This article discusses the following key trends and developments in the Indian insurance sector:

• new norms for insurers’ management and commission expenses;
• changes to guidelines on remuneration of insurers’ non-executive directors and key managerial persons; and
• changes to reinsurance norms in India.

New Norms for Insurers’ Commission and Management Expenses

In a major overhaul of the regulatory regime governing Indian insurers, in March 2023, the IRDAI notified the IRDAI (Payment of Commission) Regulations 2023 – as well as the IRDAI (Expenses of Management of Insurers Transacting General or Health Insurance Business) Regulations 2023, together with the IRDAI (Expenses of Management of Insurers transacting life insurance business) Regulations 2023 (collectively “2023 Regulations”) – which are essentially new rules on payment of commissions/remuneration to insurance agents and insurance intermediaries by insurers.

The 2023 Regulations became effective from 1 April 2023 and superseded the earlier sets of regulations of 2016. Previously, the Indian insurance sector was required to comply with individual limits on commission/remuneration payable by insurers to insurance agents or intermediaries for solicitation of insurance, which were expressed as percentages of premium paid by the policyholder to the insurer. The IRDAI has now replaced the earlier individual cap on commission payments on insurance products with an overall cap on expenses of management (EOM) of insurers.

These changes are in response to long-standing demands from insurers to allow them greater flexibility in deciding commission/rewards to intermediaries, agents, point of sales persons (POSPs) and motor insurance service providers (MISPs). On 22 January 2024, the IRDAI notified the IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024 (“EOM Regulations”) combining the 2023 Regulations to further simplify the regulatory landscape. The EOM Regulations shall come into force on 1 April 2024 and replace both the 2023 Regulations.

• EOM limits – the EOM Regulations simply require insurers to ensure that the total amount of commission paid out does not exceed the EOM limits specified under the EOM Regulations. Insurers must formulate board-approved policies (BAP) on EOM and commission, and file returns on EOMs with the IRDAI after each financial year. The policy on commission may be subsumed into the policy on EOM. Thus, insurers need to work out a compliant structure for their expenditure (including commission) for each financial year.
• In terms of the EOM Regulations, an insurer’s EOM includes its operating expenses, commission paid to insurance agents and intermediaries, and commission and expenses on inward reinsurance, which are charged to the insurer’s revenue account. Previously, insurers had to comply with segment-based EOM limits (for general/health insurers, segments such as fire, marine, motor, health retail, miscellaneous retail were applicable, whereas segments such as linked life, general annuity and pension, health and variable were applicable for life insurers). The new EOM norms provide the following for different categories of insurers.
  • General and health insurers – general and health insurers will now comply with a single limit of EOM on an overall basis. This will be calculated as a percentage of gross premium written in India in a financial year as follows:
    • up to 30% for general insurers; and
    • up to 35% for standalone health insurers.
  • Life insurers – similarly, life insurers must comply with a single EOM limit on an overall basis, which is derived by insurers through a segment-based calculation criteria by aggregating separate allowable limits, based on the premium received on different life insurance products during the financial year. The parameters for contribution of various product categories towards the EOM limit have been revised by the IRDAI, with increased EOM limits.
  • Additional expenses – over and above the EOM limits, certain new additional expenses are allowed, such as those in relation to premium sourced from the rural sector or specified government welfare-oriented insurance schemes, as well as expenses towards insurtech and insurance awareness.
  • Exemption criteria from EOM limits – the IRDAI can exercise forbearance if an insurer exceeds the EOM limits, on a case-by-case basis, for insurers with a duration of up to five years of business. In case of default life insurers, the IRDAI may also order a valuation of the insurer to evaluate its financial health and soundness (in addition to other measures such as removal of key management persons or a restriction on opening new places of business).
• BAP on commission – even though a BAP was required under the erstwhile commission regulations as well, insurers must now additionally ensure that their BAP on commission takes the following into account:
  • the nature and tenure of the insurance policy;
  • the interest of the insurance agent or insurance intermediary; and
  • enhancement of performance of the insurance agent or insurance intermediary.
• Reward – the erstwhile regime restricted payment of “rewards” to insurance intermediaries whose revenues from non-insurance intermediation activities were more than 50% of their total revenues, which made corporate agents such as banks and Non-Banking Financial Companies (NBFCs) ineligible for rewards. The EOM Regulations place all intermediaries on an equal footing and how to reward or compensate the distributor will entirely depend on the insurer.

The new rules usher in an era of flexibility in insurance sales compensation and have already led to some innovative commission structures from insurers to meet their respective goals. This has also had a trickle-down effect on commission/rewards being paid out to MISPs and POSPs engaged by insurers and insurance intermediaries.

