India: Insurance Newsletter – April 2015

REGULATORY UPDATES

THE INSURANCE LAWS (AMENDMENT) ACT, 2015 IN FORCE

The Insurance Laws (Amendment) Act, 2015, an Act to amend, inter alia, the (Indian) Insurance Act, 1938 and the Insurance Regulatory and Development Authority Act, 1999 has been notified and published in the official gazette. Accordingly, the amendments are in force.

EXPOSURE DRAFT ON REGULATIONS FOR REGISTRATION AND OPERATIONS OF BRANCH OFFICES OF FOREIGN REINSURERS (EXCLUDING LLOYD'S)

Pursuant to the Insurance Laws (Amendment) Act, 2015, foreign reinsurers are permitted to undertake reinsurance business in India through branch offices set up in India. Accordingly, the Insurance Regulatory and Development Authority of India (IRDAI) has, by way of a circular dated 7 April, 2015, issued an Exposure Draft of the regulations for Registration and Operations of Branch Offices of Foreign Reinsurers (excluding Lloyd's) (Draft BO Regulations) inviting stakeholders' comments by 30 April, 2015.

Key provisions of the Draft BO Regulations are as follows.

  1. The approval of the branch office of a foreign reinsurer will be a two stage process where the first stage of approval will be decided by the IRDAI and the second stage will be completed at the level of the Chairman, IRDAI.
  2. The eligibility norms for foreign reinsurers will include: (a) obtaining in-principle clearance from the home country regulator; (b) registration of the foreign reinsurer in national regulatory environment; (c) net owned funds of INR 50 bn; (d) minimum credit rating of "BBB+" from international credit rating agencies; (e) operational experience of at least 10 years; and (f) minimum assigned capital of INR 500 mn.
  3. The branch of the foreign reinsurer will be subject to the same reinsurance regulations as are applicable to Indian insurers and reinsurer.
  4. The branch office of the foreign reinsurer will be required to have a minimum retention of 50% of the business written in India.
  5. The repatriation of surplus generated by the operations of the branch office of a foreign reinsurer to the head office will require the prior approval of the IRDAI.
  6. The branch office of the foreign insurer will have to prepare and submit statement of assets, liabilities and solvency margin requirements in a manner which will have to be specified by the IRDAI by way of specific regulations.
  7. Every Indian insurer will be required to first offer an opportunity to an Indian reinsurer to participate in its facultative and treaty surpluses. It will next have to offer an opportunity to Indian insurers, branch office of foreign reinsurers or Lloyd's office in India. Thereafter it will have to offer to offices of foreign reinsurer set up in the special economic zone and the balance to the overseas reinsurers.

FOREIGN DIRECT INVESTMENT POLICY IN INSURANCE

The foreign investment policy has been amended ( Press Note No. 3 (2015 Series)) to recognise the 49% foreign investor cap in the insurance sector. Foreign investment up to 26% is allowed under the "automatic route" while foreign investment above 26% up to 49% is allowed with the approval of the Foreign Investment Promotion Board. The Reserve Bank of India has also amended the relevant exchange control regulations ( Circular dated 8 April, 2015).

EXPOSURE DRAFT ON REGISTRATION OF CORPORATE AGENTS

The IRDAI has, by way of a circular dated 31 March, 2015 issued an Exposure Draft of the IRDAI (Registration of Corporate Agents) Regulations, 2015 (Draft CA Regulations), inviting comments from interested stakeholders by 24 April, 2015. Once notified in the official gazette, the Draft CA Regulations will replace the existing IRDAI (Licensing of Corporate Agents) Regulations, 2002.

Key provisions of the Draft CA Regulations are set out below.

  1. An entity proposing to act as a "corporate agent" will need to be one:

    1. whose principal business is to exclusively carry on insurance intermediation; or
    2. which carries on insurance distribution as a subsidiary activity and its principal business is some other activity (e.g., banks and non-banking financing companies).
  2. Only one entity will be permitted to obtain a corporate agent registration within its group.
  3. An applicant exclusively doing insurance intermediation will be required to have a minimum equity share capital of INR 5 mn and maintain a net worth of INR 5 mn at all times.
  4. There are four categories of corporate agents, i.e., life, general, health and composite. Each corporate agent will not be permitted to have arrangements with more than three insurers in each of such category. However, the Draft CA Regulations impose a cap on premium that can be placed with an insurer in a category of the total premium procured in that category (90% in the first year reducing to 50% in the fourth year). This implies the intention of the IRDAI to require corporate agents to act as agents of more than 1 insurer in each category.
  5. In the solicitation and procurement of business, the corporate agents will need to comply with the conflict of interest provisions under the Draft CA Regulations which include: a) disclosing to the prospective customers the list of insurers with whom they have arrangements to distribute insurance products and providing any other information which the customer seeks on all the products available with them; and b) where insurance is sold as an ancillary product, corporate agent will need to ensure that its shareholder or associate does not compel the buyer of the principal business product to necessarily buy the insurance product through it.
  6. An insurer will not be permitted to require the corporate agent to insure every client with it.
  7. Any change in a corporate agent's arrangement with an insurer will need to be done only with the prior approval of the IRDAI and with suitable arrangements for servicing policyholders.

The relevant exchange control regulations will also have to be amended.

GUIDELINES ON APPOINTMENT OF INSURANCE AGENTS, 2015

The IRDAI has, by way of a circular dated 17 March, 2015 issued Guidelines on Appointment of Insurance Agents, 2015 (Agency Guidelines) which have into effect on 1 April, 2015.

Key highlights of the Agency Guidelines are set out below.

  1. Insurance agents are not permitted to solicit or procure insurance business without being approved to act as such by an insurer.
  2. An insurance agent must not act as an agent for more than one life insurer, one general insurer and one health insurer.
  3. Insurance agents must not resort to "multilevel marketing" (MLM) for soliciting and procuring insurance policies and/or induct any prospect/policyholder to join a MLM scheme.
  4. Any person acting as an insurance agent in violation of the provisions of the Insurance Laws (Amendment) Act, 2015 is liable to penalty of up to INR 10,000.
  5. Further, any insurer (or person acting on behalf of an insurer), who appoints any person as an insurance agent not permitted to act as such or transact any insurance business in India through any such person is liable to penalty which may extend to INR 10 mn.

Notably, the Agency Guidelines provide that insurers will be responsible for all acts and omissions of their agents including violation of the code of conduct specified under the Agency Guidelines and will be liable to penalty of up to INR 10 mn.

IRDAI (INTERNATIONAL FINANCIAL SERVICE CENTRE) GUIDELINES, 2015

The IRDAI has, by way of a circular dated 7 April, 2015, issued the IRDAI (International Financial Service Centre) Guidelines, 2015. Key provisions of the guidelines are as follows.

  1. An applicant meeting the eligibility criteria under these guidelines may establish an International Financial Service Centre Insurance Office (IIO) in a Special Economic Zone (SEZ) to carry on reinsurance business.
  2. All Indian insurers are eligible to set up IIO.
  3. An insurer registered with a foreign regulatory or supervisory authority seeking to set up IIO in a SEZ, will be eligible based on the criteria provided under these guidelines including that the firm must be in continuous operation for at least five years and must have a satisfactory track record in respect of regulatory or supervisory compliance.
  4. An applicant being an Indian insurer may (except a statutory body) also establish an IIO to transact specified direct insurance business within the SEZ.

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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