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In the insurance sector, the underwriters hold information of sensitive nature regarding the insured persons. In policies of life insurance or medical insurance, it becomes a matter of utmost significance that the insurance company develops a socialistic approach. This can be construed while managing the claims reserve, dealing with claims, determining premium, but most importantly when innovating products. The insurance contracts are unconscionable, in the sense that the insurer has greater bargaining power in drafting the clauses of the policy. Even though certain specific changes can be incorporated to customize the policy to suit certain individuals, the fact remains unaltered that the products are mostly of the colour “take it or leave it”.
In spite of being a cooperative device, there is no doubt of the upper-hand of the underwriters. There is no scope of negotiation involved between the insurer and the insured persons. This calls for the requisite regulation by the Insurance Regulatory and Development Authority of India (IRDAI) under Section 14 of the Act. As a matter of fact, William Wetherek was of the opinion that governments play a crucial role in making the legal, institutional, and regulatory framework within which governance systems are kept in place. The efficiency or otherwise of the governance systems will directly depend upon the framework conditions which would include legal rights of shareholders and how these are protected when violated by managements.
However, on 10th June 2022, IRDAI introduced the Use & File Procedure that doesn’t require the insurance companies to get the products approved by the Authority. The notification prescribes for institution of the ‘Product Management Committee’ (PMC) for approving life insurance products and riders during launch process. The objectives of this Use & File Procedure is facilitation of faster response by the sector to the emerging market needs in designing products, and promote ease of doing business. In India, the contribution of the sector to GDP is at 3.7 per cent as compared to 6.31 per cent for the rest of world. The life insurance sector in India is growing at 11 to 12 per cent year on year.
With the autonomy created in the hands of company to launch their own products, there lies a greater duty of governance to act in welfare of the consumers. The Product Management Committee is to constitute from the Board of the insurer, which shall include Appointed Actuary, Chief Risk Officer, Chief Marketing/Distribution Officer, Chief Technology Officer, and Chief Compliance Officer of the insurer as the members. As much as there is a clear reduction of Red Tapism, the fact cannot be disputed that the officials constituting the committee are not holding statutory positions. That is to say that, nowhere in law is the roles, functions and duties of these officials are mentioned. They are hired and fired by the underwriting company, hence it is the company itself approving its own products, subject to guidelines mentioned.
ANALYSIS IN LIGHT OF STEWARDSHIP THEORY OF CORPORATE GOVERNANCE
The notification gives powers to the Board constituted PMC to review and approve the products in accordance with the Board Approved Product Management & Pricing Policy (BAPMPP). Under Chapter II of the notification, this policy is to be drafted by the Board itself that ensures benefits being reflecting in sales literature, terms & conditions. The compliance obligation upon the PMC while carrying out such approval is due diligence, with the CEO having an overall responsibility to mitigate risks arising from products. At the time of launch, the insurer only needs to notify the Authority regarding the release of the product.
There is a major emphasis, hence, on the assumption that the PMC officials are trustworthy whose intentions won’t depart from the interests of his/her organisation. The theory of stewardship describes circumstances in which managers are stewards whose motivations are in line with the goals of their principles rather than being driven by personal interests. Control might be potentially harmful since it undermines the steward’s motivational pro-organizational behaviour.
According to Adam Smith (1776) the directors of companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance as owners.
The Canadian standards are the best place to find an expression of this emphasis on the board’s duty of stewardship and trusteeship to shareholders in the Anglo Saxon model of corporate governance. According to what is written there, stewardship refers to the board’s obligation to monitor management, which is in charge of the everyday operation of the company, as well as the business conduct as a whole. Additionally, the directors serve as a clearinghouse for all matters pertaining to the company’s operations and affairs in their capacity as stewards of the enterprise.
The risk propensity of principals, however, is what poses the biggest obstacle to the implementation of stewardship mechanisms of governance. Owners that are willing to take on risk will presume that CEOs support stewardship governance processes and are pro-organization. Agency costs are an effective protection against the self-interested behaviours of agents in situations where the executives and investors cannot afford to extend board power.
Establishment of a system of checks and balances is of utmost significance when the Board has such a wide discretionary power. There is no dispute in the fact that the insider officials appointed under the PMC are the current executives of the firm, equipped to provide expertise in specific areas. Furthermore, it reduces the bureaucracy and the resulting delay in launching of an innovative product which might be the current need of the hour of the society. Nevertheless, unless the notification accounts for a system of checks and balances in the arena of financial reporting, disclosure, socio-economic objectives of consumers cannot be said to be accounted for.
The limitations to the powers provided to the Board are prescribed under Section 23 of the Procedure. The most significant check is that the appointed actuaries have to submit summary of launched products along with Appointed Actuary’s Annual Report (AAAR). In addition, few more limitation upon the insurer as mentioned under the procedure has been enumerated as follows:
- Authority detains the power to examine any documents filed by the insurer regarding its products in the market.
