The Insurance Laws (Amendment) Act, 2015 (Amendment Act), passed in March 2015, has brought in key changes in the insurance regulatory landscape that include increasing the FDI caps in insurance companies and intermediaries from 26% to 49%, permitting foreign reinsurers to open branch offices and allowing Lloyd’s of London to set up an Indian branch. Messrs Vineet Aneja, Uday Opal and Sachin Kumar of Clasis Law* explore.
While the changes in the Insurance Laws (Amendment) Act, 2015 (Amendment Act) have been incorporated in the primary insurance statute, ie, the Insurance Act, 1938 (Act), the Insurance Regulatory and Development Authority of India (IRDAI) will need to issue amendments to existing regulations or devise new regulations to bring finality to reforms brought in by the Amendment Act.
The IRDAI recently issued regulations on registration and operation of branches of foreign reinsurers (other than Lloyd’s) and a circular clarifying the concept of “Indian owned and controlled company” (a new requirement applicable to Indian insurers/intermediaries pursuant to the Amendment Act).
IRDAI clarification on definition of control
On 19 October 2015, the IRDAI issued a circular expounding on the concept of “Indian owned and controlled company” in context of the definition of an Indian insurance company (IIC) under the Act.
Pursuant to the Amendment Act, the definition of IIC was amended as a result of increase in the FDI limit. Apart from amending the definition of IIC to reflect the revised FDI limit the Amendment Act also added a requirement that the IIC must be “Indian owned and controlled, in such manner as may be prescribed”.
The circular attempts to provide clarity on what conditions need to be satisfied for an IIC to be deemed “Indian owned and controlled”. The circular is applicable to all IICs and insurance intermediaries, such as insurance brokers, third party administrators, surveyors and loss assessors. Existing companies have been given a period of three months to ensure compliances.
Brief overview of the clarification
The circular, while recognising that control can be exercised through various methods such as shareholding/voting rights or through an agreement (voting agreement or shareholders agreement), provides that the requirement of Indian ownership and control shall be deemed to be fulfilled only if the following conditions are met:
• The Indian shareholders have the right to nominate majority directors (excluding independent directors);
• The power to appoint key management personnel, such as chief executive officer and managing director, should vest with the board of directors or with the Indian shareholders;
• The board (with majority directors nominated by Indian shareholders) should have control over decision making in relation to significant policies of the IIC;
• In case the chairman of the board of directors has casting vote/veto powers then the right to appoint the chairman should be with the Indian shareholders; and
• A board meeting will be validly quorate only if the directors nominated by the Indian shareholders constitute majority of directors attending the board meeting. In fact, the circular goes on to state that presence of directors nominated by foreign shareholders will not be a requirement to constitute a valid quorum except where the meeting is being convened to discuss matters relating to foreign investors protective rights.
The circular mandates that all companies would be required to submit an undertaking, signed by the chief executive officer and chief compliance officer, confirming compliance with the provisions of the circular. It is not clear if this is a one-time filing or whether such filing would have to be made on an annual basis.
IRDAI regulations on branch offices of foreign reinsures
On 30 October 2015 the IRDAI released the eagerly awaited Insurance Regulatory Development Authority of India (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations, 2015 (Regulations).
Pursuant to the Amendment Act, the definition of “insurer” was amended to include a foreign company engaged in reinsurance business through a branch established in India. The Regulations are applicable to all foreign non-admitted reinsurers intending on setting up a branch office in India. The Regulations, however, do not cover the regulatory framework governing the setting up and operation of a Lloyd’s branch in India.
Brief overview of the regulations
In terms of the eligibility criteria, the Regulations require, inter alia, reinsurers to obtain prior approval or in-principle clearance from their home regulator, minimum net own funds of INR50 billion (US$749 million), a minimum credit rating which is having at least good financial security characteristics for the last three years from any international credit rating agency, the infusion of a minimum assigned capital of INR1 billion into the branch and proven experience in the reinsurance market for at least 10 years.
The regulations require reinsurers to opt any of the two categories for branch registration, ie, “Category I” branches whose order of preference is on par with Indian reinsurers and “Category II” branches that have a lower order of preference.
Category I branches are required to retain a minimum of 50% of their Indian insurance business. The minimum retention for Category II branches is pegged at 30%.
Significantly, the Regulations have laid down an order of preference to be followed by Indian insurers for placing their faculty and treaty surpluses. In this regard, the Regulations require Indian insurers to:
A. First offer the Indian Reinsurer (ie GIC Re), Category I branches or to other Indian insurers the opportunity to participate in their faculty and treaty surpluses
B. Approach Category II branches after having offered to at least three entities in (A) above
C. Approach the offices of insurers set-up in Special Economic Zones, only after having offered to at least three entities in each of (A) and (B) above
D. Offer the balance to overseas non-admitted reinsurers, only after having offered to at least three entities in each of (A), (B) and (C) above
Reinsurers interested in setting up a branch will need to go through a two stage application process.
In the first stage, the reinsurer will make a requisition for registration application in the prescribed form. This is a fairly detailed requisition form requiring, inter alia, details on the reinsurer’s ratings, its shareholders, net owned funds, solvency margin, previous years financial statements, amount of capital assigned for branch office, financial projections of the branch for five years, reinsurer’s past regulatory record, details on directors and CEO of the reinsurer and CEO, Chief Underwriting Officer and CFO of the branch office. The applicant is also required to submit along with the form copies of its constitutive documents, a statement indicating infusion of capital assigned to the branch, last five years’ annual reports and a certificate from home regulator that reinsurer has necessary permissions to open an Indian branch.
Upon acceptance of the requisition by the IRDAI, the applicant is required to apply to the chairperson of the IRDAI for grant of registration in the prescribed form that includes details of results of any market analysis carried out by them with respect to the branch, extensive details on the proposed investment operations of the branch, approach to underwriting, IT systems to be employed, internal controls, proposed expenses of administration and details on the nature of its reinsurance arrangements.
Mr Vineet Aneja is a Partner; Mr Uday Opal and Mr Sachin Kumar are Associates at Clasis Law.
* Clasis Law has an association with Clyde & Co which ensures that clients are given considered opinions on the legal and regulatory ramifications of doing business, both in India and internationally.