India is expected to have the fastest-growing insurance sector of all G20 countries in the next five years, according to a report by the Swiss Re Institute. Total insurance premiums in India are expected to grow by 7.1% in real terms during this period. These numbers are perhaps not surprising when one looks at how dynamic India’s insurance and reinsurance regulatory landscape has been during the past couple of years. India’s regulator – the Insurance Regulatory and Development Authority of India (IRDAI) – has been issuing a multitude of circulars, regulations and amendments aimed at clarifying and consolidating regulatory provisions, addressing practical hurdles and enhancing the ease of doing business, while simultaneously aiming to ensure that there is no compromise in matters of compliance and governance.
2024 has been no different – in fact, the year witnessed some of the most significant regulatory reforms and proposals in recent times. The IRDAI had previously expressed its intent to shift from rule-based to principle-based regulation in the sector and there was a strong push in this direction during 2024, which marks a significant deviation from past practice. Increasing insurance penetration across the country and ensuring “insurance for all by 2047” has been a consistent theme underlying the various amendments. The result has been a bustling year in terms of legal and regulatory developments that seek to keep pace with the evolving needs of the industry and its stakeholders.
Early in March 2024, the IRDAI revamped regulations around the registration of insurers, as well as in respect of insurers’ capitalisation and shareholding. Changes were also made with regard to streamlining the set-up process and requirements for Indian insurers.
From March to May 2024, the corporate governance framework for directors and key managerial personnel (KMPs) of insurers was amended. The aim was to enhance governance standards and transparency while addressing some challenges posed under the existing regime.
Around the same time, in April 2024, regulations on the protection of policyholders were introduced. These sought to ensure fair treatment of prospective policyholders at the stage of solicitation and sale of insurance policies and to enhance policyholder-centric governance by insurers and distribution channels.
Finally, at the end of 2024, the Indian government (ie, the Department of Financial Services) and the IRDAI proposed a bill (the “Proposed Bill”) to make sweeping amendments to the Insurance Act 1938 (the “Insurance Act”), the Insurance Regulatory and Development Authority Act 1999 (the “IRDAI Act”) and the Life Insurance Corporation Act 1956 (the “LIC Act”). The Proposed Bill promises to change the face of insurance regulations in India.
Read More+
This article provides a walk-through of the key amendments introduced in the above-mentioned domains throughout 2024, which are:
The regulatory framework for the registration of insurers – as well as for their capitalisation and shareholding – was overhauled in 2022. Less than two years later, the IRDAI introduced a revamped set of regulations on these matters through the IRDAI (Registration, Capital Structure, Transfer of Shares and Amalgamation of Insurers) Regulations 2024 and the Master Circular on Registration, Capital Structure, Transfer of Shares and Amalgamation of Insurers 2024 (collectively, the “Registration Regulations”), which were intended to simplify regulation, reduce administrative red tape and enhance the ease of doing business. Although the bulk of the changes were to consolidate various regulations in one place, some key changes were introduced, as follows.
The power to grant exemptions and approvals is delegated to a “competent authority”, which could include the chairperson of the IRDAI or a whole-time member (or a committee of whole-time members or officer(s)), as determined by the chairperson. This is expected to improve administrative efficiency and quicken approval timelines. All applications for registration of an insurer now need to be handled by the competent authority.
The Registration Regulations provide relaxations on compliance to investors holding not more than 1% of the equity shares of the insurer. Such investors are not subject to lock-in requirements, restrictions on use of borrowed funds for investments, conflict of interest avoidance mechanisms, etc. Additionally, the promoters of an unlisted insurer no longer need to provide a funding commitment/undertaking in relation to one-time investors who hold less than the above-mentioned 1% threshold.
Lock-in requirements have also been relaxed for insurers that have equity shares listed on Indian stock exchanges and for equity shares allotted to insurer’s employees or directors pursuant to benefit schemes. These clarifications are important because, without them, small shareholders such as employee stock option (ESOP) shareholders would have been subject to the same compliance requirements as investors holding larger stakes. Additionally, the competent authority has the power to relax lock-ins in circumstances of financial distress or in amalgamations or reorganisations of insurers or their shareholders, pursuant to changes in law.
