Insurance Regulatory and Development Authority of India
Exposure Draft
Ref: IRDAI/F&I/Cir. No Date: 02/05/2023
All Private Sector Insurers,
Guidelines on Remuneration of Non-Executive Directors and Key Managerial Persons of Private Sector Insurers
A. Background:
i. The Authority issued the following guidelines on Remuneration of Non-Executive Directors and Managing Director / Chief Executive Officer / Whole-time Directors of Insurers vide Circular Ref: IRDA/F&A/GDL/LSTD/155/08/2016 on 5th August, 2016:
a. Insurance Regulatory and Development Authority of India (Remuneration of Non-Executive Directors of Private Sector Insurers) Guidelines, 2016
b. Insurance Regulatory and Development Authority of India (Remuneration of Chief Executive Officer / Whole-time Director / Managing Director of Insurers) Guidelines, 2016
ii. The guidelines which came into effect from 1st October, 2016 are the framework for remuneration of Non-Executive Directors and CEO/WTD/MD of private sector insurers and were issued on the set of principles brought out by the Financial Stability Board (FSB), recommendations of International Association of Insurance Supervisors (IAIS), G-20 Nations Forum and Basel Committee on Banking Supervision (BCBS).
iii. The guidelines have been in force for over 6 years and based on the experience of implementation and compliance of guidelines by the insurers, it is decided to
a. bring remuneration of other Key Managerial Persons (KMPs) also within the ambit of the guidelines,
b. give more clarity to the extent of variable pay with respect to the total remuneration of Directors and KMPs, Variable Pay Deferral, Malus and Clawback provisions, Accounting, Disclosures, etc. and
c. issue revised guidelines on remuneration of directors and key managerial persons of insurers accordingly.
B. Objectives
i. To ensure effective governance of compensation
ii. To ensure alignment of compensation with prudent risk taking
iii. To ensure effective supervisory oversight and stakeholder engagement
iv. To ensure safety of policyholders and other stakeholders
In this background, it is proposed to replace the extant guidelines on remuneration of Non-Executive directors and MD/CEO/WTD of insurers issued vide Circular Ref: IRDA/F&A/GDL/LSTD/155/08/2016 on 5th August, 2016.
Draft Guidelines proposed in this regard are placed as Annexure A and B. All are requested to offer their comments / suggestions on the proposed guidelines. The comments / suggestions should reach IRDAI in the format attached as Annexure C by 15th May, 2023 by e-mail at y.sivaprasad@irdai.gov.in with a copy to manoi@irdai.gov.in.
Manoj Kumar
General Manager (F&I)
Annexure-A
Insurance Regulatory and Development Authority of India (Remuneration of Non-Executive Directors of Insurers) Guidelines, 2023
1. Background:
Non-executive directors of the company play a crucial role to the independent functioning of the board. They bring in external and wider perspective to the decision-making by the board. They provide leadership and strategic guidance, while maintaining objective judgment. They provide an independent view on the running of the business, governance and boardroom best practices. They oversee and constructively challenge management in its implementation of strategy within the Group’s system of governance and the risk appetite set by the Board.
In view of the increased demands on non-executive directors’ participation in board and committee meetings and the higher responsibilities they are expected to bear in the interest of higher level of excellence in corporate governance and in order to enable Insurance companies to attract and retain professional non-executive directors, it is essential that such directors are appropriately compensated.
2. Remuneration Policy:
i. The Board of Directors, in consultation with its Nomination and Remuneration Committee, should formulate and adopt a comprehensive remuneration policy for the Non-Executive Directors. While formulating such policy, the Board shall ensure compliance with the provisions of the Companies Act, 2013, as amended from time to time.
ii. The Board should ensure that in structuring, implementing and reviewing the remuneration policy, the decision making process identifies and manages conflicts of interests and is properly documented. Members of the Board should not be placed in a position of actual or perceived conflicts of interests in respect of remuneration decisions.
iii. Total remuneration, however, shall not exceed Rupees Twenty lakh per annum for each Non-Executive director. If the Chairperson of the company is a Non-Executive Director, the remuneration may be decided by the Board of Directors of the insurer and, the remuneration policy shall specify the details of the remuneration and incentives to be paid to him/ her.
iv. Non-Executive Directors shall not be eligible for any equity-linked benefits.
