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Insurance Laws

Introduction

The Government of India, through the Department of Financial Services (Ministry of Finance) (“DFS”), is proposing extensive amendments to the Insurance Act, 1938 (the “Act”), with a view to enhance insurance penetration, improve efficiency, and enable product innovation and diversification[1]. The DFS published an office memorandum dated November 29, 2022 (“DFS Memorandum”), setting out the proposed amendments to the Act and commencing a process of public consultation on the proposed amendments until December 15, 2022. The Insurance Laws (Amendment) Bill, 2022 (the “Amendment Bill”), is seen to be catering to the long-standing demands of the industry and seeks to improve some of the fundamental tenets of the Act.

In this blog, we discuss the nature of changes. We see them as:

  1. Headline Items;
  2. Operational-level; and
  3. Miscellaneous Amendments/ Additions.

Headline Items

HeadingBrief ParticularsImplication/ Industry Impact
Minimum capitalisation requirementsThe Act presently prescribes the minimum capital for insurers of any class of business (INR 100 crore for life, general and health insurance businesses and INR 200 crore for reinsurance business).  

Vide the Amendment Bill[2], it is proposed to remove the minimum capitalisation requirements for insurers, with prescription being made under the regulations issued by the Insurance Regulatory and Development Authority of India (“IRDAI”).
The prescribed amount of minimum capital has been seen to create a barrier to entry into the insurance industry. Lowering such amount will give a boost to the industry as a whole and will also provide the avenue for smaller players to enter the industry.

Insurers are adopting a more virtual presence and are likely to have lesser physical footprint than traditional insurers have. For such “differentiated” insurers, having the same capital requirement as a traditional insurer may be seen as rather onerous.

Specialised Stand Alone Micro-Insurers (“SAMI”) can provide micro-insurance products to benefit people in rural areas as well as those engaged in the informal or unorganised sectors. Initial Capital requirements of such SAMIs are likely to be lesser than the current regulatory prescriptions. The Amendment Bill proposes to provide flexibility to IRDAI to prescribe different minimum capital based on class/ sub-classes of insurance businesses that the insurer is engaged in.
Composite insurance registrationThe proposed amendment to Section 3(2) of the Act indicates that an applicant may apply for registration of one or more classes/ sub-classes of insurance business of any category or type of insurer. However, an entity which seeks registration to undertake reinsurance business, is ineligible to seek registration of any other class or sub-class of insurance business.This move shall pave the way for a single insurance company to potentially undertake multiple classes/ sub-classes of insurance business (except reinsurance business).

It is yet to be seen whether the minimum capitalisation requirements will be enhanced by the IRDAI through regulations, for such composite insurers.

Other jurisdictions such as Singapore, Malaysia and the United Kingdom allow the operation of composite insurers.
Value Added ServicesIt is proposed to allow insurers to provide ancillary services which are related to the insurance business to policyholders. There is also a proposal to permit insurers to distribute other financial products as may be specified by regulations to be issued by the IRDAI[3].In the insurance industry, there is a compelling need for insurers to be customer-driven in their approach towards products and services and offer a range of value-added services to their customers in addition to the core insurance product.

Typically, value-added services include non-core services in an industry, or the enhancements made to the core product or service offered to customers. The United Kingdom permits both value-added services and cross-selling services by insurers. Singapore allows life insurers to provide financial advisory to its clients, while Malaysia allows life insurers to provide services incidental to the insurance business. Australian law, on the other hand, permits the conduct of business that is incidental to the insurance business of general insurers, however, life insurers are permitted only to carry out life insurance business.

While the regulations to be notified by the IRDAI shall detail the specifics, insurers may potentially be allowed to undertake distribution of other financial products such as debt instruments, mutual fund schemes, etc.  
Captive InsuranceThe Amendment Bill introduces the concept of a “captive insurer”, which shall be a general insurance company undertaking any or all sub-classes thereunder, exclusively for its holding/ subsidiary/ associate companies.  This move is likely to enable conglomerates and other corporate groups to incorporate a captive insurer to provide coverage for various business-related risks within their corporate groups.

