IRDAI Penalizes Edelweiss Life for Compliance Lapses

The Insurance Regulatory Development Authority of India (IRDAI) has imposed a penalty of Rs. 1 crore on M/s Edelweiss Life Insurance Company Limited (formerly Edelweiss Tokio Life Insurance Co. Ltd.) for multiple violations identified during a remote inspection conducted in January 2022. The violations primarily concern the insurer’s adherence to corporate governance guidelines and outsourcing regulations. For Charge-1, involving the failure to capture policyholders’ bank account details for premium refunds exceeding Rs. 10,000, Edelweiss Life Insurance was cautioned, despite their submission that corrective actions had been taken. The IRDAI emphasized the necessity of collecting all required bank details at the proposal stage to ensure compliance.

A more significant penalty was levied under Charge-2, pertaining to violations related to related party transactions and outsourcing norms. The inspection revealed that Edelweiss Life paid substantial amounts (Rs. 6.52 crore in FY 2020-21 and Rs. 7.22 crore in FY 2019-20) to group companies, Edelweiss Financial Service Ltd. and Edelweiss Rural & Corporate Services Ltd., with a 12% mark-up on allocated costs. The IRDAI found that these activities were not properly classified and disclosed as outsourcing, violating regulations on outsourcing activities, corporate governance, and circulars on related party transactions. The Authority stated that the insurer failed to ensure arm’s length pricing for these transactions, lacked proper documentation for vendor due diligence, and did not obtain necessary Board approvals for related party transactions under the Companies Act, 2013, despite the “mark-up pricing.” The IRDAI concluded that the insurer lacked adequate systems and controls for regulatory standards and transparency in outsourcing, leading to the financial penalty. Edelweiss Life has 45 days to remit the penalty from its shareholders’ account and must present the order to its Board.

Insurance Regulatory Development Authority of India

Ref. IRDAI/E&C/ORD/MISC/73/06/2025

Order in the matter of M/s Edelweiss Life Insurance Company Limited
(formerly known as Edelweiss Tokio Life Insurance Co. Ltd.)

1. Based on the

i. Show Cause Notice (“SCN”) reference No. IRDA/ENF/2024/762/SCN/LR/079 dated 03^rd December, 2024 issued to M/s Edelweiss Life Insurance Company Limited (formerly known as Edelweiss Tokio Life Insurance Company Limited) (hereafter ‘Insurer’ or ‘Company’) in connection with a general remote inspection conducted by the Authority during the period 10^th January, 2022 to 18^th January, 2022.

ii. Submissions made by the Insurer vide email dated 09^th January, 2025 in response to the aforesaid SCN.

iii. Submissions made by the Insurer during the personal hearing held on 03^rd March, 2025 at 02.30 PM, by the panel of Two Whole Time Members of the Authority – Shri P K Arora (Member-Actuary) and Shri Rajay Kumar Sinha (Member-F&I).

iv. Further submissions made by Insurer vide email and letter dated 18^th March, 2025 and 18^th April, 2025.

2. Background

2.1. The Authority had conducted a general remote inspection of M/s Edelweiss Life Insurance Company Limited from 10^th January 2022 to 18^th January 2022. The inspection report, inter alia, revealed certain violations of provisions of the Insurance Act, 1938 and Regulations and Guidelines issued thereunder.

2.2. A copy of the inspection report was forwarded to the Insurer on 31^st January, 2022 seeking their response and the response was received vide email dated 21^st February, 2022.

2.3. On examining the submissions made by the Insurer, show cause notice (SCN) was issued on 03^rd December, 2024. The Insurer replied to the SCN vide email dated 09^th January, 2025. As requested by the Insurer, personal hearing was granted to the Insurer on 03^rd March, 2025 by the Panel of two Whole Time Members of the Authority Shri P K Arora -Member (Actuary) and Shri Rajay Kumar Sinha -Member (F&I).

2.4. On behalf of the Insurer, Shri Sumit Rai (Managing Director & Chief Executive Officer), Shri Subhrajit Mukhopadhyay (Executive Director), Shri Nirmal Nogaja (Chief Financial Officer) and Shri Ankur Chadha (Chief Legal & Compliance Officer, Company Secretary) and on behalf of the Authority, Shri R K Sharma (CGM), Shri T Venkateswara Rao (GM), Shri Sanjay Kumar Verma (GM), Shri Manoj Kumar Asiwal (DGM) and Shri Atul Gupta (Asst. Manager) attended the hearing.

