IRDAI's New Corporate Governance Framework

Introduction

The Insurance Regulatory and Development Authority of India ("IRDAI") has introduced a new framework for corporate governance for Insurance Companies (other than branches of foreign reinsurers)¹. This article summarizes the key changes brought about by the new IRDAI (Corporate Governance for Insurers) Regulations 2024 ("CG Regulations"), notified on 22 March 2024 and the accompanying Master Circular ("CG Master Circular") of 22 May 2024.

The corporate governance framework aims to strengthen transparency, accountability, and policyholder protection. The CG Regulations' objective is stated to provide a corporate governance framework that sets out the roles and responsibilities of the Board of Directors ("Board") of Insurance Companies and protects the interests of all stakeholders². The CG Master Circular provides guidance on various operational and procedural aspects as well as prescribes the various filings to be made to the IRDAI.

The CG Master Circular also sets out a list of guidelines/circulars which stand repealed, and which inter alia, include the IRDAI's "Guidelines for Corporate Governance for Insurers in India" of 18 May 2016 ("Erstwhile CG Guidelines") and "Guidelines on Remuneration of Directors and Key Managerial Persons of Insurers" of 30 June 2023 ("Erstwhile Remuneration Guidelines").

Key Changes

A summary of the key requirements and norms under the new framework are as follows:

1. In relation to the constitution of the Board:
   1. Appointment of Chairperson: The CG Regulations stipulate that obtaining prior approval from the IRDAI is necessary for the appointment of the chairperson of the Board, excluding public sector Insurance Companies³. In addition, the CG Master Circular now prescribes the format in which the proposal for appointment of the chairperson is to be submitted to the IRDAI⁴. However, an existing chairperson is permitted to continue their position up to 31 March 2026 or till completion of tenure, whichever is earlier. Previously, the Erstwhile CG Guidelines did not require any express IRDAI approval for appointment of the chairperson, and this was largely left to the company and its Board, with a brief recognition that different structures may be possible.
   2. Appointment of Chief Executive Officer ("CEO"): The CG Regulations expressly requires the CEO to be a Whole-time Director on the Board⁵. The Erstwhile CG Guidelines previously mandated that the CEO is required to be the Whole-time Director only in situations where the Chairman is non-executive⁶.
   3. Number of Independent Directors: Insurance Companies are now required to have three Independent Directors at all times⁷. The Erstwhile CG Guidelines previously required that the Board consist of a minimum of three Independent Directors, but there could be two Independent Directors during the initial five years from the date of registration⁸. The new CG Regulations have removed this relaxation.
   4. Appointment/Removal of Directors: Any resignation or removal of an Independent Director must be promptly communicated to the IRDAI within 30 days from such vacancy⁹. Previously, only in the event that the number of independent directors fell below the minimum requirement, Insurance Companies were required to intimate the IRDAI. Such vacancies were to be filled before the next Board meeting or within 3 months from the date of vacancy, whichever is later¹⁰. The norms in relation to appointment or removal of all other Directors, such as the Managing Director or Whole-time Directors, continues to be governed in accordance with §34A of the Insurance Act 1938.
   5. Roles and Responsibilities of the Board: The CG Master Circular add¹¹ to the list of the Board's responsibilities set out in the Erstwhile CG Guidelines¹². This now includes applying high ethical standards and acting in the best interests of both the Insurance Companies and its policyholders.
   6. Roles and Responsibilities of the KMPs: As a new stipulation, the CG Master Circular now sets out a list of responsibilities of the Key Management Persons¹³ ("KMPs"), which inter alia, include: (i) carrying out day-to-day operations of the Insurance Company effectively, (ii) promoting sound risk management, compliance and fair treatment of customers, and (iii) providing adequate and timely information to the Board.
   7. Conflict of Interest: Previously, the Erstwhile CG Guidelines prohibited auditors, actuaries, directors and KMPs from simultaneously holding two positions within the Insurance Company which could lead to conflict or potential conflicts of interest¹⁴. However, the CG Regulations as well as the CG Master Circular now restrict a KMP from holding positions that could create conflicts of interest, such as combining "business and control functions" or holding multiple "control functions"¹⁵.
   8. Independence Obligation: The CG Regulations as well as the CG Master Circular require Insurance Companies to ensure the independence of the Board from the management and promoters¹⁶.
2. In relation to Board Committees:
   1. The CG Regulations mandate the formation of a Policyholder Protection, Grievance Redressal and Claims Monitoring Committee by the Board ("PPGR&CM Committee")¹⁷, chaired by an independent director. This replaces the previously required Policyholder Protection Committee, chaired by a Non-Executive Director¹⁸.
   2. The CG Master Circular clarifies that the Risk Management Committee meetings must be chaired by an independent director who is not the chair of the Board's Audit Committee¹⁹. The Erstwhile CG Guidelines required the Chief Risk Officer to guide and supervise this functioning²⁰.
3. In relation to KMPs, whilst the Erstwhile CG Guidelines recognised the Chief Compliance Officer ("CCO") as a KMP, new clarity regarding the tenure and overall roles and responsibilities of the CCO has been introduced in the CG Regulations and the CG Master Circular²¹. The CCO is tasked with ensuring that the Insurance Company complies with the regulatory framework and shall have a tenure of at least three years.
4. In relation to the Remuneration Policy:
   1. The CG Regulations require the establishment of a Board approved Remuneration Policy for the Chairperson, Non-Executive Directors, and KMPs²². In addition to this, the requirements for remuneration of directors and KMPs of Insurance Companies have been incorporated into the CG Master Circular. The policy's required content is broadly similar to the previous guidance specified under the Erstwhile Remuneration Guidelines of 2023.
   2. Per the CG Regulations, the Board is required to ensure effective implementation of the Remuneration Policy. Additionally, the Board is required to ensure that there exist no conflicts of interest with respect to the remuneration decisions²³.
5. Other requirements:
   1. Tenure of Statutory Auditors: The CG Master Circular reduces the maximum tenure for any audit firm appointed as the Insurance Company's statutory auditor from ten (ie, 2 five-year terms) to four years²⁴ and the cooling-off period from five to three years²⁵. Existing appointments for the remaining five-year term will be seen out.
   2. Stewardship Policy: The CG Regulations mandate the formulation of a Board-approved Stewardship Policy²⁶. This policy is required to outline the obligations that the Insurance Company is willing to undertake for the benefit of its policyholders, such as playing an active role in the general meetings of investee companies and engaging with their management at a greater level. In addition, the CG Master Circular prescribes a list of principles and additional guidance that are required to be approved by the Insurance Company's Board for its implementation²⁷, which inter alia, include public disclosure of their stewardship responsibilities and how they manage conflicts of interest in fulfilling them.
   3. Environment, Social and Governance ("ESG") framework: The CG Regulations require the Board to monitor the company's ESG activities and review the framework annually²⁸. This includes developing a Climate Risk Management policy, outlining environmental commitments, and establishing a position on social issues like employee welfare and diversity. Our article on the evolution of this ESG framework in India and the new requirements for the Indian insurance sector is available here: https://www.mondaq.com/india/insurance-laws-and-products/1486124/esg-in-insurance-sector-in-india.

