Foreign Direct Investment in Insurance Sector

Following a period of consultation and recent legislative changes in India, total foreign investment ownership through any means, including portfolio investment, in an Indian insurance company, directly or indirectly (through one or more holding companies), is now permitted up to 49 per cent without the prior approval of the Indian Government ("Automatic Route"). This includes insurance brokers, insurance third party administrators, surveyors and loss assessors.

Previously, foreign investment beyond 26 per cent and up to 49 per cent required the prior approval of the government (through the Foreign Investment Promotion Board ("FIPB")). Prior approval of the Insurance Regulatory and Development Authority of India (“IRDAI”) is required in all circumstances where there is any change in shareholding of an Indian insurance company. The ownership and control of an Indian insurance company (including the appointment of the CEO) must remain in the hands of resident Indians at all times. "Control" is defined to mean the right to appoint a majority of the directors on the board of the company or the power to control the management or policy decisions of a company by virtue of shareholding, management rights, shareholders agreements or voting rights agreements.

Foreign Direct Investment in Pension Funds

In line with the policy on foreign investment in the insurance sector, the Government has also permitted foreign investment in Indian pension funds to rise up to 49 per cent under the Automatic Route. Previously, 26 per cent was permitted under the Automatic Route and foreign investment beyond 26 per cent and up to 49 per cent required the prior approval of the Government (through the FIPB). Foreign investment in the Indian pension sector continues to be subject to the conditions set out in the Pension Fund Regulatory and Development Authority Act, 2013.

Regulations on Insurers’ Expense Management for Non-life Insurance

In April, 2016, the IRDAI introduced regulations on the expenses related to the management of insurers transacting general or health insurance businesses. According to Section 40B and 40C of the Insurance Act, 1938, the expenses reimbursed on reinsurance inward, operating expenses and the amount of commission or other remuneration paid to insurance agents and insurance intermediaries must not exceed the percentage of the allowable expenses under various segments of general insurance or health insurance business as mentioned under the regulations.

Guidelines for Corporate Governance for Insurers

In May, 2016, IRDAI issued Guidelines for Corporate Governance for Insurance Companies, specifying the structure, responsibilities and functions of the board of directors and management of insurance companies. The guidelines are applicable to all insurers granted registration by the authority. However, reinsurance companies are not required to have the Policyholders’ Protection Committee and branches of foreign reinsurers are not required to constitute the board and its mandatory committees. The guidelines include major structural elements of corporate governance in insurance companies, as follows:

  • Governance structure
  • Board of Directors
  • CEO
  • Key management functions
  • Role of appointed actuaries
  • External audit - appointment of statutory auditors
  • Disclosures
  • Relationship with stakeholders
  • Interaction with the Supervisor
  • Whistle blower policy

The new guidelines replaced the existing guidelines on corporate governance, with effect from April 1, 2016.

Initial Public Offerings (“IPO”) By Indian Insurance Companies

With a view of capital raising from the public markets by insurance companies, the IRDAI notified the IRDAI (Issuance of Capital by Indian Insurance Companies Transacting Life Insurance Business) Regulation, 2015 ("IRDAI Issuance of Capital by Life Insurance Companies Regulations") and IRDAI (Issuance of Capital by Indian Insurance Companies Transacting other than Life Insurance Business) Regulation, 2015 ("IRDAI Issuance of Capital by other than Life Insurance Companies Regulations" and together with IRDAI Issuance by Life Insurance Companies Regulations, as "IRDAI Issuance of Capital Regulations"). The IRDAI Issuance of Capital Regulations prescribe conditions applicable to and manner and procedure to be followed by an Indian insurance company proposing an IPO which are required to be complied with in addition to other applicable laws including the Companies Act, 2013, as amended and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended ("SEBI ICDR Regulations"). In addition to compliance with the eligibility requirements set out under the SEBI ICDR Regulations, insurance companies are required to fulfil any lock-in requirements imposed on the promoters or investors of the company under the certificate of registration issued by IRDAI. Further, the IRDAI Issuance of Capital Regulations requires that certain approvals be obtained from the IRDAI in connection with the IPO.

