International Financial Services Centres Authority
Report of the Committee of Experts on Insurance
The International Financial Services Centres Authority (IFSCA), with an objective to develop the financial products and services International Financial Services Centre (IFSC) has constituted an Insurance Committee under the Chairmanship of Mr. G.N. Bajpai, former Chairman LIC and SEBI, to identify key areas for the development of insurance and reinsurance business from IFSC.
The committee consisted of accomplished leaders with wide experience in developing insurance business and regulations, and have a strong global network:
1. Mr. M.R. Kumar (Chairman, LIC of India)
2. Mrs. T. L. Alamelu (Whole Time Member, IRDAI and Ex-Officio Member, IFSCA)
3. Mr. Atul Sahai (CMD, New India Assurance Co. Ltd.)
4. Mr. Devesh Srivastava (CMD, General Insurance Corporation of India)
5. Mr. Shankar Garigiparthy (CEO & Country Manager, Lloyd’s India)
6. Ms. Ieva Segura Cobos (Head – Regulatory Risk Management Asia, Director, Swiss Re)
7. Mr. Sakate Khaitan (Managing Partner, Khaitan Legal Associates, India & UK)
8. Mr. Manoj Kumar (Executive Director, IFSCA), Member -Secretary
The Committee after widespread consultations, incisive studies and in-depth discussions has made far reaching recommendation to develop IFSC as Global (Re)Insurance Hub in its report submitted to Chairperson, IFSCA. The significant recommendations of the Committee are as follows:
1. IFSCA has developed eco-system for Aircraft Leasing and Financing which can be utilized to develop Aviation Insurance Hub and Trade Credit Insurance at IFSC. Also, similar platform may be implemented for shipping industry through facilitating of Protection and Indemnity clubs.
2. The Captive insurance model is one of the cost efficient manner of managing own risk. Globally, leading financial centres have favourable regulatory regime for captive insurance model. Hence IFSCA may develop a new framework for enabling operations of Captives.
3. IFSCA has enabled framework for Global In-house centres which may be utilized by (re)insurers to develop Global In-House Centres to provide services ancillary to insurance.
4. Investment framework may be redesigned to give more avenues for insurers to mobilize their funds to a basket of financial instruments and products offering them more returns and flexibility.
5. Globally premium financing is prevalent which is very significant driver for some the niche areas of insurance business. The same may be introduced in IFSC.
6. Developing alternate risk transfer solutions such as insurance linked securities, catastrophe bonds and parametric risk transfers available for the global market.
The Committee has also recommended the mapping of insurance needs of the Indian diaspora and meet such needs through promotion and development of the ‘hub and spoke’ model. Currently, the regulatory architecture and supervisory framework of IFSCA are under design and development. The Committee has further outlined a series of propositions to help build a modern and globally competitive framework.
The detailed report is available at www.ifsca.gov.in
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Report of the Committee of Experts on Insurance
14th October 2021
Letter of Transmittal
14th October 2021
Shri Injeti Srinivas,
Chairperson,
International Financial Services Centres Authority
Gandhinagar, Gujarat.
Dear Sir,
The International Financial Services Centres Authority (IFSCA) vide Officer Order dated 09th November 2020 had constituted an IFSC Insurance Committee. We thank you for the opportunity given to us and pleased to submit the report of the Committee.
In line with the terms of references, the Committee undertook an examination of global best practices in areas of insurance and reinsurance. The recommendations of the Committee aim to develop IFSC as a global hub for insurance and reinsurance activities.
Thanking you,
Yours sincerely,
(G.N. Bajpai)
Chairperson
| (M.R. Kumar) Chairman, LIC of India |
(T. L. Alamelu) WTM, IRDAI & Ex-Officio Member, IFSCA |
| (Atul Sahai) CMD, New India Assurance Co. Ltd. |
(Devesh Srivastava) CMD, General Insurance Corporation of India |
| (Shankar Garigiparthy) CEO & Country Manager, Lloyd’s India |
(Ieva Segura Cobos) Head – Regulatory Risk Management Asia, Director, Swiss Re |
| (Sakate Khaitan) Managing Partner, Khaitan Legal Associates, |
(Manoj Kumar) ED, IFSCA, Member – Secretary. |
Page Contents
BACKGROUND
In April 2020 the International Financial Services Centers Authority (IFSCA) was established under the aegis of the International Financial Services Centers Authority Act, 2019 (IFSCA Act). IFSCA is a unified regulator for the development of financial products and services, and financial institutions (FI) in International Financial Services Centers (IFSC).
IFSCA also has regulatory oversight over all FI’s incorporated in the IFSC and been vested with the powers of four sectoral regulators viz. Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory Development Authority of India (IRDAI) and Pension Fund Regulatory Development Authority of India (PFRDAI).
Currently, the provision of financial services comes with several regulatory limitations that may have an impact on the ease of doing business and the overall economic growth and development. With new regulations emerging in the IFSCI and the new regulator, the focus would be on creating a light-touch regulatory model to promote innovation and growth through the sophistication of financial services.
Vision:
To develop IFSC as the preferred destination for, raising capital and investment and trading financial products, provision of financial services including “(Re)Insurance” and developing a (re)insurance hub.
Mission:
1. To facilitate global capital flows to meet India’s development needs while providing a globally competitive platform for the full range of international financial services at the regional and the global level, which can act as a second engine of growth for the economy; and
2. To develop an insurance and reinsurance hub in IFSC.
What makes an International Financial Centre a preferred destination?