Concluding Remarks

The IRDAI's new framework aims to streamline and strengthen corporate governance for Insurance Companies in India, through laying out concise and more streamlined requirements. The CG Master Circular provides some additional clarity on various governance requirements set out under the CG Regulations. Press reports indicate that these governance changes have broadly been well-received by diverse stakeholders, who view them as a positive step towards enhancing the credibility of the Indian insurance sector.

Footnotes

1. R1(4) of the CG Regulations.

2. R2 of the CG Regulations.

3. R4(1) of the CG Regulations.

4. ¶2.1(f) of the CG Master Circular.

5. R4(1) of the CG Regulations.

6. ¶5.1 of the Erstwhile CG Guidelines.

7. R4(1) of the CG Regulations.

8. ¶5.1 of the Erstwhile CG Guidelines.

9. R4(2) of the CG Regulations.

10. ¶5.1 of the Erstwhile CG Guidelines.

11. ¶2.3 and Annexure 2 of the CG Master Circular.

12. ¶3A(2) of the Erstwhile CG Guidelines.

13. ¶5.1 of the CG Master Circular.

14. ¶3A(2) of the Erstwhile CG Guidelines.

15. In this regard, the CG Master Circular requires an Board to "ensure independence of its control functions including compliance, risk, audit, actuarial and secretarial function". Please see R5(7)(c) of the CG Regulations r/w ¶2.5(e) of the CG Master Circular.

16. R4(7) of the CG Regulations r/w ¶2.5(e) of the CG Master Circular.

17. R5(5)(c) of the CG Regulations.

18. ¶7.4 of the Erstwhile CG Guidelines.

19. ¶4.3(c) of the CG Master Circular.

20. ¶7.3 of the Erstwhile CG Guidelines.

21. R6(3) of the CG Regulations r/w ¶6 of the CG Master Circular.

22. R7(1) of the CG Regulations.

23. R7(3) of the CG Regulations.

24. ¶III(2) under Annexure 6 of the CG Master Circular.

25. ¶III(2) under Annexure 6 of the CG Master Circular.

26. R9 of the CG Regulations.

27. ¶12 of the CG Master Circular.

28. R11 of the CG Regulations.

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