The IRDAI had previously regulated the corporate governance practices of insurers through elaborate guidelines explaining these practices. Recently, the IRDAI has issued regulations on the corporate governance of insurers which refine the previous guidelines into specific requirements for the insurers to comply with. Notably, the IRDAI has emphasized on maintaining the independence of the board from the management of the insurer, mandated the insurer to establish an ESG framework, and introduced requirements of IRDAI approval for the chairperson of the board and minimum number of independent directors required on the board and respective committees.

The Insurance Regulatory and Development Authority of India (the “IRDAI”) has notified the IRDAI (Corporate Governance for Insurers) Regulations, 2024 (“Corporate Governance Regulations”).
Previously, the IRDAI circular titled Guidelines for Corporate Governance for Insurers in India (“Previous Guidelines”) set out the corporate governance practices for Indian insurers to follow, in addition to the requirements set out in the Insurance Act, 1938, IRDAI Act, 1999 and various other rules and regulations issued under the above laws. Through the Corporate Governance Regulations, IRDAI has introduced a regulation on corporate governance to replace the Previous Guidelines. Some of the key provisions of the Corporate Governance Regulations are as follows:

(i) Composition of the Board

The IRDAI has reiterated the need for an insurer to have a board comprising competent and qualified individuals from different lines of business which are commensurate with the scale, nature and complexity of the business of the insurer.

(ii) Independence of the Board and compliance functions

The IRDAI has emphasized that the “insurer must ensure” the‘ independence of the board of directors from the management and the promoters’. The IRDAI’s expectation with this obligation is uncleare specially in the context of how directors are typically nominated in case of joint ventures and the obligations that the IRDAI has generally imposed on a promoter of an insurance company. The IRDAI requires promoters to commit themselves to the insurance companies by requiring that they be subject to a lock-in and also provide a commitment of und the companies as needed to maintain regulatory solvency. As in the case of joint venture arrangements, it is typical for the promoters to have the right to nominate directors on the Board and this is the case for both listed and unlisted insurance companies. Existing regulations already have a number of requirements in order to ensure the independence and strength of the board(e.g.a requirement to have a minimum of 3 independent directors and a mandate that the CEO should be on the board). While the directors are nominees of the promoters, as directors, they have fiduciary duties to the company under company law. Accordingly, it is expected that in spite of the directors being nominees of shareholders, they exercise their judgment while executing their duty as a director. It will remain to be seen how IRDAI interprets this obligation on an insurer in the context of the governance of the insurer, as determined by the promoters through arrangements in shareholder agreements.

Similarly, the IRDAI has also emphasized the need to ensure the independence of ‘control functions .While the term ‘control functions’ has not been specifically defined, compliance, risk, audit, actuarial and secretarial function have all been identified as functions whose independence has to be ensured.

(iii) Approval for Appointment of Chairperson

The Corporate Governance Regulations prescribe that prior approval of the IRDAI is required to appoint the chair person of the board of directors of an insurer, except for a public sector insurer. Until now, the IRDAI left it to the discretion of the board to choose its chairperson.

(iv) Minimum number of Independent Directors

While the Previous Guidelines required the board of an insurer to have a minimum of three independent directors, they simplified this requirement to two independent directors for the initial five years from grant of the certificate of registration to the insurer. The Corporate Governance Regulations remove this relaxation and mandate the board to have a minimum of three independent directors. If the number of independent directors falls below the statutory minimum, that must be intimated to the IRDAI immediately and such vacancy should be must now be filled in before the immediate next board meeting or within 3 months from the date of such vacancy, whichever is later. Any resignation or removal of an independent director must be intimated to IRDAI within 30 days of such vacancy.

(v) Composition of Board

The Corporate Governance Regulations have reiterated that in addition to the number of independent directors prescribed thereunder, the insurer must also comply with the Indian Insurance Companies (Foreign Investment Rules, 2015) (“Foreign Investment Rules”). As per the Foreign Investment Rules, an insurer having foreign investment must ensure that the majority of its directors and KMP, and at least one among the chairperson, the CEO, or the MD are resident Indian citizens. Further, insurers having foreign investment exceeding 49% must ensure that at least half of its directors are independent directors, and if the chairperson is an independent director, then at least one-third of the board are independent directors. Hence, an insurer must have three independent directors and also ensure compliance with the requirement with respect to the minimum percentage of independent directors under the Foreign Investment Rules, based on the extent of foreign investment that it has received.

(vi) Composition of Board Committees

The policy holder protection committee must be headed by an independent director as per the Corporate Governance Regulations, instead of by a non-executive director as prescribed under the Previous Guidelines. The Previous Guidelines also prescribed the composition of the investment committee and the “with profits committee” setup by the board. The Corporate Governance Regulations only require that these committees be set up by the board and mention that the IRDAI will issue specific requirements of composition and other matters as to the committees’ functioning. Similarly, the role of the Chief Risk Officer, which was mentioned in detail in the Previous Guidelines as the supervisory head of the risk committee, has not been specified in the Corporate Governance Regulations. It appears that IRDAI will issue more rules and details around compliance in due course.

(vii) Chief Compliance Officer

The Corporate Governance Regulations prescribe that the Chief Compliance Officer must be appointed for a minimum fixed tenure ofatleast3years.The insurer must in for many vacancy in this position (or in the position of any Key Managerial Person) to the IRDAI and ensure that it is filled on a priority basis such that the position does not remain vacant for a continuous period of more than 180 days.

(viii) Risk Control Systems

The Previous Guide lines required that insurers which are part of a group must have group-wide risk control systems in place in addition to the control systems at the level of the insurer and that the board of the insurer must formula tea

policy to address group-wide risks. In contrast, the Corporate Governance Regulations do not mention group-wide control systems and require the board to ensure that the insurer has risk management systems and internal controls in place.

(ix) Environmental, Social and Governance Framework

The Corporate Governance Regulations introduce a requirement that insurers must formulate a board-approved Environmental, Social and Governance(“ESG”) framework and a comprehensive climate risk management framework. The activities under the ESG framework are to be monitored by the board and the framework must be reviewed on an annual basis.

(x) Reorientation of Group Governance Policies

The Corporate Governance Regulations acknowledge that an insurer which is part of a corporate group may be subject to regulatory requirements regarding governance policies and practices established at the group level and implemented uniformly across the group. The Corporate Governance Regulations however state that these governance policies and practices may be re oriented at the level of the insurer to suit its specific business, risk profile, and sectoral regulatory requirements.

Authors: Deepa Christopher – Partner; Pranav Kandada – Associate.

Disclaimer: This alert highlights only 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.