India: Insurance Regulatory Round Up - 2023

True to the spirit and object of promoting and ensuring orderly growth of the insurance industry, the Insurance Regulatory and Development Authority of India (IRDAI) in the year 2023 has undertaken remarkable initiatives to foster ease of doing insurance business in India. The year 2023 also witnessed progressive steps by the Regulator to boost greater insurance penetration and aligning insurance requirement with increasing demand from varied stakeholders.

In this yearly round-up we have touched upon some relevant developments towards streamlined procedural modalities in the product filing regime, cross border reinsurers and registration of insurance companies. Relevantly, IRDAI has amended the regulations governing expenses of management and payment of commission to intermediaries which now renders more flexibility to insurers to allocate funds. From the standpoint of encouraging and promoting insurance penetration to the relevant stakeholders, the year saw some significant modifications to the guidelines governing surety insurance contracts and trade credit insurance. The year 2023 also witnessed a notable step towards the goal of positioning India as a global reinsurance hub with the amendment to reinsurance regulations. The updates are summarized as follows:

Guidelines on issuance of File Reference Numbers (FRN) to Cross Border Re-insurers[1]

The IRDAI in exercise of the powers conferred under Section 34(1) of the Insurance Act, 1938 (Insurance Act) read with Regulation 4(3) and 12(3) of the IRDAI (Reinsurance) Regulations, 2018 (Reinsurance Regulations)[2], issued these guidelines with the aim to streamline the process with respect to cross border reinsurers (CBR).

Per these guidelines, upon an application by the insurer, CBRs are applicable for allotment of a filing reference number (FRN) on auto-renewal or annual basis depending upon whether they qualify as an ‘Eligible CBR’, or a ‘Non-eligible CBR’. FRN allotted on auto-renewal basis will be valid for a period of 3 years as opposed to annual FRN which is subject to renewal on a yearly basis.

A CBR qualifies as an ‘Eligible CBR’ so long as they:

• Have a credit rating not less than ‘Standard & Poor's A- or equivalent; and
• meets the other requirements as per Regulation 4(1) of Reinsurance Regulations.

Modification of Surety Insurance Guidelines

In 2022, the IRDAI issued IRDAI (Surety Contracts) Guidelines, 2022[3] to regulate and allow transacting the business of Surety Insurance in India. Surety Bonds are a type of insurance policy protecting parties involved in a transaction or contract from potential financial losses due to a breach of contract or other types of non-performance. The purported intent to allow transacting business of surety insurance is to serve as a risk mitigation tool for maintaining integrity, quality, and adherence to contractual terms, ultimately contributing to the smooth functioning of infrastructure sector and fostering a healthy business environment.

In partial modification[4] of these Guidelines:

• The earlier cap of premium being 10% of the total gross written premium of that year, subject to a maximum of INR 500 Crore (about USD 60 Million) charged on all Surety Insurance policies is made inapplicable to monoline surety insurance companies registered for doing surety insurance business on a standalone basis.
• Further, Surety insurance which was previously restricted to private/government infrastructure projects, is now allowed for surety in commercial contracts.

Following the amendments removing the cap on premiums by monoline insurers transacting only Surety Insurance Business, on 16.05.2023 IRDAI further:

• The solvency margin applicable to insurers underwriting surety insurance is prescribed to be 1.5 times of the control level of solvency specified by the Authority.
• Removed the restriction of 30 percent of the contract value being the exposure limit applicable on each contract underwritten by an insurer.

These revisions are aimed at encouraging insurers to meet the increasing demand from various sectors of the economy by increasing the availability of such products.

Amendment of Regulations for Expenses of Management and Payment of Commission

To enable and provide flexibility to the insurers to manage their expenses within the overall limits based on their gross written premium and for optimal utilization of resources for the overall benefit of policyholders, the IRDAI in March 2023 notified the following:

1. the IRDAI (Expenses of Management of Insurers transacting life insurance business) Regulations, 2023 (“EOM Life Insurance Regulations”);
2. the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations, 2023 (“EOM General Insurance Regulations”); and
3. the IRDAI (Payment of Commission) Regulations, 2023 (“Commission Regulations”)

These regulations came into effect on 01 April 2023, repealing the IRDAI (Expenses of Management of Insurers transacting life insurance business) Regulations, 2016, the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations, 2016 and the IRDAI (Payment of commission or remuneration or reward to insurance agents and insurance intermediaries) Regulations, 2016, respectively.

