IRDAI does comprehensive liberalisation of insurance regulations
– Neha Malu, Senior Executive | corplaw@vinodkothari.com
Admittedly with the ambition to develop an economy where every citizen has appropriate life, health and property insurance cover and every enterprise is supported by appropriate insurance solutions, and also to make Indian insurance sector globally attractive, Insurance Regulatory and Development Authority of India (‘IRDAI’) has made comprehensive changes in insurance regulations. IRDAI in its 120th meeting held on 25th November, 2022 had discussed at length the reason behind notifying such changes in IRDAI regulations and the same is expressed to fulfil its objective of achieving ‘Insurance for all by 2047’[1]. All the below discussed amendments were notified vide gazette notification dated 5th December, 2022.
The amendments notified are applicable with immediate effect and are generally speaking in the nature of liberalisation measures. Among the changes, a noteworthy amendment is doing away with obtaining prior approval of IRDAI every time an Insurance company goes for raising money by way of issuance of ‘Other forms of Capital’. Further, the maximum limit of money that can be raised through this route has also been increased which will provide for an easy flow of money into an insurance company. Additionally, allowing a subsidiary company to be a promoter in an insurance company subject to the specified compliances is another significant amendment that has been notified.
List of regulations in which amendments have been notified:
| Name of the regulation | Nature of amendment |
| IRDAI (Other Forms of Capital) Regulations, 2022 | New regulation notified to supersede the earlier one; to remain in force for 3 years from the date of its publication in the Official Gazette. |
| IRDAI (Registration of Indian Insurance Companies) Regulations, 2022 | New regulation notified to supersede the earlier one; to remain in force for 3 years from the date of its publication in the Official Gazette. |
| IRDAI (Appointed Actuary) Regulations, 2022 | New regulation notified to supersede the earlier one; to be reviewed every 3 years. |
| IRDAI (Insurance Intermediaries) (Amendment) Regulations, 2022 | Amendment in the existing regulation. |
| IRDAI (Assets, Liabilities and Solvency Margin of General Insurance Business) (Amendment) Regulations, 2022 | Amendment in the existing regulation. |
| IRDAI (Regulatory Sandbox) (Amendment) Regulations, 2022 | Amendment in the existing regulation. |
| IRDAI (Actuarial Report and Abstract for Life Insurance Business) (Amendment) Regulations, 2022 | Amendment in the existing regulation. |
Below we discuss the highlights of the major amendments notified-
“Other forms of capital” means preference shares or subordinated debt issued by an Insurance company. Earlier such issuances were governed pursuant to the IRDAI (Other Forms of Capital) Regulations, 2015. However, pursuant to the IRDAI Notification dated 5th December, 2022, the earlier Regulation has been superseded by the IRDAI (Other Forms of Capital) Regulations, 2022. This new Regulation shall remain in force for a period of 3 years from the date of its publication in the Official Gazette, unless reviewed or amended earlier. Further, anything done or any action taken or purported to have been done or taken in accordance with the earlier Regulation shall be deemed to have been done or taken under the corresponding provisions of the new Regulation. The key highlights of this new Regulation are-
- Doing away with obtaining prior approval of IRDAI for issuing other forms of capital: Prior approval of IRDAI for issuing other forms of capital i.e., Preference Shares or Subordinated Debt by Insurance companies is no longer required. Approval is required only for payment of dividend for preference shares or interest on any subordinated debt if:
- The solvency is below the minimum Control Level of Solvency; or
- The impact of such accrual or payment would result in the Control Level of Solvency falling below or remaining below the regulatory requirement specified by the Authority; or
- The impact of accrual or payment of interest results in net loss or increases the net loss.
- Instruments to be non-convertible, fully paid up and unsecured: Any instrument issued pursuant to the new Regulation has to be non-convertible, fully paid up and unsecured. In the earlier Regulation, this condition of the security being non-convertibility was not present and is a new insertion. In furtherance to this condition, an exhaustive list of other conditions to be met for issue of “Other Forms of Capital” is also specified in the new Regulations.