There are various factors including a clear and transparent regulatory framework, a pragmatic approach towards business needs enabling lower and competitive costs and access to a large potential market.
The following seven factors are the key pillars for making IFSCI a preferred destination for the intermediation of financial products and services:
1. Ease of entry and exit
2. Ease of operations enabled by limited compliance burden and competitive costs
3. Ease and scope of innovation
4. Information symmetry
5. Widespread International co-operation with other key financial hubs globally
6. Regulatory predictability
7. Swift dispute resolution mechanism
Alternate dispute resolution
An alternate dispute resolution platform brings with it, tremendous possibilities in respect of ease and speed of business. Despite a large number of commercial arrangements and domestic as well as international disputes that arise therefrom, at this time, India is not a preferred destination for mediation/arbitration. One of the reasons is the lack of sufficient world-class institutions to address this burgeoning requirement and streamline the process. Given the need for an efficient dispute resolution mechanism, foreign seated arbitrations have emerged as the preferred option for resolving cross-border commercial disputes involving Indian counterparties. Some existing models across the globe such as the Singapore International Arbitration Centre may provide useful and cost-effective templates to be adopted in IFSCI.
India as the optimal destination
Indian economy:
India is a large and growing economy i.e., currently USD 3 Trillion in 2020, aspiring to be 5 trillion by 2025 and is forecast to become the 3rd largest economy of the world by 2050 (Source: PWC Report titles “World in 2050”). Various studies and trends suggest that India’s real GDP growth rate will be around 8% per annum for the next five financial years and 7% for the next five years thereafter. The nominal GDP, for the next five financial years, is expected to grow at 12% per annum, 10% for five years thereafter and 8 % for decades thereafter. The trend suggests that Indian markets will outpace the growth trajectory of most peer markets and global trends. Economic growth will have a direct and proportionate impact on the growth of the insurance market.
Protection gap:
There is a vast protection gap in India. Amongst others, COVID-19 has created greater awareness amongst Indians to de-risk both personal and financial risks. India is a hugely untapped and underpenetrated insurance market, thus making it ideal for global market players to find lucrative business opportunities. Statistical reference about Insurance penetration and potential of the Indian insurance sector is outlined in Annexure – 1.
Tax benefits:
With successive budget announcements, IFSCI now has an internationally competitive tax regime. To further supplement this, IFSCA is actively engaging with various stakeholders to put in place a modern and internationally benchmarked regulatory framework.
Geographical Location:
In comparison to existing and emerging financial centers globally, India has numerous competitive advantages. India’s geo-strategic location facilitates serving all time zones, including major financial markets like Hong Kong, London, New York, etc. It has a large pool of talented professionals and professional service providers and huge and diversified demography. Indian expats manage complex transactions and lead financial innovations at IFSCs in Hong Kong, London, Dubai, New York, and Singapore. India is also emerging as a leading technology innovation hub and through IFSCI, India can leverage several models of working including work from home or working remotely from other jurisdictions.
CONSTITUTION OF THE COMMITTEE
The International Financial Services Centers Authority (IFSCA), with an objective to develop the financial products and services in the Gujarat International Finance Tec-City International Financial Services Centre (GIFT IFSC) has constituted an Insurance Committee on 09th November 2020, chaired by Mr. G.N. Bajpai, former Chairman LIC and SEBI and currently Honorary Senior Adviser of IFSCA. The terms of reference of the Committee are as follows:
1. Identify areas for developing IFSCI as a global insurance and reinsurance hub and suggest strategic pillars for making IFSCI a preferred destination.
2. Suggest a roadmap for making IFSCI an insurance solution’ hub for the large Indian Diaspora including those residents overseas.
3. Suggest a regulatory design conducive to building and operationalization of a globally competitive re/insurance hub.
The committee consists of the following members who are accomplished leaders with wide experience in developing insurance business and regulations, and have a strong global network:
1. M.R. Kumar (Chairman, LIC of India)
2. Mrs.T. L. Alamelu (Whole Time Member, IRDAI and Ex-Officio Member, IFSCA)
3. Mr.Atul Sahai (CMD, New India Assurance Co. Ltd.)
4. Mr. Devesh Srivastava (CMD, General Insurance Corporation of India)
5. Mr. Shankar Garigiparthy (CEO & Country Manager, Lloyd’s India)
6. Ms. Ieva Segura Cobos (Head – Regulatory Risk Management Asia, Director, Swiss Re)
7. Mr. Sakate Khaitan (Managing Partner, Khaitan Legal Associates, India & UK)
8. Mr. Manoj Kumar (Executive Director, IFSCA), Member -Secretary.
EXECUTIVE SUMMARY
Globally, International Financial Service Centres are established to provide world-class financial services. Considering the uniqueness of India’s geographical location, size of the economy, economic growth, increasing international trade, an abundance of talent and need for faster economic development, the Government of India decided to set up the first IFSC and constituted the IFSCA under the provisions of IFSCA Act, 2019.
Insurance is a global business and is an essential pillar for economic development, global economic integration and growing international trade. Further, there are more than 250 operational special economic zones in India that are conducting a wide variety of free-trade, export processing businesses. Industrial estates, free ports and large-scale international businesses and multinational corporations are also operational in special economic zones. The presence of these businesses opens immense opportunities for insurance.
