Ref. No: 228/F&A (NL)/COI-DIR/01/2018-19

Date: 08-03-2019

Exposure Draft on Insurance Regulatory and Development Authority of India (Conflict of Interest) Guidelines, 2019

The Authority, in order to address conflicts of interest arising out of the appointment of common directors between insurance companies, insurance company and insurance intermediaries and common promoters of Health and General Insurers, in exercise of the powers conferred under sub-section (1) of Section 14 of the Insurance Regulatory and Development Authority Act, 1999 proposes to issues IRDAI (Conflict of Interest) Guidelines, 2019.

A brief summary of the proposed guidelines is as under:

1. Where a promoter of a general insurance company wants to be a promoter of a health insurance company or vice versa, the application for issuance of requisition of registration of certificate filed by such promoter shall be accompanied with a note duly approved Board of Directors providing the manner in which the segregation of business, if any, between the General Insurance Company and the Standalone Health Insurance Company shall take place;

2. It shall be the responsibility of the Board of Directors of the Insurance Companies to formulate policy to address conflict of interest situations that may arise due to common directors or Officers;

3. A director or officer shall, within thirty days after he/she becomes aware that a material conflict of interest exists,

a. eliminate the conflict of interest; or

b. resign from office.

4. Where the Insurer becomes aware of the Conflict of Interest situation, immediate steps shall be taken by the Insurer to ensure that the powers / authority delegated to such a Director or Officer is ceased and he / she is not allowed to participate in the day-to-day activities of the Company. Also, an enquiry, headed by an Independent Director, shall be conducted on such a Director or Officer. The person found guilty shall no more be “Fit& Proper”;

5. No permission is required where the person proposed to act as the common director is an independent director in both the companies under the same group and the remuneration payable to such a Director does not exceed Rs. Ten Lakh per annum;

6. Permission for common non-executive director of an insurance company and insurance intermediary is required where the insurance company and insurance intermediary are part of the same group;

7. However, an insurance company and insurance intermediary which are not part of the same group, cannot have a common director;

8. Further, common directorships amongst insurance companies, an insurance company and its promoter company, and insurance companies and insurance intermediaries are allowed subject to conditions stated in the guidelines.

The draft guidelines along with the formats are attached herewith. All are requested to offer their valuable comments/suggestions on the proposed Guidelines by 29th March, 2019 in the format provided at Annexure I. The comments/suggestions may be e-mailed to Mr. Nirmal Jain, AM at nirmal.jain@irda.gov.in with a copy to the undersigned at rksharma@irda.gov.in .

RK Sharma

General Manager F&A-NL

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228/F&A(NL)/COI-Dir/01/2019-19

21.02.2019

Insurance Regulatory and Development Authority of India (Conflict of Interest) Guidelines, 2019

Introduction

The concept of conflict of interest exists under various legislations in India. The provisions of the Companies Act, 2013 (CA 2013) shows that a company shall not enter into any contract or arrangement with a related party with respect to specific activities without the specific consent of the Board of Directors.[1]

A “Related party” with reference to a company [Section 2(76)] includes a private limited company in which a director or manager is a member or director, a public limited company in which a director or manager is a director or holds along with his relatives, more than two percent of its paid-up share capital; etc. However, under the Accounting Standard 18 and under Ind-As 24 on Related Party, two companies are deemed not to be related parties if they have a director in common, unless the director is able to affect the policies of both companies in their mutual dealings.

Further, it can be observed that a director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. If a director of the company contravenes this, he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.[2]

In addition to the Companies Act, 2013, there are regulatory requirements issued by various financial services regulators to address conflict arising out of appointment of common directors in companies operating within the same line of business.

Provisions relating to Insurance industry:

1. Insurance Act, 1938:

(i) Section 32A provides express prohibition on a managing director or other officer of an insurer carrying on life insurance business to be a managing director or other officer of any other insurer carrying on life insurance business or of a banking company or of an investment company.

It further provides that the Authority may permit such managing director or other officer to be a managing director or other officer of any other insurer carrying on life insurance business for the purpose of amalgamating the business of the two insurers or transferring the business of one insurer to other.

(ii) Express prohibition pursuant to section 48A and 48B

  • on common directors between an insurance agent or intermediary or insurance intermediary and insurance company, except with the explicit approval of IRDAI;
  • Further, Section 48B restricts an insurer specified in sub-clause (b) of clause (9) of section 2 and carrying on life insurance business to have a common director with another such insurer.

Sub clause (b) of Section 2 (9) states that the term “insurer” means a statutory body established by an Act of Parliament to carry on insurance business.

2. Clause 5.3 of the IRDAI Corporate Governance Guidelines 2016 (‘Guidelines’) state that “In line with the international and domestic norms, the Directors of insurers have to meet the “fit and proper” criteria…The Insurance Act prohibits (i) an insurance intermediary/ agent to be the Director of an insurance company (except with prior approval of the Authority); and (ii) the common directorship among life insurance companies.”.

These Guidelines further requires a due diligence for appointing any person as director or for the continuance of the existing directorship only after obtaining a declaration as defined under the Guidelines.

