The insurance industry is one of the more closely regulated sectors in India. With the immense population and growing sophistication in consumer consumption and lifestyle and rise in literacy and medical awareness, India offers a lucrative insurance market with a tremendous growth potential.
The primary legislation which governs insurance law in India is the Insurance Act, 1938.
Regulators and industry alike have looked to provide a framework to facilitate the penetration of the market. Dynamic changes continue to be made. Presently, there are over 50 insurance companies in India with the market divided 50:50 between life and general insurance. In recent years the increase in the number of insurance brokerage entities coupled with the adoption of digital technology in distribution of insurance have made insurance products more accessible.
The most prominent life insurance company remains Life Insurance Corporation which is the sole public sector life insurance provider. The public sector also includes six general insurance companies. Making leaps in its strategy and expansion plans is General Insurance Corporation of India or GIC Re which is the only national re-insurance company in India. Private insurance players have continued to grow in number attracting a large volume of foreign investment.
Prominent players in the insurance market in India include New India Assurance Co. Ltd., Tata AIG Corporation of India, ICICI Lombard General Insurance and IFFCO TOKIO General Insurance to name a few.
In March, 2015, the Insurance Laws (Amendment) Act, 2015 ("Amendment Act") was passed by the Indian Parliament. This paved the way for major reforms and lead to amendments to make the legislation more relevant reflecting the current needs to the manner in which the modern economies are functioning. It incorporates certain provisions to provide the Insurance Regulatory and Development Authority of India ("IRDA") with the flexibility to discharge its functions more effectively and enhances foreign investment into Indian insurance companies from 26% to a composite limit of 49% with a safeguard to Indian ownership and control of the insurance provider.
Specifics of Insurance Law in India
India is a common law jurisdiction. In general, Indian laws borrow heavily from, and are based on, English law. However, insurance law in India has certain unique features that deviate from English insurance law. Under the Indian Insurance Act, no risk is to be assumed until a premium is paid. The provision bars any insurer from assuming risk in India in respect of any insurance business on which a premium is not ordinarily payable outside India unless the premium is received by the insurer or is guaranteed to be paid in a manner and within such time as is prescribed or unless the deposit of the amount is made in the prescribed manner.
The insurance business in India is regulated by the Insurance Regulatory and Development Authority (IRDA) Act. This authority was established in 1999 and is responsible for regulating, promoting and ensuring the growth of the insurance and reinsurance business in India.
The functions of the IRDA are defined in Section 14 of the IRDA Act and include:
protecting policyholder interests, including assignment of policy, nominations, insurable interest, settlement of claim, surrender value of the policy etc;
Overview of regulatory steps in the Insurance Industry
To carry on insurance business in India, a company is required to hold the appropriate registration from IRDA.
Steps taken by the government of India for the growth of the industry:
1. In 2010, the IRDA issued guidelines for equity-linked insurance products;
2. In 2011, M&A guidelines were issued enabling consolidation of transactions in the industry; and
3. In 2015, the FDI cap was raised from 26% to 49% under the automatic route and major reforms in the insurance industry took place following the amendments to the Insurance Act.
4. In the 2017-18, the government introduced insurance pension schemes that give an assured a return of 8% to senior citizens on policies of the Life Insurance Corporation (LIC), while policies obtained through portals of public sector insurers for general insurance are discounted; and
5. The IRDA permitted IPO options to insurance companies and stipulated regulations for such insurance companies for their long-term existence (ten years or more).
In May 2016 the IRDA issued Guidelines for Corporate Governance for Insurance Companies, which includes the setting up of a mandatory risk management committee. The structure, responsibilities and functions of the board of directors and the management of insurance companies are therefore required to be as prescribed by regulations. Role of appointment actuaries and the whistle-blowers policy are mandatory.
