Shailaja Lall & Shivangi Talwarer
Some clarity has been provided on ‘services related or incidental to insurance business’ under the 2024 Amendment Bill which includes carrying on and transacting guarantee and indemnity business, managing, selling and realising any property
Merger or transfer of business between an insurer and any company not engaged in the insurance business proposed
Certain reforms under the 2022 Amendment Bill do not form part of the 2024 Amendment Bill including provisions in relation to ‘captive insurer’
The Department of Financial Services (DFS) in consultation with the Insurance Regulatory and Development Authority of India (IRDAI) and the industry has undertaken a comprehensive review of the legislative framework and has proposed amendments (2024 Amendment Bill) to the Insurance Act, 1938 (Insurance Act), the Insurance Regulatory and Development Authority Act, 1999 and the Life Insurance Corporation Act, 1956.
The 2024 Amendment Bill proposes to increase the foreign direct investment (FDI) limit in insurance companies up to 100% subject to the conditions as may be governed by applicable laws. The increase in FDI will enable foreign investors from entering the Indian market, without the requirement of forming a joint venture with an Indian partner.
With that said, it will need to be seen as to what are the conditions attached to an increase in FDI limit.
Previously, when the FDI limit had increased from 26% to 49%, it came with an added conditionality that all insurance companies should be ‘Indian owned and controlled’. As a result, many foreign investors were required to dilute their existing rights to ensure compliance with the ‘Indian control’ criteria.
While certain foreign investors did increase their shareholding in insurance companies, however, the ‘Indian control’ requirement did disincentivise many investors.
In April 2021, the FDI limit was further increased from 49% to 74%. While the ‘Indian owned and controlled’ requirement was done away with in July, 2021, the increase in FDI limit to 74% came with certain additional conditions for insurance companies with more than 49% of foreign investment, which, inter alia, included at least 50% of the net profit for the financial year to be retained by the insurance company, in its general reserve, if: (A) for such financial year, dividend is paid on equity shares; and (B) at any time during the financial year, its solvency margin is less than 1.2 times the control level of solvency; and at least 50% of its directors to be independent directors.
If, however, the chairman of the board of directors is an independent director, only one-third of the board of directors will need to consist of independent directors.
Similarly, when FDI was increased in 2019 to 100% for the insurance intermediaries, additional conditions were imposed for insurance intermediaries with majority shareholding of foreign investors and such requirements were seen as onerous by many foreign investors and despite liberalisation the sector did not see much traction or inflow of foreign investment.
The eventual success of 100% FDI in insurance companies will depend upon how well the regulatory framework supports this transition and the practicality of any conditions imposed on foreign investors and insurance companies.
Further, the definition of ‘insurance intermediary’, has been expanded to include managing general agents (MGAs) and insurance repositories. Inclusion of MGAs could lead to specialized and diverse products, designed to address specific market needs not fulfilled by traditional insurers. MGAs could also provide innovative insurance solutions and enhance insurance penetration.
Previously, DFS had also suggested changes to the Insurance Act in November of 2022 (2022 Amendment Bill), under which, it had been proposed that insurance companies could undertake ‘services related or incidental to insurance business’ and may distribute other financial products.
Some clarity has been provided on ‘services related or incidental to insurance business’ under the 2024 Amendment Bill which includes carrying on and transacting guarantee and indemnity business, managing, selling and realising any property which may come into the possession in satisfaction of claims etc, however, distribution of financial products does not form part of ‘incidental business’.
The exact scope of such functions proposed to be carried out by the insurers should be clearly delineated and clarity should be provided on the nature of ‘guarantee and indemnity’ business as it would typically fall within the contours of insurance business.
Further, it may also be clarified as to whether such additional activities can be carried out by insurance intermediaries as well.
DFS has also proposed to permit a merger or transfer of business between an insurer and any company not engaged in the insurance business. The proposal comes after years of deliberation on the subject matter and the regulatory framework could ease consolidation in the sector.
Other notable proposals include that an insurance agent can act for more than one class of insurer, net owned funds of foreign re-insurers to be reduced to INR 1000 crores from the existing requirement of INR 5000 crores and reduced capital requirements of insurers to no less than INR 50 crores for any class of insurance business serving underserved or special segments.
Certain reforms under the 2022 Amendment Bill do not form part of the 2024 Amendment Bill including provisions in relation to ‘captive insurer’ (i.e., an insurer carrying on the class of general insurance business or any of its sub-classes exclusively for its holding company or its subsidiary company or its associate company), the construct of an insurer undertaking a ‘sub-class’ of general insurance business (such as fire, marine and miscellaneous sub-classes under the general insurance class, etc.).
Further, few proposals under the 2022 Amendment Bill continue to find their way in the recent amendments which include prior approval of the IRDAI for any transfer or issuance of shares exceeding five percent of the capital of the insurer, instead of one percent as is currently prescribed under the Insurance Act.
The requirement for the 3 years’ validity period of registration for insurance intermediary is proposed to be done away with and the registration will remain in force subject to payment of an annual fee until the registration is cancelled or suspended.
Having said that, the 2024 Amendment Bill additionally requires all existing registered insurance intermediaries within a period of 3 months from the commencement date of the Insurance Laws (Amendment) Act, 2024 to apply to the IRDAI for continuation of their registration.
This could lead to an additional compliance burden on the registered intermediaries, who would have already obtained fit and proper approvals from the IRDAI.
It is also proposed that the IRDAI may in consultation with the Central Government and the Insurance Advisory Committee, make regulations on identified matters under the Insurance Act.
Additionally, insurers and insurance intermediaries could be liable for non-compliance with the provisions of the Insurance Act and the regulations thereunder for up to INR 10 crores. This is a substantive increase from the present maximum penalty of INR 1 crore.
The proposed changes seek to alter the basic structure of the insurance landscape in India.
The Indian insurance sector is currently restrictive, and the proposed reforms, if implemented, will facilitate entry of new players and make the sector more attractive for investments.
The changes can be expected to be the start of a far-reaching regulatory overhaul and in continuation of IRDAI’s objective move towards a principle-based regulatory regime as opposed to a rules-based approach, thereby providing more flexibility to all stakeholders in the insurance sector.
The authors are Partners with Shardul Amarchand Mangaldas & Co