This Newsletter captures the key legislative and regulatory developments in the insurance sector between January 2023 – March 2023.

Submission of reinsurance returns by life insurers

The Insurance Regulatory and Development Authority of India (“IRDAI”)[1] has dispensed the following reporting formats, returns and statements by life insurers:

1. Form 1.1(annual filing): Summary of reinsurance treaties
2. Form LR-2 (annual filing): Particulars of Surplus Treaty
3. Form LR-4 (annual filing): Particulars of Quota Share Treaty
4. Form LR-6 (annual filing): Particulars of Excess of Loss cover/Catastrophe Treaty
5. Form LR-9 (annual filing): Data Uploading Format for Reinsurance Rate data
6. Statement 1 (quarterly submission): Statement of Reinsurance Statistics
7. Statement 2 (annual submission): Reinsurance Details – Inforce
8. Statement 3: (annual submission) Reinsurance Details – Withdrawn

Life insurers must continue filing the remaining returns in the existing formats until further instructions.

Circular on appointment of an appointed actuary

In relation to the recently notified IRDAI (Appointed Actuary) Regulations, 2022 (“Actuary Regulations”), IRDAI has introduced the following key changes vide circular dated January 10, 2023 (“Circular”):

1. Under the Actuary Regulations, an insurer / reinsurer is required to obtain IRDAI’s approval for the appointment of appointed actuary. In this regard, the format for the application for the said appointment has now been prescribed, viz. Form IRDAI-AA-2 (an application for appointment of appointed actuary). The said form needs to be submitted along with the extract of the board resolution and a copy of the appointment letter. Also, the insurer/reinsurer must annually submit the renewed valid ‘Certificate of Practice’ issued by the Institute of Actuaries of India and can make a separate written application (along with the annexed form) seeking relaxation of eligibility conditions (if any) for appointment of the actuary.
2. As per the Actuary Regulations, life insurers must have at least 2 (two) actuaries and general/standalone health insurers and reinsurers must have at least 1 (one) actuary in addition to the appointed actuary for pricing and valuation purposes. IRDAI has directed that the above requirements must be complied: (a) on or before December 31, 2023, by life insurers ; and (b) on or before December 31, 2024, by general, stand-alone health insurers and reinsurers.[2]
3. The Circular also permits existing appointed actuaries who are: (a) appointed on relaxation of eligibility condition in respect of subject specialization for a limited period or (b) appointed with support of a mentor actuary for a limited period, to continue to work as appointed Actuary beyond such limited period subject to such appointed actuary complying with the Actuary Regulations. The insurer must inform IRDAI within 30 (thirty) days before expiry of such limited period along with a fresh Form IRDAI-AA-2.

Investments by International Financial Service Centre Insurance Office (“IIO”)

The International Financial Services Centres Authority (“IFSCA”) has notified the IFSCA (Investment by International Financial Service Centre Insurance Office) Regulations, 2022 (“IFSCA Investment Regulations”) which aim to create a regulatory framework and formulate processes related to investment of assets by an IIO.[3] With the notification of the IFSCA Investment Regulations, the IRDAI (Investment) Regulations, 2016 and Master Circular/Guidelines issued thereunder would cease to apply to an International Financial Services Centre (“IFSC”).

The IFSCA Investment Regulations apply to:

1. an IIO incorporated in an IFSC, which must undertake investment of assets in accordance with these regulations;
2. an IIO not incorporated in an IFSC, which may either elect to follow norms related to investment of assets as applicable to its parent entity or as specified under these regulations; and
3. An IRDAI registered IIO established as a branch of foreign insurer or Lloyd’s India, which may either elect to follow norms related to investment of assets as applicable to its parent entity or as specified under these regulations.

Under the new regulations, among other stipulations: (a) IIOs are required to have a board approved investment policy which provides for situations of breaches, action plans to address breaches, etc., (b) IIOs are restricted from investing more than 5% of its earmarked assets by value in entities owned or controlled by promoters; (c) investments by IIO should only be made in assets rated as ‘Investment Grade’ under Insurance Capital Standards – Rating Categories by international rating agencies recognized by the International Association of Insurance Supervisors.

Classification of Sovereign Green Bonds (“SGBs”)

In order to de-concentrate and diversify the infrastructure investment portfolio of insurers and for participation in environmental, social and governance initiatives and sustainable development and preventing environment degradation, insurers are encouraged to consider investing in SGBs. Consequently, investment in SGBs will be treated as ‘investment in infrastructure’ and will be classified as Central Government securities.[4]

Clarification on Investment Regulations

In relation to IRDAI (Investment) Regulations, 2016 and IRDAI Investments – Master Circular dated October 27, 2022, IRDAI has issued the following clarifications:[5]

1. Shares issued to insurance companies pursuant to a demerger in the resulting company would be classified as “Approved investment” or “Other Investment” for the initial 2 (two) financial years. For the purposes of the classification, the prescribed dividend criteria[6] applicable to the demerged company must be considered;
2. With regard to the restriction on investments in mutual funds applicable to insurers (i.e., whereby insurers are restricted from investing, in a single mutual fund, more than 20% of its total investments in mutual funds), it has been clarified that the provision would come into force from April 1, 2023 and the 20% threshold limit will include investments in exchange traded funds;
3. With regard to the restrictions on investment by insurers in alternative investment funds (“AIFs“) where rights attached to units are varied, it has been clarified that insurers are not permitted to invest in any schemes of AIFs that have adopted a priority distribution model which may lead to disproportionate share of losses when compared to other investors in the same class.

