India: Insurance Reforms Notified

The amendments to the Insurance Act, 1938 (Insurance Act), including the increase of foreign investment ceiling in insurance companies from 26% to 49%, have come into effect from 26 December 2014. Although, the Insurance Laws (Amendment) Bill, 2008 (Insurance Bill) couldn't be taken up for discussions in the recently concluded winter session of the Parliament (which concluded on 23 December 2014), the Insurance Laws (Amendment) Ordinance, 2014 (Insurance Ordinance) was thereafter promulgated by the President of India and published in the Gazette of India on 26 December 2014.

Ordinance and its Validity

Under the Constitution of India, the President is empowered to promulgate ordinances when the Parliament is not in session. An ordinance has the same effect as any law passed by the Parliament but is required to be laid before both Houses of the Parliament and ceases to operate after six weeks from reassembly of the Parliament. Therefore, it imperative that the Insurance Ordinance is timely approved once the Parliament reassembles for its budget session (tentatively in February 2015). Although controversial, there have been instances of some ordinances being promulgated multiple times.

In our earlier Newsflash of 18 December 2014 titled 'Insurance Reforms - Another Step Closer' (please click here), an update was provided on the key changes to the Insurance Bill recommended by the select committee to the Parliament. The Insurance Ordinance includes the changes suggested by the select committee.

Key Amendments to the Insurance Act

The key amendments are as follows:

a. Investment by Non – Residents

  • Increase of the cap on foreign investment in insurance companies from 26% to 49%.
  • 49% limit to include all forms of foreign investments including foreign portfolio investments.
  • Ownership and control of insurance companies to remain with Indian residents.
  • 'Control' defined in line with the definition of 'control' under the Foreign Direct Investment Policy to include the 'right to appoint majority of directors or to control management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements'.

b. Shareholding and Instruments

  • Insurance companies have been permitted to raise new capital through instruments other than equity shares as may be specified by the Insurance Regulatory and Development Authority of India (IRDA). However, the voting rights of shareholders are restricted to only equity shares.
  • The requirement for promoters and other shareholders of insurance companies to divest their shareholding in excess of the prescribed limit under Insurance Act has been removed. The earlier thresholds prescribed were 5% cap on shareholding for banking or investment companies, 10% cap for public shareholders and 26% cap for promoters.

c. Foreign Re-insurers

  • Foreign reinsurance companies have been allowed to engage in re-insurance business in India directly through branch offices pursuant to registration with the IRDA.
  • Lloyd's established under the Lloyd's Act, 1871 (United Kingdom) (although not constituted as a company) and its members would qualify as eligible reinsures.

d. Health Insurance

  • 'Health insurance' has been recognised as an exclusive field of insurance business and carved out from the umbrella of general insurance.
  • 'Health insurance business' has been defined to mean effecting of contracts which provide for sickness, medical, surgical or hospital expense benefits and includes in-patient, out-patient travel cover and personal accident cover.
  • The minimum paid up equity share capital requirement for exclusively carrying on the business of health insurance is INR 1 billion (similar to life insurance or general insurance).

e. Others

  • Permanent Registration of Insurance Companies: The Insurance Ordinance provides for permanent registration of insurance companies as against the erstwhile requirement of renewal each year. IRDA has been granted the power to suspend or cancel the registration on breach of certain specified conditions.
  • Removal of Requirement to Maintain Deposits with RBI: The requirement under the Insurance Act for insurance companies to deposit a specified amount with the RBI as a condition for registration has been removed. However, insurers will have to maintain a solvency margin as may be prescribed by IRDA.
  • Underwriting of Insurance Business: General insurers are required to underwrite certain minimum percentage of its insurance business in third party risks of motor vehicles (as may be specified in the regulations. However, IRDA may grant exemptions to insurers who are primarily engaged in the business of health, re-insurance, agriculture or export credit guarantee.
  • Assignment and Transfer of Insurance Policies: The Insurance Ordinance provides for absolute and conditional assignments of insurance policies. Any assignment which is not bonafide in public interest or for trading of insurance policy is not permitted.
  • Life Insurance Policy: The Insurance Ordinance provides that life insurance policies will become unchallengeable after the expiry of three years from the date of the policy.
  • Management Expenses: IRDA has been entrusted with the responsibility of prescribing the limits on expenses that can be incurred on management by insurers and also the broad framework for determination of such expenses.
  • Insurance Agents and Commission: Insurance agents have been included in the definition of 'insurance intermediaries'. Insurers are prohibited from paying any remuneration to any person other than an insurance agent or an intermediary for soliciting or procuring insurance business in India and outside of the prescribed manner. Also, insurance agents and intermediaries are required to ensure that they receive or contract to receive commission or remuneration in any form in respect of policies issued in India only in accordance with prescribed regulations.
  • Surveyors: Qualifications have been prescribed for a person to be able to act as surveyor or loss assessor in respect of general insurance business. IRDA to provide a transition period for existing surveyors.
  • Multilevel Marketing Scheme: The Insurance Ordinance prohibits insurers from appointing any principal agent, chief agent and special agent and transact any insurance business in India through them or through any multilevel marketing scheme.
  • Uniform Appellate Body: Securities Appellate Tribunal will be the body to hear appeals from the orders of IRDA.
  • Fines and Penalties: Fines and penalties for contravention of provisions of the Insurance Act have been substantially increased.

Khaitan Comments

The Insurance Ordinance demonstrates the Government's intention to give effect to this impending reform.

The amendments to the Insurance Act can overhaul the manner in which insurance business is conducted in India. It seeks to provide insurers more flexibility in conducting their business through increased opportunities for collaboration and newer products but also increases the checks on them and their level of accountability. It is likely that some of the newer requirements would also lead to an increase in the cost of doing business for insurance companies. In several instances, IRDA has been authorised to provide the subordinate rules and regulations which can be expected shortly and would further clarify the requirements.

As far as new investments from foreign investors is concerned, although the ground work for newer transactions is likely to commence in early 2015, the lack of complete certainty that the Insurance Ordinance will indeed be approved by the Parliament in its next session is likely to cause delay before  this reform can see its full potential. Several investors (particularly financial investors) are likely to be interested in concluding transactions once the Insurance Ordinance is approved by the Parliament.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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