On 5 February 2019 the Insurance Regulatory and Development Authority (IRDAI) issued the Report of the Committee on the Regulatory Sandbox in the Insurance Sector in India, which proposes to establish a sandbox environment in the insurance sector. According to the report, the sandbox will:
- facilitate innovation in the Indian insurance sector; and
- provide an ecosystem to foster the experimentation required to:
- increase insurance penetration in the Indian market; and
- benefit policyholders.
The regulatory sandbox report was issued following:
- industry discussions;
- an examination of various aspects of insurance innovation; and
- the recommendations of an IRDAI-led working group.
The report also recommends the creation of a core sandbox committee.
In the IT sector, a 'sandbox' is a "closed testing environment designed for experimenting safely with web or software projects".(1) The concept of a regulatory sandbox is also used in the financial sector to provide a ground to test new business models and applications that are not necessarily covered by or do not entirely fall within the existing regulatory framework.(2)
As per the regulatory sandbox report, it is proposed that a regulatory sandbox be introduced to:
- provide a conducive environment for experimentation;(3) and
- encourage entities regulated by the IRDAI and other service providers to offer innovative services to the insurance industry at large.(4)
In addition to the regulatory sandbox report, on 5 February 2019 the IRDAI published the Draft Guidelines for Facilitating Innovation in Insurance through a Regulatory Sandbox, which set out the contours within which the regulatory sandbox will function.
The key features of the proposed regulatory sandbox are as follows.
Categories of innovation
Under Section 3(a) of the draft guidelines, the IRDAI will consider approving proposals for the promotion or implementation of innovations in any of the following categories:
- insurance solicitation or distribution;
- insurance products;
- underwriting;
- policy and claims servicing; or
- any other category.
Applicants must demonstrate to the IRDAI that the innovation will "help increase insurance penetration or provide enhanced services to policyholders" in accordance with Section 13(1) of the draft guidelines.
Applicants
Section 2(b) of the draft guidelines provides that the following entities may apply to the IRDAI to introduce a service or product under the regulatory sandbox:
- insurers;
- insurance intermediaries;
- any person other than an individual with a minimum net worth of Rs2.5 million; or
- any other person recognised by the IRDAI.
Applicants can apply singly or jointly in one or more categories. However, if the category involves an insurance product or underwriting, the applicant must partner with an insurer.(5)
Regulatory relaxation
In cases of a valid proposal, Section 13(3) of the draft guidelines states that the IRDAI may grant a so-called 'regulatory relaxation' for proposals that promote innovation in the Indian insurance market. However, no relaxation will be granted where compliance with any statutory provisions (eg, those contained in the Insurance Act 1938 or the Insurance Regulatory and Development Authority Act 1999) is required.
Specific terms of relaxation
Under Section 13(6)(b) of the draft guidelines, an application for regulatory relaxation filed before the IRDAI must "specify in clear terms the regulatory provisions that need relaxation to execute the proposal".
Validity period of relaxation
Approved proposals will be valid for six months and can be extended for a further six months. A proposal will be deemed to be completed and be allowed to continue beyond 12 months only where it achieves the target size specified in Section 13(5) of the draft guidelines.
Board approval
Under Section 13(6) of the draft guidelines, a proposal must be approved by the applicant's board of directors. Applicants must also implement measures to closely monitor the implementation of a proposal. In this regard, the board of directors must be updated at least once a month on the status of an innovative product or service.
Adoption of proposed innovation
On completion of the allocated period or target size of the innovative product or service, the applicant must submit a report on the proposal to the IRDAI, outlining:
- the objectives met by the proposal;
- the feedback received from the policyholders involved at the proposal stage; and
- any other requirements specified by the IRDAI.(6)
?After examination of an applicant's report, the IRDAI – if satisfied that the proposal's objectives have been met – may permit the applicant to adopt the product or service in the market under regular regulatory supervision.(7)
Existing policyholders
Where IRDAI permission is received for a particular product or service, Section 13(8)(b) of the draft guidelines states that existing policyholders from the proposal stage must be given the option to continue with the same product or service.
Confidentiality of personal data
Applicants must "keep the personal information collected during the course of the business transaction confidential and prevent its misuse" and "put in place measures to maintain confidentiality of the policyholder data" in accordance with Section 13(9) of the draft guidelines.
The regulatory sandbox framework proposes to allow various stakeholders in the Indian insurance market to introduce innovative products and services where they are not prejudicial to the interests of existing policyholders. However, reservations remain regarding:
- practical aspects of the proposed regulatory sandbox, such as the extent of flexibility which may be granted; and
- procedural uncertainties, such as practical timelines for clearing proposals and potential hurdles at the time of implementation in the market.
The IRDAI has invited stakeholder comments on the regulatory sandbox report and draft guidelines. It remains to be seen how the regulatory sandbox will be implemented and which categories of innovation will be introduced by stakeholders.
Endnotes
(1) Section 2.2 of the regulatory sandbox report.
(3) Section 7.3(3) of the regulatory sandbox report.
(4) Section 8 of the regulatory sandbox report.
(5) Section 13(6)(a) of the draft guidelines.
(6) Section 12(a) of the draft guidelines.
(7) Section 12(b) of the draft guidelines.
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