3. Sitting fees and reimbursement of expenses:
In addition to the directors’ remuneration mentioned in para 2 (iii) above, the Insurer may pay sitting fees to the non-executive directors and reimburse their expenses for participation in the Board and other meetings, subject to compliance with the provisions of the Companies Act, 2013.
4. Age limit and tenure of Non-Executive Directors:
i. The maximum age limit for Non-Executive Directors, including the Chair of the board, shall be 75 years and after attaining the age of 75 years no person shall continue on the Board of an insurer.
ii. The tenure of a Non-Executive Director other than Independent Director, on the board of an insurer, shall not exceed a continuous period of eight years. After completion of eight years on the board of an insurer, the person may be considered for re-appointment only after a cooling-off period of at least one year. This shall, however, not preclude him / her from being appointed as a director on the board of another insurer subject to meeting the requirements.
iii. An Independent Director may be appointed for a term of up to five consecutive years on the Board of an insurer, and shall be eligible for re-appointment for the second term on passing of a special resolution by the insurer. No independent Director shall hold office for more than two consecutive terms, beyond a period of 10 years. After completion of 10 years such independent director shall be eligible for re-appointment only after a cooling-off period of at least three years.
For the purpose of compliance with the above stipulations, the tenure of all the Non-Executive Directors on the boards of insurers as on the date of issue/ notification of these guidelines shall be taken into account. If a director has already completed a period of eight years/ ten years as the case may be, on the date of issue of these guidelines, such insurers shall appoint new incumbent in place of such director(s) within a period of one year.
5. Disclosure:
Insurers shall disclose the amount of remuneration paid to each Non-Executive/ Independent directors, in the Notes to the Accounts forming part of Annual Financial Statements. In case no remuneration is paid during a year, the same shall be specifically disclosed.
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Annexure-B
Insurance Regulatory and Development Authority of India (Remuneration of Key Managerial Persons of Insurers) Guidelines, 2023
1. Applicability
i. The guidelines shall be applicable for remuneration payable to Key Managerial Persons (KMPs) of private sector insurers, from Financial Year 2023-24.
ii. The process of framing / reviewing the remuneration policy based on these guidelines should be completed within 3 months of the issuance of these Guidelines.
2. Definitions
i. “Remuneration” means any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961.
ii. Key Managerial Personnel, in relation to an insurer, means— member of the core management team of an insurer including all whole-time directors/ Managing Directors/ CEO and the functional heads below the MD/CEO, the CFO, Appointed Actuary, Chief Investment Officer, Chief Risk Officer, Chief Compliance Officer, Chief Underwriter, Chief Operating Officer, Chief Marketing/Sales Officer, Chief Technical Officer, Company Secretary, and any other KMPs as identified by the insurer.
Explanation: The nomenclature or designations used in the above definition are only illustrative and not exhaustive and shall be appropriately mapped to the respective risk and control functions of the insurers while reporting information under these guidelines, wherever necessary.
iii. Share linked instruments mean (i) employee stock option schemes;(ii) employee stock purchase schemes; and (iii) stock appreciation rights schemes.
3. Remuneration Policy
i. Insurers should formulate and adopt a comprehensive Board approved remuneration policy covering all the Key Managerial Persons. The policy should be formulated such that the performance based variable remuneration shall not encourage Key Managerial Persons to take inappropriate or excessive risks. The Board should ensure that in structuring, implementing and reviewing the remuneration policy, the decision making process identifies and manages conflicts of interests and is properly documented. Members of the Board should not be placed in a position of actual or perceived conflict of interests in respect of remuneration decisions.
ii. The policy should cover all aspects of the remuneration structure such as Fixed Pay including allowances, perquisites, retirement Benefits, etc., Variable Pay including incentives, bonus, share linked instruments, etc., Joining / Sign on bonus and Severance Package. All the details of the remuneration policy should be incorporated in a single document. The remuneration policy should be reviewed annually by the Nomination and Remuneration Committee.
iii. Nomination and Remuneration Committee of the insurer in consultation with the Risk Management Committee should make a coordinated effort to have an integrated approach to the formulation of the remuneration policy. It should be ensured that,
a. Remuneration is adjusted for all types of risk,
b. Remuneration outcomes are symmetric with risk outcomes,
c. Remuneration payouts are sensitive to the time horizon of the risk, and
d. The mix of cash, equity and other forms of remuneration are consistent with risk alignment.
