Report on Public Issues by General Insurance Companies SEBI Committee on Disclosures and Accounting Standards (SCODA) Page | 1 Table of contents Section No. Section Page No. 1 Background 3 2 Recommendations of Sub-group 3 3 Other Recommendations of Sub-group 8 List of Annexure Annexure No. Details of Annexure Page No. Annexure I Industry Specific Risk Factors for Insurance Sector 9 Annexure II Overview of Insurance Industry 19 Annexure III Comparison Table on Disclosures Made in Offer 21 Documents of General Insurance Companies in Other Jurisdictions Annexure IV Glossary of Terms Used in General Insurance 30 Annexure IV Format for Report on Investor Grievance 36 Page | 2 Public Issues by General Insurance Companies 1. Background: The report of the sub-group on “Public Issues by Insurance Companies” submitted to SCODA was discussed in the meeting of SCODA held on March 15, 2010. Following were the members of the Sub-group:- a) Dr. Subramanian, Head-IBD, Enam Securities Ltd. b) Ms. Dipti Neelakantan, MD & Group COO, JM Financial Consultants c) Shri Prithvi Haldea, CMD, Prime Database d) Shri R K Sharma, Deputy Director, IRDA e) Shri Shravan Jalan, Director, Ernst & Young f) Shri Sunil Kadam, General Manager, SEBI SCODA has accepted the recommendations of the sub-group for life insurance companies however, the sub-group was advised to identify additional disclosure requirement for General Insurance Companies. The report of the sub-group with the suggestions given by SCODA was placed before the SEBI Board in its meeting held on October 25, 2010 and the same was approved. Copy of the report approved by the SEBI Board is enclosed as Annexure I. The recommendation of the sub-group on the additional disclosure of General Insurance Companies was placed before the SCODA in its meeting held on January 20, 2012. The recommendation of the sub-group was accepted by the SCODA with the following changes:- a. A separate disclosure for re-insurance risk should also be incorporated in the report b. Instead of specifying the additional disclosure applicable to the general insurance companies, the sub-group may submit its supplementary report giving the all the disclosures requirement for the general insurance companies. 2. Recommendations of Sub-group 2.1. Disclosures by General Insurance Companies: 2.1.1. Industry- specific Risk Factors for Insurance Companies: The insurance industry is different from other industries and has risks which are unique to it. In order to get an understanding of risks specific to the insurance industry, offer documents of certain insurance companies which came out with issue of capital in other jurisdictions were studied. Based on the risk factors disclosed in such offer documents, following are the minimum broad industry specific risk areas that needs to be disclosed: Page | 3 i. Claims arising out of catastrophic losses (natural and man-made), which could materially and adversely impact the profitability or cash flow of the insurance companies. ii. Differences in future actual claims resulting from the assumptions used in pricing and establishing reserves for insurance and annuity products which may materially affect earnings. iii. Risk with reference to concentration by region/type of policies of the insurance company. iv. The assumptions based on which the Economic Capital is calculated and disclosed may vary significantly from time to time / among industry players. v. Inability to attract and retain productive agents in a growing competitive business environment. vi. Inability to obtain reinsurance on a timely basis or at all, which results in bearing increased risks or reduce the level of our underwriting commitments. vii. Default by one or more of our reinsurers which could materially affect the financial condition and results of operations. viii. Regulatory restrictions on investments by insurance companies ix. Exposure to recovery related risks including for foreclosure of the mortgages x. Risk of regulated tariff xi. Increase in the claim liability of motor third party due to the judgments of courts xii. Inability to accurately predict benefits, claims and other costs or to manage such costs through loss limitation methods, which could have a material adverse effect on the operations and financial condition The sub-group recommends that the aforementioned list may act as guidance for companies while disclosing the risk factors in the offer documents. The sub-group also compiled detailed risk factors for insurance companies which are placed at Annexure I. The sub-group recommends that: Page | 4 a. The detailed risk factors as identified by sub-group may be placed on the website of IRDA which may act as guidance to insurance companies coming out with IPO. b. SEBI may prescribe the disclosure of aforementioned list of risk factors in the offer documents of insurance companies through circular or standard observations. 