Various emerging economies and developed nations (Singapore, Hong Kong, United States of America) have regulations in place which permit Captives to operate. Moreover, there are jurisdictions that have successfully developed a market for Captives, which are considered as tax-friendly domiciles to set up offshore business (example, Bermuda, Luxembourg and Cayman Islands).

Captives have the potential to play an important role in being the development catalyst for the insurance sector.

A case can be made from the Indian perspective to attract such Captives in a two-fold manner:
Allowing and permitting Captives taking up on-shore risks with a regime liberal than that of traditional insurers: The main beneficiaries of such change shall be Indian corporate groups, which predominantly have assets in India; and
Allowing and permitting Captives to take up risk all over the world (except India) through IFSC with a highly flexible regime: This can potentially bring business from certain multinational corporations and groups that seek tax efficiency over and above other benefits of Captives.
Simplifying Investment-related ConditionsThe proposed amendment to Section 27 of the Act and the deletion of Sections 27A, 27B, 27C and 27D and 31 of the Act result in the simplification of investment related conditions that are contained in the Act. The key conditions are set out below:  

Insurer needs to keep earmarked and invested assets of value not less than that of liabilities[4];

Insurer can invest up to 5% of earmarked assets in a company/ body corporate owned[5] or controlled[6] by promoter[7];

Investments need to be unencumbered; and

Period of holding, manner, limitations, and restrictions to be as per regulations[8]
While the proposal prescribes the boundary condition of investment by insurers in assets of value not less than the net liabilities of insurer to policyholders, the restrictions and conditions subject to which investments can be made by insurers shall be specified by the IRDAI as per regulations.

The cap of 5% on investments into group companies that are owned/ controlled by promoters of the insurers, which is already contained in the IRDAI (Investment) Regulations, 2016 (“Investment Regulations”), is proposed to be enshrined in the Act.

It remains to be seen whether the IRDAI will cater to the demands of the insurance industry and liberalise the investment regime by amending the Investment Regulations, including facilitating acquisitions/ subsidiarisation of insurtech companies.
Net-Owned Funds Requirement For Foreign ReinsurersIt is proposed to reduce the net-owned fund requirement for foreign reinsurers setting up branches in India from INR 5,000 crore to INR 500 crore[9].It appears that this amendment ties in with the proposed inclusion of Section 101A(7A), which imposes a duty on IRDAI to promote the development of reinsurance business in India through regulations.

This move is likely to open up opportunities for foreign reinsurers that are keen on setting up a reinsurance branch in India, but could not satisfy the high threshold for net-owned funds as currently prescribed.  
Differential Solvency MarginSubject to the IRDAI specifying the particulars in the regulations, it appears that the proposed amendment to the Act enables the possibility of a differential solvency margin regime[10]. The proposed addition of the proviso to Section 64VA(3) of the Act prescribes that in specifying the solvency margin, consideration may be given to the different classes and sub-classes of insurance business of an insurer.  Under the extant regulations issued by the IRDAI, the control level of solvency is specified as a solvency ratio of 150%. In light of the proposed amendment to Section 64VA(3) of the Act, the IRDAI has the power to set the control level of solvency higher or lower (and potentially be made proportionate to the class/ sub-classes of insurance businesses undertaken by an insurer), in light of the possibility of registration of composite insurers and differentiated insurers pursuant to the removal of minimum capital requirements, as discussed above.

The movement away from a one-size-fits-all approach is commendable and necessitated in light of the proposed amendment to Section 6 of the Act.

This is perhaps the initial step towards transition of the Indian insurance industry from a factor-based solvency regime to a risk-based solvency regime.    
Share Transfer ThresholdIt is proposed to increase the share transfer threshold for prior IRDAI approval in connection with transfer of shares of insurers, from 1% to 5% of the paid-up equity capital[11].  This proposal is seen to be bringing share transfer of insurers on par with the Reserve Bank of India’s prescription for banks.