iv. A wide variety of measures of credit, market and liquidity risks may be used by the insurers in implementation of risk adjustment. The risk adjusted methods should preferably have both quantitative and qualitative elements. The following are the minimum parameters which shall be taken into account for determination of performance assessment of all KMPs for payment of variable pay or incentives:
a. Overall financial soundness such as Net-Worth position, solvency, growth in AUM, Net Profit, etc;
b. Compliance with Expenses of Management Regulations;
c. Claim efficiency in terms of settlement and outstanding;
d. Improvement in grievance redressal status/ position;
e. Reduction in Unclaimed Amounts of policyholders;
f. Persistency 37th Month to 61st Month (in case of life insurers); Renewal Rate in case of Non-Life insurers and Health insurers; and.
g. Overall Compliance status w.r.t. all applicable laws.
The above parameters should constitute at least 60% of the total weightage in the performance assessment matrix of MD/CEO/WTDs; and at least 30% of the total weightage in the performance assessment matrix of other KMPs individually. The weightage for each of the parameters may be configured suitably for MD/CEO/WTDs and other KMPs depending on their respective roles. Insurers may define additional parameters also which should be in line with the business plan of the Insurer. These shall be spelt out in the remuneration policy.
Apart from the performance assessment for payment of incentives and variable pay, these parameters shall also form the basis for revision of the Fixed Pay.
4. Annual Remuneration
Annual Remuneration shall be the aggregate of Fixed Pay (including monetary and non-monetary perquisites) and Variable Pay, for a particular financial year.
5. Fixed pay
Insurers are required to ensure that the fixed portion of remuneration is reasonable taking into account all the relevant factors including adherence to statutory requirements. Fixed Pay shall include Basic pay, allowances, perquisites, contribution towards superannuation/retirement benefits and all other fixed items of compensation.
6. Variable pay
i. Variable pay shall be in the form of cash and/or share linked instruments. All share linked benefits where the ultimate payout is in the form of cash such as Cash-Linked Stock Appreciation Rights (CSARs), Phantom Stocks etc., shall be treated as cash benefit.
ii. Variable pay includes incentives, bonus, share linked instruments etc. The Variable pay shall be performance-based using measures of individual, unit or group performance that do not create incentives for inappropriate risk taking. Performance based incentives should be aligned with long term value creation and the time horizon of risks to which the insurer may be exposed. Any variable pay or performance incentive shall be paid/ granted to any KMP only once during a financial year.
iii. Variable Pay should be at least 50% of the Fixed Pay for the corresponding period and should not exceed 300% of the Fixed Pay. Where variable pay is up to 200% of the fixed pay, a minimum of 50% of the variable pay should be via non-cash instruments. The same limit would be 70%, in case the variable pay is above 200% of the fixed pay.
iv. A minimum of 50% of the total variable pay must invariably be under deferral arrangements and the deferral period should be a minimum of three years. In case of the cash component, at least 50% of the cash component should be deferred. The first such vesting should accrue after one year from the commencement of the deferral period. Vesting should be no faster than on a pro rata basis and should not take place more frequently than on a yearly basis to ensure a proper assessment of risks before the application of ex-post adjustments. No deferment of variable pay shall be required for an amount of up to Rs 25 lakh for a particular year.
v. In case of an unlisted insurer, the fair value of the equity share certified by a Category 1 merchant banker registered with SEBI shall be considered for the purpose of benefit calculation.
vi. In case of a listed insurer, Share-Linked Instruments should be fair valued on the date of grant. The norms for grant, valuation and disclosures of share-linked instruments should be framed by the insurers in conformity with the relevant statutory provisions and applicable guidelines and should form part of the insurers’ remuneration policy.
vii. In case of an unlisted insurer, the total number of ESOPs granted in a year shall not exceed 1% of the paid up capital of the insurer.
viii. The total number of ESOPs issued, granted, vested or outstanding at any point of time shall not exceed 5% of the paid up capital of any insurer.
ix. KMPs of insurers shall not be issued/granted any sweat equity shares.
x. The deterioration in the financial performance of the Insurer and the other defined parameters as per the remuneration policy should lead to a contraction in the total amount of variable remuneration which may even be reduced to zero.
xi. In case of retirement / resignation / death of KMPs prior to the deferred period, the deferred pay may be paid as per the employment contract agreed between the insurer and the KMPs. In case of reappointment on retirement, the deferred pay due at the time of retirement (i.e., prior to reappointment) should be paid only in the respective years to which it is originally deferred.
xii. In case of termination from the services as per the directives of court / tribunal / other competent Authorities, or termination by the insurer in case of fraud/criminal offences etc., the deferred pay shall be forfeited.
