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The primary legislation regulating the Indian insurance sector is the Insurance Act 1938 and the Insurance Regulatory and Development Authority Act 1999. Pursuant to the powers granted to the Insurance Regulatory and Development Authority of India (IRDAI) under both statutes, it has issued various regulations, guidelines and circulars governing the licensing and functioning of insurers, reinsurers and insurance intermediaries, among other things. Appeals against orders issued and decisions made by the IRDAI may be referred to the Securities Appellate Tribunal, in accordance with the notified procedural rules.
The Indian insurance sector is highly regulated. The IRDAI regulations govern a wide range of issues, including:
The Reserve Bank of India's Master Direction – Insurance of 1 January 2016 (as amended) consolidates the foreign exchange regulations for insurance and provides guidance on various issues, including the manner and extent to which an Indian insurance company can issue and settle claims in respect of overseas residents. Separately, the Foreign Exchange Management (Insurance) Regulations 2015 regulate the manner and extent to which a person resident in India can take or continue to hold a general, life or health insurance policy issued by an overseas insurer.
In addition, the principles contained in the Marine Insurance Act 1963 (which has its basis in the UK Marine Insurance Act 1906) have been extended to non-marine insurance contracts.
There are no binding bilateral or multilateral instruments or covenants that have an impact on the Indian insurance sector. However, the Indian courts often refer to the decisions of overseas courts and tribunals where there is a lack of express law or precedent in India.
Insurers, reinsurers and insurance intermediaries are governed by the IRDAI. The IRDAI derives its authority from the Insurance Act and the IRDA Act, and has wide-ranging powers to introduce and enforce regulations, guidelines and circulars on matters such as:
Over the years, the IRDAI has issued guidance on a number of matters and has issued various orders against regulated entities. With the aim of supervising practices in the insurance sector, the IRDAI also carries out regular inspections to determine whether insurers, reinsurers and insurance intermediaries are conducting their operations in accordance with the relevant rules and regulations. In the past few months, the IRDAI has conducted discussion panels with various stakeholders in the insurance sector on a number of diverse topics, and has issued several circulars aimed at making it easier to carry out insurance business in India. Similar reforms are in the pipeline for the coming months.
The Insurance Act specifies the types of insurance business that can be undertaken by insurers, such as:
Life, health and general insurance products can be offered to retail and commercial customers only once the specified procedure for filing the insurance product with the Insurance Regulatory and Development Authority of India (IRDAI) has been completed.
Until recently, retail products across lines of insurance business had to be filed under a 'file and use' procedure, where the product required the IRDAI's prior approval before it could be launched; while commercial products could be filed under a 'use and file' procedure, where the product could be filed with the IRDAI and launched immediately thereafter. Further to a number of circulars issued by the IRDAI recently, insurers are now broadly permitted to offer all insurance products (ie, retail and commercial) under the 'use and file' procedure, where the product is approved and certified by the insurer's internal committees, filed with the IRDAI and then launched.
In terms of the content of insurance contracts, the IRDAI has issued guidance for various forms of insurance products, including the following:
Further, there are extraneous rules that impact on policy terms. For example, the Insurance Act gives the policyholder a right to override contrary policy terms in favour of Indian law and jurisdiction; and Indian policyholders cannot be stopped from approaching the consumer courts.
Except in case of a marine insurance cover or other cover where the use of a proposal form is exempted, a proposal for grant of insurance cover – whether for life insurance business, general insurance business or health insurance business – must be evidenced by a document in written or electronic form.
The Policyholders Regulations require the insurer to process proposals with “speed and efficiency”; and the decision on the proposal must be communicated to the proposer in writing within 15 days of the date of receipt of the proposal (or any other requirements called for by the insurer). It is also the duty of the insurer to give the insured (free of charge) a copy of the proposal form submitted by the insured within 30 days of acceptance of the proposal.
Please see questions 2.2 and 2.3.
In addition to the applicable norms and regulations, the insurer and insured must comply with certain guiding principles which act as the basis for the obligations that arise upon the conclusion of an insurance contract. Principles such as utmost good faith, disclosure of material information and confidentiality must be followed by both parties, both prior to and after execution of the insurance contract. The consequence of breach of or non-compliance with these principles may result in a right to avoid the policy, with or without a refund of the premium.
