MANU/IRDA/0013/2011

Authority : Insurance Regulatory and Development Authority

Circular No : IRDA/Life/CIR/GLD/013/02/2011

Date : 01.02.2011

Guidelines on Outsourcing of Activities by Insurance Companies

Reference:    1. INV/CIR/031/2004-05 dated 27th July, 2004

2. INV/CIR/058/2004-05 dated 28th December, 2004

3. RBI/2006/167 DBOD.NO.BO.40/21.04.158/2006-07

4. Regulation 7(c) of IRDA (Registration of Companies) Regulations, 2000

1. INTRODUCTION

1.1 Insurers in India are increasingly using outsourcing, as a means of both reducing cost and accessing expertise, not available internally and achieving strategic aims. 'Outsourcing' may be defined as Insurers use of a third party (either an affiliated entity within a corporate group or an entity that is external to the corporate group) to perform activities on a continuing basis that would normally be undertaken by the Insurer itself, now or in the future. These outsourcing arrangements are becoming increasingly complex.

1.2 Joint Forum set up by Basel Committee on Banking Supervision, International Organization of Securities Commissions and International Association of Insurance Supervisors has devised high-level principles on outsourcing in financial firms which gives guidance to firms, and to regulators, in effectively managing risks involved in outsourcing without hindering the efficiency and effectiveness of firms. Reserve Bank of India also brought out Guidelines on Managing Risk and Code of Conduct in outsourcing of financial services vide reference 3 cited above. This circular is issued based on best practices adopted internationally as outlined in above document. These instructions are intended to provide direction and guidance to insurers to adopt sound and responsible risk management practices for effective oversight.

1.3 Regulation 7 (c) of IRDA (Registration of Companies) Regulations, 2000, clearly sates The applicant will carry on all functions in respect of insurance business including management of Investment within its own organization. It has been observed that certain insurers are outsourcing even core activities such as Investment, Underwriting and Policy servicing. It is not desirable to outsource the core and important activities which will affect corporate governance, protection of policy holders, solvency and revenue flows of insurer.

1.4 In order to ensure proper corporate and regulatory oversight over the outsourcing of activities of insurers, the Authority has decided to issue following instructions under Section 14(2) of Insurance Regulatory and Development Authority Act, 1999. These guidelines apply in addition to the instructions given vide reference 2 cited above.