7. Malus and Clawback:
i. Variable Pay should be subject to Malus and Clawback provisions and these provisions should also form part of the Board approved remuneration policy. In case of deferral remuneration, in the event of any negative trend in the defined parameters and/or the relevant line of business in any year during the vesting period, unvested / unpaid portions of deferred variable pay shall be reduced or cancelled as per the assessment. However, while exercising such provisions, due consideration may be given to the actual / realized performance of the insurer.
ii. A malus arrangement permits the insurer to prevent vesting of all or part of the amount of a deferred remuneration. Malus arrangement does not reverse vesting after it has already occurred. A clawback, on the other hand, is a contractual agreement between the KMP and the insurance company in which the KMP agrees to return previously paid or vested remuneration to the insurer under certain circumstances.
iii. Insurers are required to put in place appropriate modalities to incorporate malus / clawback mechanism in respect of Variable Pay, taking into account relevant statutory and regulatory stipulations as applicable. The remuneration policy of the insurer for should confirm existence of Malus and Clawback clauses in the employment contract and it should identify a representative set of situations, which require insurers to invoke the malus and clawback clauses which may be applicable to the entire Variable Pay. When setting criteria for the application of malus and clawback, insurers should also set a period during which malus or clawback can be applied, covering at least the deferral period, Gross negligence, integrity breach, materially inaccurate financial statements due to the result of misconduct including fraud, poor compliance in respect of Corporate Governance and Regulatory matters, etc. by KMPs should invite immediate and prompt action of the board and the management.
iv. For legal enforceability, the malus and clawback system shall be driven by observable and verifiable measures of risk outcomes. Insurers may shall put appropriate mechanism in place to incorporate malus and clawback provisions in respect of variable pay linked to the defined parameters, in the employment contracts of all KMPs.
8. Age and tenure of MD/ CEO/ WTD
i. Subject to the statutory approvals required from time to time, the post of the MD & CEO or WTD shall not be held by the same incumbent for a continuous period of more than 15 years. Thereafter, the individual shall be eligible for re-appointment as MD&CEO or WTD in the same insurer, if considered necessary and desirable by the board, after a cooling off period of at least three years, subject to meeting other applicable conditions.
ii. During this cooling-off period, the individual shall not be appointed or associated with the insurer or any of its group entities in any capacity, either directly or indirectly. This provision shall not be applicable where the individual has been appointed to an insurer on deputation.
iii. No person shall continue as MD & CEO or WTD with an insurer beyond the age of 70 years. Within the overall limit of 70 years, as part of their internal policy, individual insurer’s Boards are free to specify a lower retirement age for the WTDs, including the MD & CEO.
iv. If the MD & CEO or WTD who is appointed by a promoter/ major shareholder, then he/she shall not hold the said posts for a continuous period of more than 12 years. However, the Authority may, on an application made to it by the concerned insurer giving substantial reasons for the same, permit such MD & CEO or WTDs to hold office up to 15 years.
v. Also, a promoter/shareholder cannot hold a whole time position in the Company. However, the shares received through equity-linked instruments during the course of employment are exempted while determining his/her position as the KMP.
vi. For the purpose of compliance with the above stipulations, the tenure of the MD/ CEO/ WTD of insurer as on the date of issue/ notification of these guidelines shall also be taken into account. If a director has already completed a period of twelve years/ fifteen years as the case may be, on the date of issue of these guidelines, such insurers shall appoint the new incumbent in place of such director(s) within a period of one year.