Investors (ie, shareholders who hold less than 25% but more than 10% of an insurer’s paid-up equity capital) are now prohibited from nominating a director to the board of more than one insurer in the same type of insurance business. This restriction is intended to prevent conflicts of interest. Moreover, an investor whose investment exceeds 10% in the insurer would be able to nominate only one (and not more than one) director to the insurer’s board.
The Registration Regulations allow insurers to approach a “financial sector regulator” (and not merely the Securities and Exchange Board of India (SEBI)) for listing of their shares. This would enable Indian insurers to list their shares both on SEBI-recognised stock exchanges and IFSCA-recognised stock exchanges, which currently include India International Exchange (IFSC) Limited and NSE IFSC Limited.
The IRDAI has been taking a keen interest in matters pertaining to the valuation of insurers’ shares, with a view to ensuring consistency and regulation on these matters. The Registration Regulations clarify that, until an applicant insurer commences insurance business, its equity shares (and those of its SPV promoter) must be issued at face value. By implication, an insurer’s shares are permitted to be issued at a premium following the commencement of business. Further, more recently, the IRDAI issued directions to insurers requiring them to ensure that the valuation method used for determining the fair value of an insurer’s shares remains consistent for all share transfers. If there is a change in the method used across different share transfers, prior IRDAI approval is required.
Under the Registration Regulations, the competent authority now has the power to allow a person to be the promoter of more than one insurer engaged in the same class of insurance business on a temporary basis, as part of a scheme for amalgamation and transfer of insurance business filed with the IRDAI. The change is a proactive one and keeps in mind the possibility of increased deal-making activity in the insurance sector in the future.
The IRDAI (Corporate Governance for Insurers) Regulations 2024 and the Master Circular on Corporate Governance for Insurers 2024 (collectively, “the CG Regulations”) brought about a number of clarificatory changes, as follows. They also ensured that insurers continue to operate with transparency and accountability.
Insurers are required to have at least three independent directors (IDs) at all times. The CG Regulations have done away with the earlier relaxation that permitted an insurer to have two IDs for the first five years after registration. The CG Regulations also now require the CEO to be a whole-time director (WTD) on the board of directors of the insurer (the “board”) – previously this was required only if the chairperson of the board was a non-executive director (NED).
The CG Regulations also require prior IRDAI approval to be obtained for the appointment of the chairperson (including their remuneration) for private sector insurers. Existing chairpersons can continue in their role until 31 March 2026 or the end of their tenure, whichever comes first.
The Risk Management Committee of an insurer’s board must be chaired by an ID who is not the chair of the Audit Committee. Additionally, the Policyholder Protection Committee has been replaced with the Policyholder Protection, Grievance Redressal and Claims Monitoring (“PPGR&CM”) Committee. As the name suggests, claims monitoring (including the status of claims settled, rejected and outstanding) is a core function of this committee. The PPGR&CM Committee is to be headed by an ID.
If a KMP holds multiple positions within the insurer that could lead to conflicts of interest (such as both a business and control function or two control functions), then the board will need to ensure that the KMP gives up one function by 1 April 2025.
The limit on the total remuneration for each NED has been increased from INR2 million to INR3 million per year (excluding sitting fees). For an NED who is also the chairperson of the insurer, remuneration continues to be decided by the board. NEDs are not eligible for share-linked benefits – a position reflected in earlier IRDAI regulations as well. This restriction has been extended further and the CG Regulations now restrict NEDs from receiving share-linked benefits even on account of their positions in the group entities of an insurer.
In a welcome move for the industry, the CG Regulations now treat cash-linked stock appreciation rights (“cash SARs”) as “share-linked benefits”, which is a mandatory component of variable pay for an insurer’s KMPs. Previously, cash SARs (and other instruments where the ultimate payout was in cash rather than equity shares) were treated as cash benefits and were not counted towards the mandatory share-linked component. This posed a challenge, as insurers were forced to induct KMPs onto their cap tables instead of issuing cash SARs, phantom stocks, etc – which are linked to the value of the insurer’s equity and offer the same performance incentives to KMPs but are ultimately paid out in cash.
The new provision treating cash SARs as “share-linked” solves this problem. The IRDAI can consider extending the same treatment to phantom stocks and other cash paid (but equity-linked) instruments.
For unlisted insurers, the total number of shares held by employees including KMPs cannot exceed 5% of the paid-up equity share capital of the insurer at any time. The limit no longer applies to ESOPs alone and has now been extended to shares issued pursuant to the exercise of ESOPs as well. Further, unlisted insurers are now permitted to issue ESOPs of their Indian promoter entity (even if the promoter entity is unlisted) as a form of remuneration of KMPs.