The formal and documentary requirements to make a claim must be specified in the policy document and vary from one policy to another in line with the Policyholders Regulations. Among other things, these prescribe the following key requirements to be incorporated in life insurance, general insurance and health insurance policies:
The procedural requirements for making a claim must also be specified in the policy document, which usually requires that claims or circumstances of the claim be intimated to the insurer within the period specified in the policy. This requirement may be expressed as a condition or a condition precedent to the insurer's liability under the policy; and the consequences of non-compliance will to some extent depend on whether the notification clause is expressed as a condition or a condition precedent.
Typically, the notification of a claim is required 'immediately', 'as soon as practicable' or 'as soon as reasonably practicable'. The Insurance Regulatory and Development Authority of India (IRDAI), through its circulars of 20 September 2011, 28 October 2016 and 28 June 2017, also provided guidance in relation to reporting requirements. This is an evolving sphere; but at present, the courts appear to be adopting a fairly strict approach towards adherence with policy terms and conditions, including the notification requirement. For instance, a three-judge bench of the Supreme Court in Sonell Clocks and Gifts Ltd v The New India Assurance Co Ltd upheld repudiation on the basis of delayed notification and observed that the notification requirement “is not a technical matter but sine qua non for a valid claim to be pursued by the insured, as agreed upon between the parties”.
Insurers can deny a claim on various coverage grounds, including the insured's failure to establish that the claim falls within the insuring clause, if:
Insurers can also avoid the policy entirely if there is fraud, misrepresentation or material non-disclosure by the insured.
The insured can challenge the denial of claim by:
There is no equivalent in India of the UK Third Parties (Rights against Insurers) Act 2010. As a general rule, Indian law recognises the principle of privity of contract and consequently a third party may be unable to bring a direct action or claim against an insurer.
However, it is a common practice for third parties to name the defendant's insurer in motor accident-related proceedings. The Motor Vehicles Act 1988 provides that the rights of an insured under a policy are transferred to a third party claiming against the insured in the event of the insured's insolvency. The act empowers the Motor Claims Tribunal to seek the insurer's involvement in a third-party action against the insured if:
However, Section 164 of the act has limited the insurer's liability concerning third-party insurance with effect from 1 April 2022 in the following terms:
There are presently no limits on the insurer's liability in cases of permanent disability or minor injury.
The Insurance Act specifies that an insurer must be one of the following:
A 'foreign company' has been defined to mean a company or body established under the law of any country outside India, and includes Lloyd's as established under the UK Lloyd's Act 1871 or any of its members.
Currently, foreign investment in an insurance company is allowed up to 74% of the paid-up equity capital. In terms of structuring, there are broadly two structures that are prevalent in India:
Further, there are certain restrictions set out in the insurance regulatory framework, including in relation to the shareholding percentage of Indian investors and the transfer of shares, which must be adhered to at the time of structuring the shareholding of an insurance company in India.
The foreign investment ceiling in insurance companies was increased from 49% to 74% by way of the Insurance (Amendment) Act of 2021. Pursuant to this, the Ministry of Finance had also issued the Indian Insurance Companies (Foreign Investment) Amendment Rules 2021 on 19 May 2021 amending specific provisions of the Indian Insurance Companies (Foreign Investment) Rules 2015 to expressly provide norms which must be followed by insurance companies with foreign investment. The amendment rules are yet to be notified and to come into force.
An entity must be registered with the Insurance Regulatory and Development Authority of India (IRDAI) and obtain a certificate of registration under the applicable laws to undertake insurance activities in India.
The scope of insurance activities may vary based on the registration with the IRDAI and various conditions broadly encompassed under applicable regulations, guidelines and circulars. For instance, an applicant for registration as an insurer may undertake insurance business under the classes specified in the IRDAI (Registration of Indian Insurance Companies) Regulations 2000; whereas an insurance broker registered under the IRDAI (Insurance Broker) Regulations 2018 may exclusively carry on the business of an insurance broker as permitted under these regulations. Similarly, a corporate agent may be registered under the IRDAI (Registration of Corporate Agents) Regulations 2015 where its principal business is other than the distribution of insurance products and insurance distribution is a subsidiary activity. Thus, the scope of activities undertaken by an entity is determined based on the conditions and restrictions applicable to it under its certificate of registration and the relevant norms governing its operations.