This move also aligns with the business-friendly approach that the IRDAI is keen to show-case.

Snapshot of Operational-level Amendments to the Act

OPERATIONAL-LEVEL AMENDMENTS TO THE ACT
HeadingBrief Particulars
Specification of RemunerationThe IRDAI is empowered to specify the remuneration (commission or otherwise) that an insurer may pay for insurance business transacted, by regulations, thereby removing the concept of “limits” on commission payable[12].

This amendment facilitates the IRDAI’s proposal to link commissions payable by insurers to the expenses of management limits.
Annual Fees for Renewal of Validity of Insurance IntermediariesThe fixed validity period of insurance intermediary registration (typically three years under the relevant regulations governing the intermediaries) is proposed to be done away with.

Instead, it is proposed that the IRDAI may prescribe payment of annual fees for renewal of validity of registration on an annual basis[13].
Extension of Powers of IRDAI to include IntermediariesThe IRDAI’s powers to appoint staff for scrutiny of returns filed and issue directions, under Sections 33A and 34 of the Act, respectively (which were previously applicable only in respect of insurers), are now proposed to be made applicable to intermediaries as well[14].
Enhancement of Penalty for Certain ViolationsIt is proposed to increase the penalty amount to an amount not exceeding INR 1 lakh per day of non-compliance continuing or INR 10 crore (whichever is less), from the erstwhile prescription of penalty not exceeding INR 1 lakh per day of non-compliance continuing or INR 1 crore (whichever is less) for certain key non-compliances, such as for failure to:  

furnish document, statement, account, return or report to IRDAI;
comply with directions;
maintain solvency margin; and
comply with directions on insurance treaties[15].  
Restriction on Insurance AgentsIndividual insurance agents are restricted from acting for not more than one insurer carrying on insurance business in the same class/ sub-class of insurance business[16].
Previously, an insurance agent could act for one life insurer, one general insurer, one health insurer and one of each of the other mono-line insurers.

Snapshot of Miscellaneous Amendments/ Additions to the Act

MISCELLANEOUS AMENDMENTS/ ADDITIONS TO THE ACT
 1.Definitions of the inter alia following terms are proposed to be added to the Act: Personal Accident Insurance Business[17], Premium[18], Principal Officer[19], Sub-Class[20], Surveyor and Loss Assessor[21] and Travel Insurance Business[22].
 2.Definition of the term “insurance intermediary” under the Act was previously linked to the definition provided in the IRDA Act, 1999. However, it is now proposed to be included in the Act as an inclusive definition, which specifies only insurance and reinsurance brokers and corporate agents, while granting power to the IRDAI to separately notify the list of “intermediaries”. For instance, the IRDAI may designate an electronic insurance exchange in the form of “Bima Sugam”[23], as an “insurance intermediary” pursuant to a notification. 
3. No prior Central Government approval is required by the IRDAI for constituting an Advisory Committee pursuant to Section 101B of the Act.
4. Section 52A of the Act now empowers the IRDAI to supersede the Board of a life insurer, prior to the appointment of an Administrator, if it has reason to believe that the life insurer is carrying on business prejudicial to the interests of the policyholders.
 5.The IRDAI is empowered to suspend or cancel registration of an intermediary under various grounds, including but not limited to:  
contravention of the Act, IRDA Act, 1999, Companies Act, 2013, Foreign Exchange Management Act, 1999, Prevention of Money Laundering Act, 2002, etc.;
default in complying with directions/ orders passed by IRDAI;
failure to pay annual fees; and
failure to meet eligibility criteria[24].  
 6.Pursuant to the proposed amendment to Section 34A of the Act, which replaces reference to provisions under the Companies Act, 1956, with corresponding provisions of the Companies Act, 2013, there is further clarity that there is no requirement for an insurer to procure shareholders’ approval for appointment of its Managing Director.

