Regulation

Regulatory agencies

Identify the regulatory agencies responsible for regulating insurance and reinsurance companies.

Insurance and reinsurance companies, and insurance intermediaries in India are governed by the Insurance Regulatory and Development Authority of India (IRDAI). The primary legislation regulating the Indian insurance sector comprises the Insurance Act 1938 (the Insurance Act) and the Insurance Regulatory and Development Authority Act 1999 (the IRDA Act). Pursuant to the powers granted to it under the IRDA Act, the IRDAI has issued various regulations for governing the licensing and functioning of insurers, reinsurers and insurance intermediaries. The IRDAI has also released the IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations 2015 (the Branch Office Regulations), which govern the establishment and functioning of branch offices in India set up by foreign reinsurers (foreign reinsurer branches), and has also notified regulations pertaining to the entry of Lloyd’s into the Indian market.

Although the Insurance Laws (Amendment) Act 2015 (the Amendment Act), which was passed in March 2015, introduced a plethora of changes to the Insurance Act and the insurance regulatory framework in general, the primary insurance regulator continues to be the IRDAI. Appeals from orders issued and decisions made by the IRDAI may be referred before the Securities Appellate Tribunal (SAT). Subsequently, the procedural rules for filing appeals from the IRDAI orders or decisions with the SAT are also notified.

Formation and licensing

What are the requirements for formation and licensing of new insurance and reinsurance companies?

Under the Insurance Act, an Indian insurance company is permitted to carry out insurance business in India. An Indian insurance company is a public limited company formed under the Companies Act 2013 (the Companies Act) that exclusively carries out life insurance, general insurance, health insurance or reinsurance business. An entity desirous to carry out insurance business is required to apply for a certificate of registration from the IRDAI in accordance with a three-stage process set out under the IRDA (Registration of Indian Insurance Companies) Regulations 2000 (the Registration Regulations). A certificate for registration is required for each category of insurance business (ie, life, general, stand-alone health and reinsurance). In addition, the Registration Regulations also set out the essential requirements that an applicant for registration is required to fulfil, including, but not limited to:

  • permissible foreign investment limits;
  • minimum capitalisation requirements;
  • minimum qualifications of the directors and principal officers;
  • planned infrastructure; and
  • general track record of conduct and performance of each of the Indian promoters and foreign investors in the business or profession they are engaged in.

 

The applicant must also provide adequate documentation in support of its application as prescribed under the Registration Regulations.

Further, the Amendment Act permits the establishment of foreign reinsurer branches and the setting up of service companies under the Lloyd’s India framework. The Branch Office Regulations prescribe that a foreign reinsurer is required to apply for registration of a foreign reinsurer branch. The Branch Office Regulations specify the eligibility criteria of a foreign reinsurer, such as credit rating, infusion of minimum assigned capital into the foreign reinsurer branch, in-principle clearance from the home country regulator and commitment to meet all liabilities of the foreign reinsurer branch. In addition, syndicates of Lloyd’s may participate under the Lloyd’s India framework (Syndicates of Lloyd’s India) through a service company set up in India in accordance with the IRDAI (Lloyd’s India) Regulations 2016 (the Lloyd’s India Regulations). The IRDAI notified the IRDAI (Re-insurance) Regulations 2018 (Reinsurance Regulations), thereby consolidating the provisions governing reinsurance business in India into one set of applicable regulations.

Other licences, authorisations and qualifications

What licences, authorisations or qualifications are required for insurance and reinsurance companies to conduct business?

Other than registration under the Insurance Act and general company law, no additional licences, authorisations or qualifications are required for insurance and reinsurance companies to conduct business. Banks that intend to set up insurance joint ventures with equity contributions on a risk participation basis or make investments in insurance companies are required to obtain prior approval of the Reserve Bank of India before engaging in such business.

Officers and directors

What are the minimum qualification requirements for officers and directors of insurance and reinsurance companies?

The Registration Regulations prescribe that the IRDAI will examine the following when considering granting registration to an insurance or reinsurance company:

  • the performance record of the directors and persons in the management of the promoter of the applicant and the applicant;
  • the level of actuarial and other professional expertise within the management of the applicant company; and
  • the academic and professional qualifications, professional experience, reputation and character of the directors and key persons, and whether any censure or disciplinary actions, dismissals and litigations have been instituted against them.

 

In addition to the foregoing, the application process for registration requires substantial details about the qualifications and professional background of the top management of the applicant.