2.5. The submissions made by the Insurer in its email dated 21^st February, 2022, submission made in response to SCN vide email dated 09^th January, 2025, submission during the personal hearing on 03^rd March, 2025 and those made vide emails and letter dated 18^th March, 2025 and 18^th April, 2025 have been carefully considered by the Authority and are summarized below:

3. Charge-1 (Observation-3)

Violation of-

Clause 4B(i) and 4B(ii) of Circular No. IRDA/F&A/CIR/Misc/282/11/2020 dated 17.11.2020

Order – M/s Edelweiss Life Insurance Co. Ltd. (Insp. Period: 10^th-18^th January 2022) Page 2 of 11

3.1. Inspection Observation-3

3.1.1. The insurer is not capturing the bank account details of policyholders at proposal stage where premium amount exceeds Rs. 10,000. The inspection team identified 230 such cases where premium refund amount is more than Rs. 10,000 while insurer mentioned the reason was the non-availability of details of bank account.

3.1.2. The insurer was unable to share the information sought by the inspection team with respect to these cases.

3.2. Summary of Insurer’s Submissions:

3.2.1. Insurer submitted that in compliance with Authority’s directions as per the extant circular on unclaimed amounts of the policyholders, the payments/refunds are being made generally through the electronic mode. For the cases where premium amount is less than Rs. 10,000, attempts were made to clear the unclaimed amount through cheques wherever feasible. The Cheque / RTGS details were not available for the cases where the amounts are lying in the unclaimed bucket and company continues to make efforts to collect the relevant details from the customers and reduce these amounts.

3.2.2. During personal hearing, insurer submitted that in 183 cases, the collection of bank details was not required, as either a circular was not issued, or the payment amount was less than Rs. 25,000 or Rs. 10,000. Further, the insurer confirmed that they have made the payments in all 183 cases. Furthermore, necessary preventive and corrective actions have been taken by them.

3.3. Decision on Charge 1:

The Insurer contention that the bank details of the policy holders are not required is not acceptable and considering the submission that preventive and corrective actions undertaken the insurer is cautioned for the lapse and advised to take all the required details of the bank account of the proposer/insured in the proposal form at the proposal stage itself to ensure compliance with the clause 1 (iii)b) of Section 1 of Part A of Master Circular on Protection of Policyholders Interests, 2024 issued by the Authority. Any failure in compliance in future will be viewed seriously.

4. Charge-2 (Observation-11)

Violation of-

a. Clause 3A (1) and 3A (3) of the Corporate governance guidelines issued authority issued vide order no. IRDA/F&A/GDL/CG/100/05/2016 dated 18.05.2016.

b. Regulation 10, 15 and 21 of IRDAI (Outsourcing of Activities by Indian Insurers) Regulations, 2017.

c. Clause 4(b) & 5 of the IRDAI Circular No. IRDAI/INSP/CIR/ONS/157/09 /2018 dated 19th Sept 2018.

d. Clause 6 of the Corporate governance guidelines issued authority issued vide order no. IRDA/F&A/GDL/CG/100/05/2016 dated 18.05.2016.

4.1. Inspection Observation-11

4.1.1. On examination of the related party transaction, it has been noticed that the insurer paid amounts of Rs 6.52 crore for the FY 2020-21 and Rs 7.22 crore for the FY 2019-20 to their related parties – Edelweiss Financial Service Ltd. (holding company) and Edelweiss Rural & corporate services Ltd. (Group company). It was also observed that Insurer has paid the mark up of 12% on the cost allocated by the group companies to the insurer. The details of transactions are as follows:

4.1.2. Invoices raised by the Edelweiss Financial Services Ltd. and Edelweiss Rural & Corporate Services Ltd do not contain details of the services for which the allocation has been made. No explanation/justification for adding up of mark-up of 12% was rendered. Therefore, the Board/Audit committee has failed to ensure that the transaction entered with the related parties are at arm’s length price.

4.2. Summary of Insurer’s Submissions:

4.2.1. Insurer submitted that that all the Related Party Transactions entered by the Company are in accordance with the Board approved Policy. A statement of all the related party transactions is presented to the Audit Committee on quarterly basis. All the Related Party Transactions as required under AS – 18 are disclosed in the Notes to the financial statements.

