The insurance sector in India is governed by the Ministry of Finance and is primarily regulated by the Insurance Regulatory and Development Authority of India (IRDAI). Insurance products / services are typically divided into life and non-life insurance. Over the years, this sector has seen substantial growth with contributions from a multitude of private players, also owing to the easing up of the FDI regime. In addition to insurance companies themselves, this industry also consists of insurance intermediaries such as brokers, administrators, surveyors and loss assessors. This note outlines the key factors that govern the insurance regime in India and the recent trends in this sector.
PRIMARY LEGISLATIONS GOVERNING THE INSURANCE SECTOR IN INDIA
The (Indian) Insurance Act, 1938 was enacted to consolidate and amend the law relating to the business of insurance in India. Tied with this, the Insurance Regulatory and Development Authority of India Act, 1999 was enacted to provide for the establishment of an authority to protect the interests of holders of insurance policies, and to regulate, promote and ensure orderly growth of the insurance industry in India. Upon the recommendations of the Malhotra Committee in 1999, IRDAI was constituted as an autonomous body to promote competition, and to enhance customer satisfaction through increased choices and lowered premiums in the insurance sector.
IRDAI has issued several guidelines and regulations over the years that facilitate and regulate the engagement with and dealing in the insurance sector by both, Indian and foreign investors. Some of the key regulations are briefly discussed below.
The IRDAI (Issuance of Capital by Indian Insurance Companies Transacting Other Than Life Insurance Business) Regulations, 2015 are applicable to Indian insurance companies which have been granted a certificate of registration to transact the business of general insurance or health insurance or reinsurance, and the IRDAI (Issuance of Capital by Indian Insurance Companies Transacting Life Insurance Business) Regulations, 2015 are applicable to Indian insurance companies which have been granted a certificate of registration to transact the business of life insurance. These regulations, inter alia, provide that divestment of equity by one or more of the promoters or the investor(s) of such insurance company, through a public offer for sale and/or issue of capital under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 requires prior approval of the IRDAI. Further, promoters and investors are required to abide by the lock-in periods specified by IRDAI at the time of raising any capital.
The IRDAI (Investment) Regulations, 2016, inter alia, provides a list of approved investments, and the quantum and manner in which insurers may invest in Indian insurance companies. These regulations also require an insurer to prepare an investment policy which should be approved by the board of directors of the insurer.
IRDAI has recently also extended the ‘Use and File’ procedure for most of the life insurance products (akin to the developments in health insurance and general insurance products), which essentially means that insurance companies can also launch certain products without the prior approval of IRDAI, subject to fulfillment of the prescribed conditions (for instance, the requirement to have a ‘Board Approved Product Management and Pricing Policy’).
In addition to the above, IRDAI had, in the past, issued guidelines and various circulars on Anti-Money Laundering or Counter Financing of Terrorism (AML/CFT) for general insurers and life insurers. These have now been consolidated and updated in a single set of master guidelines by way of a notification dated 1 August 2022 covering provisions of Prevention of Money Laundering Act, 2002 and rules framed thereunder and other applicable norms (as amended from time to time). These guidelines have come into force from 1 November 2022.
The IRDAI (Other Forms of Capital) Regulations, 2022 have now replaced the IRDAI (Other Forms of Capital) Regulations, 2015. These regulations define ‘Other Forms of Capital (OFC)’ as: (a) preference share capital or (b) subordinated debt instruments issued by an insurer, in the manner as prescribed.
IRDAI has, in December 2022, also notified the IRDAI (Registration of Indian Insurance Companies) Regulations, 2022 (Registration Regulations), in supersession and repeal of the IRDAI (Registration of Indian Insurance Companies) Regulations, 2000 and the IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations, 2015. The Registration Regulations prescribe conditions for registration of an insurance company including the criteria for investment by a private equity fund or an alternative investment fund in the capacity of a promoter or an investor in the insurance company. However, there are various conditions attached to the same, for instance, the insurer’s promoter(s) must collectively maintain a minimum shareholding above 50% of the insurer’s paid-up equity capital. The promoter(s) however, can dilute their stake to below 50%, but not below 26%, if: (a) the insurer has a satisfactory 5-year solvency track record, and (b) the insurer’s shares are listed on the stock exchange(s) in India. Further, investment by a single investor shall be less than 25% of the paid-up equity share capital of the insurer, and investment by investors on a collective basis shall be less than 50% of the paid-up equity share capital of the insurer. These restrictions are not applicable in case the equity shares of the insurer are listed on the stock exchange(s) in India.
