The Union Cabinet has approved amendments to the Insurance Laws (Amendment) Bill, 2008 ("2008 Bill"). The amended 2008 Bill is expected to be placed before the Upper House or Council of States of Parliament as the Insurance Laws (Amendment) Bill, 2014 ("2014 Bill") and will need to be approved by both houses of Parliament. Thereafter, the 2014 Bill will have to be presented to the President of India for his assent and then be published in the official gazette before it becomes law.
I. AMENDMENTS TO THE 2008 BILL
The 2014 Bill continues to allow an increase in the cap on foreign investment in Indian insurance companies but with Indian management control. It also makes insurers vicariously liable for violations by agents and provides appellate rights against orders of the Insurance Regulatory Development Authority ("IRDA"). The key amendments proposed in the 2008 Bill are given below.
1.1 Definition of 'Indian Insurance Company' amended
The 2014 Bill proposes to amend the existing definition of Indian insurance company to increase the cap on foreign investment to 49% and retain Indian management control. In this connection, the following changes have been proposed:
(a) an Indian insurance company can have aggregate foreign equity shareholding up to 49% (forty nine per cent);
(b) the aggregate equity may be held by foreign investors including portfolio investors; and
(c) the Indian insurance company must be Indian owned and controlled, in such manner as may be prescribed.
(i) The 2008 Bill proposes to remove the mandatory requirement on Indian promoters to divest their shareholding in an Indian insurance company in excess of 26%.
(ii) The 2008 Bill allows the capital of an insurance company to consist of equity shares and such other forms of capital as may be prescribed by regulations. The 2014 Bill does not propose any amendments to the introduction of such hybrid capital in insurance companies.
(i) Once the amended definition of Indian insurance company is brought into force, a corresponding amendment would have to be made in the IRDA (Registration of Indian Insurance Companies) Regulations, 20001 to clarify the manner of calculation of the 49% (forty nine per cent) foreign equity holding.
(ii) The 2014 Bill does not clarify the scope of Indian ownership and control of insurance companies and leaves it to the Central Government to make rules in this regard.
(iii) While the 2014 Bill does not clarify the terms 'foreign investors' or 'portfolio investors', the reference to these terms should be to the investment using foreign direct investment route and the foreign institutional investment route.
1.2 Insurer's liability for acts, omissions and violations of agents
Under the 2014 Bill, insurance companies are sought to be made liable for all acts and/or omissions of their agents including violation of code of conduct as specified by regulations. Any violation can result in a penalty of up to INR 10,000,000 being imposed on insurers.
This provision appears to have been introduced to curb mis-selling of insurance products and is broad enough to include "all acts and omissions" of agents. It would make insurers vicariously liable for all acts and omissions of their agents, which exposes insurers to significant risks.
1.3 Right to contest IRDA orders before the Securities Appellate Tribunal ("SAT")
The 2014 Bill proposes to provide insurers the right to challenge/appeal against orders passed by the IRDA before the SAT. These orders include orders directing persons to apply to court for winding up of the insurer (whether or not the registration of the insurer has been cancelled) or any other orders passed by the IRDA.
Presently, under the Insurance Act, 1938 ("Insurance Act"), (and as also proposed under the 2008 Bill), only an order for cancellation of registration of an insurer is permitted to be challenged in court.
While the 2014 Bill proposes appeals against orders of the IRDA to be made before the SAT, it does not provide the requirement for SAT to appoint members with experience in the insurance sector to deal with such matters.
1.4 Prohibition on insurance business through multilevel marketing
The 2014 Bill proposes to prohibit insurers from soliciting or procuring insurance business through 'multi-level marketing' ("MLM") schemes. MLM includes any arrangement (by whatever name called) for soliciting or procuring insurance business through unlicensed agents with or without commission or remuneration for their services.
Under the 2014 Bill, the IRDA is proposed to be authorised to make a complaint, through certain authorised officers, against persons/entities involved in MLM schemes, to the appropriate police authorities.
(i) Under the Insurance Act, appointing sub-agents and passing on commission or kickbacks to such sub-agents are prohibited.
(ii) If an agent of an insurer is prosecuted for involvement in MLM schemes, the insurer is also likely to be penalised on account of the vicarious liability proposed to be imposed on insurers under the 2014 Bill, for acts and omissions of agents.
1.5 Maintenance of policies and claims in electronic form
The 2014 Bill seeks to permit insurers to maintain records of policies and claims in electronic form.
Insurers are proposed to be mandated to make endeavours to issue policies above a specified threshold in terms of the sum insured and the premium in electronic form, in accordance with regulations as may be prescribed.
The IRDA has recently issued guidelines on pilot launch of the Insurance Repository system for digitization of life insurance policies. These guidelines mandate all life insurers to convert a minimum number of policies for each of the Insurance repositories into electronic form. Further, each life insurer has been required to issue certain number of new policies in the electronic format.
1 These Regulations, amongst others, provide the manner of calculation of the foreign equity holding in an Indian insurance company.
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