New Era in Indian Insurance: An Overview

Of the 2024 Amendment Bill.

By Celia Jenkins, Anuyj Bahukhandi, and Priti Singh – Tuli & Co.

Introduction  

Following a review of the insurance legislative framework in India by the Finance Ministry, in consultation with the IRDAI and other stakeholders in the industry, and the comments received
on the erstwhile Bill issued in 2022 (Erstwhile Bill), the Government of India has issued a draft Bill titled “The Insurance Laws (Amendment) Bill, 2024” (Draft Bill) on 26 November 2024.

The Draft Bill proposes significant amendments to the Insurance Act 1938 (Insurance Act), the Insurance Regulatory and Development Authority Act 1999 (IRDA Act), and the Life Insurance
Corporation Act 1956 (LIC Act) and is aimed at achieving the overarching goal “Insurance for All by 2047” by focusing on promoting policyholders’ interests, enhancing the financial security of
policyholders, facilitating entry of more players in the insurance market leading to economic growth and employment generation, enhancing efficiencies of the insurance industry, and enabling ease of doing business.

The Draft Bill proposes various amendments such as raising the limit of Foreign Direct Investment insurance business, and allowing differential capital requirements. We have discussed the key
changes proposed in the Insurance Act below.

Proposed Changes

A brief summary of the key changes proposed under the Draft Bill are set out below:

(1) Increase of FDI Limit: The Draft Bill proposes to insert §3AA in the Insurance Act to allow up to 100% foreign investment in an Indian Insurance Company (subject to any conditions imposed) and up to 26% foreign investment in an insurance co-operative society. The Central Government or the IRDAI is expected to issue operational guidelines and/or amend existing norms on foreign investments, which will likely shape the actual impact on the entry of new players into the Indian insurance market.

(2) Increased Scope of Business: The Draft Bill seeks to expand the existing scope of business undertaken by Indian Insurance Companies. In this regard:

(a) The IRDAI may grant a certificate of registration for “class or classes of insurance business”[i]  thereby potentially allowing an applicant to seek a certificate of registration for multiple classes of insurance business. In this regard, the Draft Bill, for the first time, proposes to define the term “class of insurance business” as class of life, general, health, re-insurance, or “any other class notified by the Central Government”.

(b) However, the Draft Bill clarifies that an entity established or incorporated under laws of any country outside India, is only permitted to carry out reinsurance business.

(c) While the Erstwhile Bill expressly proposed to allow applicants to seek certificates of registration for specific sub-classes of insurance business, the Draft Bill is unclear on whether an Insurance Company may potentially be established to carry out monoline insurance business or implement a business plan focused solely on a particular line. The reference to captive insurer, as proposed under the Erstwhile Bill, is also no longer present.

(3) Other Businesses: While presently Insurers are only permitted to carry on insurance business in accordance with their registration with the IRDAI, the Draft Bill proposes to allow an Indian Insurance Company to undertake other specific forms of business. In this regard, the Draft Bill provides that an Insurance Company may engage in one or more of the forms of business[ii]
, in the manner as may be specified, namely: (i) guarantee and indemnity business, (ii) managing, selling and realising properties obtained in satisfaction of claims, (iii) establishing or supporting the establishment of associations, institutions or trust for the benefit of employees, ex-employees or their dependents, (iv) acquiring or undertaking businesses (which are in the nature of businesses specified in this subsection), (v) undertaking activities incidental or conducive to advancing the Insurance Company’s business, and (vi) any other business as specified by the Central Government. Interestingly, the Erstwhile Bill proposed to allow Insurers to also distribute “financial products” (such as mutual funds, loans etc), but the Draft Bill does not contain this reference. Instead, it is proposed that Insurers only perform such additional business as expressly set out in the sub-section or notified by the Central Government going forward.

