IRDAI's Master Circular: What Insurers Need to Know?

INTRODUCTION

The Insurance Regulatory and Development Authority of India (IRDAI) has issued a comprehensive master circular on corporate governance for insurers, highlighting the necessity of obtaining prior approval for the appointment of board chairpersons. The circular, issued on May 22, 2024, emphasizes the importance of strong governance practices within insurance companies to ensure transparency, accountability, and the protection of policyholders' interests. The directive comes as part of IRDAI's ongoing efforts to enhance the regulatory framework governing the insurance sector in India.

MAJOR HIGHLIGHTS

Appointment of Board Chairperson:

• Insurance companies must seek prior approval from IRDAI for the appointment of their board chairperson.
• Current board chairpersons can continue until March 31, 2026, or until the end of their current tenure, whichever is earlier.
• The board chairperson should ideally be a non-executive member and should not chair any board committees.

Corporate Governance Framework:

• The board, in consultation with key management personnel, must ensure that the company's policies and strategies align with the desired level of risk, business conduct standards, and ethical behavior.
• The Chief Executive Officer (CEO) is responsible for managing the insurer's affairs in a manner that protects policyholders' interests.

Conflict of Interest Management:

• The board must monitor and manage potential conflicts of interest involving policyholders, management, board members, and shareholders.
• Ensures fair treatment of policyholders and employees, and prevents misuse of corporate assets and abuse in related party transactions.

Independence of Control Functions:

• Insurers must ensure the independence of control functions, including compliance, risk management, audit, actuarial, and secretarial functions.
• Group-wide risk control systems are required for insurers within a group.

Investment Committee and Audit Committee:

• Insurers must establish an Investment Committee, including at least two Non-Executive Directors, the CEO, CFO, Chief Investment Officer, Chief Risk Officer, and Appointed Actuary.
• The Audit Committee is responsible for recommending the appointment, remuneration, performance, and oversight of auditors.

Price/Premium for Group Companies:

• Insurance cover provided to group companies must be priced at arm's length, adhering to applicable product filing regulations.

Auditor Refresh Policy:

• Auditors must be refreshed every four years to promote independence, impartiality, and integrity in the audit process.

Compliance Deadline:

• Insurers must comply with the new guidelines by June 30, 2024.
• The circular applies to all insurers except foreign companies engaged in re-insurance business through branches in India.

IMPACT

The IRDAI's master circular on corporate governance is set to have a significant impact on the insurance sector in India. By enforcing stringent governance practices, the directive aims to:

• Enhance the accountability and transparency within insurance companies.
• Protect the interests of policyholders by ensuring fair treatment and preventing conflicts of interest.
• Strengthen the independence of key control functions, reducing the risk of internal malpractices.
• Promote rigorous financial reporting standards through regular auditor refresh policies.
• Foster a more robust risk management framework, especially for insurers within larger groups.

CONCLUSION

The IRDAI's new corporate governance guidelines mark a substantial step towards improving the regulatory landscape of the Indian insurance sector. By mandating prior approval for board chairperson appointments and emphasizing the independence of control functions, the guidelines aim to ensure that insurance companies operate with higher levels of transparency and integrity. The emphasis on managing conflicts of interest and ensuring fair treatment of policyholders underscores the regulator's commitment to safeguarding public trust. As insurers work towards compliance by June 30, 2024, these measures are expected to foster a more stable and accountable insurance industry in India.