Structure of insurance company
IRDAI's 2022 reforms
On 26 April 2022, the Insurance Regulatory and Development Authority of India (IRDAI) issued a press release which stated that it had taken a major step in setting out a new mechanism for processing the requests and applications for the registration of new insurance companies.
Such applications for registrations are currently made under the IRDAI (Registration of Indian Insurance Companies) Regulations 2000 (the Registration Regulations).
The objective of this new mechanism is to ensure ease of doing business in the insurance sector for both global and domestic investors. The mechanism will reduce the turnaround periods for incorporating new entities for insurance-related activities and granting certificates of registration to start insurance businesses.
Currently, a company that proposes to undertake insurance business in India is required to be registered with the IRDAI by way of a three-step process in accordance with the Registration Regulations:
- filing the IRDAI/R1 application with the IRDAI,(1) which includes details of the applicant company's:
- share capital;
- promoters (including their experience and present occupation); and
- investors (including their qualifications, experience and present occupation).(2)
The IRDAI/R1 application appears to be aimed primarily at seeking information to better understand the background of the promoters and investors such that the regulator can undertake the fit and proper checks deemed necessary;
- posting approval of the IRDAI/R1 application – the applicant company is required to file the IRDAI/R2 application with the IRDAI,(3) which includes details such as:
- capital as specified by the IRDAI;(4)
- the nature of the proposed insurance products;
- the level of actuarial, accounting and other professional expertise within the management of the applicant company; and
- the applicant company's organisational structure.
At this stage, the applicant company is also required to show evidence of funds to ensure that the minimum capital requirements are met; and
- when the R2 application is approved, the IRDAI grants the certificate of registration through Form IRDAI/R3.(5)
An entity is required to maintain a minimum capital of 10 million Indian rupees in order to conduct insurance business in India.(6) For companies engaged in reinsurance business, the minimum requirement is 20 million Indian rupees.(7)
Structure of insurance company
Typically, there have been two prevalent structures for setting up an Indian insurance company: traditional joint ventures and special purpose vehicles (SPVs), where the company is set up as a wholly owned subsidiary in accordance with the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines 2017 (the PE Guidelines).
A joint venture is typically preferred by companies where the shareholders and investors are directly invested in the insurance company. For such entities, foreign investment in an Indian insurance company can be up to a maximum limit of 74%, and Indian investors may hold shares in the Indian insurance company subject to a cap of 10% for each Indian investor and 25% jointly for all Indian investors.
The PE Guidelines were introduced to enable private equity funds to invest in the capacity of promoters in an Indian insurance company through an SPV, subject to certain specified conditions. The foreign investment cap is also 74% for this route.
The application process for registration requires substantial details about the qualifications and professional background of the top management of the applicant company. According to the Insurance Companies (Foreign Investment) Amendment Rules 2021 (the Amendment Rules):
- the majority of directors on the board of the Indian insurance company are required to be resident Indian citizens;
- the majority of key management persons are required to be resident Indian citizens; and
- at least one among the chairperson of the board, the managing director and the chief executive officer must be a resident Indian citizen.
In this context, the Amendment Rules further stipulate conditions where foreign investment in an Indian insurance company exceeds 49%, including the following:
- At least 50% of the net profit is required to be retained in general reserves, for a financial year in which dividend is paid on equity shares and at any time the solvency margin is less than 1.2 times the control level of solvency.
- At least 50% of its directors are required to be independent directors, unless the chairperson of the board is an independent director, in which case at least one-third of its board shall comprise independent directors.
In March 2022, a number of press releases were issued under the new IRDAI chair, Debashish Panda, on the continuing objectives and reforms proposed to ensure:
- the increase of penetration of insurance in the country;
- the healthy growth of the insurance industry; and
- the rationalisation of the regulatory framework.
In order to implement the above, the IRDAI in its recent 26 April 2022 press release took a major step in proposing a new mechanism for processing requests and applications for the registration of new insurance companies in order to ease the process for registration of new Indian insurance companies in India. Currently, the process for setting up and registering an Indian insurance company in India follows the three-step process described above. The objective of the proposed new process is expected to bring down the current turnaround time of approximately 12 to 14 months for incorporation and granting a certificate of registration.
The proposed rehaul of the existing process is also in line with the IRDAI's objective "[email protected] – Insurance for all" and can be anticipated to not only promote ease of doing business in the insurance sector but may also enable and encourage new entities to enter the insurance market in India with special outreach to global investors, which in turn will enhance foreign direct investment in the insurance sector.
The market is avidly looking forward to the new amendments to the registration process in the coming months. More developments are expected with regards to the proposed reduced timelines in the registration process and perhaps an easier approval route. While the new process norms are yet to be issued and it remains to be seen how the existing process will shape the future of investors and new players in the insurance market, there appears to be a distinct trend to promote the ease of doing business in India while allowing new and niche players to enter the insurance market.
For further information on this topic please contact Shubhangi Pathak or Swathi Ramakrishnan at Tuli & Co by telephone (+91 11 2464 0906) or email ([email protected] or [email protected]). The Tuli & Co website can be accessed at www.tuli.co.in.
(1) R3(1) of the Registration Regulations.
(2) R3 read with Form IRDAI/R1 (Requisition for Registration Application) of the Registration Regulations.
(3) R3(5) and R10 of the Registration Regulations.
(4) R10 read with Form IRDAI/R2 (Application for Registration) of the Registration Regulations.
(5) R16 of the Registration Regulations.
(6) R10(2)(a) of the Registration Regulations.