As per the Registration Regulations, a private equity fund may invest in the applicant as a promotor or an investor. However, this may be the case only if: (a) the manager of the fund or its parent fund has completed 10 years of operations; (b) the funds raised by the fund, including its group entity(ies), is USD 500 million or more (or its equivalent in INR); (c) the investible funds available with the fund is not less than USD 100 million; and (d) the fund manager has invested in the financial sector in India or other jurisdictions.
It may also be noted that from November 2022 onwards, IRDAI has allowed all insurance companies to be an ‘account aggregator’ within the Reserve Bank of India’s systems. The Insurance Laws (Amendment) Bill, 2022 (Bill) was introduced with the intention to provide for, inter alia, a composite license allowing insurers to undertake general and health insurance via a single entity, and to remove the INR 100 Crores minimum paid-up equity capital requirement for carrying out life insurance, general insurance, and health insurance businesses.
FOREIGN INVESTMENT IN THE INSURANCE SECTOR
The Insurance (Amendment) Act, 2021 read with the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021, has increased the foreign direct investment cap in the insurance sector from 49% to 74%. Certain restrictions on foreign ownership of insurance companies have also been revised through these amendments. In addition, these amendments prescribe that the majority of the directors, key management persons and at least one of, the chairperson of the board of directors, or the chief executive officer, or the managing director of an Indian insurance company is a resident Indian citizen.
The Registration Regulations also provide that an Indian insurance company having foreign investment exceeding 49%: (a) for a financial year for which dividend is paid on equity shares and for which, at any time, the solvency margin is less than 1.2 times the control level of solvency, must have at least 50% of its net profit for the financial year retained in the general reserve; and (b) the independent directors must constitute at least 50% of its board strength, unless the chairperson of its board is an independent director, in which case, at least one-third of its board must comprise of independent directors.
IMPACT OF THE COVID-19 PANDEMIC
There has been a significant shift in the outlook of the Indian society as a whole (as well as the world in general) concerning health and well-being in light of the Covid-19 pandemic. Through what may be deemed as a by-product of the pandemic, IRDAI has allowed the introduction of additional categories of insurance products such as benefit-based health insurance products. In March 2021, health insurance companies increased by 41%, driven by rising demand for health insurance products amid the Covid-19 surge. In the financial year ending in March 2021, Life Insurance Corporation of India (LIC) achieved a record first-year premium income of INR 56,406 crore (US$ 7.75 billion) under individual assurance business with a 10.11% growth over last year.
While historically, many primary insurers in India have been financially backed by banks, the restrictions on their holdings in insurance companies (as prescribed by the Reserve Bank of India and the Banking Regulation Act, 1949), have largely limited investment business in this sector to minority stake transactions.
However, in the wake of the Indian start-up culture, the presence of a large number of insurance-tech start-ups provides an interesting platform for foreign players to meaningfully participate in the Indian insurance sector. Such investment could open up avenues for investors to access the opportunities that will be forthcoming due to deep market penetration and incentivization, through technology. For instance, in July 2021, MedPay, a Bengaluru-based business-to-business tech start-up, built an application programming interface infrastructure that connects healthcare service providers, standalone clinics, pharmacies, labs and insurance companies through its ‘MedPay Connected Care Network’.
India traditionally has been an under-insured country. According to data from the annual reports issued by the IRDAI, life insurance penetration is 3.6% of India’s gross domestic product, much below the global average of 7.1%. General insurance penetration in India stands at about 1% against the world average of nearly 3%. The FDI relaxations may however, accelerate growth and competition in the Indian insurance sector, as increased foreign investment should enable deeper product expertise and greater underwriting capabilities. The further liberalised insurance regulations should enable Indian insurers to continue to augment their products and services and cater to the ever-developing needs for Indian businesses and consumers.
Based on publicly available data, as on 31 March 2021, about 23 private life insurers have been registered over the period 2001-2008; and as on 31 March 2022, about 6 standalone private health insurance companies have been registered over the period 2006-2016.
TO BEAR IN MIND, FOR BUSINESS APPLICANTS
Timelines: Approvals from the IRDAI for commencing an insurance business in India may be secured within 3 – 12 months (subject to limited extensions at IRDAI’s discretion) and insurance business to be commenced within 12 months (where extensions may be granted to up to 24 months) from the grant of registration.
Lock-in: There are share-based lock in requirements that should be borne in mind by applicants of this business sector, the time period for which lock in may vary from 5 – 12 years, based on prescribed factors.
Eligibility: An applicant needs to be a ‘fit and proper’ person. Private equity funds may also invest in an insurer in the capacity of a promoter or investor, subject to specified conditions.
Transfers: Transfer or issue of equity share capital in excess of specified thresholds would require IRDAI’s approval, conditional on, inter alia, requisite declarations on beneficial shareholding by the proposed transferee, IRDAI’s due diligence on the proposed transferee, fair valuation by a Category-I Merchant Banker and reporting requirements.