In order to develop GIFT IFSC, the IFSCA formed a committee of experts to make recommendations to build a globally competitive insurances services hub in IFSCI.
The Committee after widespread consultations, incisive studies and in-depth discussions has made the following recommendations:
1. Promoting and building an Aviation Insurance Hub
2. Promoting and developing Trade Credit Insurance
3. Developing a new framework and permitting operations of Captives
4. Develop Protection and Indemnity Club
5. Facilitate the building of Global In-House Centres to provide services ancillary to insurance.
6. Creation of an attractive investment market
7. Introduce premium financing
8. Developing alternate risk transfer solutions such as insurance linked securities, catastrophe bonds and parametric risk transfers available for the global market
The Committee has also recommended the mapping of insurance needs of the Indian diaspora and meet such needs through promotion and development of the ‘hub and spoke’ model.
Currently, the regulatory architecture and supervisory framework of IFSCA are under design and development. The Committee has outlined a series of propositions to help build a modern and globally competitive framework.
In conclusion, the Committee has recommended that the IFSC maintains a regular review of its Business and Regulatory framework, to ensure that it remains competitive among other leading IFSCs globally.
RECOMMENDATIONS OF THE EXPERT COMMITTEE
The Committee met virtually on 10-Dec-2020, 30-Apr-2021, 17-May-2021 and on 25th August 2021. The Committee utilized the services of senior level professionals from reinsurers, regulators, and direct underwriters. The Committee of professionals, which was chaired by the Secretary to the Committee undertook detailed studies, scanned relevant literature, and held widespread consultations (Report annexed as Annexure 4).
Additionally, the Committee members individually interacted with various stakeholders. The consultations were widespread and in-depth. Based on the discussions, a detailed examination of information, data and literature and widespread consultations the following recommendations are made:
1. Identify areas for developing IFSCI as a global insurance and reinsurance hub
The committee was of the view that the undermentioned areas offer great opportunities for developing IFSCI as a global insurance and reinsurance hub and makes following recommendations:
A. Aviation / Marine direct insurance:
India is poised to have the third-largest aviation sector in the world and should enter aircraft financing and leasing activities from its shores. This is critical for the “development of self-reliant aviation industry” and creating, “aspirational jobs” in aviation finance. This will be in addition to leveraging the business opportunities available in IFSCI.
On 16 October 2020, the Government of India, on the recommendation of IFSCA, had notified “Aircraft lease”, as a ‘financial product’ under International Financial Services Centres Authority Act, 2019. ‘Aircraft Lease’ includes operating and financial lease along with any hybrid of operating and financial lease of aircraft or helicopter and engines of aircraft or helicopter or any part thereof’
The IFSCI is endeavoring to develop an ‘Aircraft Leasing Centre’ which can facilitate the development of an aviation insurance hub.
In this regard, the IFSCA has notified the Framework for Aircraft Operating Lease on 19 February 2021 to enable and facilitate the setting up of the Aircraft Leasing business in IFSCI.
The committee is of the view that the IFSCI has great potential to emerge as an “Aviation Insurance Hub” with insurers providing aviation insurance cover to aviation companies across the globe. The presence of GIC Re, New India Assurance and other insurers who are big aviation insurance players should be encouraged to help migrate large Aviation Insurance businesses into the IFSCI.
B. Trade Credit Insurance and other related products such as Surety Bond:
Businesses face various risks, including counter-party risk. These risks could arise due to bankruptcy of a counter-party, worsening of political situations immediately after the supply of goods, trade sanctions, war and volatile currency fluctuations, etc.
In such scenarios, trade credit insurance plays a vital role in de-risking counter-party risk in international trade.
Currently, the Indian insurance market offers cover only for trade receivables caused by the default of the buyer. Other forms of credit insurance like the risk of banks, financial institutions and factoring companies, which provide finance to suppliers by way of discounting or purchase of bills are not available. These covers can be made available in the IFSCI by IFSC insurance offices with adequate reinsurance support.
A surety bond is a promise to be liable for the debt, default, or failure of another. It is a three-party contract by which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).
There are two broad categories of surety bonds: (1) contract surety bonds; and (2) commercial (also called miscellaneous) surety bonds.
(a) Contract Surety Bonds:
Surety bonds that are written for construction projects are called contract surety bonds. A project owner (the obligee) seeks a contractor (the principal) to fulfil a contract. The contractor, through a surety bond producer, obtains a surety bond from a surety company. If the contractor defaults, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred.
There are four types of contract surety bonds:
(i) Bid Bond: Provides financial protection to the owner if a bidder is awarded a contract but fails to sign the contract or provide the
required performance and payment bonds.
(ii) Performance Bond: Provides an owner with a guarantee that, in the event of a contractor’s default, the surety will complete or cause to be completed the contract.
(iii) Payment Bond: Ensures that certain subcontractors and suppliers will be paid for labour and materials incorporated into a
construction contract.
(iv) Warranty Bond (also called a Maintenance Bond): Guarantees the owner that any workmanship and material defects found in the
original construction will be repaired during the warranty period.
(b) Commercial Surety Bonds
Commercial surety bonds cover a very broad range of surety bonds that guarantee performance by the principal of the obligation or undertaking described in the bond. They are required of individuals and businesses by the federal, state, and local governments; various statutes, regulations, ordinances; or by other entities.
