India: Corporate Governance Guidelines for Insurers Updated

Last Updated: 16 June 2016
Article by Celia Jenkins and Shubhangi Pathak

The focus and emphasis on corporate governance increased significantly since the corporate fraud and internal governance failure came to light in the context of Satyam Computer Services Limited. Post the Satyam issue the legislature has taken steps to incorporate certain basic principles of corporate governance in the revamped Companies Act 2013 (Companies Act). These steps include provisions relating to the constitution of the board of directors, appointment of independent directors, constitution of certain mandatory board committees and the duties of directors. For listed companies corporate governance norms are even more stringent due to the need for protection of interests of multiple minority investors.

These generic corporate governance norms apply in addition to the specific norms/regulations which may be applicable to an entity by virtue of the sector in which the company is operating. In this regard it is important to note that the Indian insurance sector is a highly regulated sector in view of the nature of business undertaken by insurance entities and the duty owned by such entities to their policyholders. In view of this, the insurance regulator ie, the Insurance Regulatory and Development Authority of India (IRDAI) first put in place guidelines for corporate governance which are applicable to Insurers in India on 5th August 2009 (the 2009 Guidelines).

Recently, the IRDAI replaced the 2009 Guidelines with the Guidelines for Corporate Governance for Insurers in India of 18th May 2016 (2016 Guidelines). The 2016 Guidelines seek to incorporate the relevant changes introduced by the Companies Act and also consider other relevant changes in the insurance sector since 2009 in order to provide a relevant and appropriate corporate governance regime for Indian Insurers.  The 2016 Guidelines also supersede the Guidelines on Reporting of Key Persons of 9th October 2013 and stipulations regarding appointment of Statutory Auditors issued through circulars of 25th July 2005 and 22nd April 2009.

The 2016 Guidelines provide the system of controls which an Indian Insurer is required to put in place and inter alia set out norms for appointment of key managerial persons and statutory auditors, the constitution and functions of the Board of Directors of the Insurer and the delegation of the functions of the Board. They also provide for the disclosure requirements and provisions with respect to whistle blower policy. The key features of the 2016 Guidelines are summarised below:

Provisions in consonance with provisions of the Companies Act

  • The 2016 Guidelines provide for the mandatory appointment of independent directors and a woman director on the board of directors of an Indian Insurer in compliance with §149 of the Companies Act. The independent directors are required to meet and evaluate performance of the Board of the Insurer in accordance with the applicable provisions of the Companies Act.
  • Further, the 2016 Guidelines provide norms for prevention of conflict of interest and mandates that Insurers comply with the provisions with regard to related party transactions under §188 of the Companies Act.
  • Disclosures with respect to related party transactions and remuneration paid to the key managerial personnel are now required to be made in the annual accounts in compliance with the provisions of Companies Act. In addition, disclosures with respect to persistency ratio are required to be made by Insurers transacting life insurance business.
  • Insurers are required to constitute the 'Corporate Social Responsibility' as per the applicable provisions of the Companies Act 2013 to perform the prescribed functions.

Constitution of Board Committees

  • The 2016 Guidelines have extensively revamped the norms with respect to the constitution of the Board Committees to monitor the responsibilities of the Insurer. The key changes are as follows:
  • Under the 2009 Guidelines, the 'Nomination Committee' and the 'Remuneration Committee' were separate and the constitution of these was not mandatory. The Nomination and Remuneration Committees have now been integrated into a single committee as per the 2016 Guidelines and the establishment of these committees has been made mandatory.
  • The 'Asset Liability Management Committee' (ALM Committee) is no longer mandatory for Life Insurers. Where Insurers do not constitute an ALM Committee, the functions of the ALM Committee as stipulated under the Guidelines are required to be performed by the 'Risk Management Committee'.
  • Insurers transacting life insurance business are required to constitute a 'With Profits Committee' as envisaged under the IRDA (Non-Linked Insurance Products) Regulations 2013 which set out the framework for inter alia, the share of assets attributable to policyholders, the investment income attributable to the participating fund of policyholders and the expenses allocated to the policyholders.
  • The Insurers are required to constitute the 'Audit Committee' to perform the prescribed functions.

Outsourcing Arrangements

  • All outsourcing arrangements of an Insurer shall be required to be approved by a Committee of Key Management Persons and should be in accordance with the Board approved outsourcing policy.
  • The management of the Insurer shall monitor and review the performance of agencies to whom operations have been outsourced on an annual basis.
  • The provision stipulating that the outsourcing arrangements should be for a fixed period of 3 years now stands deleted. The 2016 Guidelines also reiterate that Insurers are prohibited from outsourcing their core functions. 

Compliance Requirements

  • Insurers are required to file a Certificate of Compliance signed by the Compliance Officer. In addition, Insurers are required to file a Compliance Report stating the compliance status of the Insurer with the 2016 Guidelines.

In addition to Insurers, the 2016 Guidelines are also applicable to Reinsurers and branches of foreign Reinsurers set up in India (excluding certain specified provisions, such as requirement of having a Policyholders' Protection Committee (for Reinsurers) and constitution of a Board and mandatory committees (for branches of Reinsurers)).  

By incorporating the changes introduced by the Companies Act into the 2016, it appears that the IRDAI seeks to significantly increase the responsibility on the management of Insurers and Reinsurers. Specifically, non-compliance with the provisions regarding independent directors and related party transactions will not only make the Insurer liable under the provisions of the Companies Act but in addition the Insurer will also be in breach of the 2016 Guidelines. Hence, the highly regulated nature of the insurance sector and a close scrutiny of the business operations of Insurers and Reinsurers continues to be significant feature for players in the Indian insurance industry.

For further information on this topic please contact Tuli & Co 

Tel T +91 11 4593 4000, fax F +91 11 4593 4001 or email lawyers@tuli.co.in
www.tuli.co.in

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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