The new regulations provide long-awaited flexibility to insurers to manage their expenses, including commissions, and will spur growth and allow for greater transparency. Interestingly, these regulations provide that they will remain in force for three years and be reviewed thereafter. The sunset clause suggests that the IRDAI is cautious in its approach and will be closely monitoring the impact of new regulations on the stakeholders.

Changes to Guidelines on Remuneration of Insurers’ Non-Executive Directors and Key Managerial Persons

In 2023, the IRDAI issued the IRDAI (Remuneration of Non-Executive Directors of Insurers) Guidelines 2023 (the “NED Guidelines”) and the IRDAI (Remuneration of Key Managerial Persons of Insurers) Guidelines 2023 (the “KMP Guidelines”) in order to regulate the remuneration payable to non-executive directors and key managerial persons of private sector insurers. These guidelines aim to bring the remuneration of key managerial persons other than the CEO, Managing Director (MD) and Whole-Time Director (WTD) within the ambit of the guidelines and to provide more clarity on variable pay in the context of the total remuneration of directors and key managerial persons, deferral of variable pay, and malus and claw-back provisions, amongst other things. The key changes under the NED Guidelines and the KMP Guidelines are discussed below.

NED Guidelines

The NED Guidelines were issued in supersession of the IRDAI (Remuneration of Non-Executive Directors of Private Sector Insurers) Guidelines 2016 (the “2016 Guidelines”) on the remuneration payable to non-executive directors of private insurers.

Among other things, the guidelines prescribe that the total remuneration for each non-executive director should not exceed INR20 lacs (approximately USD24,037) per annum, except in cases where the chairperson of the company is a non-executive director – in which case, the insurer’s board may decide their remuneration. The earlier rules required that remuneration in the form of profit-related commission to non-executive directors should not exceed INR10 lacs (approximately USD12,018) per annum for each director, excluding the non-executive chairperson (for whom the board may decide the remuneration).

Non-executive directors are no longer eligible for any equity-linked benefits. The maximum age limit for non-executive directors, including the chairperson of the board, has been prescribed as 75 years.

KMP Guidelines

The KMP Guidelines replace the IRDAI (Remuneration of Chief Executive Officer/Whole-Time Director/ Managing Director of Insurers) Guidelines 2016 (the “Erstwhile Guidelines”) and are applicable to all KMPs of an insurer, including its chief financial officer, chief risk officer, etc. The Erstwhile Guidelines were only applicable to the CEO, WTD and MD of insurers. The key changes are as follows.

• Weightage to parameters for variable payments – certain minimum parameters must be considered in the determination of performance assessment of KMPs for payment of variable pay and incentives under the insurer’s remuneration policy. Such parameters must now constitute at least 60% of the total weightage in the performance assessment matrix of MDs/CEOs/WTDs (and at least 30% for other KMPs).
• Fixed pay and variable pay – there is clear guidance on what aspects of remuneration are to be considered as fixed pay and variable pay. Fixed pay includes basic pay, allowances, perquisites, contribution towards superannuation/retirement benefits, and all other fixed items of compensation. Variable pay must be in the form of cash and/or share-linked instruments, paid based on the KMP’s performance, and includes incentives and bonus.

Share-linked instruments are to include employee stock option schemes, employee stock purchase schemes and stock appreciation rights schemes. Under the earlier guidelines, employee stock options were excluded from the components of variable pay and did not form part of the computation of the total remuneration.

• Payment of variable pay – the Erstwhile Guidelines did not prescribe any thresholds in respect of the amount of variable pay, including the break-up of cash and non-cash benefits that could be paid to KMPs. The KMP Guidelines provide that variable pay should be at least 50% of the fixed pay and not more than 300% of the fixed pay for the corresponding period payout. The new framework also sets out criteria for payment of variable pay via non-cash instruments. The key change introduced by the IRDAI is that where variable pay is up to 200% of the fixed pay, a minimum of 50% of the variable pay must be offered through non-cash instruments. KMPs also shall not be issued sweat equity shares
• Issuance of employee stock options of promoter company – unlisted insurers can issue employee stock options of their listed promoter company to their KMPs, provided that the cost is borne by the respective insurer only. The KMP Guidelines do not prescribe such issuance of employee stock options by unlisted promoters of insurers.
• Claw-back and malus arrangements – variable pay of KMPs must be subject to malus and claw-back provisions and the employment contract must identify a representative set of situations that require insurers to invoke the malus and claw-back clauses, which may apply to the entire variable pay.
• Shareholders cannot hold whole-time positions – an insurer’s shareholders (including promoters) cannot hold a whole-time position in the insurer, except where an employee becomes a shareholder by virtue of shares received through employee stock options during the course of their employment.
• Severance payments – the Erstwhile Guidelines permitted severance payouts other than accrued benefits (gratuity, pension, etc) to MDs/CEOs/WTDs with the prior approval of the insurer’s board. The KMP Guidelines provide that severance payments cannot be made other than for accrued benefits, except in cases where it is mandatory to be paid under applicable statutory provisions.