Commercial surety bonds can generally be divided into five types of bonds:
(i) License and Permit Bonds: Required by federal, state, or local governments as a condition for obtaining a license or permit for various occupations and professions. License and permit bonds include auto dealer bonds, mortgage broker bonds, contractor license bonds, and surplus lines broker bonds.
(ii) Court Bonds (also called judicial bonds): Required of a plaintiff or defendant in judicial proceedings to reserve the rights of the opposing litigant or other interested parties. Court bonds include appeal bonds, supersedeas bonds, attachment bonds, and injunction bonds.
(iii) Fiduciary Bond (also called probate bonds): Required of those who administer a trust under court supervision. Typical such bonds are executor and administrator bonds, trustee bonds, guardian bonds, and conservator bonds.
(iv) Public Official Bonds: Required by statute for certain holders of public office, to protect the public from malfeasance by an official or from an official’s failure to faithfully perform duties. Public official bonds included county clerk bonds, tax collector bonds, notary bonds, and treasurer bonds.
(v) Miscellaneous Bonds: These are commercial surety bonds that do not fit into any of the types above. Included are a wide variety of bonds, such as warehouse bonds, title bonds, utility bonds, and fuel tax bonds
Since this is an unexplored area even in the domestic market, the Committee recommends that insurers in the IFSCI should be permitted to explore and offer such bonds to foreign corporates for exposure out of India.
Further, insurance companies based in the IFSCI should be allowed to issue trade credit insurance to banks based in the IFSCI. These trade credit insurance policies can cover two categories – Corporate Risk (mainly Indian corporates borrowing from IFSCI located entities) and Financial Institution Risk (various global banks issuing Letter of Credit for exports from India). Such risk can be ceded to reinsurers present in IFSCI or any other global reinsurer.
C. Captives – (Insurance & Reinsurance) and its development in IFSC:
A Captive is a wholly-owned subsidiary or a group company tasked with unwriting group risks. Captives are generally created by large corporations/associations of corporations. Globally, Captives are licensed by territory regulators. While IRDAI has not permitted establishing Captives, big PSUs and even some State Governments have wholly-owned vehicles that insure their risks, a surrogate of captives.
In 2017, over 6,500 captives were operating in the world and 47% of these captives are owned by private entities. Thousands of global companies now successfully use captives. There is increasing momentum of owning captives.
The commercial rationale for establishing Captives is cost-efficiency and insuring uninsurable risks. Risks retained on the balance sheet are self-insured through reserves. Reserves are created from post-tax money. Since insurance premium is tax-deductible expense, it is a cost-efficient way of managing own risk. Further, insureds do not have direct access to the reinsurance market, a Captive is able to access the reinsurance market and get better pricing for placing risks resulting in cost efficiencies.
Captives insure group risks which are uninsurable due to high premium, unavailability/limited availability of underwriting capacity and/or absence of cover. Further Captives permit self-risk management with customised coverage, stability of risk coverage, flexibility in risk retention and risk transfer, access to government programs and reduced insurance administration costs and recapture of underwriting profits.
The captive model can play a vital role as a development catalyst for the insurance sector in IFSCI. It will propel many corporates and reinsurers to enter the sector. It will also facilitate the de-concentration of the risk of traditional carriers. Captive insurance can specifically cover workers’ compensation risk, specialised risks like weather, political including geo-political risk, micro-insurance, trade credit, health etc. and can be used for building the run-off business in India. The IFSCI could be an incubation centre for captives by non-insurance entities – domestic and overseas. Captive model of other jurisdictions is Annexure – 2.
The Committee has noted that the concept of captives is not explicitly prohibited by the Indian Insurance Act, 1938, though it has not been enabled by the IRDAI as yet. To introduce the concept of captives in IFSCI, the Committee recommends enabling the required framework by incorporating modifications in the Insurance Act, 1938 as laid down in Annexure 5:
The Committee suggests that IFSCA should enable the concept of captives in IFSCI along with the modern and robust IT-enabled infrastructure so that the cost of compliance and operations is substantially reduced. It is understood costs are high in financial centres in other jurisdictions.
D. Protection & Indemnity Club
Currently, all shipowners go abroad for availing insurance cover for protection and indemnity. Since protection and indemnity covers are either not available in India or available in a limited manner, ship owners with the prior permission of the IRDAI are using foreign insurers for covering the risk. IFSCA may explore introducing such covers in IFSCI for the benefit of all. The Committee is of the view that in addition to the above, IFSCA should actively engage with IRDAI with a view to evolve a suitable mechanism for utilizing the IFSCI platform as a testing ground for introducing other such currently unavailable products in India, a kind of functional Sandbox.
E. Global In-house Centers (GIC)
Insurance is a niche business and requires experts from various fields such as actuarial sciences, marketing, research, claims handling etc. Insurers from any part of the world should be allowed to set up an in-house centre in the IFSCI to cater to this need in a cost-efficient manner. Even third parties not directly undertaking insurance activities should be allowed to set up such expert services centres, which can provide services to both domestic and international clients. Global experts will be able to contribute to developing specialty lines in India and gain leverage due to the various benefits available in the IFSCI. Further, on 18 November 2020, IFSCA has notified the application for setting up a GIC in IFSCI.
Given the benefits of GICs, the offshore Insurers and Reinsurers should be permitted to expand into GIFT IFSCI and render such services globally.