- Authority can initiate actions for any violations of extant norms provided under the Insurance Act or any other applicable provision that the insurer had duty to comply to.
- IRDAI may issue any directions under Section 14 of the Act to insurers on launching of products regarding withdrawal of either product or Use &File facility.
- Transitory provisions that are yet to be incorporated shall be communicated to life insurers separately.
DETERMINATION OF ECONOMIC EFFICIENCY OBJECTIVES OF INSURED VIS-À-VIS INSURER
There is a need to determine the apt combination of trade-off between and cost and benefits of the interests catering to the corporation and the consumers.
If the rights of the consumers in relation to the quality of goods and services are assured and taken care of then there will be no case for complaints. Generally speaking, the thrusts of the good governance movement are efficiency, effectiveness, ethics, equality, economy, transparency, accountability, empowerment, rationality, impartiality and participation. In view of these requirements of the good governance one can easily and with success establish the co-relations with the concerns of the consumer protection law and policies.
In the case of M/s. National Insurance Company Ltd. v. Competition Commission of India Through Secretary Hindustan Times House, the Secretary of Financial Services “called upon the companies to continuously devise and launch new products to match the demands of the insuring community.” Procedure involving seeking approval from the Authority before launching a new product can also include setback of bureaucracy. This was one issue under judicial discussion in the case of Anant Meghji Nandu v. Central Public Information Officer & Chief Manager New India Assurance Co. Ltd, wherein the Appellant vide his RTI application sought information on 02 points with regard to the proposal and approval given by regulator IRDAI with respect to the introduction of the new life insurance product.
The one hurdle in free allocation of these resources is bureaucracy and corruptive practises by executive. As a remedy to overcome red tapism in the financial management, decentralizing the system and promoting discretion at managerial level is effective. This affects the agency directly in allocating funds effectively when they have greater autonomy over their functioning in the market. The centralized regulations lack in making up for the information asymmetry on the part of the government about an individual’s local communities and supply and demand; therefore, it will inevitably slump in meeting the needs of the society.
Insurance sector is one of the major untapped sector that till date that witnesses involvement by the middle class section of the society. General public still view insurance sector as an incentive to tax benefits more than the ipso facto purpose. Hence, social welfare shall be given dominance over profit making, as has been the directive of the judiciary as well. In the case of Reserve Bank Of India v. Peerless General Finance & Invest Co., the Apex Court observed that since the lower class of Policyholders is more likely to default on premium payments, the forfeiture provision functions harshly in practise, particularly against that class, who is the precise group that needs more security and protection.
With the autonomy provided, there is certain need of regulation by the Authority provided. Setting up of a committee that enquires into company functioning regularly would be one way to oversee this proposed regulation. Another suggestion that could account of red tapism along with such regulation is that such enquiry to be done only if the product valuation reaches a certain amount. This will ensure and prevent misuse of public money through a faulty product.
Author: Lolita Delma Crasta, 4th Year BA LLB (Hons.), CHRIST (Deemed to be University), Bangalore, in case of any queries please contact/write back to us via email to firstname.lastname@example.org or at Khurana & Khurana, Advocates and IP Attorney.
 In accordance with the Rules of Construction of Insurance Policy, written words will be given more effect than those words printed. https://doi.sc.gov/957/Understanding-Your-Insurance-Policy.
 Section 14, Insurance Regulatory and Development Authority of India Act, Act No. 41 of 1999.
 William Witherek, Organisation for Economic Co-operation and Development (2000).
 Section 6.2, Chapter II, Use & file (U&F) procedure for life insurance products & riders, Dated July 10, 2022 [Cir No. IRDAI/ACTL/CIR/MISC/115/06/2022].
 Consolidated Guidelines on Product filing in Health Insurance Business, Dated July 22, 2020 [Noti. No. Ref: IRDAI/HLT/REG/CIR/194/07/2020].
 Adam Smith, “An inquiry into the Nature and Cases of The Wealth of Nations” (1776) The Modern Library: New York.
 A.C. Fernando, K.P. Muraleedharan, E.K. Satheesh, “Corporate Governance: Principles, Policies and Practices” pp 217, (3rd edition, 2018) ISBN 978-93-530-6266-8.
 Section 23, Use & file (U&F) procedure for life insurance products & riders, Dated July 10, 2022 [Cir No. IRDAI/ACTL/CIR/MISC/115/06/2022].
 Section 14, Insurance Regulatory and Development Authority of India Act, Act No. 41 of 1999.
 2016 SCC OnLine Comp AT 450.
 2020 SCC OnLine CIC 1620.
 Pandey, Sanjay K., David H. Coursey, and Donald P. Moynihan. “Organizational Effectiveness and Bureaucratic Red Tape: A Multimethod Study.” Public Performance & Management Review 30, no. 3 (2007): 398–425.
 1987 AIR 1023.