Reforms in Regulations Governing Conduct of Reinsurance

2023 witnessed renewed focus from the government on the Gujarat International Finance Tech City (“GIFT City”), India’s first and only International Financial Services Centre (IFSC). The centre was set up in 2015 to undertake financial services transactions that are currently carried on outside India by overseas financial institutions and overseas branches/subsidiaries of Indian financial institutions. Although geographically located within India, the IFSC is considered an offshore jurisdiction as per Indian exchange control laws.

In 2023, the International Financial Services Centres Authority (ie, the unified regulator of financial services in the IFSC) issued new regulations on the conduct of reinsurance, as well as on the management control, administrative control and market conduct of insurance business.

As such, the Indian government, along with the IFSCA and the IRDAI, is actively taking steps to develop GIFT City and India as a reinsurance hub – for instance, the introduction of the IRDAI (Reinsurance) (Amendment) Regulations 2023 (the “Reinsurance Amendment Regulations”). These amendments aim to harmonise the provisions of various regulations applicable to Indian insurers and Indian reinsurers, including foreign reinsurance branches (FRBs) and the IFSC Insurance Offices (IIOs), thereby encouraging more reinsurers to set up business in India and enhancing the ease of doing business.

Some of the key changes introduced under the Reinsurance Amendment Regulations include the following.

• Minimum capital – the minimum assigned capital requirement for FRBs was reduced from INR1 billion to INR500 million, with the provision to repatriate excess assigned capital. This has been a long-standing request from reinsurers and may incentivise more reinsurers to open Indian branches.
• Order of preference – the placement of non-life reinsurance by Indian insurers is subject to the prescribed hierarchy of various entities with which Indian insurers can place business (ie, order of preference). The order of preference, previously spanning levels, has been streamlined to four. While Indian reinsurers (“Category 1”) (currently only GIC Re) remain the first category in the order of preference, IIOs that invest 100% of retained premium from Indian business in the domestic tariff area (DTA) and FRBs (“Category 2”) have been placed second. DTA means the whole of India (including the territorial waters and continental shelf and excluding special economic zones). Other IIOs have been placed as third and the cross-border reinsurers (CBRs) have been placed last. A cedant is required to secure maximum participation by Category 1 and Category 2 and abide by the order of preference while seeking placement.
• Seeking lead reinsurance support – a cedant is required to first seek lead terms from all Category 1 reinsurers transacting reinsurance business during the immediately preceding complete three financial years without interruption and at least four other Category 2 reinsurers. A cedant cannot seek lead terms from CBR/IIOs with a credit rating below A- from Standard & Poor’s or equivalent (this restriction does not apply if an IIO is a subsidiary/branch of an Indian insurer). Significantly, cedants are allowed to not seek terms from a reinsurer or an IIO that is a group/associate company of another Indian insurer.
• Retention policy – previously, Indian reinsurers including FRBs and Lloyd’s India were required to maintain a minimum retention within India of 50% of Indian reinsurance business underwritten by them. The IRDAI has now introduced a new exemption, which provides that up to 20% of the total business retroceded by Indian reinsurers (which includes FRBs and Lloyd’s India) to IIOs will be considered towards the minimum retention requirement of such Indian reinsurers.
• Maintenance of records – with the aim of easing the procedural requirements, Indian insurers are now only required to submit soft copies of the list of reinsurers with their credit rating and their shares in reinsurance arrangements along with final reinsurance programme. Previously, the insurers were required to file a soft copy of all reinsurance treaties with the IRDAI.

The Reinsurance Amendment Regulations make significant changes to the present framework for reinsurance in India, with a view to fostering a more competitive reinsurance landscape. IIOs will now participate in new placement opportunities on a par with FRBs. Recently, the IRDAI also released an exposure draft on its regulations governing the registration and operations of FRBs and Lloyd’s India, which seek to consolidate provisions for both under a single set of regulations, propose provisions surrounding mergers of parent entities of FRBs, and rationalise compliance requirements.

An increased presence of reinsurers in the market will help to expand reinsurance capacity within the country. Following the pandemic, reinsurance companies in India are witnessing a tightening of underwriting norms, leading to an increase in pricing. An increased supply will ensure availability of reinsurance cover for cedants at efficient price and terms. Such changes are intended to incentivise the growth of reinsurance business in India and thereby develop a more robust insurance ecosystem.

This article was originally published in Chambers & Partners on 23 January 2024 Co-written by: Shailaja Lall, Partner; Uday Opal, Principal Associate. Click here for original article

Read Less-