The maximum tenure of an insurer’s statutory auditor has been reduced from two consecutive five-year terms to one term of four years under the CG Regulations. After the four-year period, a cooling-off period of three years (instead of the earlier five-year period) would apply before the auditor or its associates/affiliates can be reappointed.
The IRDAI has imposed new requirements for insurers to develop a board-approved ESG framework as well as a climate risk management framework which effectively addresses climate risks, taking into account the insurer’s size, nature and complexity of operations.
The IRDAI (Protection of Policyholders’ Interests, Operations and Allied Matters of Insurers) Regulations 2024 were introduced in April 2024 to enhance protections for policyholders. Following this, the IRDAI released two master circulars – the Master Circular on Operations and Allied Matters of Insurers in June 2024 and the Master Circular on Protection of Policyholders’ Interests in September 2024 (collectively, the “PPI Regulations”). The PPI Regulations aim to reduce the compliance burden for insurers and distribution channels while also emphasising a policyholder-centric approach to regulation. The key changes are as follows.
Insurers are now allowed to outsource specific business functions to third-party service providers, subject to limitations that apply to investment/related functions, fund management, AML/KYC compliance, decision-making on product design, actuarial functions, enterprise risk management, underwriting and claims functions, and grievance redressal. This provides significant relaxation from the previous regulations, which restricted insurers from outsourcing certain key functions, including appointing agents and surveyors, and approving advertisements.
Additionally, insurers are now permitted to outsource their activities to a broader range of third-party service providers. Further, insurers must establish a board-approved outsourcing policy, create an outsourcing committee, annually review outsourced activities, and report outsourcing activities to the IRDAI.
Insurers and distribution channels need to ensure that a group exists before issuing an insurance policy. A master policyholder can only obtain policy coverage after a group is formed and members are enrolled. This is particularly important for providers of assistance services, wellness subscriptions and healthcare benefits who may need to reassess their embedded insurance models.
The PPI Regulations establish a 30-day “free look” period for all health insurance policies and life insurance policies with a term of one year or more, allowing policyholders to review and cancel policies if they disagree with the terms.
Insurers must have a board-approved “place of business” plan in place for every financial year, spanning five years and including details on capex and opex, staffing needs, and expected premium revenue – matters not specified in previous regulations. Additionally, insurers can open places of business in locations with populations of fewer than 100,000 without prior IRDAI approval, provided they meet solvency requirements and expense limits. This change allows insurers greater flexibility in establishing a physical presence. Indian insurers are also permitted to open foreign branch offices or offices within the International Financial Services Centre (IFSC) with prior approval.
Insurers are now required to settle claims within prescribed timelines. They are also required to have a board-approved grievance redressal policy in place for receiving communications and disposing of grievances through a technology-based system. Insurers are also required to maintain searchable databases for unclaimed amounts of INR1,000 or more.
Insurers must include all applicable exclusions in policy documents and must provide a CIS to policyholders explaining all terms and conditions of the policy. Life, health, and retail general insurance policies are required to be issued electronically, with an option for policyholders to receive physical copies. This change reduces the compliance burden and costs for insurers.
All advertisements where a third-party is involved are required to be approved by the insurer’s advertisement committee prior to release. Advertisements must only be related to insurance and should not exaggerate product benefits or omit highlighting risks. Importantly, unit-linked and index-linked products can no longer be advertised using the label “investment products”. Advertisements for such products must disclose associated risks and warnings, ensuring clearer communication and reducing mis-selling. The requirement to file advertisements with the IRDAI has been eliminated.
The Proposed Bill borrows several proposals from the Insurance Amendment Bill 2022 (the “2022 Bill”), which had sought to introduce drastic changes to the Indian insurance and reinsurance framework. Although some proposals from the 2022 Bill have been dropped, such as the introduction of captive insurance or permission to insurers to distribute other financial products, other proposals have been retained – for example, increasing the foreign direct investment (FDI) limit in insurance business to 100%, permitting composite insurance licences, and reducing minimum capitalisation requirements for certain insurers. The proposals are aimed at drawing in more competition, investment and expertise in the insurance and reinsurance sector. The key changes contemplated in the Proposed Bill include the following.