EOM General Insurance Regulations

With the amendment to the EOM General Insurance Regulations:

• The previously applicable segment-wise limit for expenses has been done away with and in place, a standardized cap of 30% and 35% of gross premium written in India in a financial year, is placed on general insurer and standalone health insurers respectively.
• Insurers reporting growth in the gross direct premium sourced from rural sector or other specified schemes (such as Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana or the likes) are now allowed additional allowances as specified.
• Interestingly, the amended regulations now define “Insurtech” and “insurance awareness” and permit additional allowance of 5% to the expenses of management to promote wider customer reach.

EOM Life Insurance Regulations

The EOM limits continue to be prescribed as per product categories with revised limits as follows:

Regulations of 2016	Amended Regulations of 2023
Ten percent of all single premiums received during the year on individual pure risk policies.	Fourteen percent of all single premiums received during the year on Individual pure risk policies previously.
Ten per cent of all first year’s premiums and six per cent of all renewal premiums, received during the year on policies granting deferred annuity in consideration of more than one premium.	Fifteen percent of all first year’s premiums and four per cent of all renewal premiums, received during the year on policies granting deferred annuity in consideration of more than one premium.
One half of one per cent of all annuities paid during the year.	Three fourth of one per cent of all annuities paid during the year.
One twentieth of one per cent of the average of the total sums assured of paid up policies on which no further premiums are payable at the beginning and end of the year.	One tenth of one per cent of the average of the total sums assured of paid up policies on which no further premiums are payable at the beginning and end of the year
One hundredth of one per cent of the average of the total sums assured of lapsed policies under the revival period at the beginning and end of the year.	One fiftieth of one per cent of the total sums assured of lapsed policies under the revival period at the beginning of the year.

In addition to the above, these regulations further permit:  

• Head Office Expenses of an insurer having his principal place of business in India and having branch outside India or having International Financial Service Centre (IFSC) Insurance Office (IIO) not exceeding 5 percent of the gross premium income written outside India through such branch office or IIO during the year.
• Allowance towards expenses by insurers reporting growth in the gross direct premium sourced from rural sector or other specified schemes (such as Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana or the likes) inter alia not exceeding 15 per cent of the incremental premium over the previous financial year, sourced from the rural sector and the above specified schemes.

Commission Regulations

The new regulations have entirely done away with the previous regime of product-wise limits on commission and remuneration payments to insurance agents and insurance intermediaries, instead permitting general, life and standalone health insurers to designate limits in accordance with their board approved policies, subject to the overall cap on expenses of management as prescribed under the applicable EOM Regulations.

“Use and File” Procedure for Products[5]

This Circular follows the radical shift in the product filing mandate introduced in 2022, wherein the “File and Use” procedure has been mostly replaced with “Use and File” procedure – simplifying product filing procedure, with increased flexibility and independence to insurers.

This Circular has been issued to modify the existing procedure enabling dynamism to market insurance products.

For product filing, supporting documents earlier required to be submitted to the IRDAI are now only required to be placed with the insurer’s internal Product Management Committee (PMC).

The PMC shall be responsible for the final approval of the products, maintaining the entire set of documents required under “Use and File” procedure and ensuring that the same is complete, correct, digitally signed and in compliance with the applicable legal and regulatory framework.

IRDAI with this mandate however reserves the right to call upon the documents maintained for examination with respect to products identified on monthly basis from amongst life, general and/or health insurers. Once the records are called upon, the insurer will be required to submit the same within 2 days of such request.

The triggering factors to call upon records are identified as:

• complaints received on the products launched/mis-selling/distribution channel;
• news articles of aggressive selling of specific products;
• sales volumes of the products launched;
• rampant policy cancellations or free look cancellations; or
• any other matter concerning products/solicitation.

Master Circular on Registration of Insurance Companies

In 2022, IRDAI notified the amended IRDAI (Registration of Indian Insurance Companies) Regulations, 2022 (Registration Regulations) providing a simplified, structured and streamlined process of registration. In continuation of the amended regulations, IRDAI issued a Master Circular[6] on 24 April 2023 which provides the detailed formats of the forms that are required to be filed for seeking R1 and R2 approvals. The Circular also provides the form for seeking grant of duplicate Certificate of Registration, form for seeking approval for transfer of shares, and disclosures for equity shareholding patterns.

With the Circular coming into effect, the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines 2017, the Guidelines for Listed Indian Insurance Companies 2016, the Circular dated 22 July 2020 on transfer of shares of the insurance companies and the Circular dated 27 September 2018 on details of equity holding pattern of insurance companies stands repealed.

