The IRDAI has issued a "Report of the Committee on Regulatory Sandbox in Insurance Sector in India" on 5th February 2019 (Regulatory Sandbox Report) which proposes to set up a sandbox environment within the insurance sector. The Regulatory Sandbox Report indicates that the purpose of the sandbox is to facilitate the roll out of innovations in the insurance sector in India and to provide the ecosystem required for the necessary experimentation which would increase insurance penetration in the Indian market and benefit the policyholders.

The Regulatory Sandbox Report was issued following various industry discussions, examination of various aspects of insurance innovations, and the recommendations of an IRDAI led working group. The Regulatory Sandbox Report recommends the creation of a core Sandbox Committee.

What is the proposed Regulatory Sandbox?

In the information technology sector, a "sandbox" is a "closed testing environment designed for experimenting safely with web or software projects"[[1]]. The concept of regulatory sandbox is used in the financial sector to provide a ground for testing of new business models and applications that are not necessarily covered by or not entirely in accordance with the existing regulatory framework[[2]].

Per the Regulatory Sandbox Report, regulatory sandbox in the insurance sector is proposed to be introduced with a view to provide a conducive environment for encouraging and enabling a wide variety of experimentation[[3]], and encourage entities regulated by the IRDAI and other service providers to offer innovative services to the insurance industry at large[[4]].

Salient Features of Regulatory Sandbox

In addition to the Regulatory Sandbox Report, the IRDAI has released the "Draft Guidelines for facilitating innovation in insurance through a Regulatory Sandbox" of 5th February 2019 (Draft Guidelines), which lay down the contours within which regulatory sandbox will function.

The salient features of the proposed regulatory sandbox are as follows:

  1. Categories of Innovation: ¶3(a) of the Draft Guidelines states that IRDAI will consider approving proposals for promoting or implementing innovation in any of the following categories:
    1. Insurance solicitation or distribution;
    2. Insurance products;
    3. Underwriting;
    4. Policy and Claims Servicing;
    5. Any other area.

The applicant is required to demonstrate to the IRDAI that the innovation will "help increase insurance penetration or provide enhanced services to policyholders" in accordance with ¶13(1) of the Draft Guidelines.

  1. Applicant Entities: ¶2(b) of the Draft Guidelines provides that the following entities may make an application to the IRDAI for introduction of a service or product under regulatory sandbox:
    1. Insurers;
    2. Insurance intermediaries;
    3. Any person other than an individual having minimum net-worth of Rs.25,00,000 (Rupees Twenty Five Lakhs only);
    4. Any other person recognized by the IRDAI.

The applicant could apply singly or jointly, in one or more than one category. However, if the category involves an insurance product or underwriting, then the applicant will be required to necessarily partner with an Insurer[[5]].

  1. Regulatory Relaxation: In cases of a valid proposal, ¶13(3) of the Draft Guidelines states that the IRDAI may grant a "regulatory relaxation" to proposals that promote innovation in insurance in India. However, no relaxation will be granted to compliance required with any statutory provisions, such as those contained under the Insurance Act 1938, or the Insurance Regulatory and Development Authority Act 1999.
  2. Specific Terms of Relaxation: Per ¶13(6)(b) of the Draft Guidelines, the actual application filed before the IRDAI for regulatory relaxation, is required to "specify in clear terms the regulatory provisions that need relaxation to execute the proposal".
  3. Validity Period of the Relaxation: Permission for approved proposals shall be valid for a period of six months which can be extended for a further period of six months. Only where the proposal achieves the target size specified under ¶13(5) of the Draft Guidelines, it shall be deemed to be completed and be allowed to continue beyond twelve months.
  4. Board Approval: Per ¶13(6) of the Draft Guidelines, each proposal will be required to be approved by the Board of Directors of the applicant entity. The applicant shall also be required to put in place measures for closely monitoring the implementation of the proposal. In this regard, the Board of Directors must be updated at least once a month on the status of such innovation, product or service.
  5. Adoption of Proposed Innovation: On completion of the allocated time period or target size of the innovative product or service, the applicant is required to submit a report on the proposal to the IRDAI outlining the following[[6]]:
    1. The objectives met by the proposal;
    2. The feedback received from the policyholders involved at the proposal stage; and
    3. Any other requirement that may be specified by the IRDAI. 

After examination of the report submitted by the applicant, the IRDAI, if satisfied that the objectives of the proposal have been met, may proceed to accord permission to the applicant to adopt the product or service in the market under regular regulatory supervision[[7]].

  1. Option of the Policyholder: Where IRDAI permission is received for a particular product or service, ¶13(8)(b) of the Draft Guidelines states that existing policyholders from the proposal stage, shall be provided with an option to continue with the same service or product after receipt of the IRDAI's permission.
  2. Confidentiality of Personal Data: The applicant is required to "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 ¶13(9) of the Draft Guidelines.

Concluding Remarks

The regulatory sandbox framework proposes to allow various stakeholders in the Indian insurance market to introduce innovative products and services under the regulatory sandbox, upon first ensuring that the same is not prejudicial to the interests of the existing policyholders. However, there remain reservations around the practical aspects that presently surround the proposed regulatory sandbox, such as, the extent of flexibility which may be granted and procedural uncertainties such as, practical timelines applicable for clearing of proposals, and potential hurdles at the time of implementation in the market.

The IRDAI has invited stakeholder comments and suggestions on the Regulatory Sandbox Report and Draft Guidelines in this regard. It presently remains to be seen how the regulatory sandbox will be finally implemented, and what categories of innovations will be introduced by the stakeholders.

[1]   ¶2.2 of the Regulatory Sandbox Report.

[2] ¶2.2 of the Regulatory Sandbox Report.

[3] ¶7.3(3) of the Regulatory Sandbox Report.

[4]   ¶8 of the Regulatory Sandbox Report.

[5]   ¶13(6)(a) of the Draft Guidelines.

[6] ¶12(a) of the Draft Guidelines.

[7]   ¶12(b) of the Draft Guidelines.

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