In the past few months, the Insurance Regulatory and Development Authority of India (“IRDAI”) has released various notifications, circulars, amendments to the laws governing the insurance sector. These include amendments to regulations governing:
(i) Registration of Indian insurance companies;
(ii) Issuance of other forms of capital by insurers; and
(iii) Insurance intermediaries like corporate agents and insurance marketing firms.

The IRDAI also proposed draft amendments to regulations governing the payment of commission by insurers to insurance intermediaries. Other amendments have included introducing the concept of ‘deemed approval’ in relation to appointment of common directors in an insurer and an insurance intermediary and exemptions to entities undertaking insurance business in the special economic zones (“SEZs”) and the International Financial Services Centre (“IFSC”).

Additionally, the Government of India, in consultation with the IRDAI, has issued a draft of the Insurance Laws (Amendment) Bill, 2022 (the “Bill”) on 29 November 2022, expected to be introduced before the Indian Parliament this year. The Bill proposes significant amendments to the decades-old Insurance Act, 1938 (the “Insurance Act”) including:
(i) A higher threshold for approval of share transfers;
(ii) Composite licenses to insurers;
(iii) Prohibition of common directors and officers;
(iv) Introduction of new categories of insurance businesses and distribution of other financial products by insurers; and
(v) Reduced minimum net-owned-funds for foreign reinsurers setting up branches in India.

We have summarised the key legal updates in this paper.

Section I – Amendments to IRDAI regulations
In its attempt to enable ‘Insurance for All’ vision – to increase insurance penetration and promote innovation and competition in the insurance sector – by 2047, the IRDAI, after various rounds of discussions with and comments from stakeholders, introduced amendments to, inter alia, the regulations governing (i) registration of Indian insurance companies, (ii) issuance of other forms of capital by insurers, and (iii) insurance intermediaries like corporate agents and insurance marketing firms.

Regulations applicable to insurance companies/ re-insurers

(i) Regulations for registration of Indian insurance companies
The IRDAI issued the IRDAI (Registration of Indian Insurance Companies) Regulations, 2022 (the “Registration Regulations”) in December 2022. The Registration Regulations have replaced the IRDAI (Registration of Indian Insurance Companies) Regulations, 2000, and will be in force for a period of three years (unless replaced or reviewed earlier). Certain key amendments introduced by the Registration Regulations are set out below:
(a) Categories of shareholders: The Registration Regulations recognise three categories of shareholders, namely (i) investors holding less than 10%, (ii) investors holding more than 10% but less than 25%, and (iii) “promoters” holding more than 25%, of the paid-up equity share capital of an Indian insurance company.
Promoters must collectively always hold more than 50% of the insurance company and such shareholding may be reduced below 50% only in the case of listed companies where the insurer has a track record of its solvency ratio being above the ‘control level’ in the immediately preceding five years.
A person or group can be a promoter of only one life, general or health insurance company. A person/ group can hold between 10% and up to 25% of only two companies engaged in the same class of insurance. No such limits apply in relation to holdings of less than 10%.
The Registration Regulations are silent on this, but it would appear that a person/ group can be a promoter of one insurance company and an investor (holding up to 25%) of another insurance company offering the same class of insurance; and would similarly allow an investor to hold between 10% and 25% of one insurance company and then holdings of less than 10% in any number of insurance companies.
(b) Collective holding: All investors together cannot hold 50% or more of the paid-up share capital of the insurer. This restriction is not applicable in the case of an insurer which is listed on any stock exchange in India.
(c) Investments: The Registration Regulations have codified the requirement that all investments must be made entirely out of own funds and cannot be made from borrowed funds; no encumbrance on any shares may be created without IRDAI approval.
(d) Private Equity Funds: There has been increasing investment by private equity funds (“PE funds”) in the insurance sector in India which has created new challenges, including with respect to limits on funding obligations. The Registration Regulations prescribe additional eligibility requirements for a PE fund to invest in the capacity of a promoter and acknowledge that there may be limits on the funding that a PE fund can provide. The IRDAI has clarified that in these situations the promoters will need to give an undertaking to provide funding to the company as needed to maintain regulatory solvency.
(e) Lock-in of equity shares: The IRDAI typically imposes a lock-in of five years in case of any acquisition of shares by a promoter, irrespective of when the shares are acquired. The Registration Regulations have introduced different periods of lock-in (ranging from one to five years) depending on (i) how many years after the registration of the insurance company the shares are acquired and (ii) whether the acquirer is a promoter or an investor.
(f) Investors’ right of nomination: An investor investing in excess of 10% of the paid-up capital of the insurer has the right to nominate a director to the board of the insurer.