F. Attracting Lloyd’s entities
Most insurers have set up a syndicate in the Lloyd’s Market, with a view to accessing reinsurance business in various jurisdictions through service companies or Managing General Agents, appointed to underwrite (re)insurance business on behalf of the relevant syndicates. The committee is of the view that IFCA should evaluate the feasibility of attracting such entities into the IFSC, whilst also evaluating the feasibility of Lloyd’s syndicates being set up in the IFSC.
G. Premium financing in IFSCI
For a policy to incept, Indian law requires upfront payment of premium. Affordability, therefore, hinders penetration and increases the coverage gap.
Premium Finance offers the customer the option of spreading premium payments for insurance cover over the period of insurance. Current regulations permit instalment payment of premium for health insurance. Premium finance is well known in mature insurance markets like the UK and experience shows a positive impact on penetration, coverage of individuals and development of the insurance market. In the context of IFSCI, the Lender is likely to be an IFSC Banking Unit (IBU) or any other Bank regulated by IFSCA or regulator of the jurisdiction in which finance would be sought.
Premium financing provides an elegant solution. Premium is paid upfront by a lender to the insurer on a non-recourse basis against and on behalf of the insured. The insured repays the lender in instalments being fully kept aware of the interest built-in such instalments. The collateral is only the policy. In event of default, the lender is given the right to cancel the policy and on cancellation, the Insurer refunds the pro rata portion of the premium for the unexpired period of the policy, to the lender.
In the current regulatory framework applicable in the IFSC, there are three features that require solutions for the product to work efficiently.
(i) The lender must be able to cancel the insurance policy in the event of default.
(ii) The refund pursuant to early termination of the policy must be paid to the lender, not the insured.
(iii) The refund amount needs to be calculated on a pro rata basis, not the short period rates.
These features represent minor changes to the way in which the insurance market currently works in IFSCI.
The regulatory framework needs slight intervention for premium financing to be offered, and as such regulatory coordination is needed. Premium financing should be designed in such a way so as to comply with the provisions of Section 64 VB of the Insurance Act, 1938.
Globally, premium financing solutions have increased penetration and reduced the coverage gap. It will be beneficial to explore such solutions to be provided globally through the IFSCI.
H. Alternate risk transfer solutions
Alternate risk transfer (ART) solutions are risk mitigation solutions that provide
coverage and protection to risk-bearing entities without traditional insurance.
The key features of ART solutions are: (a) ART solutions can be customized to specific problems, (b) typically ART solutions are a multi-year, multi-line cover, (c) risk may be spread over time and within a policyholder’s portfolio, and (d) risk is assumed by non- (re)insurers.
The ART market primarily functions as two solutions, (a) alternative products and (b) alternative carriers.
The alternative carrier concept encompasses self-insurance, pools, captives, and risk retention groups (RRGs). Risk transfer through alternative products generally includes transactions such as integrated multiline products, insurance-linked securities (or CAT bonds as they are commonly referred to), credit securitization, committed capital, weather derivatives, and finite risk products.
Insurance-linked securities (ILS) are products that converge between the insurance industry and the capital markets.
Catastrophe bonds (commonly abbreviated to cat bonds) are a segment of the ILS market. They are used by property/casualty insurers and reinsurers to transfer major risks on their books (such as for hurricanes, windstorms, and earthquakes) to capital market investors, reducing their overall reinsurance costs while freeing up capital to underwrite new insurance business. Cat bonds are structured so that payment of interest or principal to the reporting insurance company depends on the occurrence of a catastrophe event of a defined magnitude or, that causes an aggregate insurance loss in excess of a stipulated amount.
Parametric insurance covers the probability of a predefined event happening (e.g., a major hurricane or earthquake), paying out according to a predefined trigger.
For ART solutions to develop, there is a requirement of deregulation and provision of incentives. As an example, in Singapore, tax incentives apply to parametric re/insurance and the Monetary Authority of Singapore is supportive of various developments and incentives in the ART market. The Monetary Authority of Singapore has also been actively supporting academic, industry and academic-industry joint initiatives to produce an accurate and fair assessment of risk, industry exposures and weather reporting. One of such initiatives is the Global Asian Insurance Partnership which will bring together regulators in the region, academic and insurance companies to improve specific aspects of climate risk modelling in the region which could help to improve insurance penetration. As the initiative is open to other regulators in the region, IFSCA should consider having a representative on this platform.
In the journey of being an insurance and reinsurance hub, the IFSCI should enable providing a comprehensive range of ART products and provide an ability for re/insurers to use IFSCA as a basis for offering such covers globally. IFSCA should also support and encourage academic institutions like National Insurance Academy (NIA) for industry-academic joint initiatives to produce an accurate and fair assessment of risk, industry exposure and weather reporting.
II. To suggest a roadmap for making IFSCI an insurance solutions hub for the Indian diaspora.
Indian diaspora has a long and cultural affinity to its roots. Currently, there are close to 31.23 million Indians and persons of Indian origin spread across the globe. A congenial ecosystem for NRIs/ PIOs to buy insurance from companies set up in the IFSCI and pay the premium in the currency of their choice (including Indian Rupees) offers large potential.
