17 August 2015

SEZs: A New Avenue For Insurers & Reinsurers

Tuli & Co


Tuli & Co is an insurance-driven commercial litigation and regulatory practice established in 2000. With offices in New Delhi and Mumbai, we undertake work for a cross section of the Indian and international insurance and reinsurance market and work closely alongside Kennedys’ network of international offices
Special Economic Zones (or SEZs as they are popularly referred to) have been established in India to promote trade and investment by enabling industries to produce and trade goods at globally competitive prices.
India Insurance
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Special Economic Zones (or SEZs as they are popularly referred to) have been established in India to promote trade and investment by enabling industries to produce and trade goods at globally competitive prices. In order to encourage businesses to set up in SEZs, liberal policies are introduced and some forms of exemptions are provided in relation to, inter alia, taxation, trading and customs/excise norms.

The Special Economic Zones Act 2005 (SEZ Act) was enacted with the primary aim of providing a mechanism for the establishment and operation of SEZs. The decade following the enactment of the SEZ Act witnessed the establishment of SEZs across India and increased contribution by the SEZs to the trade and economic growth of the nation.

With an aim of extending some of the benefits of SEZs to the insurance industry, the Ministry of Finance notified the Insurance Regulatory Development Authority of India (Regulation of Insurance Business in Special Economic Zone) Rules 2015 on 27th March 2015 (Insurance SEZ Rules). In addition, the Ministry of Finance issued a notification of the same date pursuant to which an "Indian Insurance Company" carrying on the business of insurance in any SEZ is exempted from complying with certain specified provisions of the Insurance Act 1938 (as amended).

The Insurance SEZ Rules specify provisions for the regulation of insurance business in SEZs and inter alia permit Insurers registered with the IRDAI to carry on the business of insurance in a SEZ, subject to the specified conditions. Similarly, an Insurer from outside India is permitted to establish a branch office in a SEZ to transact the business of reinsurance within the SEZ, subject to the specified conditions.

Following the Insurance SEZ Rules, the IRDAI issued the IRDAI (International Financial Service Centre) Guidelines 2015 (IFSC Guidelines) on 6th April 2015. The IFSC Guidelines provide a broad framework for setting up of reinsurance business and direct insurance business in SEZs. The IFSC Guidelines specify that Indian Insurers are eligible to set up an IFSC Insurance Office (IIO) and an Insurer registered with a foreign regulatory authority can set up an IIO in an SEZ, if they fulfil the specified requirements, which include, being licensed or registered to undertake insurance or reinsurance business in the country of incorporation, being in continuous operation for the preceding 5 years, having the specified net owned funds and a track record satisfactory to the IRDAI.

In determining whether a certificate of registration should be granted to the applicant, the IRDAI will take into account various factors including, the performance of the applicant, the directors and managerial personnel of the applicant along with the capital structure and planned infrastructure of the applicant.

An IIO which has been granted a certificate of registration by the IRDAI is permitted to: (a) accept reinsurance business of all classes of business within the SEZ and from outside the country; and (b) accept reinsurance business from Insurers operating in the "domestic tariff area" (as defined in the SEZ Act) in accordance with the IRDAI regulations on reinsurance. The IIO is permitted to retrocede upto 90% of its reinsurance business. Further, IIOs are required to maintain an assigned capital of Rs.10 Crores.

All IIOs which are granted the certificate of registration are required to commence business within a period of 6 months from grant of the certificate. An exception to this rule is to be made by the IRDAI only in certain cases.

Once registered, IIOs carrying on business in SEZs are required to comply with "Know Your Customer" and "Anti-Money Laundering" guidelines and also with the provisions of the Foreign Exchange Management Act 1999. In addition, IIOs are required to pay an annual fees of Rs.1 Lakh.

Following the recent amendments to the Insurance Act 1938 through the Insurance Laws (Amendment) Act 2015, the Indian insurance industry is currently witnessing a plethora of reforms which are targeted, to a large extent, at promoting insurance business in India and attracting foreign investment in the insurance sector. The IFSC Guidelines and the Insurance SEZ Rules are also a step in this direction as they aim to provide certain regulatory exemptions to insurance entities establishing a presence in SEZs and thereby facilitate and promote insurance business.

Establishment of insurance entities in SEZs is, however, still a novel concept in India is yet to be properly "tried and tested". The manner of implementation of the IFSC Guidelines and the Insurance SEZ Rules and the enthusiasm with which the domestic and insurance industry global players will receive this new avenue of carrying out insurance business remains to be seen.

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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