Overseas Doing Business in India
Foreign investment relaxation
The recent relaxation relating to investment in the insurance sector raising foreign investment under the automatic route to 49% has encouraged several foreign joint venture partners to increase their stakes in Indian joint venture companies. For instance, Aegon, which is the foreign partner in the joint venture Aegon Religare Life Insurance Co, is looking to increase its stake from 26% to 49%. Similarly, BNP Paribas Cardiff proposes to increase its stake from 26% to 36% in SBI Life Insurance, New York Life Investments proposes to hold a significant share of 30% in Centrum Capital, Aviva plc has increased its stake to 49% in Aviva Life Insurance Company India, Nippon Life Insurance will be increasing its stake in Reliance Life Insurance to 49% and Sun Life Financial proposes to increase its stake in Birla Sun Life Insurance to 49%.
As per the regulations, ownership control must be with the Indian promoters/ investors and the chief executive officer must be nominated by the Indian promoters/ investors. In the present context, the term "control" means the right to appoint a majority of the directors on the board of the company or the power to control the management or policy decisions of a company by virtue of shareholding, management rights, shareholders' agreements or voting rights agreements.
Llyod's Branch in India
A significant development in the insurance sector in India is the opening of a branch office of Lloyd's UK, in April 2017. As stated above, in March 2016, the IRDA issued the Lloyd's Regulations, namely the IRDA (Lloyd's India) Regulations, 2016, which stipulate that Lloyd's India is subject to the same eligibility criteria and two-stage registration process that are in place for other foreign reinsurers that want to establish a branch in India.
Foreign Reinsurers Branch in India
Under the IRDA (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd's) Regulations, 2015, certain criteria are to be met for a foreign insurer to be permitted to open a branch office in India, as follows:
a. the applicant has obtained the prior approval or an in-principle clearance from the home country regulator at the time of filing the application with the authority;
b. the applicant should be registered or certified in a national regulatory environment with which the government of India has signed a double taxation avoidance agreement;
c. the net owned fund of the applicant must not be less than the prescribed amount of INR50 billion at any time;
d. the applicant must have a minimum credit rating of having at least good financial security characteristics from any of the internationally renowned credit rating agencies for the last three years;
e. the applicant must have been in the reinsurance business for at least ten years;
f. the applicant must have a solvency margin as stipulated by the home regulator;
g. the applicant is to infuse a minimum assigned capital of INR1 billion into the branch office; and
h. Any other parameters as prescribed from time to time.
In April 2017 IRDA has also issued detailed regulations with regard to outsourcing activities by Indian insurers.
IPO in Insurance Companies: 2018
Pursuant to observation of trajectory hike in the demand of capital amongst the Insurance 7 re-insurance companies, a rise in Initial Public Offers ("IPOs") by insurance companies has been noted in FY 2018.
After five insurance IPOs amongst which ICICI Lombard General Insurance, securing the First-mover-Advantage in the capital market, raising $814 million from the primary market set the trend resulting in New India Assurance securing $1352 million, HDFC Standard Life Insurance gaining $ 1242 million and SBI Life Insurance gaining $ 1198 million1 While ICICI Lombard General Insurance set the market playing field, it took inspiration from its related concern ICICI Prudential Life Insurance approaching the capital market in July, 2016, which led to listing of exponentially large number of life insurance, general insurance and re-insurances companies getting listed on the exchanges.
While observations have been made of the IPO boom to be continues in subsequent years pursuant to the resilient nature of economy, strong domestic liquidity and disinvestment of state owned insurance companies and euphoric market condition which were observed in the over-subscription of shares in ICICI Prudential life insurance being oversubscribed.
Uplifting the trend, more companies have filed the draft offer document with the capital market regulator, SEBI in FY2018, which included PNB Metlife India Insurance offering 496 million shares and expecting an over subscription. Similarly, SBI General Insurance is expected to be listed on the stock markets in FY2020.
In conclusion the insurance industry in India offers growth opportunities for Indian and overseas insurance and reinsurance companies.