(ii) Regulations for issuance of other forms of capital
The IRDAI issued the IRDAI (Other Forms of Capital) Regulations, 2022 (“Amended OFC Regulations”) in December 2022, repealing the IRDAI (Other Forms of Capital) Regulations, 2015 (“2015 OFC Regulations”). The Amended OFC Regulations will be in force for a period of 3 years (unless replaced or amended earlier). The Amended OFC Regulations seek to relax certain approval requirements in the existing regulations and provide a regulatory framework for insurance companies to raise capital through the issue of preference shares or subordinated debt (“OFC Instruments”) and has significantly done away with the requirement for IRDAI approval in the following instances:
(a) Issuance of OFC Instruments: The requirement to obtain prior IRDAI approval for the issuance of OFC Instruments under the 2015 OFC Regulations has now been done away with.
(b) Payment of dividend or interest in relation to OFC Instruments: The 2015 OFC Regulations prohibited payment of dividend or interest in relation to OFC Instruments if the solvency of the insurer was not as per the regulatory stipulation and required prior IRDAI approval if such payment would result in or increase the insurer’s net loss.
The Amended OFC Regulations require insurers to obtain prior IRDAI approval for payment of dividend or interest in relation to OFC Instruments for any financial year only if: (i) the solvency of the insurer is below the minimum control level of solvency; or (ii) the impact of such accrual or payment would result in the control level of solvency falling below or remaining below the regulation requirements specified by the IRDAI; or (iii) the impact of accrual or payment of interest results in or increases the net loss.
(c) Call back of OFC Instruments: The 2015 OFC Regulations required an insurer to obtain IRDAI approval prior to the exercise of a call option on OFC Instruments. The Amended OFC Regulations have removed such a requirement if the solvency position of the insurer is at least 20% above the control level of solvency. Instead, the Amended OFC Regulations require the insurer to inform the IRDAI of the exercise of a call option within 15 days from the date of the communication of exercise of the call option.
(d) Replacement of OFC Instruments with an equal or better-quality instrument: The requirement to obtain prior IRDAI approval to replace OFC Instruments with an equal or better-quality instrument under the 2015 OFC Regulations has been done away with, unless the call back of the OFC Instrument also requires prior IRDAI approval (as specified in paragraph (c) above).
Further, under the 2015 OFC Regulations, the total quantum of OFC Instruments issued by an insurer could not exceed 25% of the total paid up equity share capital and securities premium of the insurer at any point of time. Additionally, the total quantum of OFC Instruments could not, at any point, exceed 50% of the net worth of the insurer.
The Amended OFC Regulations have increased the total quantum of OFC Instruments which may be issued by an insurer from the current upper limit of 25% to the lower of (i) 50% of the total paid up equity share capital and securities premium of the insurer; or (ii) 50% of the net worth of the insurer.

