

The following are the instances of the said entities and the payments made there under:

*Name of the Third Party*	*Amo*unt paid in 2013-14 {INR}
Saket Commodeal Pvt Ltd	18,87,74,835.00
Vans Medicare & Biotechnology Pvt Ltd	20,07,44,708.00
Reliance Money Infrastructure Ltd	25,65,00,583.00
B2bLabyrinth Solutions Pvt.ltd.	22,49,12,572.00

Violation of Clause 9.6 and Clause 11 of the Outsourcing Guidelines, IRDA/ LIFE/ CIR/GLD/013/02/2011 dated 01/02/2011

In response, the Life Insurer stated that the awareness programs are organized on mass attendance basis and hence, these activities at a marginal cost of Rs. 100 (which also includes cost of organizing such large events) are more beneficial than any other mode of advertisement. RLIC opined that these activities may not fall under the definition of outsourcing, but post regulatory guidance, started reporting these arrangements in the outsourcing reports.

Decision:

The submission of the Life Insurer that these activities may not fall under the definition of outsourcing is not acceptable. As per Clause 11 of the Outsourcing Guidelines, all the outsourcing activities need to be reported to the Authority. However, the Life Insurer’s submission that they have started reporting these arrangement post Authority’s guidance is considered. The Authority hereby advises the Life Insurer to follow scrupulously the provisions stipulated under outsourcing guidelines.

The Life Insurer’s submission that these activities at a marginal cost of Rs. 100 (which also includes cost of organizing such large events) is more beneficial than any other mode of advertisement needs to be examined further. The regulatory action is detailed under Charge No. 6.

Charge No.6:

On visiting the office of the Reliance Money Infrastructure Ltd. (the service provider referred under Charge- 5) it was noticed that they received the amount for referring customers to the insurer though, the service provider is not a referral partner registered with the Authority under IRDA (Sharing of Database) Regulations, 2010. It was also observed from the details of the payments made by Reliance Money Infrastructure Ltd. that a major part of them are paid to various Group companies of different insurance brokers as reported hereunder and most of group companies referred in column 1and 3 of the following table have Common Directors.

Name	Grand Total	Name of the Insurance Broking Arm
(1)	(2)	( 3)
Bluechip Corporate Investment	3,76,24,500	Bluechip Insurance Broking Pvt Ltd
Religare Macquarie Wealth	1,38,27,865	Religare Ins. Broking Ltd.
Anand Rathi Shares & Stock	66,20,532	Anand Rathi Insurance Brokers Ltd
MotilalOswal Wealth	19,87,500	MotilalOswallnsurance Brokers Pvt. Ltd.
Reliable India Financial Advisor	11,81,743	Reliable Ins. Brokers Pvt. Ltd.

Violation of Clause 9.6 of the Outsourcing Guidelines, IRDA/LIFE/CIR/GLD/013/02/2011 dated 01/02/2011, Violation of IRDA (Sharing of Database) Regulations, 2010 and Violation of -Annexure 1Clause 2(a) and Clause 3(a) (Responsibilities of the Board of Directors) of Corporate Governance Guidelines, 2009.

In response, the Life Insurer stated that

1. The Company is having no direct or indirect business linkages with the entities mentioned under SCN Charge 6 except Bluechip Corporate Investment (for marketing and dissemination of distribution material) and this fact has been disclosed in Under Section 31 B reporting to the Authority.

2. They have stopped the referral business with Reliance Money Infrastructure Ltd.

Decision:

The Life Insurer has made significant payouts to Reliance Money Infrastructure Ltd., under Building awareness and distribution of promotional material for Reliance Life Insurance whereas the inspection team observed that Reliance Money has received the amount towards referring the customers to the Life Insurer. From this observation, it is clear that the entity Reliance Money has not done any activities as per the outsourcing arrangements but the Life Insurer has paid significant payments to this entity towards sharing of customers information, which is not a registered referral entity with the Authority, and the Life Insurer has also not reported these payments to the Authority till they were specifically asked to report the same. Moreover, inspection team observed that a major part of payments are paid to various Group companies of different insurance brokers as mentioned in the above charge.

