Enhancing Trust: Governance Framework for Insurers

Recently, the Insurance Regulatory and Development Authority of India (“IRDAI”) approved eight principle-based consolidated regulations after conducting a comprehensive review of the regulatory framework for the insurance sector during its 125th authority meeting held on March 19, 2024. Among these regulations is the IRDAI (Corporate Governance for Insurers) Regulations, 2024 (“Regulations”), aimed at establishing a robust governance framework for insurers by defining the roles and responsibilities of the Board and management.[1]

Background

In August 2009, IRDAI came out with guidelines on corporate governance for insurance companies and subsequently, several separate guidelines came to be issued concerning the appointment, reappointment, and remuneration of Managing Directors (“MD”), Chief Executive Officers (“CEO”), Whole Time Directors (“WTD”), etc. These guidelines were later revised to incorporate the extensive changes brought about by the Companies Act 2013, merging stipulations related to corporate governance practices and executive appointments. The revised guidelines became effective from the financial year 2016-17.[2]

Overview of Regulations

The Regulations were introduced by IRDAI to further strengthen the regulatory framework for the insurance industry. They codify governance aspects into a structured framework, emphasising the significance of governance in insurance company operations. The Regulations aim to build trust and confidence among stakeholders by prioritising transparency, accountability, and ethical conduct.

Their primary objectives are to provide insurers with a framework to adopt sound and prudent governance principles and practices, delineate the roles and responsibilities of the Board and management to safeguard the interests of stakeholders, including policyholders, and promote stewardship principles among insurers. Additionally, the Regulations address matters pertaining to corporate governance, remuneration of directors and Key Management Persons (“KMPs”), the Stewardship Code, and the appointment or continuation of Common Directors.

These provisions apply to all insurers operating in India, excluding foreign companies engaged in reinsurance through branches within the country. They are structured into seven chapters, with the overview of each chapter provided below.

Composition of the Board[3]

As per the Regulations, the Board is to comprise of competent individuals with diverse expertise relevant to the insurer’s business. The directors’ qualifications and experience should align with the complexity and scale of the insurer’s operations. Further, a balanced mix of independent directors and non-executive directors is mandated, with a minimum of three independent directors. Compliance with the Indian Insurance Companies (Foreign Investment) Rules, 2015, is mandatory for insurers with foreign investment. The CEO is designated as a WTD, and the appointment of the Chairperson requires prior approval from the Competent Authority[4], except for public sector insurers.

Independent Directors – Vacancy and Removal

The Board is required to notify the Authority immediately if the number of independent directors falls below the prescribed limit. In addition, the vacancies on the Board must be expeditiously filled, either at the subsequent meeting or within three months of the vacancy, with reasons communicated to the Authority within thirty days of the removal or resignation of an independent director.

Compliance and Criteria

Under the Regulations, the independent directors are required to adhere to the provisions of the Insurance Act, 1938, the Companies Act, 2013, and the Securities and Exchange Board of India Act, 1992, along with associated rules and regulations. The directors are mandated to continually meet the “fit and proper” criteria as outlined by the Competent Authority. Further, compliance with the Companies Act, 2013 and the Insurance Act, 1938 is obligatory concerning directors’ terms, tenure, and appointment. It is specified that the Authority would be laying down the conditions for appointing common directors between insurers and insurance agents, intermediaries, or insurance intermediaries.

Independence of the Board

The insurers are to be held responsible for ensuring the (i) independence of the Board from management and promoters and (ii) independence of control functions, encompassing compliance, risk, audit, actuarial, and secretarial functions.

Powers, Roles and Responsibilities of the Board

The Board is responsible for formulating strategies, overseeing management, ensuring risk management, framing policies, delegating responsibilities, constituting committees, managing conflicts of interest, and evaluating director performance, among other duties.

The Regulations stipulate the establishment of various committees by the Board of insurers to ensure effective governance and compliance. These committees include the Audit Committee, Nomination and Remuneration Committee, Corporate Social Responsibility Committee, Risk Management Committee, Policyholder Protection, Grievance Redressal, and Claims Monitoring Committee, Investment Committee, and With Profits Committee. The Board may constitute other committees as needed to meet regulatory requirements or address specific concerns.

Insurers are required to ensure that the formation, appointment, and removal of committee members, as well as the conduct of meetings, adhere to the provisions of relevant laws and regulations, including the Insurance Act, 1938, the Companies Act, 2013 and the Securities and Exchange Board of India Act, 1992. Measures must be put in place to address potential conflicts of interest, with adequate systems, policies, and procedures established to ensure compliance with the Companies Act. Furthermore, related party transactions must be carried out in accordance with relevant laws and regulations, with a policy on such transactions reviewed annually by the Board.

The Board also holds responsibility for overseeing continuous compliance with statutory requirements on capital structure and conducting evaluations of directors, including independent directors, in accordance with the Companies Act. Succession planning is integral to the Board’s internal governance practices, ensuring the identification and nurturing of individuals for directorship and key management positions.