Profit related commission to non-executive director(s)

Vide circular dated September 2, 2022, IRDAI had introduced a deemed approval mechanism for appointment/continuation of common director(s) under section 48A of Insurance Act, 1938 (i.e., appointment or continuation of a common director representing an insurance agent or intermediary on the board of an insurance company) and directed insurers to not pay any remuneration to non-executive directors (other than sitting fees), without prior approval of IRDAI.

To further simply the process, insurers have now been permitted to pay profit related commission to non-executive director(s), including the non-executive director(s) appointed under section 48A of the Insurance Act, 1938, under the deemed approval mechanism, subject to the following conditions:[7]

1. the insurer has reported positive profit after tax for the relevant period;
2. the insurer’s board has approved such payment under a resolution;
3. the profit related commission payment to each non-executive director is within limits specified in IRDAI’s Guidelines on remuneration of non-executive directors and managing director/ chief executive officer/ whole-time directors of insurers;
4. payment related disclosures are made in the financial statements for the respective financial year; and
5. the insurer complies with other applicable laws.

Treatment of inward co-insurance while reporting motor third party obligations

It has been clarified that where the insurer undertakes co-insurance arrangement as a part of risk sharing program, the inward co-insurance will not be considered for the purpose of reckoning compliance under the provisions of Section 32D of the Insurance Act, 1938 and the IRDAI (Obligation of Insurer in Respect of Motor Third Party Insurance Business) Regulations, 2015, which requires insurers carrying on general insurance business to underwrite the prescribed minimum percentage of insurance business in third party risks of motor vehicles.[8]

Amendment of Master Guidelines Anti-Money Laundering/ Counter Financing of Terrorism (AML/CFT), 2022 (“AML Guidelines”)

The AML Guidelines have been amended[9] in line with the Prevention of Money-Laundering (Maintenance of Records) Amendment Rules, 2023 (“PML Rules”). The definition of “Politically Exposed Persons” (“PEPs”) has been substituted in the Master Guidelines to refer to the revised definition of PEPs under the PML Rules[10]. The AML Guidelines stipulate certain obligations for insurers vis-à-vis PEPs in terms of proposals of PEPs requiring examination by senior management, enhanced due diligence requirements, etc. These requirements would now have to be adhered to, in view of the above revised definition. Further, insurers are also required to adhere to other amendments notified under the PML Rules.

New Regulations on payment of commission and expenses of management

IRDAI has, pursuant to notifications dated March 26, 2023, notified 3 (three) new regulations, i.e., (a) the IRDAI (Expenses of Management of Insurers transacting life insurance business) Regulations, 2023; (b) the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations, 2023 ((a) and (b) is collectively referred to as “EOM Regulations”); and (c) the IRDAI (Payment of Commission) Regulations, 2023 (“Commission Regulations”). These regulations have come into effect on April 1, 2023, and have replaced the IRDAI (Expenses of Management of Insurers transacting life insurance business) Regulations, 2016 and the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations, 2016 and the IRDAI (Payment of commission or remuneration or reward to insurance agents and insurance intermediaries) Regulations, 2016, respectively. Among other changes, product-level commission caps as well as segment specific limits on expenses of management (in case of general and health insurance businesses) have been done away with. These changes would indeed afford increased flexibility to insurers in managing their expenses and structuring their commission payments and is also likely to enable insurers to be more responsive to market forces and bring in better product pricing for customers. For a detailed analysis, please refer to the JSA Prism of April 12, 2023.

Further, following the notification of EOM Regulations and Commission Regulations, the payment of distribution fees to the Motor Insurance Service Provider (MISP) by the insurer or insurance intermediary will be in accordance with the board approved policy for payment of commission of the insurer.

“Use and File” Procedure for Products

With effect from April 1, 2023, the existing ‘use and file’ procedure has been modified for the purpose of enabling dynamism as well as speed to market insurance products.[11] Instead of filing the documents with IRDAI, the documents to be submitted under ‘use and file’ will now be submitted to the Product Management Committee (PMC), which is responsible for the final approval of the product. However, IRDAI may request documents in respect of a few products identified on a monthly basis from amongst life insurers, general insurers and health insurers for examination as per the prescribed procedure.

This Newsletter has been prepared by:

Venkatesh Raman Prasad Partner

Ronak Ajmera Partner

Nandini Seth Partner

For more details, please contact [email protected]

[1] Circular dated January 3, 2023.

[2] This requirement does not apply to new insurers/reinsurers for a period of 2 (two) years from the date of issuance of certificate of registration.

[3] Notification dated January 12, 2023.

[4] Circular dated January 13, 2023.

[5] Circulars dated January 19, 2023 and January 31, 2023.

^[6] For shares of a company to qualify as “approved investment”, the following dividend criteria applies: (a) in case of preference shares, dividends should have been paid on its equity shares; and (b) in case of equity shares of any listed company, at least 10% dividends have been paid, in each case, for at least 2 (two) of immediately preceding 3 (three) consecutive years.

[7] Circular dated January 30, 2023.

[8] Circular dated February 20, 2023.

[9] Circular dated March 20, 2023.

[10] ‘Politically Exposed Persons’ is defined to mean individuals who have been entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials.

[11] Circular dated March 31, 2023.