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Corporate governance guidelines for insurers in India

GCA India News Corporate governance guidelines for insurers in India


Corporate governance guidelines for insurers in India

The IRDAI Guidelines on Corporate Governance is a Corporate Governance Code to be followed by all the Insurers registered with the IRDAI. The Code provides detailed guidelines for Corporate Governance to be followed by the Insurers. It consists of 14 Chapters and 9 Annexure.

    1. General
      1. Corporate Governance is important since poor Governance and Weak Internal Controls have been associated with major corporate failures.
      2. In the insurance sector, there is regulatory responsibility to protect the interest of the policy holders. As such, this demands insurers to have in place –
        • Good Governance practises for maintenance of solvency.
        • Sound Long Term Investment Policy
        • Assumption of Underwriting risk on prudential basis.
      3. These guidelines shall supersede the Guidelines on Reporting of Key Persons dated 09/10/2013 & Appointment of Statutory Auditors vide Circular dated 25/07/2005 and 22/04/2009.
    2. Objective
      1. The basic objectives of the Guidelines are that the structure, responsibilities and functions of the Board of Directors and Management of the Company recognize the expectations of all stakeholders as well as the regulators.
      2. These guidelines cover following major structural elements of Corporate Governance in Insurance:
        • Governance Structure
        • Board of Directors
        • CEO
        • KMP
        • Role of Appointed Actuaries
        • External Audit – Appointment of Statutory Auditor
        • Disclosures
        • Relationship with Stakeholders
        • Interaction with Supervisor
        • Whistle Blower Policy
    3.  Role of Board of Directors
      1. There is a minimum lock in period of 5 years for transfer of shares from the date of commencement of business for promoters of the Insurance Company. The above conditions are not applicable if the approval of the Board for such a transaction is done.
      2. According to the provisions of the Insurance Act, 1938, Foreign Investment in Indian Insurance Company is allowed maximum up to 49% subject to Company being India owned and controlled.
      3. Control shall include right to:
        • Appoint a majority of Directors
        • Control management and policy decisions
      4. Approval of IRDAI required for
        • Registration or Transfer of shares exceeding 1% of the paid up share capital of the Company.
        • transactions which result in holding or share capital after transfer in excess of 5%.
      5. Conflict of Interest – Board of Directors
        • Below mentioned policies to be established for Compliance with the Companies Act, 2013.
          • Board Level Review of Key Transactions
          • Disclosures of Conflict of Interest
        • Policies w.r.t. related party transactions should lay down the following:
          • Definition of Transactions
          • Method of determination of Arms’ Length Price (ALP)
          • List of Items requiring approval
          • Other matters
          • There shall be a yearly review of Policies by the Board of Directors.
        • Auditors, Actuaries, Directors, KMP shall not hold positions in the Company that lead to Conflict of Interest.
        • The Board of Directors shall ensure compliance of Statutory Requirement on maintenance of Capital Structure.
    4. Governance Structure
      1. Guidelines for Composition of the Board of Directors of PSUs are laid down by Government
      2. SEBI (LODR) 2015 – IRDAI advises all insurance companies to initiate steps to familiarise with SEBI (LODR) as many insurance companies are in the listing pipeline.
    5. Board of Directors
      1. All Insurance Companies have to be incorporated necessarily as Public Limited Companies. (Insurance Act, 1938)
      2. The Board of Directors should comprise of competent and qualified people.
      3. Composition
        • Minimum 3 Independent directors to be on Board the Insurance Companies. The limit of 3 is 2 Independent Directors for the initial period of 5 years from the date of Incorporation.
      4. If the no. of independent directors falls below 3, new Independent Directors have to be appointed within 3 months.
      5. Where Chairman of the Insurance Company is Non – Executive, the CEO shall be a Whole Time Director.
      6. There should be at least one Woman Director on Board of Directors ( Section 149 of the Companies Act, 2013)
      7. Board of Directors in consultation with KMP should establish and evaluate strategies to address, at the minimum:
        • Overall Direction of Business
        • Projections of Capital Required, profitability etc.
        • Compliance of applicable laws and regulations
        • Addressing conflicts of interest
        • Ensuring fair treatment of policyholders and employees
        • Ensuring information sharing with Stakeholders
        • Encouraging employees for raising concerns or reporting breach of laws and regulations
        • Appropriate measures to protect whistle blowers
        • Developing culture that recognises ethical standards
      8. ‘Fit and Proper’ Criteria
        • Insurance Act prohibits
          • Insurance Intermediary / Agent to be director of Insurance Company.
          • Common directorship in Life Insurance Companies
          • the director should not have been convicted or received any adverse notice of laws and regulations involving moral turpitude or of any professional Board of Directors.
        • The insurance company has to undertake a due diligence enquiry before appointment of the Director.
        • For the continuation or appointment, the Director has to submit a Declaration as specified in Annexure-2.
        • Disclosures about meetings of Board of Directors & Committees
        • The insurance company has to ensure compliance of Companies Act, 2013 and Secretarial Standards.
        • Disclosures required in Directors Report
          • of meetings of Board of Directors & Committees mandated under these guidelines in the Financial Year.
          • Composition of Board of Directors mandated setting out name, qualifications, specialisations, status etc.
          • of meetings attended.
          • details of the remuneration paid.
    6. Control Functions
