Evolving Insurance Landscape in IFSC

The Gujarat International Financial Tec-City (“GIFT City”) in Gandhinagar, Gujarat, is India’s first operational greenfield smart city, housing a domestic tariff zone and an International Financial Services Centre (“IFSC”) in a Multi-service Special Economic Zone (“SEZ”). As part of developing India’s very own and first IFSC, both Indian and foreign entities are permitted to establish and operate IFSC Insurance Offices (“IIO”) from GIFT City, upon obtaining the requisite approvals. The IIOs have the advantage or the ability to transact in freely convertible foreign currencies in offshore markets, while being situated within the territorial borders of India. From 2015 to early 2020, the Insurance Regulatory and Development Authority of India (“IRDAI”) issued guidelines for IIOs (“IRDAI IIO Guidelines”). Thereafter, pursuant to the International Financial Services Centres Authority Act, 2019, the International Financial Services Centres Authority (“IFSCA”) was empowered on October 1, 2020 as the unified regulator with wide powers to develop and regulate financial products, financial services, and financial institutions in IFSCs, including IIOs.

Major Developments in Insurance Regulation in IFSC

In October 2021, the IFSCA notified the IFSCA (Registration of Insurance Business) Regulations, 2021 (“IIO Regulations”) superseding the IRDAI IIO Guidelines. The IIO Regulations provide for eligibility criteria, process of application for registration, permissible activities by an IIO and other incidental matters. The Regulations permit the following to apply for an IIO:

Applicant Permitted Structure Additional Conditions
Insurer registered with the IRDAI Branch office Prior IRDAI No-Objection Certificate (“NOC”)
Foreign insurer Branch office Registration of the entity in its home country* and a NOC from the home country regulator
Foreign Reinsurer Branch office Registration of the entity in its home country* and a NOC from the home country regulator
Branch office of a foreign insurer or Lloyd’s society registered with IRDAI Branch office Registration of the entity in its home country* and a NOC from the home country regulator
Indian Public Company Public Company incorporated under the Companies Act, 2013
Wholly owned subsidiary of a foreign or Indian insurer or reinsurer Public Company incorporated under the Companies Act, 2013
Insurance Co-operative Society registered under the Co-operative Societies Act, 1912 Co-operative society registered under the Co-operative Societies Act, 1912
Body corporate incorporated outside India not in the nature of a private company Public Company incorporated under the Companies Act, 2013 as a wholly owned subsidiary Registration of the entity in its home country*
Managing General Agent having a binding agreement with a foreign insurer or reinsurer Branch office Registration of the entity in its home country* and a NOC from the home country regulator

* The home country should be a country which has signed a double taxation avoidance agreement with India

The Regulations inter alia provide for the following:

a. An IIO can conduct its business in a freely convertible foreign currency other than the Indian Rupee;

b. A registered IIO (not engaged in reinsurance) is permitted to engage in business from the IFSC, SEZs and any country outside India;

c. An IIO engaged in reinsurance business may accept reinsurance business from cedants based in the IFSC; or from Indian insurers in accordance with order of preference prescribed by the IRDAI;

d. An applicant willing to set up a branch office in IFSC is required to earmark USD 1.5 million as assigned capital and may maintain solvency margin in its home country as prescribed by the home country regulator;

e. An IIO which is set up in an incorporated form is required to have a paid-up capital as prescribed under the Insurance Act, 1938 (“Act”) and shall maintain a solvency margin as prescribed by the IFSCA.

On October 27, 2021, the IFSCA issued the Guidelines on Operations of IIOs (“Guidelines”). The Guidelines inter alia provide for operational aspects of an IIO including corporate governance norms, settlement of claims, reinsurance, maintenance of books of accounts and appointment of a principal officer.

On July 4, 2022, the Central Government has notified the non-application of various provisions of the Act to SEZ and IFSC (“Notification”).[1] The Notification brings about a paradigm shift in the manner insurance companies are regulated in the IFSC. The Notification inter alia exempts IIOs from the mandate of Section 101A of the Act, which provided for insurers to compulsorily place certain risks with an Indian reinsurer. The Notification further amends the investment regime applicable to IIOs allowing greater flexibility in investment by IIOs. The extant regime of Sections 27 to 27E of the Act governing investments by insurers in India has been, in effect, nullified for IIOs. The IIOs are required to comply with only two conditions:

  1. An IIO is not allowed to invest more than five percent of its assets in a body corporate which is owned or controlled by the promoters of the IIO; and
  2. All investments by an IIO must be held free of any encumbrance.