Guidelines on Cross Border Reinsurers

In January, 2016 IRDAI issued guidelines on Cross Border Reinsurers (“CBR”) which supersede the existing guidelines issued by the IRDAI in the past. Release of these new guidelines discontinues with the existing process of annual allotment of Unique Identifying Numbers’, issued by the Indian Regulatory and Development Authority (IRDA), to cross border reinsurers. However, the cross border reinsurer still has to submit an information sheet to the IRDAI, through an insurer (for the purpose of these guidelines insurer means all Indian general insurance companies, stand-alone health insurance companies, GIC Re and branches of Lloyds and other foreign reinsurance companies who have been licensed by the IRDA to set up a branch office in India). The insurer shall file the information sheet through an online portal available on the IRDAI website. A filing reference number shall be created automatically, on successful filing of the CBR information sheet.

Regulations on Registration and Operation of Lloyd’s India

In March, 2016 the IRDAI released regulations on the Insurance Regulatory and Development Authority of India (Lloyd’s India) Regulations, 2016 ("Regulations"). As per the Regulations, Lloyd’s India will be subject to the same eligibility criteria and two-stage registration process as is in place for branches of foreign reinsurers under the IRDA (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations, 2015. The minimum assigned capital to be infused into Lloyd’s India is pegged at INR 1 billion and the requirement for minimum net own funds is set out to be INR 50 billion.

Members of Lloyd’s UK that intend to become Members of Lloyd’s India are required to notify the IRDAI through Lloyd’s India in the prescribed form. Syndicates of Lloyd’s UK that intend to become a syndicate of Lloyd’s India are required to apply along with the Service Company to the IRDA through Lloyd’s India. In a manner akin to the framework governing foreign reinsurers seeking to establish branches. The IRDAI will issue a joint certificate of registration to the service company and syndicate which shall be valid for three years.

Managing Agents of Lloyd’s UK and Indian companies may apply to the IRDAI to set up service companies, with indications as to the syndicates that it may or may not represent. Service companies are required to complete the Lloyd’s, UK Service Company Coverholder Undertaking and the Lloyd’s UK Coverholder Decision Paper (“Decision Paper”). Subsequent to completing the decision paper, the service company is required to perform Lloyd’s UK Service Company Self-Assessment against the Lloyd’s UK Minimum Standards.

Every syndicate is required to maintain, through the service company, a minimum assigned capital of INR 50 million. The syndicates may accept business ceded by Indian insurers as well as inward reinsurance business from a syndicate or company outside of India that transfers a risk exposure under a reinsurance contract.

IRDAI (General Insurance - Reinsurance) Regulations, 2016

The IRDAI has revised its regulations for the reinsurers, giving preference to public sector reinsurer GIC Re in the domestic insurance sector.

The current regulations have clearly defined the order of preference to be adhered to by every Indian insurer. As per the regulations “every Indian insurer has to offer its reinsurance business to an Indian reinsurer and then to other reinsurers like foreign reinsures which are having branches in India, Lloyd’s and reinsurers which are having branches in special economic”.

Conclusion

Following the recent amendments to the Insurance Act 1938, through the Insurance Laws (Amendment) Act 2015, the Indian insurance industry is currently witnessing a plethora of reforms which are targeted, to a large extent, at promoting insurance business in India and attracting foreign investment in the insurance sector. However, systematic and gradual changes will still be required to simplify the obligations imposed on the foreign insurers. For instance under, the IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd's) Regulations, 2015, the onerous requirements on the foreign reinsurers of setting up of their claim settlement, risk management and investment teams in India and preferential treatment given to the public sector reinsurers under IRDAI (General Insurance - Reinsurance) Regulations, 2016, has greatly impacted the moral of foreign reinsurers who had already applied for a license with the IRDAI, awaiting the final approval to start their businesses in India.

Expected liberalised regulatory norms in the in near future for reinsurers and insurers would significantly pave the way for a positive sentiment and inclination of the foreign reinsurers to tap into the insurance market in India.