Any entity applying for a licence or certificate of registration from the IRDAI must fulfil certain essential requirements, including in relation to the following:
For insurers and branches of foreign reinsurers, a multi-stage application process is set out in the respective regulations for these entities. For insurance intermediaries, broadly, a single-stage application process is set out under the respective regulations.
The timelines for obtaining registration are not expressly specified under the applicable regulations and thus vary on a case-by-case basis and depending on the form of entity being registered.
Indian insurers/reinsurers must have a minimum paid-up equity share capital of INR 1 billion/INR 2 billion respectively.
Foreign reinsurers seeking to set up a branch office in India must have a minimum net owned fund of INR 50 billion and must further infuse a minimum assigned capital of INR 1 billion into the branch office.
Syndicates of Lloyd's India must maintain a minimum assigned capital of INR 50 million through their service companies set up in India.
Section 64VA of the Insurance Act requires insurers and reinsurers to maintain an excess of their assets over liabilities. It provides as follows:
In this regard, insurers must value their assets, determine their liabilities and maintain required solvency margins, the details of which must be periodically filed with the IRDAI. The required solvency margin is calculated by insurers based on their mathematical reserves and the sum at risk. The IRDAI periodically specifies the factors that are considered in the calculation of the required solvency margin.
In relation to the Insurance Regulatory and Development Authority of India's (IRDAI) supervision of the group to which an insurer, an Indian reinsurer or an insurance intermediary belongs, the IRDAI directly regulates only entities permitted by it to operate in the Indian insurance sector; currently, it does not regulate the operations of the group entities of such entities. However, there are some restrictions on entities operating in the same group undertaking insurance activities, where the IRDAI has discretion (in some cases) to determine the scope of the 'group', as follows:
Additionally, to avoid conflicts of interest, two entities from the same group are ordinarily not permitted to undertake the same line of insurance business.
The Insurance Regulatory and Development Authority of India (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations 2002 prescribe certain disclosures which must be made by insurers in their financial statements. Further, the Insurance Regulatory and Development Authority of India (IRDAI) has specified additional disclosure requirements for different forms of insurers under the Guidelines for Corporate Governance for Insurers in India of 18 May 2016 ('CG Guidelines').
Insurers must:
There are a number of regular filing requirements that insurers must comply with, such as in relation to the following:
Various other compliance reports must also be filed with the regulator.
In addition, a range of reports and filings must be submitted to the regulator on the occurrence of various events, which may be either for regulatory approval or post-facto intimation.
Under the CG Guidelines, insurers must comply with the following key governance requirements, among others:
The CG Guidelines require all insurers to establish a risk management committee to implement the insurer's risk management strategy and formulate an effective risk management framework and risk management policy. The risk management committee is also required, among other things, to:
In addition, the CG Guidelines require:
Further, the board of directors must disclose the risk management architecture in its annual accounts. The IRDAI also reviews the quality of risk management functions while assessing the corporate governance of the insurer.
Insurers may have different structures, with the board of directors headed by an executive or non-executive chairman with distinct responsibilities over the other directors and key managerial personnel (KMPs). As per the Guidelines for Corporate Governance for Insurers in India ('CG Guidelines'), the following management structure must be observed by insurers:
Insurers must also ensure that directors of the company have various different types of financial and management expertise such as “accountancy, law, insurance, pension, banking, securities, economics, etc., with qualifications and experience that is appropriate to the company”.
In terms of remuneration, the IRDAI's Guidelines on Remuneration of Non-executive Directors and Managing Director/Chief Executive Officer/Whole-time Directors of Insurers dated 5 August 2016 ('Remuneration Guidelines') stipulate the remuneration mechanisms for non-executive directors and managing directors/chief executive officers (CEOs)/full-time directors of insurers. Recently, the IRDAI issued an exposure draft which will modify the existing guidelines if brought into force.