The Branch Office Regulations, which prescribe similar requirements as above, require the key management persons of the foreign reinsurer branch to be appointed with the prior approval of the IRDAI. Moreover, an executive committee of the foreign reinsurer branch is required to be constituted by the board of directors of the foreign reinsurer to perform the functions of the board with clearly defined delegation from the board of the foreign reinsurer. Lloyd’s is required to obtain a prior approval from the IRDAI for the appointment, removal or managerial remuneration payable to the Chief Executive Officer of Lloyd’s India. Further, details of the key management persons of service companies along with their biodata are required to be submitted at the time of registration with the IRDAI. Any change in the details submitted is required to be intimated to the IRDAI.

Capital and surplus requirements

What are the capital and surplus requirements for insurance and reinsurance companies?

Insurance companies are required to have a minimum paid-up equity capital of 1 billion rupees, whereas a minimum paid-up capital of 2 billion rupees has been prescribed for reinsurance companies. For foreign reinsurer branches, the minimum assigned capital shall be 1 billion rupees. In addition, a minimum assigned capital of 1 billion rupees is required to be assigned to Lloyd’s India. Syndicates of Lloyd’s India are required to maintain an assigned capital of 50 million rupees through their service companies in India.

Reserves

What are the requirements with respect to reserves maintained by insurance and reinsurance companies?

Insurance and reinsurance companies are required to maintain at all times an excess value of assets over the amount of liabilities of not less than 50 per cent of the amount of the minimum capital requirement of such insurance or reinsurance company. In addition, insurance and reinsurance companies are also mandated to maintain a minimum solvency margin. The required solvency margin is calculated by insurance companies on the basis of their mathematical reserves and the sum at risk. The IRDAI periodically specifies the factors that are considered in the calculation of the required solvency margin. The Branch Office Regulations prescribe that the foreign reinsurer setting up a foreign reinsurer branch shall fully comply with the solvency margin requirements under the home country’s regulatory requirements. Moreover, the foreign reinsurer branch and the service companies registered under the Lloyd’s India framework are also required to maintain their solvency margin in accordance with the applicable regulations issued by the IRDAI.

Product regulation

What are the regulatory requirements with respect to insurance products offered for sale? Are some products regulated by multiple agencies?

The IRDAI (Protection of Policyholders’ Interests Regulations) 2017 (the Policyholders Regulations) prescribe certain terms to be incorporated in life insurance, general insurance and health insurance policies. For life insurance policies, the IRDAI requires insurance companies to include, inter alia:

  • name and unique identification number (UIN) allotted by the IRDAI for the product governing the policy, its terms and conditions, the name, code number and contact details of the person involved in the sales process;
  • whether it is participating in profits, whether it is linked or non-linked;
  • the manner of vesting or payment of profits such as cash bonus, deferred bonus, or simple or compound reversionary bonus;
  • benefits payable and the contingencies on which these are payable, and the other terms and conditions of the insurance contract;
  • the name and age of the nominee, and his or her relationship with and name of guardian in the case of a minor nominee;
  • details of riders being attached to the main policy;
  • date of commencement of risk, the date of maturity and the date on which survival benefits, if any, are payable;
  • the premiums payable, periodicity of payment, grace period allowed for payment of the premium, the date of last instalment of premium, the implication of discontinuing the payment of an instalment of premium and the provisions of guaranteed surrender value;
  • the details of revival schemes provided for reviving a lapsed policy and requirements to be submitted for revival thereunder. Insurers shall use ‘revival’, the popular term for renewing a lapsed insurance policy;
  • name, address, date of birth and age of the insured as at the date of commencement of the policy;
  • the policy conditions for:
    • conversion of the policy into a paid-up policy;
    • surrender;
    • foreclosure;
    • non-forfeiture; and
    • discontinuance provisions in the case of linked policies;
  • contingencies excluded from the scope of the cover, in respect of both the main policy and the riders;
  • the provisions for nomination, assignment, loans on security of the policy and a statement that the rate of interest payable on the loan shall be as prescribed by the insurer at the time of taking the loan;
  • any special clauses, exclusions or conditions imposed on the policy;
  • the address and email identification of the insurer to which all communications in respect of the policy shall be sent;
  • the notes to the policyholder highlighting the significance of notifying the change of his or her address in good time;
  • details of the insurer’s internal grievance redressal mechanism along with address and contact details of the insurance ombudsman within whose territorial jurisdiction the branch or office of the insurer or the residential address or place of residence of the policyholder is located; and
  • the list of documents that are normally required to be submitted by a claimant in the case of a claim under the policy.