Conclusion

The Amendment Bill is a progressive step in the evolution of the Indian insurance industry. The proposals contained in the Amendment Bill can be seen as facilitating the commitment of the IRDAI to enable “Insurance for All” by 2047 (i.e., 100 years of independent India)[25]. Further, we note from the minutes of the 118th meeting of the IRDAI, that the Chairperson of the IRDAI observed that there is a need to move from a rule based approach to a principle based approach in regulation and supervision of the insurance industry[26]. Such a movement from rule-based approach to a principle-based approach in regulation would also require amendments to the Act, without which the IRDAI may not be able to move in the envisaged direction, even if it wishes to do so.

If the Amendment Bill is tabled before both the Houses of the Indian Parliament during the Winter Session 2022, it is possible that these amendments may be made effective in FY2023-24. Tagging along with the proposals contained in the Amendment Bill, it will also be interesting to see the regulatory reforms which the IRDAI may bring about.


[1] Paragraph 1 of the DFS Memorandum

[2] Proposed amendment to Section 6(1) of the Act

[3] Proposed introduction of new Section 3AB to the Act

[4] “Liabilities” is defined as net liabilities of insurer to policyholders 

[5] Owned is defined to mean ownership of more than 50% of paid up share capital of a company

[6] Control is defined to mean the right to appoint majority of directors, control management or policy decisions of a company, including through voting/ shareholder arrangements

[7] The definition of “promoter” is aligned with the definition set out in Companies Act, 2013

[8] Proposed amendment to Section 27 of the Act and deletion of Sections 27A, 27B, 27C and 27D and 31 of the Act

[9] Proposed amendment to Section 6(2) of the Act

[10] Proposed amendment to Section 64VA(3) of the Act

[11] Proposed amendment to Section 6A(4)(b) of the Act

[12] Proposed amendment to Section 31B of the Act.

[13] Proposed amendment to Section 42D(4) of the Act. Further, as a transitory measure, annual fees for renewal of intermediary registration is not payable by insurance intermediaries for a registration which is in force at the time of effectiveness of the Amendment Bill, until completion of the unexpired period of validity.

[14] Proposed amendment to Sections 33A and 34 of the Act

[15] Proposed amendment to Section 102 of the Act

[16] Proposed amendment to Section 42(1) of the Act

[17] “personal accident insurance business” means effecting contracts of insurance that provide for payment of money in the event of death, disablement or hospitalisation arising on account of an accident

[18] “premium” means the amount paid or payable as consideration to the insurer for a contract of insurance

[19] “principal officer” means an officer of an insurer, authorized as such for the purposes of the Act

[20] “sub-class” of a class of insurance business means fire, marine and miscellaneous sub-classes of the class of general insurance business; personal accident and travel sub-classes of health insurance business and any other part or segment of a class of insurance business, specified by the IRDAI under section 2BA of the Act

[21] “surveyor and loss assessor” means a person who carries out any survey or loss assessment for insurers carrying on general insurance business, for a claim in respect of loss occurred in India

[22] “travel insurance business” means effecting of contracts of insurance that provide for sickness benefits or pay for medical and health expenses or payment of money in the event of death, disablement or hospitalization arising on account of an accident or for losses suffered, in the course of travel

[23] See: https://government.economictimes.indiatimes.com/news/healthcare/eying-digital-inclusion-irdai-plans-one-stop-bima-sugam-platform-for-all-insurance-solutions/95200873

[24] Proposed amendment to Section 42D(6) of the Act

[25] See: https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo4672

[26] Page 1 of the minutes of the 118th meeting of the IRDAI. See Chairperson’s address to the members of the IRDAI.

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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 Anirud Sudarsan R Anirud Sudarsan R

Senior Associate in General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. Anirud advises on mergers and acquisition, foreign direct investments, joint ventures, business transfers with special focus on the financial services sector, including in the insurance space. He can be…

Senior Associate in General Corporate practice in the Mumbai office of Cyril Amarchand Mangaldas. Anirud advises on mergers and acquisition, foreign direct investments, joint ventures, business transfers with special focus on the financial services sector, including in the insurance space. He can be reached at anirud.sudarsan@cyrilshroff.com