Increased FDI limit – the Proposed Bill seeks to raise the current FDI limit in the insurance sector from 74% to 100% under the automatic route. This would allow foreign entities to set up insurance companies in India without the need to form a joint venture with an Indian partner. This can be expected to give significant impetus to FDI inflows in insurance.
Composite licensing – a composite licensing regime has been proposed, which would allow insurers to seek registration for more than one class of insurance business. By way of example, one insurance entity could obtain registration for health and life insurance business. This may trigger considerable restructuring in the insurance sector, with foreign promoters consolidating their insurance businesses in India into one entity.
Wider scope of permitted activities – insurers may be permitted to undertake “services related or incidental to insurance business”, which includes carrying out and transacting guaranty and indemnity business and managing, selling and realising any property that may come into possession in the satisfaction of claims. This widens the scope of activities that an insurance company can now undertake.
Transfer of business to non-insurance company – insurers may be permitted to merge with non-insurers (which is not contemplated under current regulations). Until recently, the IRDAI was not permitting a non-insurer to merge with an insurer, even where the resulting entity carried out insurance business exclusively.
Reduction of minimum capitalisation and net owned fund requirements – the Proposed Bill proposes a significant reduction of the minimum paid-up equity capitalisation requirements for classes of insurance business serving underserved or special segments. Minimum capital for such classes is proposed to be INR500 million (lower than the INR1 billion amount applicable presently). Additionally, the net owned fund for foreign reinsurance branches and Lloyd’s members has been reduced from INR50 billion to INR10 billion. The changes are expected to increase the inflow of FDI and increase insurance penetration in the country by encouraging small-sized insurers as well as foreign reinsurers to set up in India.
Reduction of share transfer thresholds – prior approval of the IRDAI is proposed for any transfer or issuance of shares exceeding 5% of the capital of the insurer, instead of the current threshold of 1%. Easing share transfer/exit restrictions is likely to make insurance investments a more attractive prospect for investors.
Insurance intermediaries – in a significant move, the Proposed Bill recognises managing general agents (MGAs) as a distribution channel for insurance. MGAs are specialised insurance brokers with the authority to underwrite a policy on behalf of the insurer. The MGA route promises to serve as a novel tool for enhancing insurance distribution capability.
The Proposed Bill also seeks to introduce the concept of a one-time perpetual registration for insurance intermediaries and do away with the requirement of periodic renewals. This change, although expected to reduce the IRDAI’s administrative workload, also has the potential to reduce the oversight currently enjoyed by the IRDAI. It is also proposed to permit insurance agents to enter into arrangements with multiple insurers in the same class of insurance business, which is not currently permitted.
Online premium payments – as the wave of digital and online payments sweeps India and the globe, insurance premium payments are not immune to these developments. Policyholders have started preferring to pay premiums online, which the Proposed Bill seeks to recognise under Section 64VB of the Insurance Act. In such cases, risk is to be assumed only upon the receipt of the money in the insurer’s bank account. This may likely be an issue for insurers, especially in online modes.
Increasing penalties – insurers and insurance intermediaries could be liable to enhanced penalties of up to INR100 million for non-compliance with the Insurance Act and regulations. This is a significant increase from the present maximum penalty of INR10 million and reflects the IRDAI’s intent not to compromise on compliance matters.
The Proposed Bill is expected to be tabled in the budget session of Parliament (ie, February 2025), which means that there is still some way to go before a decision is taken to approve and effect the changes. Although the amendments proposed are groundbreaking, the devil lies in the details and a clearer picture of the implications is likely to emerge only once the Proposed Bill is approved by Parliament and the necessary rules and regulations are framed by the IRDAI to implement them. Having said that, the present IRDAI chairperson has been quite vocal about the need to liberalise the sector and – with the Indian government having shown positive intent by putting together the Proposed Bill – it seems that India’s insurance and reinsurance regulatory landscape is on the cusp of witnessing a complete metamorphosis.
This article was originally published in Chambers and Partners on 21 January 2025 Co-written by: Shailaja Lall, Partner; Akshay Sachthey, Partner. Click here for original article
Read Less-
Disclaimer
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
Partner
The Bar Council of India does not permit solicitation of work and advertising by legal practitioners and advocates. By accessing the Shardul Amarchand Mangaldas & Co. website (our website), the user acknowledges that:
Click here for important public notice from the Firm.