 

For general insurance policies, insurance companies are required by the Policyholders Regulations to incorporate, inter alia:

  • names and addresses of the insured and of any banks or any other persons financially interested in the subject matter of insurance, the UIN name and code number of the product, and contact details of the person involved in the sales process;
  • full description of the property or interest insured;
  • location or locations of the property or interest insured under the policy and, where appropriate, with respective insured values;
  • period of insurance;
  • sums insured;
  • perils that are covered and not covered;
  • franchise or deductible applicable;
  • premium payable, and where the premium is provisional subject to adjustment, the basis of adjustment of premium be stated;
  • policy terms, conditions, warranties and exclusions, if any;
  • action to be taken by the insured upon the occurrence of a contingency likely to give rise to a claim under the policy;
  • the obligations of the insured in relation to the subject matter of insurance upon the occurrence of an event giving rise to a claim and the rights of the insurer in the circumstances;
  • any special conditions attached to the policy;
  • the grounds for cancellation of the policy, which in the case of a retail policy, for the insurer, can be only on the grounds of misrepresentation, non-disclosure of material facts, fraud or non-cooperation of the insured;
  • the address of the insurer to which all communications in respect of the insurance contract should be sent;
  • the details of the endorsements and add-on covers attaching to the main policy;
  • that, on renewal, the benefits provided under the policy or terms and conditions of the policy including premium rate may be subject to change; and
  • details of the insurer’s internal grievance redressal mechanism along with address and contact details of insurance ombudsman within whose territorial jurisdiction the branch or office of the insurer or the residential address or place of residence of the policyholder is located.

 

For health insurance policies, insurance companies are required by the Policyholders Regulations to incorporate, inter alia:

  • the name of the policyholder and the names of each beneficiary covered, the UIN name and code number of the product, and contact details of the person involved in the sales process;
  • date of birth of the insured and corresponding age in completed years;
  • the address of the insured;
  • the period of insurance and the date from which the policyholder has been continuously obtaining health insurance cover in India from any of the insurers without break;
  • the sums insured;
  • the sub-limits, proportionate deductions and the existence of package rates if any, with cross-reference to the concerned policy section;
  • co-pay limits if any;
  • the pre-existing disease waiting period, if applicable;
  • specific waiting periods as applicable;
  • deductible as applicable – general and specific, if any;
  • cumulative bonus, if any;
  • periodicity of payment of premium instalment;
  • policy period;
  • policy terms, conditions, exclusions and warranties;
  • action to be taken on the occurrence of a claim for cashless and reimbursement options separately;
  • details of third-party administrators (TPAs), if any engaged, their address, toll-free number and website details;
  • details of the grievance redressal mechanism of the insurer;
  • free look period facility and portability conditions;
  • policy migration facility and conditions where applicable;
  • that, on renewal, the policy could be subject to certain changes in terms and conditions, including change in premium rate;
  • provision for cancellation of the policy; and
  • address and other contact details of an ombudsman within whose territorial jurisdiction the branch or office of the insurer or the residential address or place of residence of the policyholder is located.

 

Where exclusions are to be stipulated in the policy, the Policyholders Regulations require that, wherever possible, insurers shall endeavour to classify the exclusions into the following:

  • standard exclusions applicable in all policies;
  • exclusions specific to the policy that cannot be waived; and
  • exclusions specific to the policy that can be waived on payment of additional premium.

 

Similarly, so as to give clarity and understanding of the conditions to the policyholder, insurers are also required to endeavour to broadly categorise policy conditions into the following:

  • conditions precedent to the contract;
  • conditions applicable during the contract;
  • conditions when a claim arises; and
  • conditions for renewal of the contract.

 

Additionally, under the IRDAI (Health Insurance) Regulations 2016, the IRDAI has specified a number of regulatory requirements and conditions that are required to be incorporated into health insurance policies, making such policies highly regulated. The IRDAI has also prescribed a standard set of definitions, standard nomenclature for critical illnesses and a standard list of generally excluded expenses in relation to health insurance policies. The IRDAI has also recently notified the Guidelines on Standardisation of Exclusions in Health Insurance Contracts of 27 September 2019 (Standardisation Guidelines). Under the Standardisation Guidelines, certain exclusions are prohibited from being incorporated in health insurance policies and insurers are required to use the standardised wordings for the exclusions as stipulated therein. The IRDAI has also issued the Guidelines on Migration and Portability of Health Insurance Policies of 2 January 2020, which stipulate that insurers offering indemnity-based health insurance policies are required to provide for ‘portability’ and ‘migration’ of policies in accordance with the norms specified.