3. Further, IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017 allows a Private Equity fund to become a promoter of an insurance company subject to the condition that it invests through a Special Purpose Vehicle. However, a Private equity fund shall not be the promoter of more than one life, one general, one health insurer and one re-insurer.

The Authority in the recent times has noticed that the promoters of existing insurance companies more particularly of general insurance companies have applied to the Authority to set up Standalone Health Insurance Companies and / or Reinsurance Companies.

Further, the Authority has been receiving applications from the Insurers seeking approval for appointment of persons as directors who are also holding position of director in other insurance companies and / or in insurance intermediaries. The Directors have a fiduciary position towards the Company. They must ensure that their personal interests do not conflict with the company’s interests. There is no statutory definition of the term “Conflict of Interest”. It can include situations when a person’s impartial and objective performance of duties or decision-making could be jeopardized because of personal interests being involved. Companies with Board Members having pertinent industry experience would only improve its effectiveness, albeit it could result in conflicting situations.

In light of the above, the Authority, in exercise of the powers conferred under sub-section (1) of Section 14 of the Insurance Regulatory and Development Authority Act, 1999, hereby, issues the following guidelines:

1. Objective: To avoid situations involving material conflict of interest arising due to common promoter group and / common directors among insurance companies and insurance intermediaries.

2. Applicability:

i. These Guidelines shall be in addition to, and should be read with any other law for the time being in force, including the Guidelines for Corporate Governance for Insurers in India, 2016;

ii. These Guidelines shall be called Insurance Regulatory and Development Authority of India (Conflict of Interest) Guidelines, 2019;

iii. These Guidelines shall be applicable to all Insurers and insurance intermediaries;

iv. These Guidelines shall be applicable from the date of issuance.

Part- A

3. Definitions: In these guidelines, unless the context otherwise requires, –

i. “Act” means Insurance Act, 1938 (4 of 1938);

ii. “Authority” means the Insurance Regulatory and Development Authority of India established under sub-section (1) of Section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999);

iii. “Conflict of Interest” means a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another and includes situations when a person’s impartial and objective performance of duties or decision-making could be jeopardized because of personal interests being involved;

iv. “Entity” means an “Indian Promoter” as defined under Section 2(g) of the IRDA (Registration of Indian Insurance Companies) Regulations, 2000;

v. “Independent Director” means a director as defined in Section 2(47) of the Companies Act, 2013;

vi.“Non-Executive Director” means a director other than Managing Director, Whole-time Director and Independent Director;

vii. “Officer” means an officer defined in Section 2 (59) of the Companies Act, 2013 but does not include non-whole-time director;

viii. “Whole-time Director” means a director as defined in Section 2(94) of the Companies Act, 2013;

ix. All words and expressions used herein and not defined, but defined in the Insurance Act, 1938 (4 of 1938), or in the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), or in any Rules or Regulations made thereunder, shall have the meaning respectively assigned to them in those Acts or Rules or Regulations.

Part-B

4. Conflict of Interest arising due to common Promoter Group:

(i) An entity shall not be a promoter for more than one life insurance, general insurance, stand-alone health insurance and reinsurance company;

Provided that where an entity which is already a promoter of a general insurance company wants to be a promoter of a health insurance company or vice versa, the application for issuance of requisition of registration of certificate filed by such promoter shall be accompanied with:

  • A note providing the manner in which the segregation of business, if any, between the General Insurance Company and the Standalone Health Insurance Company shall take place. The note shall be supported with Board Resolution passed by the Board of Directors of the promoter company to this effect.
  • The value addition that the promoters of the exiting General Insurance Company / Health Insurance Company hopes to achieve by setting up a standalone Health Insurance Company / General Insurance Company.
  • The measures to deal with the situations of Conflict of Interest that may arise between the General Insurance Company and the Health Insurance Company.

(ii) Where the Promoter of an insurance intermediary wants to set up an insurance company or vice versa, necessary disclosures as to manner of dealing with conflict of interest situations has to be made.

(iii) The further processing of requisition of certificate of registration shall be subject to the compliance of the manner of segregation of health insurance business, if any.

5. Conflict of Interest arising due to common Directors:

(i) The Board of Directors of the Insurance Company / Insurance Intermediary shall:

  • Formulate a policy to determine the maximum no. of companies in which an individual can act as a director or officer. This has to be decided taking into account time and attention required to be devoted to the affairs of each company taking into consideration the complexity of business etc.;
  • Identify circumstances which constitute or may give rise to a Conflict of Interest situation which may entail a material risk of damage to the interests of all stakeholders, more particularly, to the interest of the policyholders;
  • Establish, implement and maintain procedures to be followed & measures to be adopted to prevent Conflict of Interest & to manage such conflicts in an independent manner;
  • Make all reasonable efforts to resolve Conflict of Interest but in cases where Conflict of Interests unavoidable seek to address it on an arm’s length basis and make proper disclosures; and
  • Maintain an updated record of the situation where Conflict of Interest entailing material risk of damage to policyholders may arise, have arisen and how they have been addressed.

