IRDAI notifies CG Regulations, 2024
Mahak Agarwal | corplaw@vinodkothari.com
Introduction
The Guidelines for Corporate Governance (‘2016 Guidelines’) for insurers in India have been around for close to a decade now. These Guidelines were initially brought as an update to the then 2009 Guidelines for the purpose of aligning the same with the extensive changes to the governance of companies brought about by the Companies Act, 2013. As such, the new Guidelines were framed to be mostly in line with the Act of 2013 except certain provisions such as requiring the CEO to be a WTD of the Board (where the chairman is NED), prescribing fit and proper criteria for directors, requiring certain additional committees, having only profit criteria for CSR applicability, etc.
Through the years, these Guidelines have served as a valuable source of direction in ensuring corporate governance for insurers; laying down guidance for the composition, roles and responsibilities of the Board, functions of various Board Committees, appointment and remuneration of KMPs, disclosures in financial statements, etc.
Having said that, on 20th March, 2024, IRDAI issued the Insurance Regulatory and Development Authority of India (Corporate Governance for Insurers) Regulations, 2024 (‘2024 Regulations’) which, for the first time, notified certain governance aspects of the 2016 Guidelines in the form of regulations. Looking at the language of the 2016 Guidelines, it is understood that the same is in the nature of advisory as compared to the 2024 Regulations which requires mandatory compliances pursuant to section 102 of the Insurance Act, 1938[1]. As per our comprehension, the 2024 Regulations have enforced a more stringent framework for certain aspects of the Guidelines.
While the exposure draft for these regulations do not provide any clarity, however, from the conciseness and the extent of coverage of these Regulations, it appears that the same is to be read along with the existing Guidelines, except in cases where new additions have been made, in which case the Regulations shall apply. Further, while most of the regulations are an altered paraphrase of the existing Guidelines covering the same intent, certain alterations and new additions have also been made which has been discussed hereunder.
Comparison and analysis
| Sl. no. | Broad head | Provisions under the 2024 Regulations | Provisions under the 2016 Guidelines |
| 1. | Board | Insurers having foreign investment shall also comply with the Indian Insurance Companies (Foreign Investment) Rules, 2015 w.r.t. The board composition. | No such provision |
| The CEO shall be a Whole time director of the Board. Remarks: Irrespective of the Chairman if the Board being executive/non-executive, the CEO shall be a whole time director of the Board. | Where the Chairman of the Board is non-executive, the Chief Executive Officer should be a whole time director of the Board. | ||
| The Chairperson of the Board shall be appointed with the prior approval of the Competent Authority except for public sector insurers. | No such provision | ||
| Upon removal/ resignation of an Independent Director of the insurer, the insurer shall forthwith intimate the same, along with reasons, within thirty days to the Authority. | No such provision | ||
| The directors shall fulfill the “fit and proper” criteria, at all times, on a continuous basis, as may be specified by the Competent Authority. Remarks: It appears that the said regulation has to be read with the existing Guidelines and format specified in the said Guidelines. | Discussion of fit and proper criteria along with a detailed format of obtaining declaration from directors in Annexure 2. Currently, the said declaration is required at the time of appointment, re-appointment of directors and for the continuance of existing directors (normally obtained on annual basis) | ||
| The conditions for appointment of common directors between insurers and insurance agents or intermediaries or insurance intermediaries as provided under section 48A of the Act, shall be as specified by the Authority. Remarks: Should ideally be read with Section 48A of the Insurance Act, 1938 and Circular dated September 2, 2022. Read our article on the above. | The Insurance Act prohibits (i) an insurance intermediary/ agent to be the Director of an insurance company (except with prior approval of the Authority); and (ii) the common directorship among life insurance companies. | ||
| The insurers shall ensure: 1. independence of the Board from the management as well as the promoters 2. independence of control functions including compliance, risk, audit, actuarial and secretarial function. Remarks: This provision does not imply that a management person cannot act as a board member. It only means to ensure that the directors are independent in their decision-making in their role as a board member. | No such provision Mentions independence of control functions including specifically risk management function (only) | ||