In addition, the IRDAI has issued the Guidelines on Standard Individual Health Insurance Product of 2 January 2020, stipulating the product structure, applicable norms and relevant formats for filing of the standard individual health insurance product, mandated to be offered by all general and health insurers.

Insurance contract wording is highly regulated. The terms and conditions of property and engineering insurance covers are currently governed by the policy wordings specified by the former Tariff Advisory Committee. Very few modifications to these policy wordings have been permitted. On all other lines of insurance business (except ‘mega risks’ and other forms of specialised insurance covers), insurance companies are permitted to issue only those policy terms and conditions, endorsements and other ancillary documentation that have been approved by and filed with the IRDAI under the relevant product filing procedures. The Guidelines on Product Filing Procedures for General Insurance Products of 18 February 2016 require that all retail products (ie, those products that are sold to individual customers, including their families) are filed with the IRDAI under the File and Use Procedure before they are marketed. However, commercial products (ie, those products that are sold to entities other than individuals, including firms, companies, trusts) fall under the Use and File Procedure, which enables an insurer to market the products on being filed with, and a UIN being allotted by, the IRDAI subject to certain conditions.

The IRDAI has issued an Exposure Draft on the Guidelines on Standardisation of General Clauses in Health Insurance Policy Contracts of 10 January 2020, which proposes to standardise certain general clauses that are commonly incorporated under indemnity-based health insurance policy wordings (excluding personal accident and domestic or overseas travel policies). At present, the IRDAI has requested comments on the draft from stakeholders and the final guidelines are anticipated in due course.

Regulatory examinations

What are the frequency, types and scope of financial, market conduct or other periodic examinations of insurance and reinsurance companies?

Insurance companies, reinsurance companies and insurance intermediaries are amenable to inspections and investigations by the IRDAI. No specific frequency has been prescribed for these investigations and inspections. With the passing of the Amendment Act, even service providers and contractors to insurance companies or intermediaries are obliged to furnish to the IRDAI, if required, during any investigation or inspection, all such books of account, registers, other documents and databases in their custody or power that relate to the affairs of the insurance company or intermediary. Directors and other officers of such service providers or contractors may also be called on by the IRDAI to furnish statements on oath.

Investments

What are the rules on the kinds and amounts of investments that insurance and reinsurance companies may make?

Investments made by insurance and reinsurance companies are governed by the Insurance Act, the IRDAI (Investment) Regulations 2016 (the Investment Regulations), the Investments – Master Circular – IRDAI (Investment) Regulations 2016 of 3 May 2017 and various circulars issued by the IRDAI. The Insurance Act mandates that assets of life insurers should be invested as follows: 25 per cent in government securities, a further sum equal to not less than 25 per cent in government securities or approved securities, and the balance in any other approved investment in accordance with the Investment Regulations. General insurers are required to invest 20 per cent of the assets in government securities, a further sum equal to not less than 10 per cent of the assets in government securities or approved securities, and the balance in any other approved investment in accordance with the Investment Regulations. Reinsurers and foreign reinsurer branches are required to invest and keep invested at all times 20 per cent of the assets in government securities, a further sum equal to not less than 10 per cent of the assets in government securities or approved securities, and the balance in any other approved investment in accordance with the Investment Regulations.

The Investment Regulations, which contain the exposure or prudential norms, set out, inter alia, the limits on investments to be made by insurers or reinsurers on the basis of the investee company, group or industry. In addition, subject to the Investment Regulations, insurers cannot invest more than 5 per cent of their assets in companies belonging to promoters. Moreover, insurers are also prohibited from investing the funds of policyholders, directly or indirectly, outside India.

Change of control

What are the regulatory requirements on a change of control of insurance and reinsurance companies? Are officers, directors and controlling persons of the acquirer subject to background investigations?

Per section 6A of the Insurance Act read with the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015, prior approval from the IRDAI must be obtained in the event of a change in shareholding of an insurance or reinsurance company where, after the transfer, the total shareholding of the transferee is likely to exceed 5 per cent of the total paid-up capital of the company.