(ii) The Board may further delegate the implementation of the Policy to the Nomination & Remuneration Committee or the Audit Committee;

(iii) No person shall be appointed as director or officer if at the time of the appointment there is a material conflict of interest between the person’s role as director or officer and any other role of the person;

(iv) A director or officer shall, within thirty days after he / she becomes aware that a material conflict of interest exists,

a. eliminate the conflict of interest; or

b. resign from office.

(v) Where the Insurer / Insurance Intermediary becomes aware of the Conflict of Interest situation involving a Director or Officer, the same shall be dealt as under:

a. The powers / authority delegated to such a director or officer shall be ceased with immediate effect and he / she shall not be allowed to participate in the day-to-day activities of the Company;

b. An enquiry, headed by an Independent Director, shall be conducted on such a Director or Officer;

c. Where the Director or Officer is found guilty and has not acted as per the provisions of Para 5(iv) above, his services shall be terminated with immediate effect. Further, such a person shall not be considered as “Fit & Proper” to hold any position in an insurance company or insurance intermediary for a minimum period of five years.

(vi) Common Directorships among insurance companies / insurance intermediaries shall be allowed subject to the prescriptions as provided in the table given at Annexure-A.

Provided that:

a. For “Allowed” category, the insurers may appoint the directors subject to compliance of Corporate Governance Guidelines. However, no seeking the specific approval of the Authority is required;

b. For “not allowed” category, the insurers shall not appoint the directors or Officers.

c. For other categories, the insurers may appoint the director or officer subject to the conditions stated in the annexure.

d. For life insurance companies, in addition to the stipulation stated in the annexure, the appointment of directors or officers shall also be subject to compliance of Section 32A of the Act;

For the cases of Common Directorships among insurance companies / insurance intermediaries not provided for in Annexure-A, the Insurer shall seek prior approval of the Authority. The Authority may grant approval for the same subject to such conditions or restrictions as it may consider necessary to protect the interest of the policyholders and to avoid conflict of interest.

(vii) The common director(s) shall not hold the position of KMP or CEO in more than one insurance company or insurance intermediary.

(viii) There shall be no business relationship by the common director(s) with other insurance company or insurance intermediary, other than holding the position of non-executive director.

(ix) The common director(s) shall not achieve or attempt to achieve any undue gain or advantage either to himself or his relatives, partners or associates and if found guilty of making any undue gain, the Authority may direct the insurance company or insurance intermediary to remove him from the Board as Director without prejudice to any action taken on him / insurance company / insurance intermediary under provisions of Insurance Act, 1938.

6. Approval under Section 48A

A) Common Non-Executive Directors:

An insurer / insurance intermediary seeking permission of the Authority for appointment of common Whole-Time or Non-Executive Directors under the provisions of Section 48A of the Act, shall submit the following:

a. Particulars of the Directors in the format specified in IRDA (Registration of Indian Insurance Companies) Regulations, 2000;

b. Certified copy of the board resolution appointing the director of both the companies in which the individual shall be acting as the Director;

c. An undertaking from the CEO of the Company, to the effect that the conditions mentioned at para 5(A)(i) to 5(A)(v) below shall be complied by the Company;

The Authority may permit the appointment such a Director under Section 48A subject to the following conditions:

(i) The individual so appointed as director shall not be working in the capacity of Chief Insurance Executive/ Specified Person or any other officer responsible for soliciting insurance business for or on behalf of insurance intermediaries; CEO, CAO / CMO or any other officer responsible for soliciting business for or on behalf of a TPA, while holding the position of non-executive director in the Insurance Company and vice-versa;

(ii) Prior approval of the Authority shall be taken for payment of remuneration to Non- Executive Director other than for the payment of sitting fees;

(iii) The directors of the insurance intermediary shall ensure that there is no conflict of interest or prejudice against the interest of the policyholders as a result of the appointment;

(iv) Disclosure requirements as laid down in the Corporate Governance Guidelines, IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002 and any other applicable laws shall be complied with by both the agent or insurance intermediary and the Insurance Company; and

(v) The appointment of the directors shall be subject to compliance of all other Laws, Rules and Regulations made there under.

B. Common Independent Directors within the same group:

No prior permission of the Authority is required in the following case:

1. The person proposed to act as the common director is an independent director in both the companies operating in the same group; and

2. The remuneration payable to such a Director by the Insurer does not exceed Rs. Ten Lakh per annum.

However, an intimation shall be provided to the Authority for such appointment.

Interpretation:

3. The interpretation of these regulations shall be that of the Chairperson of the Authority, whose decisions on all issues shall be binding on all applicants.

(Pravin Kutumbe)

Member – F&I

[1] Section 188 of Companies Act, 2013

[2] Section 166 of Companies Act, 2013

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ANNEXURE 1

FORMAT FOR SUGGESTIONS ON

Draft IRDAI (Conflict of Interest) Guidelines, 2019

Change suggested by
Date
Note v It is suggested that ONE Page may be used for one change.

v This will enable us to group all the suggestions and take a decision on the changes suggested

Page No. Regulations /Annexure Regulation and Sub-Regulation No./ Para Number Comments/ Suggestions Reasons

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