- Superiority of claims of the policyholders: It is clarified that the claims of the policyholders will always remain superior to that of any creditor of the Insurance company. This amendment is more in the nature of clarification as the similar intent was also projected in the earlier Regulation.
- Issuance of securities with ‘call option’: Insurers shall not be permitted to issue instruments with “put option”. However, securities with “call option” may be issued provided the instrument has run for at least 5 years. Similar provision was also there in the earlier Regulation. However, in the new Regulation it is clarified that Insurer may exercise the call option even without the prior approval of IRDAI except in cases where after exercising such call option, the solvency position of insurer is not, at least 20% above the Control Level of Solvency. It is further expressly clarified that any event of non-payment of Interest and non-repayment of the redemption amount of the Subordinated Debt by the Insurer shall not be construed to be an event of default and shall not be qualified to be included in an event of default intimation.
- Investment by an Insurer in “Other Forms of Capital” of another insurer: An Insurer may invest in the other forms of capital of another Insurer subject to the compliance with the following conditions-
- such investments shall only be classified under “Other investments”
- such instruments shall be subject to the exposure norms as specified in IRDAI (Investment) Regulations, 2016
- Such investments shall not qualify as an admissible asset for determining the Control Level of Solvency
- Insurer shall not invest in the Other Forms of Capital of another insurer having a common promoter
- Increase in limits for Other Forms of Capital: Limit for other form of capital at any point of time has been revised to the lower of –
- 50% of the total paid up equity share capital and securities premium of an Insurer;
- 50% of the net worth of the insurer
Earlier it was 25% of the total Paid up Equity Share Capital and Securities premium of the insurer at any point of time. This increase in the overall limit for issuing other forms of capital as has been discussed in the 120th IRDAI meeting is to enable the companies to raise the funds in a quick and timely manner to meet its urgent obligations.
- Amortization of instruments issued: The instruments issued as Other Forms of Capital shall be subjected to a progressive hair cut for the purpose of computation of available solvency margin on a straight-line basis in the final five years prior to maturity. Pursuant to the IRDAI (Assets, Liabilities, and Solvency Margin of General Insurance Business) Regulations, 2016, every insurer at all times shall maintain its available solvency margin at a level which is not less than higher of 50% of the amount of minimum capital and 100% of required solvency margin.
- Responsibility of the Board of the Insurer: Responsibility of the Board of the Insurer has also been specifically provided in the new Regulations which includes the following-
- Passing of the requisite resolutions;
- Ensuring that it is rational for Insurer to issue Other Forms of Capital to meet its capital and / or solvency requirement;
- Ensuring compliance with the Regulation at every point of time;
- Ensuring the reasonableness of the interest/coupon rate for subordinated debt or dividend rate for preference shares.
With this new Regulation coming into light, it has led to the repulsion of IRDAI (Registration of Indian Insurance Companies) Regulations, 2000 and IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations, 2015. Similar to the IRDAI (Other Forms of Capital) Regulations, 2022, this Regulation will also remain in force for a period of 3 years from the date of its publication in the Official Gazette, unless reviewed or amended earlier.
This new Regulation as is evident from the provisions notified is intended to project towards ease of formation and continuation of Insurance business in India as it do away with some of the stringent requirements as were present in the earlier regulations. The key highlights of this new Regulation are as follows-
- Subsidiary companies may be allowed to be a promoter of Insurance company: Before the notification of this Regulation, subsidiary companies were expressly prohibited from being a promoter of an insurance company. However, this new Regulation has lifted this bar and now even subsidiary companies can be a promoter subject to the compliance with the following:
- Such subsidiary company is listed on any stock exchange in India
- has its own source of funds, independent from its holding company
- has a net worth of at least Rs.500 crore as at the end of the financial year preceding the date of application
- The holding company of the said subsidiary company is not subsidiary of any other company
- Allowing direct investment by Private Equity (‘PE’) Funds in Insurance companies: The new Regulation provides the PE Fund a liberty to invest in the Insurance companies either in the capacity of a promoter or investor. However, investment in the capacity of promoter, shall be allowed only if the PE fund meets the following criteria:
- The manager of the PE Fund or its Parent Fund has completed 10 years of operation;
- The funds raised by the PE Fund including its group entity(ies) is USD 500 million or more (or its equivalent in INR);
- The investible funds available with the PE Fund is not less than USD 100 million; and
- The manager of the PE Fund has invested in the financial sector in India or the other jurisdictions
- Prior approval of IRDAI to be obtained for transfer of shares in certain cases: Where after share transfer, the total paid-up holding of the transferee in the shares of the insurance company is likely to exceed 5% of the paid-up capital of the company; or the Nominal value of shares intended to be transferred by investors under same management, jointly or severally exceeds 1% of the paid-up equity capital of the insurance company, the same shall not be registered unless the prior approval of IRDAI is obtained for the same. Provisions on similar lines were also there in the earlier Regulation.