The submission of the Life Insurer that they have stopped the referral business with Reliance Money Infrastructure Ltd., clearly shows that they had referral tie-up with this entity without taking approval of the Authority as required under IRDA (Sharing of Database for Distribution of Insurance Products) Regulations, 2010.

It was also observed during the onsite inspection of the Life Insurer in the year 2012, that the Life Insurer has made payments to various entities towards Marketing Activities, Dissemination of information and Generation of Leads to in violation of IRDA (Sharing of Database for Distribution of Insurance Products) Regulations, 2010 and Circular dated 09/08/2010.

After examining the issue, in its Final Order dated 11/4/2014, under Charge No.37, the Authority has imposed a penalty of Rupees Fifty lakhs for the violations of the said Regulations. Payments made to Reliance Money Infrastructure Ltd., for the FY 2010-11 were taken into account while levying the penalty vide Final Order dated 11/4/2014.

In the said Order, the Authority has also directed the Life Insurer to discontinue the payments to third party entities towards ‘lead generation’ and ‘dissemination of information’. But the present inspection observation and Agreement dated 16/9/2011 entered into with Reliance Money Infrastructure Ltd, makes it clear that the Life Insurer is still continuing the agreement with Reliance Money Infrastructure Ltd., and paying amounts for referring customers to the Life Insurer, which is non-adherence to the directions issued by the Authority, though Reliance Money Infrastructure Ltd., is not a registered referral entity with the Authority as required under Regulation 3 of the IRDA (Sharing of Database for Distribution of Insurance Products) Regulations, 2010. The Authority by exercising the powers vested under Section 102(b) of the Insurance Act imposes a penalty of Rs 15,00,000 (Rupees Fifteen Lakhs only)(Rs. 5,00,000/- for each FY 2011-12, 2012-13 and 2013-14) for violation of Regulation 3 of the said Regulations.

From all these observations, it is obvious that the Board of the Life Insurer did not have adequate procedures in place to ensure regulatory compliance and also to review Corporate Business Policy and define the standards of business conduct and ethical behavior and hence a violation of Clause 1, Clause 2 (a) and Clause 3(a) and 7(a) of Annexure-1 (Responsibilities of the Board of Directors) of Corporate Governance Guidelines for Insurance Companies, 2009.

The Authority has taken a serious note of non-compliance to the directions issued in the Final Order dated 11/4/2014 and hereby expresses its displeasure and concern to the Board of the Life Insurer and gives the following directions to the Board of the Life Insurer:

(i) To submit the procedures that are put in place to comply with the regulatory directions and review of the same by the Board and the reasons for non-compliance of the directions issued in the Final Order dated 11/4/2014 including fixing of responsibility for the lapse.

(ii) To review and examine the outsourcing policy and related activities of the Company and initiate necessary steps to bring about compliance in letter and spirit to the Regulatory provisions referred in this Order.

(iii) (a) To cause an audit by an independent Chartered Accountant firm into the entire transactions of payments made to the service providers referred under the Charge No. 5 and the structure/shareholding pattern/composition and the existence of all these entities including the relevance of payments made by Reliance Money Infrastructure to various entities as mentioned under Charge No.6. The issues that are to be specifically examined/covered under the said audit, if any, will be notified to the Life Insurer separately.

The Chartered Accountant Firm chosen by the Life Insurer shall have a standing service of 10 years in conducting audit of reputed firms of Financial Services and shall not have been engaged by the Life Insurer or its promoters towards any activities in the preceding five financial years.

(b) To take corrective actions, if any, based on the observations made by the Audit Firm.

(iv) To submit an Action Taken Report within 90 days from the date of this Order on the above three directions.

The penalty amount of Rs. 85,00,000 (Rs. Eighty five lakhs only) shall be remitted by the Life Insurer by debiting the Shareholders’ Account within a period of 15 days from the date of issuance of this Order through NEFT/RTGS (details for which will be communicated separately). An intimation of remittance may be sent to Mr. V. Jayanth Kumar, Joint Director (Life) at the Insurance Regulatory and Development Authority of India, 5^th Floor, Parishram Bhavan, Basheer Bagh, Hyderabad 500004, email id life at irda dot gov dot in.

Place : Hyderabad (T.S. Vijayan)

Date : 06^th August, 2015 CHAIRMAN

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