      1. The Board of Directors of the Insurance company has to lay down policy to put in place the following:
        • Risk Management
        • Compliance of Board of Directors policy and Rules and Regulations
        • Internal Controls to ensure that risk management and Compliance policies are duly observed.
        • Internal Audit Function
          • Review & Assessment of the adequacy and effectiveness of internal controls
          • Reporting on strategic policies and procedures.
        • Independence of control function including risk management function from business operations demonstrated by credible reporting arrangement.
      2. For insurers within a group, Group wide policies are required.
    7. Delegation of Functions – Committees
      1. Following aspects need to be defined w.r.t. role and functions of Committees:
        • Constitution
        • Objectives
        • Responsibilities
        • Frequency of Meeting and Quorum
        • Appointment & Renewal of Members
        • Reporting to Board of Directors
      2. Mandatory Committees to be formed by Insurers
        • Audit
        • Investment
        • Risk Management
        • Policyholders Protection
        • Nomination and Remuneration
        • CSR
        • Regulation 45d of IRDA ( Non-Linked Insurance Products) Regulations 2013 requires ‘With Profits Committee’ by Life Insurance Company.
  1. Audit Committee
    1. Constitution
      • Audit Committee is to be formed as per Section 177 of the Companies Act, 2013.
      • the chairperson of the Audit Committee shall be an Independent Director with an accounting or finance background or a Chartered Accountant or a financial analysis expert.
      • There shall be minimum 3 Directors with majority being Independent Directors in the Committee.
    2. Objectives
      • As set out in the Companies Act, 2013, the objectives of the Audit Committee shall be to oversee the Financial Statements, Financial Report, Statement of Cash Flows and annual or quarterly disclosures.
    3. Responsibility
      • The Committee oversees the efficient functioning of the Internal Audit Department and reviews its report. It also takes a note of the rectifications of irregularities detected by the Internal audit function.
      • The Committee is responsible for Appointment, Remuneration, Performance, Oversight of audit and independence of Statutory Audit.
      • Responsibility also includes oversight of Procedures, processes for Books of Accounts.
      • The Committee acts as a Compliance Committee
      • The Committee also overlooks at other work of Statutory Audit within the Group.
  2. Investment Committee
    1. Constitution
      • The Committee shall consist of at least 2 NED, CEO, CFO, Chief Investment Officer, Chief Risk Officer and the Appointed Actuary.
    2. Objectives
      • The responsibility of the Committee is to recommend investment policy and lay down operational framework for Investment operations.
      • The Policy should
        • focus on Prudent Asset Liability Management
        • Encompass aspects concerning liquidity
        • Compliance of regulatory Norms
        • Protection of Policyholders funds.
      • The committee is also responsible for implementation of the Investment Policy.
      • In the assessment of credit risk and market risk, the committee should not be influenced by Credit Rating only.
  3. Risk Management Committee
    • The Committee shall be formed under the guidance and supervision of Chief Risk Officer.
    • Responsibilities
      • Establish Risk Management Framework
      • Set Risk Management tolerance limits and cost benefit analysis.
      • Review of risk to reward performance
      • Performance of specialised analysis and quality reviews
      • Acting as an advisor to Board of Directors
      • Reporting specific aspects to the Board of Directors
      • Review of the Solvency Position of the Company.
      • Formulation of the Fraud Monitoring Policy and Framework
      • Monitoring implementation of Anti-Fraud Policy.
      • Review the compliance of Insurance Fraud Monitoring Framework dated 21/01/2103.
  4. Policyholders Protection Committee
    1. Constitution
      • The committee shall be headed by NED and shall include an expert / representative of Customers.
    2. Regulations governing Policyholders:
      • Protection of Policyholders Interest Regulations, 2002
      • Insurance Advertisement and Disclosure Regulations, 2002
      • Master Circular on Insurance Advertisement, 2015
      • Guidelines on Public Disclosures for Insurance Companies.
      • Guidelines on Advertising, Promotion & Publicity of Insurance Companies and Insurance Intermediaries in May 2007.
      • Various Circulars on Handling and Disclosures of Unclaimed amount of Policyholders.
      • Guidelines on Grievance Redressal by Insurance Company, July 2010 and Handling of Complaints of Policyholders, April 2015.
      • Guide on electronic mode of Payment.
    3. Responsibilities
      • Adoption of Standard Operating Procedures to treat customers fairly.
      • Establishment of effective mechanism to address complaints and grievances of policyholders.
      • Creating a Framework for review of awards given by Insurance Ombudsman Consumer Forum.
      • Review of the unimplemented awards of the Consumer Forum for more than 3 months and Reporting to Board of Directors for remedial action to be taken.
      • Ensuring disclosure of material information to PH.
      • Providing details of grievances to Regulatory Authorities at periodic intervals.
      • Review of Claims report.
  5. Nomination and Remuneration Committee
    1. Composition
      • The committee shall consist of 3 NED. An Independent Director shall be the Chairman of the Committee and at least one half of the members of the committee shall be Independent Directors.
    2. The committee is to be formed according to the Section 178 of the Companies Act, 2013.
    3. A Deed of Covenant as per Annexure-3 to these guidelines is to be executed such that there is a clear understanding of the Role of the Company, Directors and Board of Directors.
    4. The conditions for appointment of KMP is given in Annexure-4 to these guidelines.
    5. Section 34(A)(1) of the Insurance Act, 1938 provides that remuneration of CEO/WTD is subject to IRDAI approval.
  6. CSR Committee
    1. According to the Section 135 of the Companies Act, 2013-CSR Committee is to be formed only if :