- Lock-in period on investments made by investors and promoters: Lock-in on transfer of equity shares by the promoter and investor of the Insurance company has been included in the new Regulation. The lock in schedule is provided on the basis of the age of the insurer.
- Determination of ‘Fit and proper’ status of investors and promoters: An indicative list of fit and proper criteria has been introduced for the purpose of assessing the applicant, its promoters and investors. The Regulation also makes it mandatory for the applicant, its promoters and investors to remain “fit and proper” in terms of this Regulation at all times even after the grant of certificate of registration failing which, IRDAI shall have the authority to take any decision as it may deem fit.
- Dilution of stake by promoter: The minimum promoter shareholding in an Insurance company has been provided to be maintained at above 50% at all times. However, the promoter may dilute the stake below 50% of the paid up equity capital of the Insurance company up to 26% of the paid up equity capital subject to the compliance with the following conditions-
- The insurance company has a track record of solvency ratio above control level during 5 years immediately preceding the dilution of stake by promoter, and
- The shares of the insurance company are listed on the stock exchange in India.
With the notification of IRDAI (Appointed Actuary) Regulations, 2022, the earlier IRDAI (Appointed Actuary) Regulations, 2017 has been ruled out. This new Regulation has in a way increased the role and responsibilities of the appointed Actuaries by prescribing a long drawn out list of responsibilities that an appointed Actuary is required to discharge. Most of which is included to ensure that the risks faced by the entity do not affect its solvency position. Further, to enhance the supply of Actuaries in the Insurance segment, the experience and qualification requirements for an Actuary to be appointed in an Insurance company have been made flexible.
Through IRDAI (Insurance Intermediaries) (Amendment) Regulations, 2022, IRDAI (Registration of Corporate Agents) Regulations, 2015 and IRDAI (Registration of Insurance Marketing Firm) Regulations, 2015 has been amended. Pursuant to this amendment, the number of insurers with which a corporate agent can enter into an arrangement for the purpose of soliciting, procuring and servicing the insurance products has been increased to a maximum of nine insurers in each line of business as against the earlier limit of three insurers. Further, the maximum number of associations for Insurance Marketing Firms has also been increased to six insurers as against the earlier limit of two insurers in each line of business.
Regulatory sandbox provides a controlled regulatory environment to the companies for trying out the assessment of its innovative products and technologies. Earlier the time duration for the experimental period of the Regulatory Sandbox was 6 months. However, pursuant to this amendment notification, the said time limit has been extended to 36 months. In addition to this, the maximum extension that may be granted post the expiry of the above mentioned duration has also been increased to a period of 12 months from 6 months. This change in the long run may turn out to be advantageous for the orderly development and growth of the insurance ecosystem as now the entities will have a good long break of 36 months to test its products.
Upon discussing the major changes introduced, it can be very well summed up that the notification of these amendments had led to a comprehensive liberalisation of some of the core insurance regulations and the mandate to review the new amendments at the end of three years from the date of notification will ensure an evaluation of the effect which the new regulation brings in and the extent to which the objectives with which the same is notified is achieved. All in all the changes are welcoming in nature.
[1] https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo4867
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