The Insurance Regulatory and Development Authority of India (IRDAI) has recently notified the IRDAI (Corporate Governance for Insurers) Regulations, 2024 (Regulations) on 20 March 2024. The Regulations provide a streamlined framework for insurers to adopt for their governance structure, and specifically define the roles and responsibilities of the board of directors (Board) and management of the insurers. These Regulations apply to all insurers except FRBs or branch offices of foreign reinsurers in India.
While the Regulations are the first of its kind on corporate governance of insurers, the IRDAI had earlier issued separate guidelines and circulars for corporate governance, appointment / reappointment and remuneration of Managing Director (MD) / Chief Executive Officer (CEO) / whole time directors (WTDs) & key management persons (KMPs) and appointment of statutory auditors. In 2016, the IRDAI issued the Guidelines on Corporate Governance (Guidelines) which consolidated the stipulations for the above.
It is interesting to note that while the Regulations elaborate on all points covered under the Guidelines, there is no clarity on the fact whether the Regulations supersede the Guidelines or not. In this article, we have summarised some of the key features enumerated in the Regulations:
(1) Board of the Insurer
Composition
- The qualifications and experience of the directors should match the complexity of business and size of the insurer.
- The directors should be from various areas of financial and management expertise like the lines of insurance business underwritten, actuarial and underwriting risks, finance, accounting, etc.
- Minimum three independent directors (INEDs). The relaxation in the Guidelines of 2 INEDs for the first 5 years from grant of certificate of registration is not captured here.
- Prior approval of competent authority required for appointment of Chairperson of the Board, except for public sector insurers.
- In addition to informing IRDAI in case the number of INEDs falls below 3, the insurer is required to inform IRDAI in case of removal / resignation of INEDs within a period of 30 days.
Powers, Roles & Responsibility
- Set a clear and transparent policy framework for translation of the corporate objectives.
- Formulate the overall strategy and direction to the insurer and overseeing its overall management.
- Ensure appropriate systems and procedures for risk management and internal controls.
- It may delegate its responsibilities to Committees but is responsible for the acts and omissions of the Committees.
- Constitute committees as mandated by the Companies Act, 2013 (Act), including but not limited to audit committee, nomination and remuneration committee (NRC) and corporate social responsibility committee in the manner stipulated under the Act. Chairperson of these 3 committees mentioned here is required to be an INED.
- Additionally, constitute risk management committee, policyholder protection, grievance redressal and claims monitoring committee, investment committee, with profits committee (only for life insurers) and such other committees to discharge its functions and responsibilities under applicable regulatory framework or as it deems.
- Ensure that KMPs do 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.
- Insurer to ensure that related party transactions and disclosures are in compliance with the provisions of the Act and other applicable laws and other requirements.
- Insurers that are part of a corporate group may be subject to the regulatory requirements established for the group-level and implemented uniformly across the group. These practices may be reoriented for the insurer considering the specific nature of the business, risk profile and sectoral regulatory requirements.
(2) KMPs
- KMPs include members of core management team of an insurer including all WTDs or MDs or CEOs and the functional heads one level below the MD or CEO including the Chief Financial Officer, Appointed Actuary, Chief Investment Officer, Chief Risk Officer, Chief Compliance Officer (CCO) and the Company Secretary.
- CCO to be appointed for minimum fixed tenure of not less than 3 years.
- In case of vacancy due to retirement / resignation, etc. of KMP, insurer to inform IRDAI and initiate action for filling up such vacancy on priority. No position to remain vacant for a continuous period of 180 days.
- KMPs to be appointed by the Board on recommendation of the NRC.
(3) Remuneration to Directors and KMPs
- Insurer should have a comprehensive Board approved remuneration policy in terms of the specified framework for remuneration of Chairperson of the Board, non-executive directors and KMPs.
- Board should ensure that implementation of the said policy does not induce excessive or inappropriate risk taking and specifically manages conflicts of interests among other aspects like identified risk appetite, long term interest of the insurer, interest of the policyholders.
(4) Statutory Auditors
- Board to appoint minimum of 2 auditors as joint statutory auditors, on the recommendation of the Audit Committee. The said appointment must be approved by the shareholders as well.
- Insurer to ensure that there is no conflict in the appointment of auditors.
(5) Stewardship
- The Insurer to have a Board approved Stewardship Policy identifying and defining its stewardship responsibilities and the manner of fulfilling the same to enhance the benefits to the policyholders.
- The said policy must lay down that insurers will play an active role in the general meetings of investee companies and engage with their managements to improve governance.
(6) Environment, Social and Governance (ESG)
- Every insurer to have in place a Board approved ESG framework which is to be reviewed annually by the Board. The Board must also monitor the insurer’s activities under ESG.
- Board to establish a comprehensive Climate Risk Management framework to facilitate the climate risk management.
(7) Disclosure & Reporting Requirements
- The CCO is responsible for ensuring and monitoring compliance with the Regulations and will be the designated compliance officer for submitting returns, reports and applications for approval to the IRDAI.
- Report on the status of compliance with the Regulations to be filed annually with IRDAI along with a separate certificate from the CCO.
Alongside mandating the insurers to formulate policies on stewardship and ESG, the Regulations have succinctly put in place the structure for seamless operations of insurer’s business. The specifically defined roles and responsibilities of the Board and the management will prove to be crucial in fostering an environment of accountability, transparency, and efficiency in insurance companies. This structured approach not only safeguards the interests of shareholders and policyholders but also ensures compliance with regulatory standards, thereby enhancing the overall stability and integrity of the insurance sector.
For more information, please get in touch with Senior Partner, Sakate Khaitan at sakate.khaitan@khaitanlegal.com, Senior Associate, Arushi Arora at arushi.arora@khaitanlegal.com or Associate, Lovina Ropia at lovina.ropia@khaitanlegal.com
AUTHORS: Sakate Khaitan (Senior Partner) | Arushi Arora (Senior Associate) | Lovina Ropia (Associate)