(4) New/revised definitions: The Draft Bill proposes to introduce new definitions under the Insurance Act:

(a) The Draft Bill states that “Insurance Business” [iii] means “the business of effecting insurance contracts, whereby the insurer undertakes to assume risk and to pay to the insured an agreed compensation for loss, damage, or liability arising from a contingent event on such terms and conditions and subject to such limitations as may be agreed, and includes any other form of business as may be notified by the Central Government from time to time”.

(b) Other new introductions include definitions for “class of insurance business”, “premium”

(c) Similarto the Erstwhile Bill, the definition of “insurance intermediary” is proposed to be moved to the Insurance Act (from the IRDA Act). The proposed definition remains inclusive but deletes “insurance consultants” from the list and adds “managing general agents” and “insurance repositories” to the list to be expressly recognised as insurance intermediaries[x]
.
(d) The definition of “Indian insurance company” has been simplified to state that “Indian insurance company” means “an insurer being a public company,  registered under the Companies Act, 2013”.

(5) Differential Capital: The Draft Bill retains the existing minimum paid-up equity capital requirement applicable to Insurance Companies[xi] and introduces provisions allowing the IRDAI to specify a different minimum paid-up equity capital for specified classes of insurance business. To elaborate, the IRDAI may (i) specify a paid-up equity capital, which is not less than the sum of the capital required for each class of insurance business[xii] , and (ii) reduce the paid-up equity capital to no less than Rs.50 crores for any class of insurance business serving underserved or special segments, as may be specified by the regulations[xiii] . This is a shift from the proposed norm under the Erstwhile Bill which allowed the IRDAI to determine the paid-up equity capital of all categories of Insurance Companies on the basis of the size and scale of operations, class or sub-class of insurance business and the category or type of Insurer.

(6) In addition, the Draft Bill proposes to reduce the requirement of maintaining net owned funds, applicable to foreign insurance branches, to Rs.1000 crores from the presently specified Rs.5000 crores[xiv].

(7) Share Transfer: The Draft Bill proposes to increase the existing limit of 1% to 5% (of the paid-up equity capital) on Insurance Companies, allowing transfer of shares within the group or under the same management without prior approval of the IRDAI, up to 5% jointly or severally [xv].

(8) Actuarial Investigations & Report: The Draft Bill extends the requirement, which is presently applicable to only Life Insures to all Insurers, of conducting an annual investigation by an actuary into their financial condition, including a valuation of its liabilities and preparing a report in accordance with the regulations[xvi] . In this regard, the Draft Bill proposes to require all Insurers to appoint an actuary subject to the eligibility criteria and other conditions as may be specified by the regulations.

(9) Investments in a Private Limited Company: The Draft Bill proposes to amend and consolidate the norms on investment, presently spread across §27, §27A, §27B, §27C and §27D, into a consolidated §27[xvii] and while the norms contained under the consolidated §27 is broadly similar to the present norms, the consolidated §27 does not retain the prohibition on Insurers investing in shares and debentures of a private limited company out of its controlled funds/assets[xviii]

(10) Prohibition on Common Directors: The Draft Bill extends the prohibition on having (i) a common managing director or other officers between an Insurer and any other Insurer/banking company/investment company[xix] and (ii) a common director between two Insurer carrying on the same class of insurance business, presently applicable to only Life Insurers, to all Insurers[xx]

(11) Amalgamation with non-Insurers: The Draft Bill proposes to allow a scheme of arrangement/amalgamation or transfer of business between an Insurer and any company not engaged in insurance business, subject to the conditions under the Insurance Act and as may be specified by the IRDAI[xxi]

(12) An Insurance Agent for multiple Insurers: The Draft Bill allows an insurance agent to represent more than one Insurer. In this regard, the Draft Bill proposes to delete existing provision that prohibits a person from acting as an insurance agent for more than one life insurer, one general insurer, one health insurer, and one mono-line insurer of each type and require the IRDAI to frame regulations to ensure that there is no conflict of interest in one insurance agent representing more than one Insurer[xxii]

