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Insurers can’t Outsource Core Activities

IRDA says works related to underwriting, claims, product design, investments cannot be outsourced

The Insurance Regulatory and Development Authority (IRDA) of India has barred insurance companies from outsourcing core activities to a third party.

In a circular issued on Monday, the insurance regulator expressed its concern over the practice of outsourcing 'the core and important activities which will affect corporate governance, protection of policy holders, solvency and revenue flows of insurer.

IRDA said that insurers are outsourcing even core activities such as investment, underwriting and policy servicing, which may diminish their ability to fulfil their obligations to customers. In the circular, IRDA had listed the activities it considered core and non-core.

Among the activities kept in core category are underwriting, claims, product design, investment, premium collections,\ information technology support (except hardware support), data storage (physical &image), cheque pickup and banking of cheques, admission or repudiation of all claims, bank reconciliation et al. Activities in the non-core category are call centre and outbound calling for registering complaints or answering enquiries, claim processing for overseas medical insurance contracts and tele-marketing among others.

The circular further said that insurers have to take steps to ensure that in case of outsourcing the service provider employs the same high standard of care in performing the services as would be employed by them if the activities were conducted in house and not outsourced. Accordingly Insurers should not engage in outsourcing that would result in their internal control, business conduct or reputation being compromised or weakened.

The new guidelines come into force with immediate effect. Insurance companies are required to terminate all outsourcing contracts entered into in breach of these guidelines before April 1, 2011.