(iii) Proposed regulations for payment of commission
The IRDAI proposes to issue the IRDAI (Payment of Commission) Regulations, 2022 (the “Proposed Commission Regulations”), which, once effective, will replace the IRDAI (Payment of commission or remuneration or reward to insurance agents and insurance intermediaries) Regulations, 2016 (“Erstwhile Commission Regulations”). The Erstwhile Commission Regulations prescribed the maximum commission, remuneration as well as rewards payable to intermediaries in relation to various insurance products.
IRDAI proposes to do away with the specific caps on commissions and instead, states that commissions paid by life, health and general insurers to insurance intermediaries cannot exceed the expense of management (“EoM”) limits specified under the respective IRDAI regulations.
Some key provisions of the Proposed Commission Regulations are set out below:
(a) Insurers’ board approved policy: Insurers are required to have a written, board-approved and periodically reviewed policy for payment of commission to insurance agents and intermediaries.
(b) Amount of commission payable: The total commission payable under life insurance products (including health insurance products) offered by life insurers cannot exceed EoM limits specified under relevant IRDAI (EoMs of Insurers transacting life insurance business) Regulations, 2022. Under these regulations, life insurers have the flexibility to manage their EoMs within overall limits based on their gross written premium. The EoM limit is proposed to be an aggregate sum of certain percentages of single premiums on policies granting annuity, individual and group pure risk policies, group fund-based policies, etc.
The total amount of commission payable under general insurance products (including health insurance products) offered by general insurers and health insurance products offered by standalone health insurers cannot exceed 30% and 35%, respectively, of the gross premium written in India in that financial year.
(c) Board-approved returns: Insurers are required to submit board-approved returns on payment of commission by them to insurance agents and insurance intermediaries within 45 days of expiration of every financial year.

Regulations applicable to insurance intermediaries
(iv) Regulations for insurance intermediaries
In December 2022, the IRDAI notified the IRDAI (Insurance Intermediaries) (Amendment) Regulations, 2022 (“Intermediaries Regulations”). The Intermediaries Regulations govern corporate agents and marketing firms and these amendments, inter alia, have increased the maximum limit on tie-ups between insurers and intermediaries.
Some key amendments are set out below:
(a) The maximum limit on tie-ups between insurance companies and corporate agents has been increased from three to nine for each category of general, life and health insurance.
(b) Corporate agents for composite insurers may have arrangements with insurers in excess of the ceilings statutorily prescribed, provided that the total number of arrangements with life, general and health insurers does not exceed twenty-seven.
(c) Corporate agents for general insurance companies are not allowed to solicit, procure and service retail lines of general insurance products and commercial lines of such insurers where the total sum insured for these products exceeds INR 5 crore per risk for all insurances combined.
(d) The tie-up limit between insurers and insurance marketing firms/ insurance sales persons has been increased from two to six for each category of health, life and general insurance. IRDAI intimation is required for any change in the engagement of insurance marketing firms with insurers, which will be governed by the terms of their agreements; suitable arrangements are required to be put in place for existing policyholders in case of cancellation/ termination/ discontinuity of such agreement.

Section II – Notifications and circulars
IRDAI has issued two notifications which clarify: (i) IRDAI’s introduction of the ‘deemed approved’ construct in relation to the appointment of an individual to the board of directors of both an insurer and an insurance intermediary (notified in September 2022), and (ii) the Ministry of Finance’s exemption of certain specified entities carrying insurance businesses in SEZs and the IFSC from the applicability of the Insurance Act (notified in July 2022).
(i) Notifications on appointment of common directors between intermediaries and insurance companies
Previously, prior IRDAI approval was required for the appointment of an individual to the board of directors of both (i) an insurer and (ii) an insurance agent or insurance intermediary. The IRDAI has now issued various circulars to relax this approval requirement and introduced a ‘deemed approval’ construct, which allows for such an appointment, subject to the fulfilment of certain conditions (described below) relating to conflicts of interest, policyholders’ interests and disclosure requirements, provided that such appointment is not inconsistent with the notifications issued by IRDAI in this regard:
(a) A person who is currently appointed as an executive director/whole-time director on the board of directors of the insurer/agent/intermediary/insurance intermediary cannot be appointed as nominee/common director on the board of the insurer/ insurance intermediary. This restriction is, however, not applicable to: (i) individuals appointed as the nominee director of the promoter of the insurance company; and (ii) common directors already appointed with IRDAI approval, who may continue to hold their directorship until the expiry of their tenure.
(b) For intermediaries, no common director is permitted to hold the position of key managerial personnel, chief executive officer, principal officer or whole-time director with another intermediary or insurance intermediary. However, the common director can hold the position of a non-executive director.
(c) A common director may also be appointed as the chairperson of the board of directors of an insurance company, agent, intermediary or insurance intermediary, subject to necessary safeguards to protect the interest of policyholders being in place.