Directors and senior executives of insurers must be appointed in accordance with the provisions of the Companies Act 2013 and the relevant norms under the CG Guidelines, which derive from the Insurance Act. Section 34A of the Insurance Act requires the prior approval of the IRDAI for the appointment, reappointment or termination of, among others, the managing director, the CEO and full-time directors of an insurer.
The CG Guidelines also prescribe norms in relation to the appointment or termination of all KMPs, which include a requirement for the approval of the board of directors for the appointment or termination of KMPs that follows the recommendation of the nomination and remuneration committee.
Prior to the appointment of a person as a KMP, the board or a committee thereof must carry out due diligence to ensure that the appointee is 'fit and proper' for the proposed position.
The CG Guidelines also prohibit persons from holding more than one KMP position that may involve a potential conflict of interest, unless the IRDAI's prior approval has been obtained.
In terms of eligibility, all directors and KMPs of insurers must comply with the 'fit and proper' criteria stipulated by the IRDAI.
The legal duties of directors and senior executives are set out in Section 166 of the Companies Act 2013 and include:
In addition, the CG Guidelines impose additional responsibilities on directors, such as those relating to:
As discussed in question 9.1, the IRDAI's Remuneration Guidelines set out the manner of remuneration payable for non-executive directors and managing directors/CEOs/full-time directors of insurers.
Insurers can transfer their assets and liabilities in accordance with the following:
Further, new norms on the method for assessing compensation due to shareholders or members whose interests in or rights against the transferee insurer resulting from amalgamation are less than their interests in or rights against the original insurer have been introduced under the IRDAI (Manner of Assessment of Compensation to Shareholders or Members on Amalgamation) Regulations 2021.
Under Section 6A of the Insurance Act, read with the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015, prior approval from the IRDAI must be obtained in the event of a change in shareholding of an insurer or reinsurer where, after the transfer, the total shareholding of the transferee is likely to exceed 5% of the total paid-up capital of the company.
The prior approval of the IRDAI must also be obtained if the nominal value of the shares intended to be transferred by any individual, firm, group, constituent of a group or body corporate under the same management, jointly or severally, exceeds 1% of the total paid-up capital of the insurer or reinsurer.
The Registration Regulations also impose the following reporting requirements, among others:
The Policyholders Regulations issued by the Insurance Regulatory and Development Authority of India are the primary regulations on the protection of policyholders' interests. The Policyholders Regulations prescribe the practices that must be undertaken by insurers and insurance intermediaries at the point of sale of the insurance policy to ensure that the policyholder understands the terms of the policy properly.
In addition, the Policyholders Regulations prescribe the claims procedure that must be followed by insurers to ensure the timely processing of claims. Insurers must pay interest at 2% above the prevalent bank rate where payment of the claim amount is delayed.
Insurers must also put in place proper grievance redressal procedures and mechanisms in accordance with the applicable provisions for the resolution of grievances of policyholders.
The Consumer Protection Act 2019 was notified on 9 August 2019. It aims to strengthen the existing framework for consumers while also introducing a centralised agency, the Central Consumer Protection Authority (CCPA). The CCPA has wide-ranging powers, including the power to initiate investigations and impose such sanctions and penalties as may be required to prevent the violation of consumer rights.
By operation of law, an insured can approach a consumer forum in relation to any claim against an insurer. This right of forum is independent of any right which the insured may have under the policy terms to initiate arbitration or court proceedings.
The consumer commissions have a three-tier hierarchy, with district commissions on the lowest rung, followed by a state commission (for every state) and a national commission at the apex level. District commissions have jurisdiction to deal with complaints arising from contracts for goods services where the consideration does not exceed INR 5 million. State commissions have jurisdiction where the consideration is above INR 5 million and below INR 20 million; while the national commission hears original complaints where the consideration is above INR 20 million.
The fee for filing a complaint before a consumer forum is nominal, unlike court fees, which are ordinarily determined based on the claim amount.
The government also notified the Consumer Protection (Direct Selling) Rules 2021 on 28 December 2021. The rules aim to regulate trade practices across all models of direct selling; any unfair trade practices which result in a breach of the rules by direct selling entities or direct sellers are punishable under the Consumer Protection Act.
