Introduction
The insurance sector was opened for private players in 2000. Since then the insurance penetration1 and insurance density2 has been significantly growing in India. As per the latest data released by Insurance Regulatory and Development Authority (“IRDA”), insurance penetration has increased to 5.20% (in which life insurance contributes to around 4.60% and non-life insurance contributes to about 0.6%). The insurance density has grown to USD 54.3 (in which life insurance contributes to around USD 47.7 and non-life insurance contributes USD 6.7) from USD 9.9 in 2000.3 The sector is also open to foreign investment but has a cap of 26%, however, the Insurance Laws (Amendment) Bill, 2008 (passed by the Rajya Sabha and awaiting the approval of Standing Committee on Finance) proposes to raise it to 49%.
IRDA as the principal statutory body to regulate and develop the insurance industry in India has periodically introduced an array of progressive policies and regulations with a motive to augment investment in the sector. The recent measures have been in a wide range of activities including regulatory, M&As, licensing, IPO norms, corporate governance and several new areas of insurance that are growing steadily. This bulletin discusses some of these changes and its overall impact on the sector.
1.M&A norms for general insurers
The first crucial development has been the issuing of the IRDA (Scheme for Amalgamation and Transfer of General Insurance Business) Regulations 2011 (“Regulations”) to govern M&A in general insurance space. The Regulations prescribe a three-fold approval/notification process applicable to all private general insurers with effect from May 31, 2011, but it does not remove the requirement of other statutory approvals. M&A of insurance companies would still be governed by the provisions of the Companies Act, 1956 (“Companies Act”) and require a sanction from the relevant courts to become effective. Moreover, in case the merger or amalgamation crosses the prescribed monetary threshold under the CCI (Procedure in regard to transaction of business relating to combination) Regulations, 2011 (“Combination Regulations”), it would also require an approval from the Competition Commission of India (“CCI”).
As a first step, a “notice of intention” is to be filed with IRDA before an application is made for implementation of the scheme. Along with such a notice, reports are to be filed on the manner in which the interest of all policyholders would be protected and on
compliance with all applicable laws including the Competition Act, 2002. The second step involves seeking of an “in-principal approval” from the IRDA before an application is made to the courts for the sanction of the merger/amalgamation scheme or to that matter any other regulatory authority. While granting such an approval, IRDA may recommend changes to the scheme, and the terms and the nature of the scheme are then required to be published in one national daily and one vernacular newspaper. Finally, pursuant to approval from the court and other regulatory authorities, “final approval” is to be sought from the IRDA. The effective date of the amalgamation or transfer of general insurance business would be the one as specified by the IRDA while grating its “final approval.”
The fee for the above filings ranges from USD 10,000 to USD 100,000(approx) which clubbed with fees for securing other regulatory approvals would put a crunch on the pockets of the transacting parties. Moreover, there is no time-line prescribed for grant of approvals which would leave the parties wondering about the consummation of the transaction. IRDA is also required to harmonize its “final approval” with the relevant provisions of the Companies Act, which mandates for a filing with registrar of companies within 30 days of the court order for the scheme to become effective. It would also be preferable that CCI and IRDA provide for a “single-window clearance” in case the proposed merger or amalgamation also requires a filing under the Combination Regulations.4
2.Draft IPO norms for life insurance companies
To provide capital resource options for life insurance companies, IRDA had released draft IRDA (Issues of Capital and Disclosure Requirements for Life Insurance Companies) Regulations, 2011 (“IPO Regulations”) on June 21, 2011. IPO Regulations provide an option for public issue by life insurance companies within the term of SEBI (Issues of Capital and Disclosure Requirements) Regulations, 2009, provided they have completed 10 years from the date of commencement of operation. The issue or allotment of capital under the IPO Regulations is required to be done only as fully paid up equity shares. A prior approval from IRDA is mandatory for filing the draft red herring prospectus with SEBI to go public. Before granting approval, IRDA shall verify if the applicant has (i) satisfactory regulatory record with them; (ii) maintained the prescribed regulatory solvency margin as at the end of preceding six quarters; (iii) embedded value of at least twice the paid up capital; and (iv) complied with the corporate governance guidelines issued by IRDA. In addition, the applicant’s record of protection of policy holders and the pendency of the policyholder complaints should be satisfactory.
The 10 year business operation criterion would only see a few life insurance companies getting listed, as only a handful have such a long track record. Moreover, as the industry awaits the notification of the final IPO Regulations, media reports and our informal discussion with IRDA officials suggest that the insurance regulator might make it mandatory for all life insurance companies to go public. None of the existing laws in India puts such an onerous condition on companies in any sector. Hence, such a step by the insurance regulator
would require amendment to an array of laws.5 IPO norms for general/non-life insurers are also on the cards and would be released in early march next year.