(ii) Application of Insurance Act, 1938 modified for insurance business carried on in SEZs and the IFSC
The Ministry of Finance issued a circular on 4 July 2022 (“MoF IFSC Circular”) that modified the application of certain provisions of the Insurance Act in relation to insurance companies, insurance cooperative societies and identified corporate bodies under the Insurance Act (“Specified Entities”).
Indian and foreign entities are permitted by the IRDAI to set up insurance offices to carry out insurance/ re-insurance business in the IFSC. This was originally done vide the IRDAI (Registration and Operations of International Financial Service Centre Insurance Offices (“IIO”)) Guidelines, 2017, which were later replaced by the IFSC Authority (Registration of Insurance Business) Regulations, 2021 (the “IFSC IIO Regulations”). The IFSC IIO Regulations mandate IIOs to be registered with the IFSC, provide certain eligibility conditions and regulatory requirements (such as, paid-up equity capital and solvency margin) and enlist permissible activities which can be carried out by these IIOs.
The MoF IFSC Circular exempts Specified Entities (which includes IIOs) carrying on insurance business in SEZs and IFSC from complying with certain provisions of the Insurance Act, such as in relation to the regulation of loans, operation in rural areas, insurance of motor vehicles, councils of life and general insurers and modifies certain provisions for IIOs such as in relation to assumption of risk.
Importantly, the MoF IFSC Circular does away with the Insurance Act mandate that insurers have to re-insure an IRDAI-prescribed percentage of the sum assured with Indian re-insurers. In relation to investment of assets, the MoF IFSC Circular prescribes that: (i) insurers are required to earmark and invest assets of value more than the value of the liabilities; (ii) insurers cannot invest more than 5% of their assets in an entity owned or controlled by the insurer; and (iii) the assets invested should not have any encumbrance, charge, hypothecation or lien on them.

Section III – Investigations and sanctions
This section highlights some recent investigations instituted against and sanctions imposed on insurance companies and/or intermediaries for non-compliance of various IRDAI laws and directions.

(i) Goods and service tax related investigations against insurers and insurance intermediaries
The goods and services tax (“GST”) authority in India initiated investigations against 16 insurance companies for incorrectly claiming input tax credits. The GST authority published a press release noting that the insurance companies had claimed input tax credit on the basis of false invoices issued by several insurance intermediaries for providing non-existent services. The GST authority has also issued summons to insurance intermediaries and aggregators and initiated legal proceedings against a leading online insurance intermediary.
Under the existing regulations (as mentioned above), the IRDAI imposes specific limits for commissions payable to corporate agents by an insurer; the input tax credit claimed by the insurance companies is also not permissible under GST laws given the lack of provision of any actual services.
This has become a critical issue for various insurance companies in India as they come under greater scrutiny from the GST authority.