2.1.2. Disclosure on Overview of the Insurance Industry: The SEBI (ICDR) Regulation does not prescribe the format or the contents of industry overview which need to be disclosed in the offer documents for any industry. However, considering the fact that no insurance company in India has come out with an issue so far, it is felt necessary that the investors get a broad overview of the insurance industry. In view of this, broad parameters under which the disclosure on insurance industry overview may be made have been listed and placed in Annexure II. The sub-group recommends that this listmay be placed in the website of IRDA, which may act as guidance for insurance companies coming out with issues. 2.1.3. Disclosure of Financial Information: It is observed that the components of financial statements of insurance companies are significantly different from other companies. An insurance company prepares two types of income accounts i.e. policy holder’s account (Revenue account) and shareholder’s account (profit and loss account). IRDA has prescribed the formats in which the financials of the insurance companies need to be submitted to them on a periodic basis. On the other hand, provisions regarding disclosure of financial information in SEBI (ICDR) Regulations are general and are applicable to all companies. The subgroup noted that banking companies follow format of financial statements prescribed under Banking Regulation Act, 1949 and similarly insurance companies may follow formats specified by IRDA. Sub-group recommended that the financial disclosure for insurance companies may be as per the format specified by IRDA. 2.1.4. Specific Disclosures which are followed in other Jurisdictions: The sub-group carried out an analysis of the specific disclosures which are followed in other jurisdictions. A detailed comparative chart along with the comments of the IRDA on each disclosure item in case of General insurance companies is attached as Annexure III. It is observed that the extant disclosure norms prescribed by IRDA are by and large at par with the international practice in vogue in various jurisdictions. The sub-group recommends that following disclosures shall be included in the offer documents of General insurance companies i. Gross premium- along with Geographic segmentation Page | 5 ii. Cross selling iii. Distribution network iv. Claims outstanding with age-wise and type-wise break-up a. Outstanding upto 180 days b. Outstanding more than 180 days and for each year upto 5 years c. 5 years and above v. Reinsurance a. Number of re- insurers with break-up- domestic and foreign b. Type of arrangement with Reinsurers i. Treaty Reinsurance- 1. Proportional treaties a. Obligatory and b. Others 2. Non-proportional Treaties a. Excess of Loss b. Stop Loss c. Any other ii. Facultative Reinsurance.- iii. Obligatory and iv. Others c. Reinsurance balances outstanding- age-wise vi. Maximum probable Loss Ratio vii. Incurred but not reported IBNR) /Incurred but not enough reported (IBNER) The sub-group recommends that SEBI/ IRDA may mandate the disclosure of aforementioned list of disclosure items in the offer documents of insurance companies through circular or standard observations The sub-group recommends that report of an independent actuary on the Economic Capital of the insurance company should be made a part of the offer document. The contents and format of the reports and criteria for actuaries who are authorized to prepare such report may be prescribed by IRDA. The sub-group recommends that SEBI may mandate the disclosure of aforementioned list of disclosure items in the offer documents of insurance companies through circular or standard observations. 2.1.5. Glossary of terms used in the Insurance Industry: In order to familiarize the investors with terms used in insurance industry and to standardize the definition and understanding of such terms, the sub-group felt that a “Glossary of the terms used in Insurance industry” Page | 6 may be prepared. IRDA provided a “Glossary of the terms used in Insurance industry” which is placed in Annexure IV. This glossary of terms may act as guidance for insurance companies coming out with issues. The sub group recommends that the glossary may be placed on the website of IRDA. 2.1.6. Continuous Disclosure Requirements for Insurance Companies: In the report submitted to SCODA, sub-group had suggested a separate format for continuous financial disclosure to be made by insurance companies pursuant to listing on stock exchanges. The sub-group recommended that the said formats may be incorporated in clause 41 of the listing agreement, which shall be used by insurance companies for publishing and filing financial information with stock exchanges on a periodic basis. After deliberating on the same SCODA suggested the sub-group to re- work on the formats specified in Clause 41 of the Listing Agreement and retain only critical portions, as the same needs to be published in the newspapers. Further, SCODA suggested that the sub-group should classify those disclosures which need to be filed with the exchanges and those which need to be published.