A comprehensive guide to India’s new insurance laws

Read the fine print.
Read the fine print.
Image: AP Photo /Manish Swarup
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After nearly 13 years since the last amendment to India’s insurance laws—and seven years after the last attempt to increase the foreign direct investment (FDI) cap in the Indian insurance companies—there has finally been a breakthrough.

Last week, the Bharatiya Janata Party government managed to squeeze the Insurance Laws (Amendment) Bill, 2015 through both houses of parliament.

Here is the list of major changes proposed in the new legislation:

Increase in FDI cap from 26% to 49%

For the insurance industry to continue to grow in underinsured India, it needs a lot more capital. A bulk of this could come through FDI, and would help ensure innovations on product design, distribution, better risk management and improved solvency standards.

The option to absorb more foreign capital, including from foreign institutional investors, is also likely to urge some insurance companies like Bajaj Allianz, ICICI Prudential, Reliance Life Insurance, and SBI Life Insurance to consider initial public offerings (IPO). HDFC Life, for instance, has already announced its plans to go public within one year, if discussions with its joint venture partner Standard Life progress well.

The increased FDI cap would also induce foreign joint venture partners to invest more by increasing their stake in their domestic partners. The foreign partners of Bharti AXA (life and general insurance) and Max Bhupa have already committed to raising their stakes up to 49%. Reliance Capital has indicated that it is in similar talks with its foreign life insurance partner, Nippon. SBI, too, has initiated talks with its foreign partner BNP to raise its stake in the joint venture.

This, however, is dependent on management control remaining vested with Indians.

Foreign re-insurers 

Foreign re-insurers that intend to open branches in India must now register with the Insurance Development & Regulatory Authority (IRDA)—India’s insurance regulatory body— if they possess a minimum net-owned fund of Rs5,000 crore.

The Bill has also expressly broadened the ambit of foreign re-insurer companies to include global re-insurer company, Lloyd’s of London. The Standing Committee of Finance reckons that the entry of Lloyd’s, the world’s largest insurer/re-insurer, into India would boost competition and ultimately benefit the market.

This new change will enable all other global re-insurer companies, who were earlier unable to set up branches in India, like Berkshire Hathway, Hannover Re, Munich Re, Scor Re, and Swiss Re to finally enter Asia’s third largest economy. The General Insurance Corporation, currently the only re-insurer in India, is struggling to meet the requirements in several sectors. 

Re-insurers, who take up all or part of the risk under an insurance policy in exchange for a premium payment, are important for covering large risks in capital-intensive sectors like refineries, airlines, among others.

Re-Insurance defined

The term “re-insurance” has been defined in the Bill for the first time and refers to insurance taken by an insurer from a re-insurer, only for a part of the risk in the insurer’s insurance policy. The re-insurer, in this case, will be paid a “mutually acceptable premium” for its services by the insurer.

This definition will perform the dual function of taking away from an insurer the option of insuring 100% of its risk through a re-insurer, while also protecting the re-insurer in the process.

Raising capital

The Bill permits public companies to raise their funds by issuing both equity shares of single fixed denomination or value and other forms of securities, as specified by the IRDA.

The IRDA might also allow insurance companies to raise capital by issuing hybrid instruments such as convertible preference shares or debentures. By providing options to raise capital innovatively, this will expand the scope of structuring existing joint ventures.

The General Insurance Corporation and other public sector general insurance companies have also been permitted to raise capital for increasing their business in rural and social sectors. The only condition is that the central government should maintain a minimum shareholding of 51% in such general insurance companies.

Fewer compliances

The Bill has also done away with the following requirement under the earlier insurance laws:

  • Indian promoters must bring down their stake in the insurance company to 26% after a 10 year period, from the day the insurance company started its business.

This will provide some relief to Indian promoters who have, in the past, expressed concerns at being reduced to a minor shareholder while their foreign investors gain majority stake in the insurance companies with the increase in the FDI cap. The finance ministry had suggested removal of this requirement on the basis of this reason alone;

  • Maintenance of deposits by insurance companies with the IRDA as a condition for registration. The IRDA already regulates this using the solvency margin, which insurance companies are required to maintain.

This will help insurance companies who have had to maintain both deposits with the Reserve Bank of India as a registration requirement, in addition to the solvency margins prescribed under the earlier insurance laws. Fewer compliance requirements, in view of the existing minimum paid-up capital and solvency margins, will encourage foreign insurers and re-insurers to invest in India.

Challenge timeline

An insurance policy, according to the new Bill, cannot be challenged by the insurer on any ground after three years. Even if a fraud is detected after the policy has been in force for more than three years, insurance companies will have to honour the commitment towards the policy holder.

The Bill will not only give more powers to the IRDA, ensuring greater consumer protection, but also provide a better time frame to a policyholder to question an insurance company in case of misinformation or misleading statements.

Monica Benjamin, an associate at HSA Advocates, assisted in writing this post.