On 30 October 2015 the Insurance Regulatory and Development Authority of India (IRDA) released the eagerly awaited Insurance Regulatory Development Authority of India (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations, 2015 ("Regulations").

Background and purpose

Pursuant to the Insurance Laws (Amendment) Act, 2015 ("Amendment Act") the definition of “insurer” was amended to include a foreign company engaged in re-insurance business through a branch established in India.

On 7 April 2015, the IRDA released the first draft of “Branch Offices of Foreign Reinsurers (excluding Lloyd’s) Regulations” ("First Exposure Draft"). The First Exposure Draft provided for registration of a single class of branch offices. Following comments from the industry, the IRDA released a second exposure draft in May, 2015 which proposed allowing two classes of branch offices to operate in India (having a different priority status for accessing the Indian reinsurance market and separate minimum retention requirements). The aforesaid ‘two categories model’ has been incorporated in the Regulations.

Applicability of the Regulations

The Regulations, which are effective from 19 October 2015, are applicable to all foreign nonadmitted reinsurers intending on setting up a branch office in India. The Regulations, however, do not cover the regulatory framework governing the setting up and operation of a Lloyd’s branch in India, which has also been recognized as an ‘insurer’ pursuant to the Amendment Act1.

Brief overview of the Regulations

In terms of the eligibility criteria, the Regulations require, inter alia, reinsurers to obtain prior approval or in-principle clearance from their home regulator, minimum net own funds of INR 50 billion, a minimum credit rating which is having at least good financial security characteristics for the last three years from any international credit rating agency, the infusion of a minimum assigned capital of INR 1 billion into the branch and proven experience in the reinsurance market for at least 10 years. The regulations require reinsurers to opt any of the two categories for branch registration, i.e., “Category I” branches whose order of preference is on par with Indian reinsurers and “Category II” branches that have a lower order of preference. Category I branches are required to retain a minimum of 50% of their Indian insurance business. The minimum retention for Category II branches is pegged at 30%.

Significantly, the Regulations have laid down an order of preference to be followed by Indian insurers for placing their faculty and treaty surpluses. In this regard, the Regulations require Indian insurers to:

  1. first offer the Indian Reinsurer (i.e., GIC Re), Category I branches or to other Indian insurers the opportunity to participate in their faculty and treaty surpluses;
  2. approach Category II branches after having offered to at least three entities in (a) above;
  3. approach the offices of insurers set-up in Special Economic Zones, only after having offered to at least three entities in each of (a) and (b) above.
  4. offer the balance to overseas nonadmitted reinsurers, only after having offered to at least three entities in each of (a), (b) and (c) above.

Reinsurers interested in setting up a branch will need to go through a two stage application process. In the first stage, the reinsurer will make a requisition for registration application in the prescribed form. This is a fairly detailed requisition form requiring, inter alia, details on the reinsurer’s ratings, its shareholders, net owned funds, solvency margin, previous years financial statements, amount of capital assigned for branch office, financial projections of the branch for 5 years, reinsurer’s past regulatory record, details on directors and CEO of the reinsurer and CEO, Chief Underwriting Officer and CFO of the branch office. The applicant is also required to submit along with the form copies of its constitutive documents, a statement indicating infusion of capital assigned to the branch, last 5 years annual reports and a certificate from home regulator that reinsurer has necessary permissions to open an Indian branch.

Upon acceptance of the requisition by the IRDA, the applicant is required to apply to the chairperson of the IRDA for grant of registration in the prescribed form along with, inter alia, evidence of minimum INR 1 billion (USD 15.39 million) assigned capital, certificate from a practicing chartered accountant or a company secretary certifying that all the requirements relating to registration fees, assignment capital and other requirements of the Insurance Act, 1938 have been complied with. Reinsurers will also be required to submit, inter alia, results of any market analysis carried out by them with respect to the branch, extensive details on the proposed investment operations of the branch, approach to underwriting, IT systems to be employed, internal controls, proposed expenses of administration and details on the nature of its reinsurance arrangements.

Conclusion

The Regulations pave the way for new players in the Indian reinsurance space and bring in a rigid hierarchy in reinsurance market access for domestic insurers that will undoubtedly have significant long term implications for the industry.

Article is contributed by Mr. Vineet Aneja (Partner) Clasis Law, New Delhi.