For insurers operating within corporate groups, regulatory requirements regarding governance policies and practices established at the group level must be adhered to, with considerations made for the insurer’s specific business, risk profile, and sectoral regulatory requirements.

Appointment of KMPs

These Regulations further aim to ensure that insurers appoint qualified and competent individuals to key positions within their organisations and maintain transparency and compliance in their operations. 

Insurers are mandated to appoint MDs, CEOs, or WTDs in accordance with Section 34A of the 1938 Act, ensuring their suitability through effective due diligence. The appointment of KMPs is to be based on recommendations from the Nomination and Remuneration Committee, with adherence to regulations governing the appointment of Appointed Actuaries. Additionally, Chief Compliance Officers (“CCOs”) must be appointed for a minimum tenure of three years, with defined responsibilities including compliance framework designing. The Board is required to promptly report the vacancies in KMP positions to the Authority, with action taken to fill them within the specified timeframe.

Remuneration of Directors and KMPs

Insurers are required to establish sound remuneration policies within their Corporate Governance framework, aligning with regulations set by the Competent Authority. This policy covers remuneration for the chairperson of the Board, non-executive directors, and KMPs. The Board is mandated to oversee the implementation of remuneration policy to ensure it mitigates excessive risk-taking and aligns with the insurer’s long-term interests and stakeholder needs. The conflict of interest in remuneration decisions is to be identified and managed, with Board members avoiding situations that may compromise impartial decision-making.

Statutory Auditors

It is stipulated that insurers must appoint a minimum of two auditors to serve as joint statutory auditors and ensure that there is no conflict of interest in their appointment. The appointment process should be carefully managed by the Board on the recommendations of the Audit Committee. However, the final approval rests with the shareholders, who must sanction the appointment at the insurer’s general meeting. This transparent procedure aims to uphold accountability and transparency in the selection of auditors. Moreover, the Competent Authority retains the authority to establish eligibility criteria, minimum qualifications, experience requirements, and other specifications for the appointment of statutory auditors. This oversight ensures that auditors possess the necessary expertise and integrity to fulfil their crucial role effectively, safeguarding the integrity of financial reporting within the insurance industry.

Stewardship Policy

The Regulations mandate insurers to develop a stewardship policy approved by the Board, outlining their responsibilities towards policyholders and strategies to enhance their benefits. This policy should clearly identify and define the stewardship responsibilities the insurer intends to undertake. Additionally, it must specify measures to actively engage with investee companies’ managements, particularly during general meetings, to improve governance practices. The Competent Authority may further specify requirements for this policy. Overall, the stewardship policy aims to ensure insurers fulfil their responsibilities effectively and contribute to the betterment of policyholders.

Other Provisions

The Regulations also cover disclosure and reporting requirements, Environmental, Social, and Governance (“ESG”) frameworks, Climate Risk Management, and the Authority’s powers to issue circulars and clarifications as needed. The regulations mandate insurers to appoint a CCO responsible for ensuring ongoing compliance and unless otherwise specified, the CCO will be the designated Compliance Officer for submitting reports to the Competent Authority. An annual compliance report, along with a separate certification from the CCO, must be submitted in the prescribed format. Insurers are required to disclose various details about their Board composition, meetings, remuneration, etc. as per the specified format. Furthermore, insurers must establish a Board-approved ESG framework, monitored annually, along with a comprehensive Climate Risk Management framework tailored to their operations.

Conclusion

It is evident that IRDAI has enacted these provisions to strengthen the regulatory framework governing insurers. These Regulations primarily aim to reinforce existing guidelines rather than introduce an entirely new framework. The goal is to enhance oversight and governance within the insurance sector, ensuring that insurers operate in compliance with established norms and standards. Overall, the new Regulations provide for a structured framework for insurers to adhere to, promoting sound governance practices and ensuring the protection of policyholders’ interests.

References:

[1] Accessed from press release dated March 22, 2024: https://irdai.gov.in/document-detail?documentId=4534434

[2] Revised guidelines available at: https://irdai.gov.in/document-detail?documentId=382140

[3]Regulation 3(1)(c) defines “Board” as the Board of Directors of the insurers.

[4]“Competent Authority” is defined under Regulation 3(1)(e) to mean (i) the Chairperson or (ii) such whole-time member or committee of the whole-time members or such officer(s) of the Authority, as may be determined by the Chairperson.

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It is evident that IRDAI has enacted these provisions to strengthen the regulatory framework governing insurers. These Regulations primarily aim to reinforce existing guidelines rather than introduce an entirely new framework. The goal is to enhance oversight and governance within the insurance sector, ensuring that insurers operate in compliance with established norms and standards. Overall, the new Regulations provide for a structured framework for insurers to adhere to, promoting sound governance practices and ensuring the protection of policyholders’ interests.

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