On 26 November 2024, the Ministry of Finance, Government of India, published an office memorandum proposing amendments to the Insurance Act, 1938 (“Insurance Act”) and the Insurance Regulatory and Development Authority Act, 1999 (“IRDAI Act”) (the “2024 Draft Amendments”). The 2024 Draft Amendments were placed before the public for consultation and have received stakeholder comments. The amendments (updated as per stakeholder comments) are expected to be introduced in the (Indian) Parliament in its upcoming budget session (which will take place around February 2025) in the form of the Insurance Laws (Amendment) Act, 2025 (“Amendment Act”), as may be updated basis stakeholder comments.

The 2024 Draft Amendments propose some transformative changes in Indian insurance laws with the intent of aligning the Indian insurance sector with the prevalent global practices – these include increasing the foreign direct investment (“FDI”) limit in Indian insurers from 74% to 100% and introducing composite licensing for undertaking different classes of insurance business. The key changes proposed by the 2024 Draft Amendments are described below:

Key Changes at a Glance

• FDI up to 100% to be permitted in a company undertaking insurance business in India, subject to conditions governed by applicable laws.
• Composite licensing for insurers proposing to undertake more than one class of insurance business.
• Insurers will be allowed to engage in additional business activities, such as providing guarantees and indemnities.
• Revised minimum paid-up equity capital requirements for certain types of insurers.
• The threshold for IRDAI approval for share transfers has been increased from the current 1% of the paid-up equity capital to 5%.
• Restrictions on common managing directors, officers and directors extended to non-life insurers.
• Insurance intermediary registration to remain valid until suspended or canceled, subject to the payment of an annual fee, as opposed to the current regime where registration must be renewed every 3 years.
• Relaxation of regulations governing the investment of insurers’ assets, including permitting up to 15% of controlled funds to be invested in non-approved securities and lifting restrictions on investments in the shares of a single banking or private company.
• Increase of penalties under the Insurance Act, with the maximum penalty for non-compliance with insurance laws rising from INR 1 crore to INR 10 crores.

 1) Permitting 100% FDI in Indian insurance companies

The 2024 Draft Amendments propose to insert a new provision in the Insurance Act which will permit 100% FDI in Indian insurers, as opposed to the current limit of 74%. This will be effective from the date of commencement of the Amendment Act. The increase in FDI (to 100%) will be subject to conditions as may be governed by applicable laws. While there is no clarity on whether these will be the same as the current requirements for FDI in Indian insurers or whether any additional conditions will be introduced, we do not expect that the conditions will be of a nature that would make 100% FDI into Indian insurers unattractive for foreign investors.

Since the insurance sector is a capital-intensive industry, the increase of the FDI limit to 100% will potentially bring in significant capital to existing Indian insurers with foreign investment. Allowing 100% ownership is also likely to increase foreign investor interest in the Indian insurance sector, some of whom have been reluctant to enter into joint venture arrangements, which was unavoidable on account of the FDI cap. The global expertise of foreign insurers is likely to enhance the Indian insurance market in the form of technological and data related upgrades, risk management capabilities and strategies that have been successful in mature markets, which will ultimately benefit the consumers.

2) Expanding the scope of business of insurers

The 2024 Draft Amendments aim to inter alia foster expansion and development of the insurance industry and streamline business processes. In furtherance of this, the following changes have been introduced in relation to the scope of business that can be undertaken by Indian insurers:

(i) Composite registration for undertaking different classes of insurance business

As per the current regime, an insurer can undertake only one class of insurance business (for instance, a company registered as a life insurer cannot offer re-insurance or general or health insurance products to its customers). The 2024 Draft Amendments propose to omit this restriction and introduce a composite licensing mechanism through which an insurer will be able to obtain license for undertaking multiple classes of insurance business (subject to it meeting the eligibility criteria for such classes of business). For this purpose, a “class of insurance business” means class of life, general, health and re-insurance or such other class as may be notified by the Central Government.

Registering for multiple classes of insurance business via a composite license mechanism will be subject to compliance with the following requirements:

(a) the minimum capital of the insurer will have to be in accordance with the amount prescribed by the Insurance Regulatory and Development Authority of India (“IRDAI”) in this regard – this will be more than the sum of the capital required for each class of insurance business proposed to be undertaken by the insurer; and

(b) the account of all receipts and payments in respect of each class of business will have to be maintained separately.

The introduction of composite licensing is expected to have multiple benefits for insurers, including:

(a) reduced costs and compliance-related issues;

(b) increased efficiency of the insurance distribution process; and

(c) ability of insurers to offer holistic bundled products that cater to diverse customer segments, which will allow insurers to remain competitive in a dynamic market.

Further, insurance agents will now be able to partner with multiple insurers across different classes of insurance business, thereby allowing them to diversify the range of policies and bundled products offered to customers. Customers will be able to access multiple insurance options through a single agent.

However, practical implementation of the composite licensing will be challenging and may take some time given various IRDAI rules and regulations (in relation to capital, solvency margin requirements, etc. for different classes of insurance) will have to be amended to give effect to the proposal. These regulations will need to provide for adequate conflict of interest related provisions to regulate insurance agents who propose to obtain affiliation with multiple insurers.

(ii) Permitting insurers to undertake certain additional businesses

An Indian insurer can currently only undertake the specific insurance business it is licensed for (such as general insurance business, life insurance business, etc.). The 2024 Draft Amendments propose to insert a new provision in the Insurance Act which will permit insurers to undertake the following additional activities, in the manner provided in the relevant regulations:

(a) carrying on and transacting the business of guarantee and indemnity;

(b) managing, selling and realizing any property which may come into the possession of the insurer in satisfaction or part satisfaction of any of its claims;

(c) establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pensions and allowances;

(d) acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described above;

(e) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the insurer; and

(f) any other functions notified by the Central Government in this regard.