      N.P. > Rs. 5 Cr. in the previous F.Y.

      N.P. = NPBT – Profit from Overseas Branch – Dividends from Company complying Section 135 of the Companies Act, 2013.

    2. Section 135(5) of the Companies Act, 2013 provides that the Board of Directors shall ensure that the Company spends at least 2% of the 3 year Average N.P. as defined towards CSR activities.
    3. The CSR Committee shall formulate the CSR Policy and get it approved by the Board of Directors.
    4. The constitution of the CSR committee shall be as per the provisions of the Companies Act, 2013.
    5. The expenses of CSR shall not be –
      • included in calculation of Ceiling of Expenditure of Management u/s 40B and 40C.
      • Charged to Profit and Loss Account.
  7. With Profits Committee
    1. IRDA(Non Linked Insurance Products) Regulations, 2013 lays down the framework for With Profit Fund Management and Asset Sharing.
    2. Constitution
      • The committee shall consist of an Independent Director, CEO, Appointed Actuary and Independent Actuary.
    3. Responsibilities
      • Determination of the share of Assets attributable to PH.
      • Determination of Investment Income attributable to participating fund of PH.
      • Determination of the Expenses allocated to PH.
    4. The report of the With Profits Committee is to be attached to the Actuarial Report and Abstract furnished by the Insurers to Authorities.

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