In addition, prior approval of the IRDAI must also be obtained if the nominal value of the shares intended to be transferred by any individual, firm, group, constituents of a group or body corporate under the same management, jointly or severally, exceeds 1 per cent of the total paid-up capital of the insurance or reinsurance company.

There are no specific provisions dealing with background investigations of officers and directors of acquirers. However, while obtaining the IRDAI’s approval, information may be required to be submitted regarding whether the directors of the transferee have ever been refused a licence or authorisation in the past to carry out regulated financial business or whether any company, firm or organisation with which such directors have been associated as directors, officers or managers has been investigated by a regulatory or professional body.

Financing of an acquisition

What are the requirements and restrictions regarding financing of the acquisition of an insurance or reinsurance company?

The Indian insurance regulatory framework does not expressly regulate financing of the acquisition of an Indian insurance or reinsurance company.

Minority interest

What are the regulatory requirements and restrictions on investors acquiring a minority interest in an insurance or reinsurance company?

There are no specific provisions or requirements under the Indian insurance regulatory framework on the acquisition of a minority interest in an insurance company or reinsurance company.

Foreign ownership

What are the regulatory requirements and restrictions concerning the investment in an insurance or reinsurance company by foreign citizens, companies or governments?

With the passing of the Amendment Act, foreign investment in insurance and reinsurance companies was increased from 26 per cent to 49 per cent of the paid-up equity capital. To implement the changes introduced by the Amendment Act, the Ministry of Finance notified the Indian Insurance Companies (Foreign Investment) Rules 2015 (the Foreign Investment Rules) on 19 February 2015. The Foreign Investment Rules provided that approval of the Foreign Investment Promotion Board (FIPB), set up under the Ministry of Finance, will be required for any foreign investment over 26 per cent and up to the permissible limit of 49 per cent. On 16 March 2016, the Foreign Investment Rules were amended to reflect that foreign investment up to 49 per cent of the total paid-up equity capital of an insurance or reinsurance company shall be allowed on the automatic route (ie, without requiring any approval from the FIPB) subject to verification by the IRDAI. Subsequently, the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry notified the Consolidated Foreign Direct Investment Policy on 7 June 2016 to ensure uniformity with the Foreign Investment Rules.

In addition, the Amendment Act also mandated that insurance and reinsurance companies must be ‘Indian owned and controlled’. The Foreign Investment Rules read with the Guidelines on ‘Indian owned and controlled’ of 19 October 2015 provide that ‘Indian ownership’ means that more than 50 per cent of the equity capital is beneficially owned by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens. Further, ‘Indian control’ of an insurance or reinsurance company shall mean control of such company by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens. ‘Control’ includes the right to appoint a majority of the directors or to control the management or policy decisions by virtue of shareholding, management rights or shareholders agreements or voting agreements.

On 2 September 2019, the Indian Insurance Companies (Foreign Investment) Amendment Rules 2019 (the Amendment Rules) were notified which effectively increased the permissible limit of foreign direct investment in insurance intermediaries to 100 per cent. Press reports indicate that the IRDAI has sought comments from various shareholders regarding increasing the permissible foreign direct investment limit for Indian insurers, from 49 per cent to 74 per cent.

Private equity or alternative investment funds are permitted to invest in Indian insurance companies as either investors or promoters in accordance with the norms stipulated under Investment by Private Equity Funds in Indian Insurance Companies Guidelines of 5 December 2017.

Group supervision and capital requirements

What is the supervisory framework for groups of companies containing an insurer or reinsurer in a holding company system? What are the enterprise risk assessment and reporting requirements for an insurer or reinsurer and its holding company? What holding company or group capital requirements exist in addition to individual legal entity capital requirements for insurers and reinsurers?

In relation to the IRDAI’s supervision of the group to which an insurance company, reinsurance company or insurance intermediary belongs, the IRDAI directly regulates only those insurance companies, reinsurance companies and insurance intermediaries operating in the Indian insurance sector, and currently does not regulate the operations of the group entities of such insurance companies or insurance intermediaries. However, there are some restrictions on insurance companies and insurance intermediaries operating in the same group, where the IRDAI has discretion (in some cases) to determine the scope of ‘group’:

  • an Indian corporate group can have an insurance company and an insurance broker within the same group, subject to certain conditions being fulfilled;
  • typically, within a group, the IRDAI will grant one certificate of registration to only one entity for insurance intermediation, unless a case on merits and with no conflict of interest is made before the IRDAI;
  • a web aggregator cannot be a related party of an insurance company;
  • there is no express restriction on insurance companies and surveyors operating in the same group, but the IRDAI is likely to view this as an inherent conflict of interest;
  • there is no express restriction on insurance companies and TPAs operating in the same group; and
  • an insurance agent or insurance intermediary is not permitted to be a director of an insurance company.
Reinsurance agreements

What are the regulatory requirements with respect to reinsurance agreements between insurance and reinsurance companies domiciled in your jurisdiction?