4.2.2. The Benchmarking report issued by PwC specifies that the total cost charged by comparable companies providing similar services is 10.00% to 16.61%. Mark-up of 12% is well within the acceptable benchmark range of the industry. Insurer further submitted that the expenses incurred and cost recovered from sister concerns are determined & accounted in compliance with the laws of regulators – SEBI, RBI, etc.

4.2.3. Even under GST provisions, supplies to related parties with or without consideration are deemed as taxable supplies for taxation purpose, adopting the open market value. In case such open market value is not available for any reason, the GST laws mandates to adopt mark-up of 10% over cost for determining the taxable value of such services.

4.2.4. During personal hearing, the Insurer submitted that pooling of services occurs at the group level for cost optimization purposes, and they have paid only their due share. They do not procure any business with these entities. The Insurer clarified that the amount in question is not charged from the policyholders’ fund, but rather contributed from the shareholders’ fund. They further stated that this is a prevalent industry­wide practice.

4.3. Decision on Charge 2:

4.3.1. Insurer did not properly classify and disclose activities like training and advertising as outsourcing, despite regulatory stipulation under regulation 4(i) (e) of the IRDAI (outsourcing of activities by Indian Insurer) Regulation 2017. The aforesaid failure indicates a lack of accountability and commitment to regulatory compliance in the insurer’s overall approach to outsourcing and failure to adhere to their own outsourcing policy put in place by their outsourcing committee.

4.3.2. Insurer paid Edelweiss Financial Services Limited Rs. 1.59 Crores in FY 2019-20 and Rs. 1.59 Crores in FY 2020-21 under various heads. Similarly, Insurer paid Edelweiss Rural & Corporate Services Limited Rs. 5.63 Crores in FY 2019-20 and Rs. 4.92 Crores in FY 2020-21 under various heads. However, these payments were not considered as outsourcing and thus were not shown in the outsourcing return filed by the insurer under Regulation 21 of IRDAI (Outsourcing of Activities by Indian Insurers) Regulations, 2017. The insurer’s failure to report the above payments for outsourced activities violates disclosure requirements, while also limiting the Authority’s capacity to evaluate outsourcing risks. As a result, this situation increases both regulatory and reputational risks, indicating that the insurer lacks the necessary systems and controls to meet regulatory standards as specified in clause 6 of Corporate Governance Guidelines for Insurers in India, 2016.

4.3.3. Insurers must avoid or mitigate any conflicts of interest while outsourcing. Insurer is responsible for all regulatory obligations and conducting proper due diligence and monitoring of the outsourced service provider. Adequate systems, policies and procedures to address potential conflicts of interest and compliance with the provisions of Companies Act, 2013 need to be established by the insurer. These include Board level review of key transactions, disclosure of any conflicts of interest to manage and control such issues. The Insurer has failed to submit a resolution passed by their Board with respect to the Related Party Transactions under Section 188 of Companies Act, 2013. The Insurer’s argument that said transaction were in “ordinary course of business” hence not required to be approved by the Board is not tenable specially in the light of mark-up pricing.

4.3.4. Insurer has failed to undertake due diligence of the Vendors in terms of Regulation 10 of IRDAI (Outsourcing of Activities by Indian Insurers) Regulations, 2017 since they have not documented the selection process and reviewed it annually.

4.3.5. Neither Edelweiss Financial Services Limited nor Edelweiss Rural & Corporate Services Limited are engaged predominately in the activities for which the payments have been made by the insurer. Moreover, the Insurer failed to submit any documents pertaining to the approval process followed by them for engaging the services of Edelweiss Financial Services Limited and Edelweiss Rural & Corporate Services Limited as per Regulation 15 of IRDAI (Outsourcing of Activities by Indian Insurers) Regulations, 2017 since it casts additional burden of compliance on the insurers when the Outsourcing Service Providers are the related parties or group entities of the insurers. Regulation 15(d) mandates that Insurers shall ensure that in respect of the outsourced activities to the group companies, the consideration amount agreed upon shall be subject to specific approval of the Outsourcing Committee of the Insurer.