(13) Perpetual license for Insurance Intermediaries: The Draft Bill seeks to remove the existing requirement on insurance intermediaries to renew their certificate of registration every three years[xxiii] . In this regard, the Draft Bill proposes to insert a new provision which empowers the IRDAI to suspend or cancel the registration of such insurance intermediaries on certain conditions (such as contravention of the statutory provisions, failure of the payment of annual fee, or even “makes any other default, as may be specified by regulations” [xxiv] ), to ensure continued oversight and accountability. Overall, this change is expected to free up resources for intermediaries to focus on business development and customer servicing.

(14) Increased Powers & Penalties: The Draft Bill propose to enhance the IRDAI’s power to issue directions, which is presently limited to Insurers, to insurance intermediaries as well and clarify that the power to issue directions includes and deems to include the power to direct any person, who made profit or loss by indulging in any transaction or activity in contravention of the provisions of the Insurance Act or regulations made thereunder, to return an amount equivalent to the wrongful gain made or loss averted by such contravention[xxv]
.
(15) In addition, the Draft Bill increases the penalty on any Insurer or insurance intermediary failing to (i) furnish any document, statement, account, return or report to the IRDAI; or (ii) comply with the directions of the IRDAI, or (iii) maintain solvency margin, or (iv) comply with the directions on insurance treaties, to at least Rs. 1 Lakh, which may increase to Rs.5 lakhs for each day the failure continues but not exceeding Rs.10 crores. At present, the penalty is Rs.1 Lakh for each day or Rs.1 crore, whichever is lower[xxvi]
.
(16) The Draft Bill also introduces stronger penalties on Insurers and insurance intermediaries for providing false information to the IRDAI[xxvii] . In this regard, the Draft Bill provides that
the penalty shall not be less than Rs.1 crore and may extend to Rs.5 crores for each such failure. These higher penalties are expected to act as a significant deterrent against fraudulent activities, and emphasise greater accuracy and transparency in dealings with the regulator.

Conclusion

The Draft Bill, with its focus on strengthening regulatory oversight, promoting competition, and enhancing policyholder protection, is expected to re-shape the dynamics within the present
Indian insurance market.

The changes are primarily aimed at achieving the overarching goal of “Insurance for All by 2047”,  facilitating the entry of new players in the Indian insurance sector by allowing 100% FDI in Indian Insurance Companies, 26% FDI in insurance co-operative societies, expanding the scope of business to be undertaken by Insurance Companies, introducing differential capital requirements for Insurance Companies, and one-time registration for insurance intermediaries. If implemented as proposed, the impact is likely to be wide ranging:

• 100% FDI limit could attract new international players, intensifying competition within the market but also potentially leading to product innovation, improved service quality, and perhaps even lower premiums for policyholders.

• Further, allowing Insurers to engage in other forms of business could potentially create new revenue streams for Insurers and allow them to offer policyholders a wider range of valueadded services, while leveraging their existing infrastructure and expertise.

• Perpetual licenses could streamline operations for insurance intermediaries, reducing administrative burden. This is proposed to be balanced by the IRDAI’s enhanced power to suspend or cancel licenses in case of non-compliance.

• The Draft Bill also aims to strengthen policyholder protection through measures like increased penalties for providing false information, the requirement for actuarial investigations, prohibiting common directors and the IRDAI’s expanded powers to intervene in case of unfair practices.

If the Draft Bill is implemented in the present form, it is likely to have a significant impact on several registration and operational aspects of the Indian insurance market. The Bill was initially
expected to be introduced in the winter session of Parliament. However, due to the need for further refinement based on stakeholders’ feedback and time constraints, it is now anticipated
that the Bill may be introduced in the upcoming Budget session.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information on this topic please contact Tuli & Co T: +91 11 4593 4000, E: lawyers@tuli.co.in, or W: https://www.tuli.co.in