Insurance sector in India has witnessed many changes and reforms since 2000. Be it, opening the market for private players in 2000, Foreign Direct Investment (FDI) upto 26% in 2000, detariffing in 2007, allowing foreign reinsurers to open their branch offices in 2015, FDI upto 49% in 2015 etc. These measures did had positive impact in the industry as a whole and one of the coming reform measures which Insurance Regulatory and Development Authority of India (IRDAI) has proposed is of Regulatory Sandbox in Insurance. This post will be discussing about the proposed Regulatory Sandbox.
IRDAI will be coming up with a separate regulation for the regulatory sandbox in insurance and draft of this regulation has been already published and once published in the Gazette of India after necessary changes if required will come into force and will be known as IRDAI (Regulatory Sandbox) Regulations, 2019. There are two important terms which requires attention to understand what this proposed regulation is all about and what will be its impact in the insurance sector. These two terms are:
- Regulatory Sanbox: This means an environment used in the financial service sector, which provides testing ground for new business models and applications that may not necessarily be covered fully by or fully compliant with existing regulations. Let’s understand this in simple terms. Insurance is a highly regulated sector and there is much regulatory compliance which needs to be followed in this market. Regulations are there in every step in insurance. What regulatory sandbox says is that it will be providing and environment for testing of new business models which will not require being fully compliant with the existing regulations. Having said that, this means insurance company can come up with new products and business models with relaxation in terms of being fully compliant with the existing regulations.
- Sanbox Environment: This means a testing environment designed for experimentation for a specific period of time. Regulatory Sandbox provides testing grounds for new business with relaxation from being fully compliant and Sandbox environment gives the testing environment to experiment for specified period of time. Let’s understand this with a simple example. Suppose an insurance company had developed a new product covering those risks which are normally excluded. Product development requires many regulatory clearances but since the company has developed this product with the provisions of Regulatory Sandbox, all the regulations need not to be complied. As the insurance company had developed a new product, they require seeing how the product will perform and for that they need to experiment with the newly developed product which can be accomplished by Sandbox Environment which provides the ground for doing experiment. Regulatory Sandbox gave the opportunity to develop new product with relaxation in being fully complied with the regulations and Sanbox Environment gave the testing platform for the newly developed product.
As it can be inferred from the above discussion, the whole idea of Regulatory Sandbox is to allow insurance industry to come up with the new ideas, innovation, business models etc. with relaxation with existing regulations while keeping the interest of policyholder’s intact. An applicant may apply to the Authority seeking permission for promoting or implementing innovation in insurance in India in any one or more of the following categories:
- Insurance Solicitation or Distribution
- Insurance Products
- Policy and Claims Servicing
- Any other category recognised by the Authority.
The application shall be accompanied by a non-refundable processing fee of rupees ten thousand plus applicable taxes. IRDAI will verify the application and once satisfied with the application can grant permission for the period of 6 months. However, extension can be granted if required but not more than for 6 months. This means, the applicant has to complete the task in six months and if granted extension, maximum one year. IRDAI will review the progress at periodical intervals.
On completion of the allocated time period or size of the proposal specified, the Applicant shall submit a report to the Authority within 15 days on how the proposal met the objectives along-with feedback from the policyholders. The applicant shall also submit a plan of action as to how to enable the proposal to be brought under regular regulatory supervision. On examining the report submitted by the applicant, IRDAI may grant permission to the applicant to adopt the proposal under regular regulatory supervision wherein in addition to provisions of Insurance Act, 1938, IRDA Act, 1999 all regulations, guidelines, circulars, etc will be applicable from the date of moving to regular regulatory supervision.
In brief, the introduction of Regulatory Sanbox allows the insurance industry to come up with new innovations in insurance with relaxation of from existing regulations for maximum period of one year. Once the performance of the proposal is up to the mark or meets the objectives as expected it can be converted into the normal regulatory supervision. Since there are provisions for regulatory relaxation and hence, regulatory sandbox can be considered as a good move for the innovation in insurance industry. Not only this, it will also allow to do experiment in untested areas of insurance which will also promote research and innovation in insurance sector in India.
What are your thoughts on this introduction of Regulatory Sandbox in insurance? Do share your views.
– Ashish Kumar