The Committee proposes the following for harnessing a very large untapped insurance potential:
A. A Bouquet:
IFSCI should enable providing a comprehensive range of products such as term insurance, endowment, unit-linked plans, annuities and pension, health, property etc.; in effect a diversified bouquet to choose from.
Further, NRIs should be permitted to buy portable insurance policies while they are outside India. NRIs should also be allowed to buy insurance policies for their dependents in India from an IFSCI unit. The insurance premium paid by them in foreign currency should not be subjected to the Goods and Services Tax (GST), which would make the policies more attractive from a pricing standpoint. Flexibility should also be provided to people migrating back to India to continue to service policy/s taken from an IFSCI unit in foreign currency and they should be allowed to remit premium under the liberalized remittance scheme of the Reserve Bank of India.
B. Hub and Spoke Model:
LIC of India operates a hub & spoke model through LIC International EC Bahrain (LICI) in GCC countries. LICI Bahrain is the ‘hub’ – the manufacturer and service provider and ‘spokes’ in various GCC countries operate as distribution centers. LIC and other direct insurers from both life and non-life should be facilitated to replicate that model from IFSCI to operate globally.
The Committee, therefore, recommends that IFSCI enters into MOUs with other jurisdictions to facilitate the creation of spokes for an entity that has a Hub in the IFSCI.
Life Insurance Companies should explore providing Pension and Group schemes for expatriates serving in multinational companies in India. Several large companies like Allianz, Generali, AXA etc. have corporate insurance verticals to offer P&G Schemes to expatriates of multi-national companies across geographies. Since such covers will be in foreign currencies mostly in USD & Euro, IFSCI can be an ideal platform to onboard such products globally. LIC may be requested to consider taking lead on this behalf and provide such services globally from IFSCI like other transnationally operating insurance companies.
C. Health Insurance for resident Indians under LRS:
Most Indian health insurance policies do not cover treatment outside India. In case an individual requires treatment outside India for any ailment, they may be required to meet such treatment expenses from their own funds, as the local insurance product does not cater to overseas treatment expenses. The limited number of policies that are currently available in India to cover overseas treatment are very expensive and offer limited benefits.
Therefore, it is recommended that residents be permitted to buy overseas health insurance policies for themselves and their dependents (in India or overseas) from insurance players operating out of the IFSC to be treated anywhere in the world.
The premium payable on such policies should be permitted within the liberalized remittance scheme limits.
III. Suggest a regulatory design conducive to building and operationalizing a global re/insurance hub.
The Committee proposes the following suggestions:
A. Regulatory Architecture
1) In March 2015, the Government of India notified the IRDA (Regulation of Insurance Business in Special Economic Zone) Rules, 2015. In 2017, the IRDAI issued the IRDAI {Registration and Operations of International Financial Service Centre Insurance Offices (IIO)} Guidelines, 2017 replacing the rules of 2015.
These guidelines mainly discuss the permitted activities of Indian and foreign insurers and also permit them to carry on business in the IFSCI subject to the following conditions:
i) It requires the insurer to set up its place of business in an SEZ.
ii) A foreign insurer can set up its branch in the IFSCI to transact the business of insurance and/or reinsurance business.
iiii) An insurer can underwrite only such classes or sub-classes of business of life insurance, general insurance, health insurance or reinsurance as may be specified by IRDAI.
iv) The insurer is allowed to accept re-insurance of all classes of business involving cover either within the SEZ or from outside the country, i.e., foreign to foreign, foreign to India.
v) Domestic Tariff Area (DTA) entities may be allowed to procure services relating to insurance and reinsurance from insurers operating from the IFSCI on the same terms, as they may be allowed in general from offshore entities.
2)With the formation of IFSC Authority, the objective is to create a regulatory architecture, which is at par with the leading global financial centers in terms of ease of doing business, the flexibility of product design, regulatory equivalence, protection of policyholders etc. Some of the key recommendations for improving the efficacy of regulatory architecture are as follows:
i) Operational Framework on the scope business activities to be carried out from IFSCI:
An IFSCI Insurance office should be allowed to do business in all SEZs in India, within IFSCI and outside India. To facilitate that IFSCA needs to issue an elaborate and detailed framework about operating modalities for each segment of the insurance business i.e., Life, Health, General and Reinsurance etc. so that the prospective entities can evaluate a business case for setting up Insurance offices in the IFSCI. Global outlook in the design of operating framework must be kept in view. A comparison in some of the areas is in Annexure 3.
ii) Regulations for product design and approval:
While competing in global markets, speed to market solutions and products features are vital for success. Currently, IFSCI Insurance Offices can offer products only with the approval of the IFSC Authority. This creates a bottleneck in comparison to other international financial centers thereby hampering the speed to market. However, if a “Use and File” replaces the “File and Use” model currently adopted by IFSCA, many insurers would be keen to utilize the IFSCI platform to innovate and develop new lines of products. The regulations need to support the speed of innovation in line with the demands of the market while balancing risks.
The framework should allow flexibility in the design of products, and it should not be restrictive as the IFSCA is going to service the global population and industry. It is further recommended that there is no strict compartmentalization of life and health insurance, and products should be aligned with global market practices and customer requirements.
IFSCA can also permit on-demand and pocket-sized products that can cater to the various requirements of industries and services in the various SEZs in India. The IFSCA should give broad contours of “Use and File” within which insurers can operate.
iii) Mutual recognition of supervisory practices:
One of the primary motivations to operate from an IFSCI, especially the Life Insurance companies would be to expand the customer base beyond the national boundaries. The success of insurance companies in the IFSCI also depends upon their ability to offer products which are acceptable in other countries. Often, host country regulations act as an impediment to participation by foreign insurance companies and intermediaries.