With the repealing of the above, the Circular provides transitory clarifications regarding:

• the validity of forms/NOC issued prior to the notification of the Registration Regulations,
• applicable fees for seeking approval of transfer of shares,
• applicable lock-in period for approval granted prior to notification of the Registration Regulations,
• shareholder’s status depending upon the percentage of equity held in the insurer.
• Clarification in relation relaxation on lock-in on shareholding as provided in Regulation 6(1) of the Registration Regulations.

Information and Cyber Security Guidelines

The IRDAI recently issued revised Information and Cyber Security Guidelines “IRDAI Information and Cyber Security Guidelines” on 24 April 2023 replacing the earlier cyber security guidelines of 2017.

These guidelines aim to implement, maintain, and improve the security of critical data and information assets. The revised guidelines seek to enable the insurance industry to strengthen their governance mechanisms to combat potential cyber threats. Key features of the Cyber guidelines are summarized as follows:

Applicability: These guidelines are applicable to all Insurers including Foreign Re-Insurance Branches (FRBs), Insurance Intermediaries regulated by the IRDAI, Insurance Repositories and Insurance Information Bureau and other regulated entities.

Scope: Cyber Security Policies of an organization are intended to apply to Information Assets (such as include business data, system logs, servers, desktops, network equipment, network media, storage media, paper, people etc) throughout their lifecycle, including creation, distribution, transmission, storage and disposal.

Governing Body: The Board shall play a proactive role in ensuring an effective Information and Cyber Security governance and shall be ultimately responsible for the information security of the organization. The guidelines further provide for formulating the Information and Cyber Security Policy (ICSP) of  the organization which will be governed by the Information Security Risk Management Committee (ISRMC) comprising of the Chief Risk Officer (CRO), Chief Information Security Officer (CISO), Chief IT Security Officer (CITSO), Chief Security Officer (CSO), Chief Human Resource Officer (CHRO), Chief Technology Officer (CTO), Function heads of Operations, Finance, Legal, Compliance.

Policies for increased level of cyber security: The Guidelines streamline the scope of various polices to ensure security for the protection of consumers’ sensitive data. Some of the policies introduced are - Data Classification Policy, Assent Management Policy, Access Control Policy, Human Resource security Policy, Information Systems acquisition and development policy, Information systems maintenance policy, Mobile Security Policy, to name a few.

Policies for use of Personal Devices and Social Media Platforms: The Guidelines provides policies governing use of personal social media platforms by the employees which includes BYOD (Bring your own device) Policy regulating the use of employee-owned devices for accessing corporate emails, applications and data in order to protect the company’s reputation and data accessed through personal devices.

Third Party Service Providers: the Guidelines provide policy which provides for selection, termination and mode of operations for all third-party service providers such as contractors, vendors and consultants who handle, store or transmit organization’s information and information resources in any form.

Work from Remote Location: This policy provides for terms of use of organization’s information assets by employees, contractors and third-party accessing organization’s information assets and facilities using remote connections. Some of the checks to regulate remote access include frequent change in the passwords, sharing of certain important documents on need-to-know basis, sharing of evidence within the authorised domain.

Inclusion of Intermediary Rules in the Guidelines: the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 is made applicable to all employees, contractors and third parties who shall access organization’s information assets and facilities.

Submission of Annual Audit Report to IRDAI - Every organization continues to be required to do an Independent Assurance Audit ("IA Audit") annually. The Cybersecurity Guidelines specify the following in this regard:

• the format of the audit report, which includes the audit summary, overall findings, non-compliances, risk rating, and audit checklist. [Annexure III of the Guidelines give the format of the audit report]
• the requirements for the auditor(s) or audit firm to be hired; and
• the format of the audit certificate that the auditor(s) or audit firm must certify.

The Audit Report is required to be presented to the Audit Committee/Board of Directors/Principal Officer of the organisation, as applicable. Following the same:

• an Insurer is required to submit their Audit Report (including the comments by the Board) duly signed by the auditor(s)/audit firm to the IRDAI within 90 days from the end of the financial year or within 30 days of the completion of the Audit, whichever is earlier; and
• while an insurance intermediary is required to submit the Audit Report (including the comments by the Board) to the Insurer(s) annually.

