Corporate Governance in the Indian Insurance Sector

Very recently, the regulator of the insurance sector of India, the Insurance Regulatory and Development Authority of India (IRDAI), issued regulations on the corporate governance of insurers. Previously, Indian insurers were following the IRDAI circular 'Guidelines for Corporate Governance for Insurers' along with the requirements set out in the Insurance Act, 1938, the IRDAI Act, 1999, and several other regulations mentioned under the above Acts. IRDAI has already notified the IRDAI (Corporate Governance for Insurers) Regulations, 2024 (Corporate Governance Regulations). The new guidelines are a refinement and summation of existing practices related to governance.

Some of the new regulations under the Corporate Governance Code include:

1. Composition of the board: It is the need for an insurer to have a board comprising competent and qualified individuals from different disciplines of businesses such as finance, economics, management, audit, accounting, etc., which will be as per the needs of the insurers, matching the scale, nature, and complexity of the business.

2. Approval for appointment of chairperson: Prior approval of the IRDAI is necessary to appoint the chairperson of the Board of Directors of an insurance company. This code is not applicable to a publicsector insurance company. To date, it has been left to the discretion of the board to choose its chairperson.

3. Chief compliance officer: The chief compliance officer should be appointed for a minimum period of at least three years. This position should not remain vacant for a continuous period of more than 180 days. This position must be filled in on priority basis as it is a Key Managerial Person.

4. Risk control systems: As per the new guidelines, it is the responsibility of the board to ensure that the insurer has its own risk management systems and internal controls in place according to the needs of the insurer. The new corporate governance regulations do not mention group-wide control systems like the old one which required that if the concerned insurance company is the associate / subsidiary of a group company then, it should have group-wide risk control systems in place along with to the control systems at the level of the insurer and that the board of the insurance company has formulated risk management policy to address group-wide risks.

5. Environmental, social and governance framework: The new regulation has introduced a requirement that an insurance company must formulate a Board approved ESG framework (Environmental, Social and Governance) along with a comprehensive climate risk management framework. The output under the ESG framework are to be reviewed on yearly basis. The ESG framework is to be monitored by the board. Experts feel that ESG Framework is to be reviewed more frequently.

6. Reorientation of group governance policies: An insurance company has to fulfil the requirements of Companies Act, SEBI Act and others (for listed insurance companies like LIC, SBI Life, ICICI Pru or HDFC Life in life sector and The New India Assurance Co. Ltd. in nonlife sector). The new regulations acknowledge that an insurance company which is an associate/subsidiary company of a corporate group may be subject to the regulatory requirements regarding governance policies and practices established at the group level and implemented uniformly across the group. The new regulations have specified that all these new governance policies and practices must be aligned at the level of the insurer to suit its specific business, risk profile and sectoral regulatory requirements.

7. Composition of board: Indian insurance companies must comply with Foreign Investment Rules 2015. As per the Foreign Investment Rules, an insurer having foreign investment must ensure that the majority of its directors, KMP, and at least one of the chairpersons, the CEO or the MD, are resident Indian citizens. If the chairperson is an independent director, then at least one-third of the board is made up of independent directors. An insurer must have three independent directors and 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.

8. Composition of the board committee: An independent director must be the head of the policyholder protection committee. In previous guidelines, there was mention of a non-executive director. 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 mentioned in the corporate governance regulations. It is expected that the IRDAI will issue more rules and details around compliance in due course. Regarding the composition of the Investment committee and the profit committee set up, the new regulations only require that IRDAI issue specific requirements for composition and other matters as to the committees' functions.

9. Minimum number of independent directors: As per the old guidelines, for initial five years from the grant of the 'certificate of registration' to the Insurer, two independent directors will be required. New corporate governance regulations mandates the board to have a minimum 3 independent directors at all times. Under the previous guidelines, it was 3 independent directors. The regulator must be informed immediately if the no of independent directors falls below the stipulated minimum level. The shortfall must be filled up before the next board meeting or within 3 months from the date of such vacancy whichever is later. Any removal/resignation by any independent director must be informed to IRDAI within 30 days of such vacancy.

10. Independence of the board: The regulator has strongly asserted on the independence of board of directors from the owners. Though the directors are the nominees of the promoters but they have their specified judiciary duties and responsibilities towards the role. Control functions like compliance, risk, audit, actuarial and secretarial functions are identified as functions for which independence is a necessity.

The earlier guidelines for corporate governance for insurers in India was issued on May 18, 2016. IRDAI consulted with industry representatives, professionals and other stakeholders. It covered corporate governance practices, appointment of MD/CEO and key managerial personnel as well as the appointment of statutory auditors of insurers. It clearly defines the governance structure in terms of composition of board, its role and responsibility of board, disclosures about meetings of the board and its committees. It delegated the specific functions to the board committees – audit committee, investment committee, risk management committee, policyholder protection committee, nomination and remuneration committee, corporate social responsibility committee, with profit committee and other committees.

The role and functions of the committees were clearly defined in terms of constitution, objectives, responsibilities, frequency of meeting/ quorum requirements, appointment and removal of members and reporting of respective committees to the board. The role of appointed actuary was clearly defined in the corporate guidelines, so also be roles of Internal Audit department as well as statutory auditors.

The other important corporate guidelines of 2016 include disclosure requirements, outsourcing arrangements, interaction with the regulator, reporting to IRDAI, and whistle blower policy.

Let us examine the scenario of corporate governance in the Indian insurance industry

Since 2016, many Indian life insurance companies have been charged on several counts for violation of regulations and norms. The regulator imposes fines on such companies. It is observed that though insurance companies are submitting reports on time and committees are being formed as per the regulations, it cannot be said that strict compliance is being followed. The regulator is proactive in its onsite inspection, but loopholes are observed regularly. The irony is that most of the insurance companies with whom fault is found are life insurance companies.

Payment of higher commission to the distributors over and above the regulator's stipulated level is a common violation in insurance companies. Another commotion violation is not following the guidelines of the regulators regarding publicity and advertisements. The third common violation is not maintaining the minimum solvency ratio (which is 150% stipulated by the Regulator IRDAI and for some companies, it is stipulated more than 150%, when the policy holders' liabilities of the insurance companies are more.)

It is worthwhile to mention that the regulator, IRDAI, has announced three companies, LIC, GIC Re and New India as Domestically Important Insurance Companies. They are “too big to fail" based on the size, market importance and domestic and global interconnectedness. LIC and New India are the largest life and general insurance companies in India and GIC Re is the sole Indian reinsurer. These companies are supposed to manage their systematic risks and moral hazard issues with an increased level of Corporate Governance and the need for these insurers to identify all relevant risks and promote a sound risk management framework and culture.

The four failures of corporate governance are poor ethical leadership, lack of integrity, fraud, and corruption. Other than these, some other reasons lead to failure of corporate governance include no attention to risk management, inconsistent and random distribution of roles and responsibilities, failure of internal audit team, ineffective board committees, non-independent board, and non-independent audit committees.

The regulators want big insurance companies like LIC, GIC Re or New India to be more vigilant to governance issues.

Good governance practices in the Indian insurance sector helps in:

(1.) Promoting the economy of the country and industry.
(2.) Enhancing the company performance.
(3.) Promoting productivity and efficiency of its people.
(4.) Extending full proof support to the risk management systems of the companies.
(5.) Helping the company in its commitment to corporate social responsibility

It is expected that some new modifications will also be introduced by the regulator gradually in the corporate governance regulations. Better results are expected, provided that insurance companies follow the corporate governance guideline stipulated by the IRDAI in letter and spirit.