The Indian insurance regulatory framework is set for an overhaul and the proposed amendments by the Government of India aim to focus on protection of policyholder interest, facilitating more players in the market, enhancing efficiencies in the insurance industry and promoting ease of doing business to ensure “Insurance for All by 2047”.
In this podcast, our Partners, Sidharrth Shankar and Shivangi Sharma Talwar discuss the proposed amendments to the regulatory landscape and its impact on stakeholders and the Indian insurance sector.
Transcript:
Question 1. What are the recent developments in the insurance sector
Response:
In November 2024, the Ministry of Finance in consultation with the IRDAI issued a memorandum proposing amendments to overhaul the insurance regulatory framework. The proposed amendments focus on ease of doing business and enhancing insurance penetration to achieve the goal of “Insurance for All by 2047”. The Government also invited comments from external stakeholders to the proposed amendments to the legislative framework.
In continuation with the Government’s proposal, the finance minister in the budget speech proposed to increase the FDI limit for insurance companies from 74% to 100%. The enhanced limit will be available for insurance companies which invest the entire premium in India, and it is also expected that the current guardrails and conditionalities associated with foreign investment will be reviewed and simplified. The finance minister also stated that specific benefits to insurance offices of global companies which are set up in IFSC will be proposed.
The amended bill to the Insurance Act,1938 and the allied acts is expected to be tabled in the current session.
Question 2. What are the expected changes in the legislative framework
Some of the key reforms are:
Increase in FDI
FDI in insurance companies is currently permitted up to 74%. Insurance companies with any foreign investment are required to have majority of its directors and key management persons as resident Indian citizens. Interestingly, insurance companies with more than more than 49% FDI are required to have (i) at least 50% of its directors to be independent directors, subject to certain exceptions and (ii) at least 50% of the net profit for the financial year to be retained in the general reserve, if (A) dividend is paid in the said financial year; and (B) solvency margin is less than 1.2 times of the control level (150%) of solvency.
It is expected that with the proposed increase in FDI limit to 100%, the existing conditionalities to FDI will be simplified including in relation to residency status of directors and key management persons. Under erstwhile insurance laws, a cooling off period of two financial years was prescribed to apply for registration of an insurance company, if the Indian promoter or the foreign investor had exited an insurance venture. Currently, there is no such restriction, and promoters including foreign promoters can exit a joint venture and immediately apply for registration of an insurance company with 100%FDI.
Composite License
Insurance companies can undertake life, general, standalone health insurance business under separate legal entities which requires the promoters to form separate entities and diversify their assets. It is proposed that insurance companies can obtain a com posite license under which life, general and health insurance business can be undertaken under one unified entity. This proposal aligns with the global practices in many jurisdictions and could lead to consolidation of existing ventures in the Indian insurance market.
Merger of Insurance companies
The Insurance Act prohibits a merger of or transfer of insurance business of an insurance company with a non-insurance company. This restriction was much debated in 2015 on the proposed merger of HDFC Life and Max Life. The said transaction involved an intermittent step of merger of Max Life with its listed holding company Max Financial Services and thereafter a merger of the combined entity with HDFC Life. After much debate, the transaction was rejected by the IRDAI on a technicality that the Insurance Act permits a merger between two insurance companies of the same class.
It is now proposed that insurance companies can merge and transfer insurance business to a company not engaged in insurance business. If implemented, this proposal could lead to innovative structures in the market where exits could be provided to investors investing in the promoter of an insurance company, also, non-insurance companies could achieve backdoor license to undertake insurance business.
Other Notable Reforms
The Government has also proposed reduced capital requirements for insurance companies that serve underserved segments, insurance companies to undertake incidental business other than insurance business, prior approval of the IRDAI for transfer or issuance of shares exceeding five percent of the share capital as opposed to one percent of the share capital, inclusion of managing general agents as an insurance intermediary to provide customised insurance solutions.
Conclusion
Reduced compliance burden, lower capital requirements, simplified process and effective and efficient implementation of such processes are key to transforming the insurance sector and for insurance to become a common and multi-faceted financial product with emphasis on financial literacy, distribution network, development of innovative products, utilization of AI and big data for product development, claim settlement and speedy claim redressal.
Shivangi Sharma Talwar is a partner, specialising in mergers and acquisitions, investment transactions, strategic buyouts in the insurance sector.