In relation to reinsurance contracts, the Reinsurance Regulations issued by the IRDAI define a reinsurance contract as a commercial agreement that is legally binding on all the parties, and is evidenced by a reinsurance slip or cover note, or other such document. Reinsurance arrangements do not need to be pre-approved by the IRDAI, but they must be documented and filed with the IRDAI within the stipulated time frame.

The overarching regulatory framework for the reinsurance of all insurance risks in India is set out in the Reinsurance Regulations, which repeal the IRDAI (General Insurance – Reinsurance) Regulations 2016 and IRDAI (Life Insurance – Reinsurance) Regulations 2013. They also amend to the relevant extent the Branch Office Regulations and the Lloyd’s India Regulations. The guiding principle is maximising retention within India, so each Indian insurer must maintain the maximum possible retention commensurate with its financial strength, quality of risks and volume of business. In this regard, both Indian reinsurers and foreign reinsurance branches are required to maintain a minimum retention of 50 per cent of their Indian business. An Indian insurer is also strictly prohibited from fronting for a foreign insurer or reinsurer. ‘Fronting’ is now defined as a process of transferring risk in which an Indian insurer cedes or retrocedes most or all of the assumed risk to a reinsurer or a retrocessionaire.

Further, Indian insurers are required to mandatorily cede a certain percentage of the sum assured on each policy for different classes of insurance written in India to Indian reinsurers as defined under the provisions of the Insurance Act. Apportionment of obligatory cession for the financial year 2020–2021 is 5 per cent and is required to be placed with General Insurance Corporation of India.

The Reinsurance Regulations do not stipulate categories of reinsurance branches. In addition, subject to the retention limit and the mandatory cession to the Indian reinsurer for reinsuring the remaining insurance risks, every cedent, is required to comply with the ‘order of preference for cession’ set out in the Reinsurance Regulations, where ‘cedent’ is defined under the Reinsurance Regulations as an Indian insurer writing ‘direct’ insurance business, who contractually cedes a portion of the risk. A cedent is required to first offer its facultative and treaty surpluses to Indian reinsurers transacting reinsurance business during the immediate past three continuous financial years, and thereafter to other Indian reinsurers and foreign reinsurer branches. The Indian insurer may then proceed to offer the surplus to foreign reinsurer branches set up in special economic zones (IIOs) and overseas reinsurers, who meet the required credit rating criteria, followed by other IIOs, and then other overseas reinsurers and Indian insurers (only for facultative placements).

Although the order of preference does not apply to Indian insurers transacting life insurance business, the Reinsurance Regulations require them to endeavour to utilise the Indian domestic capacity before offering reinsurance placements to cross border reinsurers (CBRs). Life insurers are also required to obtain the prior approval of the IRDAI before entering into reinsurance arrangements with their promoter company, or associate or group companies, except where the arrangements are on commercially competitive terms and an arm’s-length basis.

Indian insurers are also required to comply with various requirements set out in the Reinsurance Regulations, including filing requirements for the reinsurance programme, and the wordings of each reinsurance contract, as well as details of their shares in the reinsurance arrangements entered into.

Further, proposals for alternative risk transfer – namely non-traditionally structured reinsurance solutions tailored to the specific needs and profile of an insurer or a reinsurer – are also required to be submitted to the IRDAI.

Ceded reinsurance and retention of risk

What requirements and restrictions govern the amount of ceded reinsurance and retention of risk by insurers?

Indian insurers are mandated to retain risk proportionate to their financial strength, quality of risks and business volume. The IRDAI has not issued any specific guidance on the appropriate minimum amount to be retained by non-life insurers. However, life insurers are required to maintain a minimum retention of 25 per cent of the sum at risk for pure protection life insurance business portfolios and 50 per cent otherwise. Further, Indian insurers are also required to mandatorily cede the prescribed percentage of the sum assured on each policy for different classes of insurance written in India to the Indian reinsurer. So far as the order of preference for cession is concerned, no specific amount or percentage has been prescribed for placement of reinsurance risks by an Indian insurer with the relevant entities set out therein.