| 2. | Committees | While the 2024 regulations discuss committees only briefly, it appears that the same has to be read with the existing Guidelines which provide the composition and detailed functions for almost all the committees. Additionally, the new regulations require that the constitution of the committees, appointment and removal of its members, quorum and frequency of meetings, and its functioning shall be in compliance with the provisions of the Act, Companies Act, SEBI Act and rules, regulations, circulars, etc. issued thereunder. Certain noteworthy points under this aspect are as under: Chairperson of the NRC shall be an independent director Chairperson of PPGR&CM Committee shall be an Independent Director (2016 Guidelines required the committee to be headed by an NED) | |
| 3. | Conflict of interest and RPT | The Board shall ensure that Key Management Persons shall not simultaneously hold more than one position in the insurer that could lead to conflict or potential conflicts of interest such as ‘business and control function’ or ‘two control functions’. Remarks: Examples of conflict of interest have been included. | Insurers shall ensure that no single individual is simultaneously holding more than one position of Key Management Person that may have potential conflict of interest. |
| 4. | Succession planning | The insurer shall adopt a succession plan and the Board shall review such succession plan on an annual basis. | No such provision |
| 5. | Key Management Persons | Chief Compliance Officer (CCO) shall be appointed for a minimum fixed tenure of not less than 3 years. The duties and responsibilities of the compliance function shall include at least the following: (a) Apprising the Board and senior management on applicable Acts, Rules, Regulations, Guidelines and Circulars. (b) Ensuring compliance with the provisions of applicable Acts, Rules and Regulations made thereunder, and other Regulatory stipulations/directions. (c) Designing compliance framework | No such provision |
| 6. | Remuneration to directors and KMPs | Regulation requires formulation of a remuneration policy w.r.t. NEDs as well. Indicative guidance for the policy has also been provided: 1. the policy should not induce excessive or inappropriate risk taking 2. It should be in line with corporate culture, objectives, strategies, identified risk appetite and long term interest of the insurer 3. It should give due regard to the interests of its policyholders and other stakeholders. | 2016 guidelines are silent on remuneration of NEDs. Further, while the guidelines mention the requirement of a remuneration policy, it does not provide any specific guidance as to what the policy should comprise. |
| 7. | Stewardship | 1. The insurer shall formulate a board approved Stewardship Policy which shall identify and define the stewardship responsibilities that the insurer wishes to undertake and how the policy intends to fulfill the responsibilities to enhance the benefits to its policyholders 2. The policy shall, at a minimum, provide that the insurers would play an active role in the general meetings of investee companies and engage with the managements at a greater level to improve their governance. Remarks: Detailed guidelines on Stewardship Code for Insurers in India already in place. The same have also been included as part of the CG Regulations now. Read our article on a related topic. | No such provision |
| 8. | Reporting requirement | A report on the status of compliance with the Regulations shall be filed on an annual basis within such time and in such format as may be specified by the Competent Authority. Remarks: This should ideally be read with the 2016 guidelines and accordingly the timeline of three months and format as per Annexure 9 of the guidelines should be followed till there is any other format specifically prescribed under the Regulations. | All insurers are required to file a report on status of compliance with the Corporate Governance guidelines on an annual basis. This report shall be filed within 3 months from the end of the financial year, i.e., before 30 June. The report shall be filed as per the format in the Annexure 9 of the guidelines. |
| 9. | Environment, Social and Governance | 1. Every insurer shall have in place a board approved Environmental, Social and Governance (ESG) framework. The activities of insurers under ESG are to be monitored by the Board. The ESG framework shall be reviewed by the Board on an annual basis. 2. The Board shall establish a comprehensive Climate Risk Management framework to facilitate the climate risk management, keeping in view their size, nature and complexity of operations. Remarks: New insertion emphasizing ESG and environmental obligations of insurers. Also refer to our resource center on ESG and sustainability here. | No such provision |
Concluding remarks
Although the bulk of the new regulations largely adhere to the 2016 guidelines, there are several notable additions: mandating the CEO to be a Whole-Time Director (WTD) of the Board, establishing a stewardship policy, and implementing an Environmental, Social, and Governance (ESG) framework. Regarding other regulations, it is important to note that the 2024 regulations do not explicitly address the fate of the guidelines. Therefore, it appears that the same should ideally be complied alongside existing guidelines (to the extent not repugnant), unless there is a subsequent notification from the authority indicating otherwise.
[1] Pursuant to S.102 of the Insurance Act, 1938, if any person fails to comply with the regulations made thereunder, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.
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