9. Guaranteed bonus, Joining / Sign on Bonus and Severance Pay
i. Guaranteed bonuses are not consistent with sound risk management or the pay-for performance principles and hence should not be part of remuneration plan.
ii. Joining / sign on bonus should only occur in the context of hiring new staff and be limited to the first year of employment. Such joining / sign-on bonus should be in the form of ESOPs only since payments in the form of cash upfront would create perverse incentives. Such bonus will neither be considered part of fixed pay nor part of variable pay. Value of such bonus in the form of ESOPs should not exceed the value of Fixed Pay payable for the first twelve months of the appointment.
iii. Insurers should not grant Severance Pay other than accrued benefits like gratuity pension, etc., to Key Managerial Persons except in cases where it is mandatory under any applicable provision of the statute. It is clarified that Severance Pay does not include notice period pay.
10. Disclosures:
The following disclosures are mandated in the notes to the accounts forming part of the Annual Report.
i. Qualitative Disclosures
a. Information relating to the composition and mandate of the Nomination and Remuneration Committee.
b. Information relating to the design and structure of remuneration policy and the key features and objective of remuneration policy.
c. Description of the ways in which current and future risks are taken into account in the remuneration policy. It should include the nature and type of the key measures used to take account of these risks.
d. Description of the ways in which the insurer seeks to link performance during a performance measurement period with levels of remuneration.
ii. Quantitative disclosures
a. Complete details of remuneration awarded for the financial year to each Key Managerial Person mentioning Pay, Allowances and Perquisites, Variable Pay including share-linked Benefits, Joining / Sign on Bonus, Severance payment, accrued benefits like gratuity, pension, if any, etc. classifying the same under fixed and variable, deferred and non-deferred as applicable , the remuneration accrued during the applicable financial year shall be debited to Revenue Account (Policyholders Technical Account) and Profit and Loss Account (Shareholders Account). The disclosure in the note to accounts shall be made as per the format provided (Annexure I).
b. Details of outstanding deferred remuneration of KMPs at the end of the financial year mentioning name, designation, financial year (remuneration pertaining to), nature of remuneration and the amount outstanding. The disclosure has to be made as per the format provided (Annexure II).
c. Complete details of reduced / cancelled / recovered remuneration during the year as per the malus and clawback provisions of employment, mentioning name, designation, nature of original pay, amount reduced / cancelled / recovered and reason for the same. The disclosure shall be made as per the format provided (Annexure III).
11. Accounting:
i. In case the Annual Remuneration of MD/CEO/WTD and other KMPs individually exceeds Rs.3 crore, such excess shall be borne by the shareholders and debited to Profit and Loss Account.
ii. Liability in the respective books of accounts should be created in respect of deferred remuneration of the reporting financial year.
iii. Deferred remuneration pertaining to previous financial years and paid in the reporting financial year should not be debited to Revenue Account / Profit and Loss Account as the same shall be adjusted against the liability outstanding in the books of accounts at the beginning of the year.
iv. In case of forfeiture of deferred pay, the corresponding liability outstanding shall be reduced accordingly.
v. In case of recovery of earlier paid remuneration, if any, the same should be credited to Revenue Account / Profit and Loss Account, as the case may be.
12. Approval and Renewal of Remuneration:
i. Appointment and Remuneration of MD / CEO/ WTDs requires prior approval of the Authority in terms of Section 34 A of the Insurance Act, 1938.
ii. In respect of remuneration of the MD / CEO / WTDs, no revision shall be permitted by the IRDAI before the expiry of one year from the date of earlier approval.
iii. The cost of remuneration paid to MD/CEO/WTD/KMPs shall be borne by the respective insurer only.
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ANNEXURE-C
Format for comments / suggestions on the IRDAI proposed draft guidelines on remuneration of Non-Executive Directors and KMPs of Private sector insurers:
Name of the insurance company:
Date:
| SI. No. | Annexure and Para reference | Comments / Suggestions | Remarks |
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Name of the insurer:
Annexure II
Date:
Details of Outstanding Deferred Remuneration of Key Managerial Persons (KMPs)
as at
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Name of the insurer:
Date:
Annexure III
Details of Remuneration Reduced / Cancelled / Recovered in respect of KMPs during the Financial Year
| Sl. No. | Name of the KMP | Designation | Nature of Remuneration | Whether Reduced / Cancelled / Recovered | Remuneration Reduced / Cancelled / Recovered (Rs.
In Lakhs) |
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