REGULATORY UPDATES REVISED GUIDELINES FOR CORPORATE GOVERNANCE FOR INSURERS IN INDIA ISSUED The Insurance Regulatory Development Authority of India ("IRDAI") has, by way of a circular dated 18 May, 2016 issued revised Guidelines for Corporate Governance for insurers 1 in India ("CG Guidelines"). The CG Guidelines are intended to align corporate governance norms in the insurance sector with the (Indian) Companies Act 2013 ("Companies Act"). The CG Guidelines, amongst others, prescribe 'fit and proper' criteria for selection of the Board of Directors of an insurance company, mandate establishment of various committees for the discharge of significant corporate responsibilities, and provide for certain mandatory reporting and disclosure requirements for insurers. The key norms introduced by way of the CG Guidelines are highlighted below. 1. Lock-in Period - The IRDA has prescribed a minimum lock-in period of 5 years from the date of certificate of commencement of business of an insurer for the promoters of such insurer. During such lock-in period, the promoters are not permitted to transfer their shares in the insurer without the specific approval of the IRDAI. 2. Compliance with "Indian owned and controlled" requirement Insurers are required to demonstrate through express provisions in the agreements between promoters/shareholders and/or the Articles of Association of the insurer that the "ownership" as well as "control" rests with resident Indian citizens. By way of illustration, Indian ownership and control may be demonstrated by ensuring, amongst others, that 2 : the board of directors of the insurer comprises of a majority of directors (excluding independent directors) nominated by the Indian promoter(s) or the Indian investor(s); the presence of a majority of the directors nominated by the Indian promoter(s) or Indian investor(s) is required to constitute "quorum" whether or not the nominees of the foreign investor are present. 3. Board composition - The board of directors of an insurer is required to have a minimum of 3 independent directors. This requirement is relaxed to 2 independent directors, for the initial 5 years from grant of certificate of registration to an insurer. Additionally, in line with the Companies Act 3, the CG Guidelines mandate every insurer to have at least 1 woman director on their board of directors. 1 Under the Insurance Act, an "insurer", inter alia, means an Indian insurance company and a foreign company engaged in re-insurance business through a branch established in India. 2 As specified in the 'Indian Owned and Controlled Guidelines' dated 19 October, 2015 issued by the IRDAI which clarify the "Indian owned and controlled" requirement for Indian insurers. 3 Section 149. Page 1
4. Conflict of interest role of the Board of Directors - Insurers are to establish adequate systems, policies and procedures to ensure compliance with the provisions of the Companies Act in relation to transactions with 'related parties' 4 and disclosure of interest by directors. For this purpose, the board of directors of an insurer is required to formulate a policy providing for the following: (c) (d) definition of transactions in the 'ordinary course of business' giving examples specific to the insurance company; method of determining arm's length pricing; list of items requiring approvals from various authorities including the board of directors and shareholders; and any other matter relevant to related party transactions. The CG Guidelines provide, by way of an example, that in case of cover given by an insurance company to its group companies, the premium quoted by such companies under the Guidelines of the IRDAI on File & Use must be considered at arm's length. 5. Establishment of committees: Every insurer 5 is required to mandatorily constitute, inter alia, the following committees in accordance with the Companies Act: (c) Audit Committee - to oversee financial statements, financial reporting, statement of cash flow and disclosure processes on annual and quarterly basis. The Audit Committee must comprise of a minimum of 3 (three) directors and the Chairperson must be an Independent Director with accounting/finance/audit experience. Investment Committee to recommend investment policy and lay down the operational framework for the investment operations of the insurance company. This Committee must, amongst others, comprise of the CEO, CFO, Chief of Investment and Chief Risk Officer. Policyholder Protection Committee 6 for ensuring, amongst others: (i) effective redressal of complaints and grievances of policyholders including mis-selling by intermediaries; (ii) compliance with statutory requirements as laid down in the regulatory framework; and (iii) ensuring adequacy of disclosure of material information to policyholders. The Committee is required to be headed by a Non- 4 Under the Companies Act, 'related party', with reference to a company, has been defined, amongst others, to mean: (i) a director or his relative; (ii) a key managerial personnel or his relative; (iii) a firm, in which a director, manager or his relative is a partner; (iv) a private company in which a director or manager is a member or director; (v) any company which is: (A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary. 5 Branches of foreign reinsurers are not required to set up the mandatory committees. 6 Reinsurance companies are not mandatorily required to set up this Committee. Page 2
