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Posted on Jul 03, 03:14PM | IANS
By V. Jagannathan, Chennai, July 3 : A warning bugle for the industry is what life insurance officials say of the Rs.1.47 (USD 333,000) crore penalty imposed by the insurance regulator on HDFC Standard Life Insurance Company Ltd. last week.
According to officials, the Insurance Regulatory and Development Authority (IRDA) may start directing the companies to fix official responsibility for various violations of its regulations.
"Perhaps the next action could be that if one goes by the trend. Initially, the IRDA levied just a fine. It then started multiplying the fine amount with the number of violations. Now it has asked HDFC Standard Life to debit the penalty levied to its shareholders' account," D. Varadarajan, a Supreme Court lawyer who specialises in company and insurance laws, told IANS.
Though IRDA has the power to cancel the licence of an insurer for violating its regulations, this is too extreme a step and will have a wide-ranging impact, he added.
The appointment of the CEO and an actuary of an insurance company needs IRDA's approval, officials said.
Last week IRDA levied a penalty of Rs.1.05 crore on HDFC Standard Life for rejecting 21 death claims under its home loan protection policy under the 90-day exclusion condition. The IRDA had specifically asked the company to delete the clause while approving the product in 2003, but the company sold its policies with that clause till April 2011.
The balance fine (Rs.42,00,000) is towards payment of excessive remuneration to its distributors including four group companies - HDFC Ltd., HDFC Bank, HDFC Securities and HDB Financial Services- in contravention of the regulations and for other violations.
For the first time IRDA has explicitly ordered a company to debit the shareholders' account and not the policy holders' account so that the cost of regulatory non-compliance is not loaded on the policy holders.
HDFC Standard Life is a joint venture between India's HDFC Ltd. and Britain's Standard Life.
"It is a wake up call for the share holders and independent directors of all life insurers to sit up and look at the happenings in their companies. The boards of all insurance companies should start asking more probing questions of the managements on operations," the head honcho of a private life insurer, preferring anonymity, told IANS.
"The penalty is harsh. A fine of Rs.500,000 each for 21 claims is very steep," S.L. Mathur, secretary general, Life Insurance Council, a self-regulating body of life insurers told IANS.
"Violation of 'file and use' directions is a serious issue. Further rejecting death claims under a clause that the regulator had asked to be removed is nothing but atrocious," a senior industry official told IANS, preferring anonymity.
"We have gone through our entire database. Only 21 claims had been rejected. The IRDA inspection was done in 2010 and we have progressed further from there," HDFC Standard Life executive director and chief operating officer Paresh Parasnis told IANS over the phone.
"The IRDA order may not stand legal scrutiny. As per the charge, the violation is only that of file and use of norms relating to the home loan product. It is only one violation. Levying penalty is not a simple formula of multiplying the number of rejected claims with the maximum penalty permissible under the law," Varadarajan said.
However, some senior industry officials are of the view that IRDA was lenient on HDFC Standard Life as it considered 21 instances of violations (number of rejected claims) instead of the number of policies sold with the 90 days exclusion condition.
Though IRDA has ordered HDFC Standard Life to settle the rejected claims within 30 days, the claimants can still approach the consumer courts and claim punitive damages for deficiency in service, said Varadarajan.
(Venkatachari Jagannathan can be contacted at firstname.lastname@example.org)