4.3.6. Further, in order to determine “arm’s length distance” as specified under the Regulation 15(c) of IRDAI (Outsourcing of Activities by Indian Insurers) Regulations, 2017, it must be seen that whether the services are priced at similar rates as of a third party. By paying 12% mark-up over and above the value of the services, the Insurer has failed to satisfy the test of “arm’s length” pricing.

4.3.7. The underlying principle of “mark-up pricing” is that there has to be a value added to the service rendered by the group company. The Insurer has paid the markup of 12% on the cost allocated by the group companies to the insurer. This markup implies that the insurer is adding an additional 12% cost to the price of services or products provided by the group companies which is nothing but a pass through cost without adding any value to the service provided.

4.3.8. The insurer has contended that the application of a markup reflects a prevailing practice within the insurance industry. However, this assertion remains unsubstantiated. The insurer failed to submit any evidence to this effect. In the absence of such evidence, the justification for the markup appears uncorroborated. The insurer’s position, therefore, lacks the requisite factual or legal foundation.

4.3.9. During the personal hearing, the insurer stated that these payments have been made through shareholders’ fund and not from the policyholders’ fund. Accordingly, the insurer was advised to submit an undertaking to this effect. The insurer has submitted an undated undertaking and it is only for the “mark-up” paid on the cost allocated by the group companies but not about the entire payouts.

4.3.10. The insurer has stated that mark-up is not detrimental to the interest of the policyholders as any excess of Expenses of Management (EoM) is charged to the shareholders’ account. However, the insurer has failed to provide outsourcing policy / any other policy approved by the Board to charge the marked-up cost to the Shareholders. Further, while this may be true in current position of the insurer where its actual EoM are higher than the allowable EoM, the insurer’s argument is not tenable due to the fact that the insurer is only required to charge the actual expenses to the policyholders and not the inflated amount of the expenses. Moreover, had the insurer been compliant to EoM limits then, as per the submission of the insurer the mark-up amount would have been charged to the policyholders and thereby adversely affecting the interest of the policyholders.

4.3.11. It is essential to note here that it is not the regulatory intent to force the insurers for carrying out all the activities in house and not take assistance of third parties. The regulations only aim to safeguard the insurers from any risks emerging out of dependence on such third parties. Precisely, for this reason the disclosure and reporting requirements are treated as sacrosanct and inalienable and any attempt to deviate from the same is viewed seriously.

4.3.12. In view of the above, in exercise of the powers vested under Section 102 of the Insurance Act, 1938, the Authority hereby imposes a penalty of Rs. One Crore for the violation of sub-clause (1) of Clause 3A and Clause 6 of the Corporate Governance Guidelines issued by the Authority vide circular no. IRDA / F&A / GDL / CG / 100 / 05 / 2016 dated 18.05.2016; Regulation 10, 15 and 21 of IRDAI (Outsourcing of Activities by Indian Insurers) Regulations, 2017; and Clause 4(b) & 5 of the IRDAI Circular No. IRDAI/INSP/CIR/ONS/157/09/2018 dated 19th Sept 2018.

4.3.13. The insurer is further advised to

i. categorise the transactions as outsourcing in accordance with the Regulations as applicable and report the same to the Authority henceforth as mandated by the Regulations.

ii. put in place an outsourcing policy duly approved by the Board with a provision of periodic review along with a vendor management policy with clear SOPs for cost allocations.

5. Summary of Decisions:

6. The penalty amount of Rs. 1 Crore (One Crore) shall be remitted by debiting the shareholders’ account within a period of forty-five days from the date of receipt of this order through NEFT/RTGS (details of which will be communicated separately). An intimation of remittance may be sent to Shri Sanjay Verma, General Manager (Enforcement and Compliance) at its email id – enforcement@irdai.gov.in with a copy to accounts@irdai.gov.in.

7. Further,

a. The Order shall be placed before the Board of the Insurer in the upcoming Board Meeting and the Insurer shall provide a copy of the minutes of the discussion to the Authority

b. The Insurer shall submit an Action Taken Report to the Authority on direction given under this Order within 90 days from the date of this Order.

8. If the Insurer feels aggrieved by this Order, an appeal may be preferred to the Securities Appellate Tribunal as per the provisions of Section-110 of the Insurance Act, 1938.

Rajay Kumar Sinha
Member (F&I)

P K Arora
Member (Actuary)

Place: Hyderabad
Date: 23^rd June, 2025