Permitting insurers to distribute other financial products (with or without being bundled with insurance) can provide insurers with alternative sources of income (and reduce their reliance on premium and underwriting income) and also provide customers with multiple financial solutions in the form of a single product. However, insurers will have to ensure they obtain the requisite skill sets and technology that may be required in order to undertake these businesses efficiently.

3) Change in the capital requirements of insurers

The 2024 Draft Amendments propose the following changes in relation to the minimum capital requirements for registering and undertaking an insurance business:

(i) The minimum capital required to undertake different classes of insurance business will differ and will be prescribed by the relevant regulations. There is no clarity at this point on whether such prescribed amounts will be lower than the current rates – currently, the minimum capital requirement is INR 100 crores for general, health and life insurers and INR 200 crore for companies exclusively carrying on re-insurance business;

(ii) the minimum net owned fund required for registration of a foreign company that is engaged in the re-insurance business (through a branch established in India) will be reduced from INR 5000 crores to INR 1000 crores; and

(iii) the minimum capital required for insurers serving the underserved or special segment of the population will be reduced from the existing INR 100 crores to not less INR 50 crores.

The reduction in the minimum capital requirements for certain types of insurers is expected to make the insurance sector accessible to regional and smaller companies that aim to target specific customer segments (which do not currently enjoy easy access to insurance products).

4) Increase in threshold for share transfer approval  

As per the current regime, approval of the IRDAI is required for the transfer of more than 1% of the capital of an insurer. The 2024 Draft Amendments propose to increase this threshold to 5%, which will significantly ease share transfers by, and between, small shareholders such as private equity and/or other financial investors.

5) Restrictions on common managing directors and officers (“Officers”) for non-life insurers

Under the current regime, an Officer of a life insurance company cannot be an Officer of any other life insurance company, banking company or investment company. Similarly, two life insurance companies cannot have a common director.

The 2024 Draft Amendments propose to extend these restrictions in relation to common Officers and directors to all insurers, including general and health insurers. The only exception to this will be for the purpose of amalgamating the business of two insurers or transferring the business of one insurer to the other – although these are matters which require IRDAI approval, and there is a separate regime for it.

6) Extension of registration period of an insurance intermediary

Currently, insurance intermediaries can only register with the IRDAI for a period of 3 years and once such period expires, it must apply for renewal. The 2024 Draft Amendments propose that every existing insurance intermediary must re-apply to the IRDAI for continuation of its registration within three months from the commencement of the Amendment Act.

Post commencement of the Amendment Act, the registration of every insurance intermediary (that obtains fresh registration under the Insurance Act or continues its registration (as per the above paragraph)) will remain in force until suspended or cancelled, subject to payment of an annual fee. The extended registration will ensure business stability and continuity for insurance intermediaries and facilitate long-term relations with insurers as well as customers.

(ii) Grounds for cancellation of registration will include:

(i) breach of applicable (insurance, companies, foreign exchange and prevention of money laundering) laws by the insurance intermediary;

(ii) the insurance intermediary being convicted for any offence;

(iii) the insurance intermediary’s foreign holding company or joint venture partner being barred to carry on insurance intermediary business in the relevant jurisdiction; and

(iv) failure to pay the prescribed annual fee.

Further details regarding the procedure for cancellation and suspension of registration, etc. are proposed to be notified by relevant regulations.

7) Relaxation in provisions relating to investment of assets by insurers 

The 2024 Draft Amendments propose certain relaxations to the laws regulating investment of an insurer’s controlled funds or assets. These include: (i) permitting insurers to invest or keep invested any part of its controlled funds or assets otherwise than in approved securities subject to such investment not exceeding 15% of the assets of the insurer, subject to conditions that may be specified by relevant regulations; and (ii) removing the restriction disallowing insurers to invest their assets in shares of any one banking company or in shares / debentures of any one private company.

8) Increased penalties for non-compliance with insurance laws

The 2024 Draft Amendments propose to increase the penalty for non-compliance with insurance laws (including the IRDAI Act, rules and regulations, which were earlier not specifically included in the penalty related provisions of the Insurance Act) (“Insurance Laws”):

(i) penalty chargeable on a daily basis for default in complying with Insurance Laws will be increased from INR 1 lakh to INR 1-5 lakhs and the cap on such penalty has been increased from INR 1 crore to INR 10 crores;

(ii) a new provision is proposed which provides for a penalty ranging from INR 1-50 crore for any insurer or insurance intermediary that makes a mis-statement or furnishes any false documents;

(iii) a minimum monetary penalty of INR 1 lakh will be introduced for a company (along with its officers) for acting as an insurance intermediary without obtaining registration as such under the Insurance Laws; and

(iv) a minimum penalty will be introduced for any person transacting business through unregistered insurance intermediaries – this will be INR 10 lakhs for the person and INR 1 lakh for its officers, in case the person is a body corporate.

Authors – Deepa Christopher – Partner; Chhavi Singhal – Senior Associate and Nandini Pradhan – Associate

Disclaimer: This alert only highlights key issues and is not intended to be comprehensive. The contents of this alert do not constitute any opinion or determination on, or certification in respect of, the application of Indian law by Talwar Thakore & Associates (“TT&A”). No part of this alert should be considered an advertisement or solicitation of TT&A’s professional services. This communication is confidential and may be privileged or otherwise protected by work product immunity.