The provisions of the Insurance Act 1938 (Insurance Act) provide guidance on certain conflict of interest situations. Section 48A and 48B of the Insurance Act provide the norms regarding common directors between an insurance company and an insurance agent/intermediary. In addition, per Section 32A of the Insurance Act, a managing director or other officer of an insurer carrying on life insurance business is prohibited from being a managing director or other officer of any other insurer carrying on life insurance business or of a banking company or of an investment company.
However, with the rapid growth of the insurance industry in the past few years there has been a surge in insurance companies and insurance intermediaries, with multiple insurers often being set up under the umbrella of the same corporate group. This has also led to an increase in the common directors between various insurance entities and therefore, an increase in situations where such directors may have to deal with a direct or indirect conflict of interest.
To address such conflict situations, the Insurance Regulatory and Development Authority (IRDAI) has issued an Exposure Draft on Insurance Regulatory and Development Authority of India (Conflict of Interest) Guidelines 2019 (Draft Guidelines) which seeks to provide guidance on the conflicts of interest arising between entities of the same group and common directors between an insurance company and other insurance companies or insurance intermediaries.
The Draft Guidelines define the term "conflict of interest" to mean a situation in which a person or organization is involved in multiple interests (financial or otherwise), and serving one interest could involve working against another, and includes situations when a person's impartial and objective performance of duties or decision-making could be jeopardized because of personal interests being involved.
Conflict due to Common Promoter Group
The Draft Guidelines propose the norms to address the material conflicts of interest arising due to common promoter group. These norms are summarised below:
- The Draft Guidelines expressly stipulate that an entity shall not be a promoter for more than one life insurance, general insurance, stand-alone health insurance and reinsurance company;
- Where a promoter of a general
insurance company seeks to be a promoter of a health insurance
company or vice versa, the application for issuance of
certificate of registration filed by such promoter shall be
- A note duly approved by the board of directors of the promoter providing the manner in which the segregation of business, between the general insurance company and the standalone health insurance company shall take place;
- The value addition that the promoters of the existing company hope to achieve by setting up a standalone health insurance company or a general insurance company (as the case may be);
- The measures to deal with the situations of conflict of interest that may arise between the general insurance company and the health insurance company.
- Where the promoter of an insurance intermediary wants to set up an insurance company or vice versa, the application filed with the IRDAI will have to be supplemented with necessary disclosures as to manner of dealing with conflict of interest situations.
Conflict due to Common Director
The Draft Guidelines propose the norms to address the material conflict of interest arising due to common directors between an insurance company and another insurance company/insurance intermediary. These norms are summarised below:
- The board of directors of the insurance company/insurance intermediary (Board) shall formulate a policy to address conflict of interest situations that may arise due to common directors or officers, in accordance with the provisions of the applicable guidelines. The policy shall establish procedures to be followed and measures to be adopted to prevent conflict of interest and to manage such conflicts in an independent manner;
- The Board shall take all reasonable efforts to resolve conflict of interest but in cases where conflict of interest is unavoidable, the Board shall seek to address it on an arm's length basis and make proper disclosures;
- No person shall be appointed as director or officer if at the time of the appointment there is a material conflict of interest between the person's role as director or officer and any other role of the person;
- A director or officer shall, within
thirty (30) days after he/she becomes aware that a material
conflict of interest exists:
- eliminate the conflict of interest; or
- resign from office.
- Where the insurer becomes aware of the conflict of interest situation, the insurer shall take immediate steps to ensure that the powers/authority delegated to such a director or officer is ceased, and he/she is not allowed to participate in the day-to-day activities of the company. Further, an enquiry, headed by an independent director, shall be conducted on such a director or officer. The person found guilty shall no more be "Fit & Proper";
- Where the director or officer is found guilty and has not acted as per the guidelines prescribed by the IRDAI, his services shall be terminated with immediate effect. Further, such a person shall not be considered as "Fit & Proper" to hold any position in an insurance company or insurance intermediary for a minimum period of five years;
- The common director(s) shall not hold the position of Key Managerial Personnel or Chief Executive Officer in more than one insurance company or insurance intermediary;
- There shall be no business relationship by the common director(s) with other insurance company or insurance intermediary, other than holding the position of non-executive director;
- The common director(s) shall not achieve or attempt to achieve any undue gain or advantage either to himself or his relatives, partners or associates;
- Common independent directors between an insurer and another insurer/insurance intermediary in different groups shall not be allowed. Further, common whole time directors between an insurer and another insurer/insurance intermediary shall not be allowed.
- No permission from the IRDAI shall be required where the person proposed to act as the common director is an independent director within the same group and the remuneration payable to such a director does not exceed Rs.10,00,000 per annum.
The Draft Guidelines also propose to establish the procedure for obtaining the approval of the IRDAI under section 48A of the Insurance Act. The Draft Guidelines stipulate that directorships among insurance companies / insurance intermediaries shall be allowed subject to the prescriptions as provided in the table given under Annexure A of the Draft Guidelines. An insurer or insurance intermediary shall not appoint common directors under the "not allowed" categories. However, it is noteworthy that at present there may be certain common directors on the boards of the insurance entities which fall under the "not allowed" categories.
The Draft Guidelines seek to provide much needed clarity to market players vis-à-vis establishment of general insurance companies, health insurance companies and/or insurance intermediaries within the same group and also seek to provide guidance on the manner of tackling conflict of interest situations. However, the Draft Guidelines are at present not clear regarding the retrospective effect (if any) of the provisions of the Draft Guidelines on the common directors already appointed on the boards of insurance companies/insurance intermediaries.
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.