The Policyholders Regulations require insurers to maintain all policyholder data as confidential, unless it is necessary to disclose such information to statutory authorities due to the operation of law. Further, data pertaining to all policies issued and all claims made in India must be held in data centres located and maintained in India.
Given the significant increase in e-commerce over the years, the Insurance Regulatory and Development Authority of India (IRDAI) has recognised the sale and servicing of insurance products online and the issuance of e-insurance policies. The insurance sector is continuously adapting to various technological advancements – such as artificial intelligence, data analytics and digital marketing – in relation to:
The IRDAI has also issued specific norms on issues such as:
Insurers and reinsurers must comply with these norms.
On 7 April 2017 the IRDAI also issued its Guidelines on Cybersecurity which, among other requirements, provide that insurers must have:
The guidelines also mandate that the risk management committee should be responsible for an annual comprehensive assurance audit, including vulnerability assessment and penetration testing, and should report the findings to the IRDAI.
Further, on 1 October 2021 the IRDAI issued a public notice on a cybersecurity awareness campaign, in which it set out a list of dos and don'ts to be considered while carrying out various insurance transactions.
The Prevention of Money Laundering Act 2002 came into force on 1 July 2005 and, along with the Prevention of Money Laundering (Maintenance of Records) Rules 2005, obliges entities such as insurers to:
On 1 August 2022, the Insurance Regulatory and Development Authority of India issued the Master Guidelines on Anti-Money Laundering/Counter Financing of Terrorism 2022, which consolidate the earlier guidance issued on this subject for insurers. The guidelines are to be implemented from 1 November 2022 and require insurers to establish policies and procedures for the prevention of money laundering and terrorist financing. The guidelines will apply to all classes of life, general and health insurance; but will not apply to reinsurers.
The Competition Act 2002 regulates anti-competitive activities in India through the Competition Commission of India (CCI), which was established under the act. The Competition Act regulates, among other things:
Mergers and acquisitions in the insurance sector are governed by the Insurance Act as well as the Competition Act. The Insurance Act sets out the requirements and procedure for obtaining in-principle approval from the Insurance Regulatory and Development Authority of India for the amalgamation and transfer of an insurance business. Upon receipt of in-principle approval, the entities in question must seek 'other regulatory approvals', including any applicable approvals under the Competition Act. The standards adopted by the CCI are similar across sectors and there are no specific measures targeted towards insurers.
The Insolvency and Bankruptcy Code 2016 governs the law relating to the insolvency of corporate persons, partnership firms and individuals. The definition of 'corporate persons' under Section 3(7) of the code excludes 'financial service providers', including insurers. The code also provides the government with the power to introduce specific rules on the insolvency of financial service providers.
Pursuant to this power, the government notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules 2019. The rules apply to such financial service providers as may be notified. To date, the rules have only been notified for non-banking finance companies, including housing finance companies.
Consequently, the insolvency of insurers is still governed by the Insurance Act and the relevant provisions of the Companies Act 2013.
Recently, norms have been introduced or amended in relation to a number of important issues in the insurance sector, including:
The new chairperson of the Insurance Regulatory and Development Authority of India (IRDAI) has also held a number of meetings with the aim of increasing the ease of doing business and insurance penetration in India.
The IRDAI has also conducted sessions with market players to:
It has identified various areas within the existing legal/regulatory architecture for internal review. The IRDAI is also known to have held various sessions with industry players in order to review and discuss progress made towards enhancing insurance penetration and policyholder welfare.
Recently, the IRDAI has issued exposure drafts on:
While these exposure drafts are at the deliberation stage and stakeholder comments have been invited, we anticipate that new regulations and guidelines will be issued on these and other matters in the coming year.
The Indian insurance sector is highly regulated. As per the regulatory guidance issued in recent years and past orders of the Insurance Regulatory and Development Authority of India, we note that the primary focus has been to protect and promote policyholders' interests and increase insurance penetration. Judgments from the Indian courts and other forums, particularly on retail matters, also appear to be focused on protecting policyholders' interests. Therefore, insurers should develop robust internal controls and mechanisms to ensure compliance with the reporting requirements, approval requirements, record requirements and various other requirements which apply on a day-to-day level. They should also develop strong internal policies and procedures which are focused on:
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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