Amendment to Reinsurance Regulations

With the intent to maximize retention and to increase the overall capacity of the reinsurance sector, the IRDAI (Re-insurance) (Amendment) Regulations, 2023 have been issued to amend the 2018 reinsurance regulations. The key amendments are summarized as follows:

• In order to avoid dual compliances by the IIOs (International Financial Services Centres Authority Insurance Offices) who are otherwise required to comply with the regulations issued by International Financial Services Centres Authority, the amended reinsurance regulations have excluded applicability of the reinsurance regulations to IIOs.
• Retention policy of 50% applicable to Indian Re-insurer is now also applicable to FRBs. The amended Regulations additionally provide that retrocession to an IIO up to 20% of Indian re-insurance business underwritten shall be reckoned towards the required minimum retention of 50%.
• Prior approval from IRDAI will now be required for re-insurance placement with any International Pool or Risk sharing arrangement which has CBRs as members, participants, or administrators.
• The amendments have also modified and streamlined the preference order for re-insurance placements with four levels in place of the earlier six levels. While the Indian re-insurers remain the first category in the order of preference, IIOs which invest 100% of retained premium from Indian business in domestic tariff area (“DTA”)[7] and FRBs, have been placed as the second category in the order. Other IIOs have been placed as third category and other Indian Insurers and CBRs have been placed at the end of the preference order.
• It is clarified that an Indian cedant may decide to not seek terms from an Indian re-insurer or FRB or IIO which is a group / associate company of any other Indian insurer.
• The current law provides for different cession limits for re-insurance placement with CBRs. The new regulation excludes the applicability of the cession limits on a cedant, transacting in business other than life insurance, if it places total re-insurance premium of up to INR 75 Crore (about USD 9 Million) outside India during a financial year and the placements are with CBRs having a rating of BBB+ and above.
• The minimum capital requirement for setting up branch offices by a foreign re-insurer other than Lloyd’s has been reduced from INR 100 Crore (about USD 12 Million) to INR 50 Crore (about USD 6 Million) with the provision to repatriate any excess assigned capital.

Modification to the Trade Credit Insurance Guidelines, 2021[8]

By way of this Circular, IRDAI has effectively modified the Trade Credit Insurance Guidelines to now permit trade credit cover to be extended to reverse factoring transactions through invoice discounting platforms[9] such as TReDS (trade receivable discounting system).

Trade Credit Insurance is essentially an effective risk management tool for suppliers of goods and services and other financial institutions, to mitigate the seller’s risk of non-payment of trade receivables and potential risks of insolvency of the buyers in both domestic and global trade scenarios.

The Trade Credit Insurance Guidelines were previously amended in September 2021 permitting trade credit policies to be offered to Banks/Financial Institutions in addition to sellers, which was earlier prohibited. Trade Credit Insurance cover is now permitted to be provided to financiers to cover default of the buyer against the invoices financed on TReDS platform.

Following the same, financiers can now be secured for the financial assistance extended by it to Sellers who have procured trade credit policies. Likewise, the 2021 Guidelines allowed insurance coverage for factoring transactions, however prohibited coverage for ‘reverse factoring’ transactions.

The recent modification permits insurance coverage for reverse factoring transactions carried out by TReDS.

This modification is in alignment with RBI’s guidelines issued in July, 2018 as an initiative to ease constraints faced by MSME, in converting their trade receivable to liquid funds. Following the same, RBI extended insurance facility for TReDS transactions in June 2023 to aid financiers to hedge default risk, allowing insurance companies to participate as “fourth participant” in TReDS and undertake “reverse factoring”.

The IRDAI modified the 2021 guidelines after examining the feasibility of Trade Credit Insurance cover against “reverse factoring” transactions on TReDS platforms.

Amendment of Arbitration Clause in General Insurance policies[10]

Considering that the retail / individual policy holders have various forums for redressal of their grievances including the Insurer’s Grievances System, Insurance Ombudsman and the Consumer Courts besides the Civil Courts, the IRDAI in exercise of its powers under Section 14(2)(i) of the IRDA Act 1999 has decided to eliminate arbitration as a dispute resolution mechanism in retail policies.

IRDAI has further recommended a standard arbitration clause for policies issued under the Commercial Lines of Business as under:

“The parties to the contract may mutually agree and enter into a separate Arbitration Agreement to settle any and all disputes in relation to this policy. Arbitration shall be conducted under and in accordance with the provisions of the Arbitration and Conciliation Act, 1996.”

This is applicable to policies issued on or after the date of this circular.

The initiatives and developments in the year 2023 have set the course for product and operational evolution in the Insurance industry. It will be interesting to see what 2024 has in store towards development of insurance business in India.   

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Authors

	Sumeet Lall  Partner, CSL Chambers  Sumeet.Lall@cslchambers.com
	Nanki Arora Senior Associate, CSL Chambers  Nanki.Arora@cslchambers.com