Executive Director and must include experts and representatives of customers to enable insurers to formulate policies and ensure compliance. (d) Corporate Social Responsibility (CSR) Committee The CSR Committee would need to be set up only by those insurance companies which earn a net profit 7 of INR 50,000,000 or more during the preceding financial year. The Board of Directors of the insurance company would need to ensure that the company spends at least 2% of the three years' average net profits on CSR activities. Such spending must not be charged to the policyholders' account. 6. Reporting and compliance Insurers are required to ensure compliance with the CG Guidelines within 3 months from the date of their notification 8. Each insurer is required to designate a Company Secretary as the Compliance Offer whose duty would be ensure compliance with the CG Guidelines. There are broadly 2 (two) levels of reporting compliance: the Compliance Officer is required to separately certify the Annual Report of the insurer in the format prescribed; and all insurers are required to file a report on the status of compliance with the CG Guidelines on an annual basis (i.e., within 3 months from end of each financial year, before 30 June), in the format prescribed. EXPOSURE DRAFT OF INSURANCE E-COMMERCE REGULATIONS, 2016 The IRDAI has, by way of a circular dated 7 June, 2016, issued an exposure draft of the IRDAI (Insurance E-Commerce) Regulations, 2016 ("Draft E-Commerce Regulations") prescribing norms for selling and servicing of insurance policies through e-commerce platform, the Insurance Self-Network Platform ("ISNP"). The ISNP will be an e-commerce platform which may be set up by defined set of participants such as insurers, insurance agents 9 and insurance intermediaries with the prior permission of the IRDAI. The key reforms proposed under the Draft E-Commerce Regulations are set out below. 1. The ISNP can be made available as an internet web-site, a mobile application or both subject to meeting the requirements set out in the Draft E-Commerce Regulations. 7 'Net Profit' has been defined under Para 7.6 of the CG Guidelines to mean the 'profit/(loss) before tax' as per an insurer's financial statements prepared in accordance with the Insurance Act and the regulations thereunder, which must not include the following, namely: (i) any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and (ii) any dividend received from other companies in India, which are covered under and complying with the relevant provisions of the Companies Act. 8 Where compliance is not possible within such period, insurers are permitted to write to the IRDAI for further guidance. 9 The ISNP used by an insurance agent will be treated as that of an insurer, and the insurer will be responsible for complying with such Regulations. Page 3
2. Creation of an e-insurance account in accordance with the relevant guidelines of the IRDAI will be mandatory before selling insurance policies on the ISNP. 3. Premiums will be permitted to be paid online through net banking, credit card/debit card and any other modes prescribed by the Reserve Bank of India. 4. Insurers will be permitted to decide the price of each product and in the process, will need to ensure that pricing is in compliance with the product filed with IRDAI. Insurers may offer different pricing for the same product when sold through the ISNP. EXPOSURE DRAFT OF INSURANCE WEB-AGGREGATOR REGULATIONS, 2016 The IRDAI has, by way of a circular dated 7 June, 2016, issued an exposure draft of the IRDAI (Insurance Web-Aggregator) Regulations, 2016 ("Draft WB Regulations") 10 inviting comments from stakeholders by 20 June, 2016. The Draft WB Regulations seek to introduce stricter requirements/compliances for web aggregators. Some of the key changes proposed include: 1. increase in the paid up capital requirements and net worth for a web-aggregator, from the existing INR 1,000,000 to INR 2,500,000; 2. increase in the foreign investment in a web aggregator from 26% to 49% subject to them being Indian owned and controlled (in the same manner as insurance companies); 3. requirement of prior approval of the IRDA where: any transfer of the total paid up equity capital/contribution of a transferee in the shares of a web aggregator is likely to exceed 5% of the paid up equity capital of the insurer; and the nominal value of shares intended to be transferred by an individual, firm, group under the same management jointly or severally exceeds 1% of the paid up capital or contribution. 4. prohibition on a promoter in a web aggregator from being a promoter in another web aggregator; 5. prohibition on an investor from individually holding more than 10% of the paid up equity capital of a web aggregator, where there are more than one investors. Further, prohibition on all investors jointly holding more than 25% of the paid up equity capital of a web aggregator; and 10 The Draft WB Regulations are intended to supersede the existing the Insurance Regulatory and Development Authority (Web Aggregators) Regulations, 2013. Page 4
6. permission to web aggregators to sell insurance online in accordance with E-Commerce Regulations For inquiries/queries please contact insurancenewsletter@phoenixlegal.in PHOENIX LEGAL NEW DELHI Second Floor, 254 Okhla Industrial Estate, Phase III, New Delhi 110 020 T +91 (0) 11 4983 0000 F +91 (0) 11 4983 0099 MUMBAI Vaswani Mansion, Office No.17 & 18, 3rd Floor, 120 Dinshaw Vachha Road, Churchgate, Mumbai 400020 T +91 (0) 22 4340 8500 F +91 (0) 22 4340 8501 CHENNAI Seethakathi Business Centre, 9th Floor, Office Number 2B # 684-690, Anna Salai, Chennai-600 006 T+91 (0) 44 28294626 Disclaimer: The contents of this newsletter are intended for information purposes only, and parts of this newsletter are based on news reports and have not been independently verified. The newsletter is not in the nature of a legal opinion or advice. The contents of the newsletter may not encompass all possible regulations and circumstances applicable to the subject matter and readers are encouraged to seek legal counsel prior to acting upon any of the information provided in this newsletter. Phoenix Legal neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this newsletter. This newsletter is the exclusive copyright of Phoenix Legal and may not be circulated, reproduced or otherwise used by the intended recipient without the prior permission of its originator. Phoenix Legal 2016 Page 5