Irda paves way for insurers to outsource NAV calculation

The Insurance Development Regulatory Authority (Irda) has clarified that it has not prohibited outsourcing of custodial services. It has also now permitted insurers to outsource calculation of net asset values (NAVs) for unit-linked plans (ULIPs).

Originally, the regulator was of the view that investment operations of players should be done in-house to protect policyholders.

Irda, in its latest circular, has laid down the norms for the outsourcing of these services and pointed out that an insurer could outsource this provided the custodial service provider has experience and expertise in NAV computation and is also regulated by the central bank.

The Irda move comes on the back of representation made by private life insurance companies to the regulator on the issue. They had pointed out that companies which had a small fund size, the calculation of NAV would mean huge investments in acquisition of hardware and software which would be underutilised.

"Even a mutual fund company that has a small asset base outsource the calculation of NAV to third-party service providers. So this is not something unique to insurance companies and the Irda clarification is welcome," said the chief executive officer of a life insurance firm.

However, the industry is seeking clarity on whether the facility can be extended to other insurance schemes.

Sandeep Batra, CFO, ICICI Prudential said, "The outsourcing of NAV calculation allows for better control, greater efficiency and is in line with international practices."

S Krishnamurthy, CEO of SBI Life, however, said, "We would rather do the computation in-house." SBI Life, however, has yet to introduce a unit-linked plan.

Irda has also said that insurance companies should ensure that the company to which they outsource custodial services should not be part of a 'group' as defined under Regulation 2 (ca) of Irda's investment regulations.

This apart, the entity to which the work is outsourced should comply with all consumer laws and regulations and maintain confidentiality and protect data from intentional or inadvertent disclosure to unauthorised persons.

Irda has also specified that the outsourcing agreement should contain an exit clause providing for the smooth transfer of records and functions to the insurer or its nominated contractor in the event of the outsourcing agreement being terminated, without imposing onerous penalties for termination.

Irda has also said that as a regulator it should get access to all records and other material to the regulator or its representative.

Irda has specifically mentioned that insurance companies using the outsourced mode for custodial services should keep the regulator informed about the same, and the agreement as such should be filed with the regulator.

Irda has mandated that the principal officer of the insurer should confirm to the regulator that the insurance firm has established a comprehensive policy to guide the assessment of the outsourcing activity and its periodic review.

The principal officer also would have to confirm that the company has applied due diligence in selecting the service provider and the board of the company has approved the same.