An essential requirement is that the products developed and sold in IFSCI are recognized in other countries – particularly in the Middle East by the UAE financial regulatory authority (Qatar, Abu Dhabi, Dubai etc.) to facilitate seamless access to such markets and in particular, to the large Indian diaspora in these countries. IFSC should be prepared to facilitate the issuance of such products.
The IFSCA should seek to have mutual recognition of supervision / rely on each other’s supervisory practices with all the key jurisdictions. This will make the IFSCI attractive for insurers and intermediaries reducing regulatory overlap and time to market.
iv) Investment Avenues:
IFSCI Insurance Offices (IIOs) have been permitted to transact only in Foreign Currency. Currently, the IFSCI Insurance Offices have a limited scope of investment i.e., to invest in fixed deposits with IFSC Banking units, and the rate of interest is around 2 percent per annum. In the current low-interest regime coupled with highly competitive markets, the yield from investments is the major source of income and profits.
The framework for investment regulations, therefore, should be redesigned to give more avenues for insurers to mobilize their funds to a basket of financial instruments and products so that returns can be higher, making the IFSCI attractive. India permits overseas insurance companies to invest their surplus resources in India through the FPI route. Insurance entities operating out of IFSCI be given the same benefit of generating higher returns on their investible surplus, without further regulatory approvals.
It is necessary to draft separate investment regulations, offering more flexibility to invest both in India and abroad to get better returns, while fully taking care of the solvency issues.
v) Entities Eligible to Undertake Insurance Activities in IFSCI:
Currently, IIOs are allowed to be set up only as branches in the IFSCI. Subsidiaries, Incorporated Entities, and other recognized formats should also be permitted to be set up to undertake insurance, reinsurance, and insurance intermediation in IFSCI.
vi) Solvency Requirements:
Capital, Solvency and other terms and conditions should be prescribed for entities other than branches based on the volume of business transacted rather than a minimum requirement structure to offer more efficient use of capital. Risk-based solvency regimes as practiced in countries like Bermuda, Singapore, DIFC, ADGM etc. may be considered and adopted by the IFSCI.
vii) Outsourcing Requirements:
Units in IFSCI cannot be viewed from the same prism as insurers operating in DTA. Subjecting them to the same restrictions with respect to outsourcing and a highly regulated framework is not recommended. IFSCA should introduce a special framework with respect to outsourcing for these units.
B. Business Practices:
(i) IFSCI should create a niche for itself. The current Covid-19 scenario has impelled leveraging technology substantially. It can be a niche for GIFT IFSC.
(ii) A longer tax holiday of 50 years should be considered.
(iii) There should be better and more efficient claims settlement practices and AI-enabled technological solutions like smart contracts should be introduced.
(iv) Insurance / Reinsurance intermediaries are an integral part of the reinsurance business. The IFSCI operating guidelines for insurers, reinsurers (Indian and Foreign) and intermediaries have been issued. However, these guidelines for Insurance intermediaries do not cover foreign intermediaries. In the absence of basic operating guidelines, the participation of foreign insurance intermediaries would be difficult in IFSCI, which adversely impacts foreign reinsurers. Intermediaries are the backbone of any insurance hub, and this should be done on priority.
(v) FRBs and their satellite offices in IIOs should be treated at par with Indian reinsurers.
(vi) IFSCA should accept reinsurance on a cross-border basis from entities based outside of the IFSC or India.
C. Business Developments
IFSCA should conduct roadshows in major insurance markets engaging inter alia direct insurers, reinsurers, and intermediaries (including loss adjusters, risk modelers, surveyors, etc.) to showcase the advantages of operating in India’s International Financial Center. These roadshows should be held on a priority basis, in countries where there is a concentration of Indian diaspora to harness their latent potential and to target specific segments such as protection and indemnity clubs, top cross-border reinsurers, risk management agencies and loss adjusters.
D. IT Infra-structure:
Globally, the financial sector has benefitted immensely from the introduction of new technologies. It has significantly enhanced efficiency and ease of doing business. The insurance industry is relying on digital technology to develop products, assess claims, manage business processes, and provide greater customer satisfaction. This is made possible with the help of new technologies. Going forward key areas of focus should be:
(i) Use of Blockchain technology:
The use of blockchain will help in driving radical transformation in the insurance sector while increasing transparency, security, and outcomes across the entire value chain. The insurance industry has several challenges like accounting for third-party payment transactions, fraudulent claims, handling massive amounts of data and complex compliance issues. Leveraging Blockchain technology increases transparency, enhances security and reduces transaction friction. Blockchain can reduce the incidence of fraud and can manage, share, and monetize large amounts of data, in turn, saving a significant amount of time and costs.
(ii) Artificial intelligence (AI) and Internet of Things (IoT)
AI can help automate a complicated task with perfection and limited manual intervention. The use of AI not only speeds up the time for a customer to buy a policy or settle a claim, but it also helps in creating personalized packages by making use of historical and behavioral data such as a driving record etc. A suite of Internet of Things (IoT) technologies can help reduce manual interventions in claims settlement and pricing of policy, eventually, bring down the cost of operations and therefore, premium resulting in increased penetration.