For cedents transacting other than life insurance business, surplus over the domestic reinsurance arrangements shall be placed outside India with only those CBRs that satisfy the prescribed criteria and have the details filed with the IRDAI.

Specifically, the Reinsurance Regulations stipulate the maximum limits on reinsurance cession that can be made by an Indian insurer to a particular CBR under any insurance segment, and are as follows:

  • if Standard and Poor’s (S&P) rating of the CBR is BBB and BBB+, up to 10 per cent cession is allowed;
  • if S&P’s rating of the CBR is greater than BBB+ and up to and including A+, up to 15 per cent cession is allowed; and
  • if S&P’s rating of the CBR is greater than A+, up to 20 per cent cession is allowed.

 

The percentages of the cession limits are calculated on the total reinsurance premium ceded outside India. Any cession to a CBR that does not satisfy the eligibility criteria or where the cession is above the prescribed limit requires the prior approval of the IRDAI for placement.

Collateral

What are the collateral requirements for reinsurers in a reinsurance transaction?

The Indian insurance regulatory framework does not specify any collateral requirements for reinsurance companies in a reinsurance transaction.

Credit for reinsurance

What are the regulatory requirements for cedents to obtain credit for reinsurance on their financial statements?

The Indian insurance regulatory framework does not presently expressly regulate requirements for cedents to obtain credit for reinsurance on their financial statements.

Insolvent and financially troubled companies

What laws govern insolvent or financially troubled insurance and reinsurance companies?

Insolvency and bankruptcy law in India was overhauled by way of the Insolvency and Bankruptcy Code 2016 (the Insolvency and Bankruptcy Code). It provides the insolvency and liquidation process for corporate persons. However, insurers have been excluded from the scope of ‘corporate debtor’ as defined under the Insolvency and Bankruptcy Code.

The Insurance Act specifically provides that the winding-up of an insurance company shall be in accordance with the procedure laid out in the Companies Act. In addition, the Insurance Act specifies certain other conditions under which the court may order the winding-up of an insurance company.

The process for winding up involves compliance with various procedural requirements set out in the Companies Act. The process includes:

  • the appointment of a company liquidator;
  • realisation of the assets of the company;
  • repayment of all the outstanding creditors and any other statutory dues owed by the company; and
  • dissolution of the company.

 

In relation to repayment of the creditors and outstanding dues of the company, the Companies Act provides that certain dues are required to be paid in priority, including dues to employees of the company, and the statutory dues owed to governmental authorities.

Further, the Insurance Act provides that the voluntary winding-up of an insurance company is subject to certain restrictions. An insurance company cannot be wound up voluntarily except for the purpose of effecting an amalgamation or a reconstruction of the company, or on the ground that by reason of its liabilities it cannot continue its business.

An insurance company may also be partially wound up, whereby a class of its business is wound up but another class either continues to operate or is transferred to another insurance company. In this scenario, a scheme may be prepared and submitted in court that should provide for the following: the allocation and distribution of the assets and liabilities of the company between any classes of business affected (including the allocation of any surplus assets that may arise on the proposed winding-up) for any future rights of every class of policyholders in respect of their policies; and the manner of winding up any of the affairs of the company that are proposed to be wound up. The scheme may also include provisions for altering the memorandum of association of the company with respect to its objects and such further provisions as may be expedient for giving effect to the scheme.

In addition to the above, the Insurance Act also authorises the IRDAI, after affording opportunity to be heard, to appoint an administrator to manage the affairs of the insurer (under the direction and control of IRDAI), if at any time the IRDAI has reason to believe that the insurer carrying out life insurance business is acting in a manner likely to be prejudicial to the interests of holders of life insurance policies. In June 2017, the IRDAI, in exercise of this authority, appointed an administrator for Sahara Life Insurance Company.

Claim priority in insolvency

What is the priority of claims (insurance and otherwise) against an insurance or reinsurance company in an insolvency proceeding?

The Indian insurance regulatory framework does not specifically regulate the priority of claims against an insurance or reinsurance company in an insolvency proceeding. However, because the winding-up of an insurance company would be in accordance with the Companies Act and the Insolvency and Bankruptcy Code 2016, the priority of claims prescribed thereunder would apply to an insurance and a reinsurance company as well.