(ii) IRDAI penalises an insurance company for a share sale deal with a corporate agent
IRDAI penalised an insurance company and a corporate agent for entering into arrangements pursuant to which the corporate agent acquired shares of the insurance company at a discount to fair market value and then sold the shares to the promoters of the insurance company at a premium. These transactions were implemented in the context of the corporate agent becoming a promoter of the insurance company without any obvious linkage to the distribution services provided by the corporate agent. The IRDAI imposed a penalty of INR 30,000,000 on the insurance company for making misrepresentations, failure to comply with the directions of the IRDAI on the calculation of the fair market value of the shares and misuse of the dual relationship with the corporate agent as a shareholder and corporate agent to circumvent the IRDAI’s regulations imposing limits on the commission that can be paid to a corporate agent. IRDAI also imposed a penalty of INR 20,000,000 on the corporate agent for, amongst other things, a violation of the above regulations.

Section IV – Proposed amendments to the Insurance Act, 1938
In November 2022, the Government of India, in consultation with the IRDAI, issued a draft of the Bill proposing various amendments to the Insurance Act. The proposed amendments were preceded by an exhaustive review of the insurance sector framework by the Indian Government, the IRDAI and various stakeholders, as well as public feedback. The Bill closed for public comments on 15 December 2022 and will have to be passed by both houses of the Indian Parliament and notified in the official gazette before it becomes the law. The Bill is expected to be introduced before the Indian Parliament this year; however, there is no official confirmation on the exact timeline.
Some of the key changes proposed are set out below:
(a) Higher threshold for approval of share transfers: Under the existing regime, prior IRDAI approval is required for any share transfer where the nominal value of the shares intended to be transferred by any individual, firm, group, constituents of a group, or body corporate under the same management, jointly or severally exceeds one percent of the paid-up equity capital of the insurer. This threshold is proposed to be relaxed to five percent of the paid-up equity capital of the insurer, thereby assisting in the execution of smaller transactions.
(b) Composite license: Insurers would be able to apply for a composite registration for one or more classes or sub-classes of insurance business. The IRDAI would make specific provisions for insurers to carry on insurance business of one or more classes or sub-classes, to ensure the protection of policyholders’ interests and prudent risk management. The solvency margin would also be different for different classes and sub-classes of insurance business of an insurer. Reinsurers would not be eligible for registration of any other class or sub-class of insurance business.
(c) Minimum paid-up capital based on business type: The Bill proposes to abolish the statutory minimum paid-up equity capital requirement for each class of insurance and instead states that the minimum paid-up capital required to be maintained by an insurer should be prescribed on a case-by-case basis, taking into account the size and scale of its operations, class or sub-class of insurance business and the category or type of insurer.
(d) Reduced minimum net-owned-funds: The net-owned-funds requirement for foreign reinsurers setting up branches in India is proposed to be reduced from INR 5,000 crore to INR 500 crore.
(e) Differential solvency margin: It is proposed that the IRDAI will set out different solvency margins for the classes and sub-classes of particular insurers and abolish the current prescribed limit of 150%.
(f) New categories of insurance businesses: The IRDAI would be empowered to designate any part or segment of a class of insurance business as a sub-class other than those currently prescribed under the Insurance Act. The IRDAI would also be able to specify different types or categories of insurers based on certain criteria such as area of operation, level of risk or premium and channel of distribution. Specifically, for instance, the Bill introduces new insurance businesses such as captive insurance business, personal accident insurance business and travel insurance business.
(g) Distribution of other financial products: Insurers would be allowed to provide services related or incidental to insurance business, and to distribute other financial products as specified by and subject to the regulations prescribed by the IRDAI.
(h) Prohibition of common directors and officers: The existing regime restricts the managing director or other officers of life insurers from being appointed as the managing director or other officer of (i) any other insurer carrying on life insurance business or (ii) a banking company or (iii) an investment company. The Bill would extend this requirement to all insurers and also prohibit insurers from having common directors with another insurer carrying on the same class or sub-class of insurance business, except in the case of directors nominated by the Central Government. However, certain exemptions would apply, e.g., for the purpose of facilitating the amalgamation or the transfer of business of one insurer to another.

Authors: Kunal Thakore & Deepa Christopher – Partners; Chhavi Singhal – Senior Associate