(iii) Robotic Process Automation (RPA) for claims and data management.
Cloud computing, advanced analytics, big data can be used to measure and control risk. This will also facilitate the development of new insurance products and models. There should not be requirements / expectations to localize these data centers within the country / IFSCA. This weakens the operational resilience of the company and increases operational costs. The same may be reviewed and permitted in compliance with the National Data Protection Policy.
E. Database – Knowledge warehouse
Database – knowledge warehouse facilitates product development, customer service, creates/promotes expertise formation, retention, and use. Database – knowledge warehouse can be used to enhance the underwriting processes. Negotiations should be held, and agreements reached with owners of databases across geographies including insurers, reinsurers, syndicates, international financial centers, Regulators etc. to create a knowledge hub in IFSCA. The services of IT experts should be utilised to organize the hub.
F. Building of Talent Pool
In any International Financial Centre, the availability of talent is essential. IFSCA should take special steps to build a local talent pool while allowing access to a global talent pool and expertise. The following ideas could be explored:
i) Lower Income Tax on the income generated out of operations by the professionals serving exclusively for IFSCI. This will facilitate the relocation of talent from low-tax jurisdictions like Singapore.
ii) An internship programme should be started by IFSCA to build a future ready talent pool with the stipulation that they would serve IFSCI for say a minimum period of 3/5 years. The pool should include underwriters, claim adjusters, investment experts, actuaries, data scientists, business process managers etc.
iii) Companies looking to aid the value proposition of the IFSC, such as Aviation, Trade Credit, etc., can get the benefit of a subsidy for training Indian staff in these areas such as a 50% subsidy on the training cost incurred by the entity.
CONCLUSION
The global environment is constantly undergoing metamorphic transformation. Today’s competitive edge fast disappears for lack of vigilance and constant innovation. The digitization of assets, moneys and business processes enables the frictionless transfer of operations. The longevity of stay has been contracting. Businesses are in search of returns and building a competitive edge. Policymakers have, therefore, been at pains to evolve, reengineer, refurbish structural, systemic, and operating frameworks periodically.
The businesses that IFSCA is seeking to attract are global. Hence, IFSCA will have to be agile and create a regulatory environment which is robust and growth-oriented i.e., Pro-active, Co-active and Re-active, the TRINETRA (3 eyes) for a robust and growth-oriented regulatory framework.
The pro-active will focus on understanding the impact of macro-economic, political, social, environmental, and technological factors to suggest the appropriate regulatory environment in the IFSCA. Innovation is being marshalled by market participants even before the regulators can make sense of the impact and risks. An incisive approach can mitigate and de-risk the likely impact.
The Co-active will collect the intelligence of what is happening in other global IFSCs and decipher what re-orchestration is necessary. This will enable IFSCA to consider changes simultaneously to keep pace with the competitors.
IFSCA like other regulators is expected to maintain the rhythm of the markets in IFSCI. To effectively render this obligation, the study and interpretation of data will have to be undertaken constantly. This will help inter-alia in understanding market trends and behavior of operators enabling the IFSCA to fix the regulatory gaps and prevent market misconduct. Further, every unexpected and intertwined event must be studied to update the regulatory framework so that its repetition is avoided. Regulatory cognizance should extend beyond penalties to introduce changes in the systems and processes that may be necessary.
An anecdotal study by the Chairman of the Committee of a few financial misconducts impacting the markets in India revealed that enforcement action against the initial misdemeanors undertakers was not accompanied by appropriate changes in the operational framework i.e., appropriate preventative measures have not been adopted. One of the underlying philosophies of combining Legislative, Executive and Judicial powers in one authority, is the speed of consequential action in the event of an untoward incident, enabling markets to operate efficiently. Hence, the committee suggests a comprehensive reactive approach.
Whereas the expeditious and efficacious implementation of the recommendations of the Committee made above has the propensity to place IFSCI alongside the best in the world in terms of framework, the Committee strongly recommends an evolutionary approach also be pursued, being the third leg of the TRENETRA (3 EYES) strategic framework. Periodical up-gradation will not be enough. Constant reengineering will keep IFSCI ahead in the race and attractive to global businesses.
ACKNOWLEDGEMENT
At the outset, we would like to express our sincere gratitude to Mr. Injeti Srinivas, Chairperson, IFSCA who has reposed trust and confidence in the committee and proffered an opportunity to make some contribution to the development of IFSCI Insurance Hub.
We would like to thank Professor Anantha Nageswaran, all senior-level professionals, who were members of the Sub-Committee namely Shri K R Ashok (Chief Actuarial, LIC of India), Ms. Kuhu Mohapatra (Deputy General Manager, The New India Assurance Co. Ltd.), Ms. Sheetal Gawde (Deputy Manager, GIC Re) and other industry experts who shared their opinions and made valuable suggestions to the committee. The inputs provided by each one of them were of immense help in shaping the report.
We would also like to thank IFSCA officials namely Mr. Rishi Kale, Assistant Manager, Ms. Manju Choudhary, Manager and Mr. Bhaskar Khadakbhavi, Deputy General Manager for their help, support, co-operation, and co-ordination in recording the discussions, summarizing, recommendations and drafting the report. We are grateful to the IFSCA staff for their support in organizing the virtual meetings and providing other logistical support.
Chairman & Members of the Committee