Intermediaries

What are the licensing requirements for intermediaries representing insurance and reinsurance companies?

The IRDAI regulations govern all insurance agents and intermediaries, that is:

  • corporate agents;
  • insurance brokers;
  • insurance marketing firms (IMFs);
  • TPAs;
  • surveyors and loss assessors; and
  • web aggregators.

 

Insurance intermediaries need to obtain licences and registrations pursuant to the provisions of the specific regulations that are applicable to them in view of the nature of the business proposed to be undertaken by them. The IRDAI has issued regulations setting out the licensing or registration requirements (including eligibility criteria, capital and net worth requirements, qualification requirements of the principal officer, directors or partners of the concerned entity) and procedures for all the above-mentioned intermediaries. Licence or registration is typically granted for three years, and may be renewed thereafter.

On 2 September 2019, the Amendment Rules were notified, which effectively increased the permissible limit of foreign direct investment in insurance intermediaries to 100 per cent. However, where an entity whose primary business is outside the insurance sector, is allowed by the IRDAI to function as an insurance intermediary, the foreign equity investment caps applicable in that sector shall continue to apply to such intermediary, subject to the condition that the revenues of such entities from the primary (non-insurance related) business remain above 50 per cent of their total revenues in any financial year.

The IRDAI also notified the IRDAI (Insurance Intermediaries) (Amendment) Regulations 2019, which amended the existing regulations governing insurance intermediaries in line with the Amendment Rules. Also, the requirement for insurance intermediaries to be Indian owned and controlled was expressly removed vide notification of Circular on Withdrawal of Indian Owned and Controlled Condition for Insurance Intermediaries of 19 November 2019.

Insurance agents

An individual may be appointed as an insurance agent by an insurer on complying with the conditions provided under the regulations notified by the IRDAI in this regard. An insurance agent is required to have passed the relevant examination, and is also required to possess the requisite knowledge for soliciting insurance business and providing necessary services to policyholders. An insurance agent is permitted to solicit insurance business for only:

  • one life insurer;
  • one general insurer;
  • one health insurer; and
  • one each of the monoline insurers.
 Corporate agents

Entities eligible to operate as corporate agents include:

  • firms;
  • banks;
  • non-banking financial companies;
  • cooperative societies;
  • non-governmental organisations; and
  • companies.

 

An entity registered as a corporate agent may either exclusively carry out the business of insurance distribution or engage in any business other than insurance distribution as its main business. Where a corporate agent has a main business other than insurance distribution, that agent is not permitted to make the sale of its products contingent on the sale of an insurance product, or vice versa. A corporate agent may have arrangements with a maximum of three insurers in each category of life, general or health insurance.

Insurance brokers

Insurance brokers are required to exclusively carry out the distribution of insurance products. Any company, limited liability partnership or cooperative society may apply to the IRDAI for the grant of an insurance broker certificate of registration. Applicants may register as a direct broker (life, general, or life and general), a reinsurance broker or a composite broker (involved in both direct and reinsurance broking). The minimum capital for a direct broker is 7.5 million rupees, 40 million rupees for a reinsurance broker and 50 million rupees for a composite broker. All insurance brokers are required to be members of the Insurance Brokers Association of India.

 IMFs

Entities such as companies, limited liability partnerships or cooperative societies that are registered as IMFs are permitted to distribute insurance products along with mutual funds, pension products and certain other financial products, provided that permissions from the respective regulator are in place to distribute these financial products. IMFs are permitted to distribute the insurance products of only two life insurers, two general insurers and two health insurers at any one time, and a change in the insurer whose products are to be distributed may take place only on the prior approval of the IRDAI. IMFs are required to have a  net worth of 0.5 million rupees, if the IMF is operating out of only one district (aspirational district), and a net worth of 1 million rupees in all other cases. IMFs are also permitted to undertake survey functions through licensed surveyors employed on its rolls, policy servicing activities and other activities that are permissible to be outsourced by insurers under the applicable regulatory framework.

 Web aggregators

An entity such as a company or a limited liability partnership that is registered as a web aggregator is permitted to display on its website information on insurance products of those insurers with whom the web aggregator has entered into an agreement. The web aggregator is also permitted to display product comparisons on its website, carry out activities for lead generation and share leads with insurers. A web aggregator is required to have a minimum capital of 2.5 million rupees.

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