3.Portability of health insurance policies
Another significant development is the “right of portability” that IRDA has vested in all policyholders of health insurance schemes w.e.f. October 1, 2011. The “right of portability” basically empowers a policyholder with the right to purchase a health insurance policy from another insurer or switch to another product of the same insurer, without losing the credit gained by the insured for pre-existing conditions and time bound exclusions. Putting it in simple terms, a policyholder will be able to carry over the waiting period with respect to pre-existing ailments. For instance suppose the waiting period for pre-existing ailments under the existing and the new health insurance policy (offered by a different insurer) is four years. Now, in case the policyholder shifts to the new health insurance policy after a year itself, the waiting period for the pre-existing ailment will be three years with the new insurer. This new flexibility provided by the insurance regulator is a boon for both the insurance companies and the policyholders, and would surely augment competition in the health insurance sector.
4.Corporate Governance Guidelines
In August 2009, the IRDA issued its Corporate Governance Guidelines for all insurers.6 These guidelines that came into force from April 1, 2010 are regularly updated7 and are to be necessarily complied with.8 These guidelines are supplementary in nature and in case of conflict between the guidelines and any other enactments; the provision of the other enactment is to prevail. According to the IRDA, insurers need a corporate governance framework that clearly defines roles, responsibilities and accountability within the organisation and that contains built-in checks and balances. These guidelines recommend the appointment of a board chairman with distinct executive and oversight responsibilities. They also stress the importance of complying with Clause 49 of the Listing Agreement, even before the insurers go public, so as to facilitate easy transition when they eventually get listed. IRDA has also made it mandatory for all insurers to file a report on status of compliance with these guidelines within 90 days of each financial year from the financial year 2010-11.
5.Emerging trends in the insurance sector
Most of the corporate houses today are increasingly exposed to a wide array of claims. This has led them to subscribe to a number of new corporate liability insurance covers such as Directors and Officers Liability (“D&O”) Insurance and Professional
Liability Insurance apart from established Public9 and Product10 Liability Insurances that they normally take. D&O Insurance is a means by which various companies try to indemnify their directors and managerial personnel who are prone to varied liabilities under the present era of stringent corporate laws and regulations.11 It is interesting to note that presently there is no legal stipulation which makes it mandatory for a company to take up a D & O policy, but a lot of companies have been opting for it to augment the confidence of their directors. Moreover, recently the Report of the Expert Committee on Company Law, has recommended that Companies Act should be specifically modified to provide for D & O Liability Insurance and the same stipulation has been added in Clause 175 (2) of the Companies Bill of 2009.
There is also increasing trend of reinsurance in the insurance sector, as a risk management technique, whereby a part of the risk exposure is transferred from the insurer to the reinsurer. Essentially, it is insurance for insurers made by ceding a part of the premium by the original insurer to the reinsurance for sharing the risk. This facility provides additional underwriting capacity, stability, protection, and loss prevention to the primary insurers.12
Conclusion
The insurance sector has witnessed exponential growth and the role of IRDA as a pro-active and forward looking regulator is worth praises. But still insurance sector in India is highly under-penetrated and capital-intensive. High investment, poor underwriting and lack of technical expertise are the major hurdles faced by insurance firms. These challenges have substantially slowed down the penetration level in the industry. There are still many people across the nation, who are either under-insured or uninsured and it will take huge capital and expertise to educate them. This would necessarily entail an increase in the FDI limit with notification of final IPO Regulations for all insurers at the earliest.
Author: Ankush Goyal
1 Insurance penetration is defined as the ratio of premium underwritten in a given year to the gross domestic product of the country
2 Insurance density is defined as the ratio of premium underwritten in a given year to the total population
3 Annual Report, 2009-2010, IRDA available at http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo984&flag=1&mid=Annu al%20reports%20%3E%3E%20Annual%20reports%20of%20the%20Authority
4 The Combination Regulations prescribe a maximum time-limit of 210 days in case a filing is done with the CCI. Thus, in case separate approvals are sought from IRDA and CCI, it can sometimes lead to delay of the proposed transaction to a commercially unviable point
5 Read Companies Act, SEBI Act, IRDA Act etc.
6 Circular number IRDA/F&A/CIR/025/2009-10 dated 05th August, 2009
7Circular numbers IRDA/F&I/CIR/F&A/014/01/2010 dated January 29, 2010 and IRDA/F&A/CIR/CG/081/05/2011 dated May 2, 2011
8 As discussed above, IPO Regulations mandate compliance with the Corporate Governance Guidelines before a life insurer plans to go public and get
9 Public Liability Insurance is a statutory requirement for every manufacturer dealing with hazardous materials under section 4(1) of the Public Liability Insurance Act, 1991
10 A Product Liability Insurance normally protects a manufacturer from claims with respect to any damage which his goods might cause to the user
11 For example under sections 69 (4) and 70 (4) of the Companies Act, a director is exposed to pecuniary liability for contravention done in allotment of shares. Similarly, under the Income Tax Act, 1961, a director is exposed to both civil and criminal liability
12 For a detailed analysis of the current legal framework and development of reinsurance sector in India, see Reinsurance: Ensures the “insured”! available at http://www.psalegal.com/upload/publication/assocFile/BankingLawsBulletin-IssueIX.pdf