The year 2015 will undoubtedly hold tremendous importance in the history of India's insurance regulatory landscape. In March, the Indian Parliament finally passed the Insurance Laws (Amendment) Act, 2015 (Amendment Act), cementing the eagerly awaited insurance reforms in the country. The reforms include raising the foreign investment cap on insurers and intermediaries from 26% to 49% and laying out of the statutory framework for the entry of Lloyd's and branches of foreign reinsurers in India.
More significantly, the Amendment Act revised the Insurance Act, 1938 (the Act) to statutorily recognise branches of foreign reinsurers and Lloyd's of London as insurers. However, while the Act stands revised with immediate effect, the exact manner of the establishment and regulation of a Lloyd's branch and foreign reinsurers' branches will be decided by the Insurance Regulatory and Development Authority of India (IRDAI), which has been expressly empowered under the Act to frame regulations governing both the entry of Lloyd's and foreign reinsurers' branches.
Draft Regulations on Foreign Reinsurers' Branch Offices
In this context, on April 7th, 2015, the IRDAI released an exposure draft on "Branch Offices of Foreign Reinsurers (excluding Lloyd's) Regulations" (First Exposure Draft), seeking comments from industry stakeholders. In terms of the eligibility criteria, the First Exposure Draft requires, inter alia, reinsurers to obtain prior approval or in-principle clearance from their home regulator, minimum net own funds of INR 50 billion (USD 769 million), a stable outlook credit rating for the last five years from any international credit rating agency, the infusion of a minimum assigned capital of INR 500 million (USD 7.69 million) – now proposed as INR 1 billion (USD 15.39 million), into the branch and proven experience in the reinsurance market for at least ten years.
Significantly, the First Exposure Draft also proposes to require Indian insurers to:
- Offer Indian (re)insurers the first opportunity to participate in their facultative and treaty surpluses
- Offer an opportunity to Indian insurers, foreign reinsurers' branches or Lloyd's Indian office
- Approach the offices of foreign reinsurers in special economic zones (SEZs)
- Approach non-admitted foreign (re)insurers for participation in their surpluses
Following comments from the industry, the IRDAI released a second exposure draft in May, 2015 (Second Exposure Draft), which retained the aforementioned requirements but introduced two categories for branch registration, i.e., "Category I" branches whose order of preference is on par with Indian reinsurers and "Category II" branches that have a lower order of preference. It is now proposed that Indian insurers first offer participation in surpluses to the Indian (re)insurers or "Category I" branches, following which "Category II" branches could be approached. Subsequently, they may approach the offices of foreign reinsurers' in SEZs and lastly, overseas non-admitted reinsurers. Additionally, "Category I" branches are required to retain a minimum of 50% of their Indian insurance business. The minimum retention proposed for "Category II" branches is only 30%.
After receiving comments on the Second Exposure Draft, the IRDAI set up a committee in July this year to review the proposed regulations in detail once more.
Branches in Special Economic Zones
In addition to the foregoing developments which stem directly from the Amendment Act, separately, in March, 2015 the Indian Central Government notified the "IRDA (Regulation of Insurance Business in Special Economic Zone) Rules, 2015", which enables the IRDAI to permit foreign (re)insurers to set up branches in SEZs to underwrite reinsurance within the SEZ and elsewhere in the country on the condition that they will be viewed as cross border reinsurers.
Pursuant to these rules and in anticipation of the setting up of India's first international financial service center (IFSC), i.e., a financial services focused unit inside an SEZ, in Gujarat, the IRDAI issued the "IRDA (International Financial Service Centre) Guidelines, 2015" (Guidelines) in April, 2015 stating that foreign (re)insurers interested in carrying out business in and from an SEZ could register an "IFSC Insurance Office" (IIO) to accept reinsurance business within the SEZ and from outside India. The IIOs will additionally be permitted to service mainland Indian insurers and may retrocede up to 90% of their business. However, reports indicate that the establishment of the first IFSC is presently on hold until 2017 as a number of taxation and forex issues need resolution by the government. Meanwhile, the IRDAI's committee for examining regulations on branches of foreign reinsurers has also been directed to make recommendations on the Guidelines. It remains to be seen whether the IRDAI will permit IIOs in SEZs in the interim before the IFSC(s) becomes functional.
While committee reports on these sets of regulations are eagerly awaited, it is understood that Lloyd's has been in talks with the IRDAI over the nuances of its form of operation and regulation in India and hopes to set up shop in 2016. As per recent reports, the chairman of the IRDAI has indicated that the final regulations on branches of foreign reinsurers will be notified in October, 2015. Needless to say, India will be closely watched as uncertainty gradually clears up.
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