Apart from these, the IFSCA has been given broad power to regulate investments by an IIO, but is yet to come out with regulations for investment norms of IIOs. In the absence of any specific investment related regulations by the IFSCA, the IRDAI (Investment) Regulations, 2016 will apply to IIOs along with provisions of Act.[2]

Insurance Opportunities in GIFT

With the flexibility accorded to IIOs in the manner set out above, IFSC can become an attractive destination for the following insurance products:

a. Global life insurance policies for resident Indians (frequent travellers), premiums being subject to limits prescribed under the liberalised remittance scheme;

b. Insurance investment plans for non-resident Indians (“NRI”) or non-Indians – Owing to the products being dollar derived, the policyholders would be protected from currency depreciation risk. Further, this can also be used as a hedging instrument by NRIs wishing to return to India in the future;

c. General insurance for industry- Various Indian companies engaged in specialised engineering products obtain general insurance policies from insurers outside India. Such products can be distributed through IFSC at competitive prices due to applicable tax incentives;

d. Trade credit insurance- With aircraft leasing and shipping business picking up in IFSC, avenues of trade credit insurance and aviation insurance can be explored;

e. Cross border reinsurance- Under the order of preference for obtaining reinsurance by Indian general insurance companies as provided by the IRDAI, IIOs are given a preference over cross border reinsurers giving IIOs a competitive edge over cross border reinsurers.

f. A committee was appointed to develop IFSC as a global hub for insurance. On October 14, 2021, the committee submitted its report to the IFSCA. The committee recommended introduction of captive insurers, promoting aviation insurance, premium financing and develop alternative risk transfer solutions including catastrophe bonds.

Conclusion

Currently, there are four insurers who have set up operations in IFSC, including insurers from the public and private sector.[3] With the extant ease of business, the insurance sector in IFSC has many growth opportunities even in its evolving stage. Since it is an underexplored avenue, the barrier to entry and operation is relatively low.

The class of expected policyholders is significantly different for IIOs and Indian insurers. While the former would cater to body corporates and high net-worth individuals, the latter have a larger policyholder base in India with increasing focus on insurance penetration. Accordingly, the IIOs have been given greater flexibility in market access, investment norms and product structures when compared to Indian insurers.

With the fast-paced changes in the regulatory environment, the IFSC is set to become a global insurance hub connecting the insurers and reinsurers to Asian markets providing the necessary infrastructure, policy support and tax incentives.

Disclaimer

This note only provides information on IFSC in India and the insurance activities being permitted thereunder. The note is for informational purposes only. The information and/or observations contained in this note do not constitute legal advice and should not be acted upon in any specific situation without appropriate legal advice.


[1] Notification S.O. 3035(E) dated July 4, 2022.

[2] Section 34 of the International Financial Services Centres Authority Act, 2019.

[3] List of registered insurers and reinsurers available at https://ifsca.gov.in/InsuranceAndReinsuranceCompanies#

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Photo of Indranath Bishnu Indranath Bishnu

Partner in the general corporate practice at the Mumbai office of Cyril Amarchand Mangaldas. Indranath advises on foreign direct investments, mergers and acquisitions and joint ventures and specializes in the Insurance industry. He has advised multiple corporations, both Indian and foreign, in relation…

Partner in the general corporate practice at the Mumbai office of Cyril Amarchand Mangaldas. Indranath advises on foreign direct investments, mergers and acquisitions and joint ventures and specializes in the Insurance industry. He has advised multiple corporations, both Indian and foreign, in relation to the establishment, operation, management and control of insurance companies in India. Pursuant to the amendments of the Insurance Act as well as the Foreign Investment Policy relating to the insurance sector in 2015, Indranath has been involved in multiple deals involving the entry, exit and increase of ownership of stakeholders in the said sector.

He also advises on mergers and acquisitions in other financial services sectors such as mutual funds, credit information companies, commercial banks, credit card companies, and payment and settlement systems. Other sectors that he has advised in include civil aviation, retail, consumer goods and services, and real estate. He can be reached at indranath.bishnu@cyrilshroff.com

Photo of Soumyaditya Dasgupta Soumyaditya Dasgupta

Associate in General Corporate practice at the Mumbai office of Cyril Amarchand Mangaldas. Soumyaditya advises on mergers and acquisitions, foreign direct investments and joint ventures with special focus on the insurance space. He can be reached at soumyaditya.dasgupta@cyrilshroff.com

Photo of Shravan Belsare Shravan Belsare

Associate in General Corporate practice at the Mumbai office of Cyril Amarchand Mangaldas. Shravan advises on mergers and acquisitions with special focus on the insurance space and International Financial Services Centres in India. He can be reached at shravan.belsare@cyrilshroff.com