Corporate Governance for Insurers: A New Robust Framework

Authored by Shubhangi Pathak (Partner) and Aditi Mishra (Associate)

In furtherance of the Insurance Regulatory and Development Authority of India (Corporate Governance for Insurers) Regulations, 2024 (“the Regulations”) issued by the Insurance Regulatory and Development Authority of India (“IRDAI”), the Master Circular on Corporate Governance for Insurers, 2024 was notified on 22^nd May 2024 (“Master Circular”), with an aim to provide various operational and procedural aspects for adoption by insurers.

The Master Circular repealed several circulars and guidelines including the Guidelines for Corporate Governance for Insurers in India, 2016. The intent of the Master Circular is to strengthen the capacity of key stakeholders responsible for an insurer’s governance – such as the board of directors (“Board”), senior management, and key management persons (“KMP”) to effectively and prudently manage the insurer’s business. The thrust of the Regulations and Master Circular is to further improve the corporate governance framework for Indian insurers.

Some of the key aspects set out in the Regulations and the Master Circular are:

Board of Directors

The Regulations and the Master Circular have set out certain additional requirements which are now required to be complied with by Indian insurers in relation to the constitution and responsibilities of the Board. These include:

Prior approval of the IRDAI shall be required for the appointment of the chairperson of the Board (except for the public sector insurers). The Master Circular also provides the format for obtaining such prior approval.
The Chief Executive Officer of the insurer is now required to be a whole-time director on the Board.
All Indian insurance companies (irrespective of when they were set up) are required to have 3 (three) independent directors on the Board. Further, any resignation/removal of an independent director is required to be communicated to the IRDAI within 30 (thirty) days of the occurrence of the vacancy.
The roles and responsibilities of the Board have also been expanded and now include applying high ethical standards and acting in the best interests of both the insurer and its policyholders.
KMPs are prohibited from holding positions that may create a conflict of interest.
Insurers are now mandated to ensure the independence of the Board from the management and the promoters of the relevant insurer.
In relation to the committees of the Board, a ‘Policyholder Protection, Grievance Redressal and Claims monitoring Committee’ is required to be formed, which is to be chaired by an independent director.

Other key requirements

A Board-approved remuneration policy for the chairperson, non-executive directors, and KMPs is required to be put in place by insurers. The Board is required to undertake all measures for the effective implementation of the policy and ensure that there is no conflict of interest.
A Board-approved stewardship policy is also mandated for insurers which shall identify and define the stewardship responsibilities that the insurer wishes to undertake and how the insurer plans to enhance the wealth of the policyholders. The principles required to be followed in the formulation of the policy have also been provided.
The chief compliance officer of an insurer is required to be appointed for a minimum tenure of 3 (three) years. The duties and responsibilities of the chief compliance officer have also been provided, which include, advising the Board and senior management on regulations, conducting compliance risk assessments, adherence to Anti Money Laundering/Counter Financing of Terrorism guidelines, and promptly reporting compliance failures. Further, the chief compliance officer should not have any reporting relationship with business verticals to ensure independence.
The Board is required to monitor the insurer’s ‘Environmental, Social and Governance (ESG)’ activities and review the framework annually. The Board shall also establish a comprehensive ‘Climate Risk Management’ framework to facilitate climate risk management, keeping in view the size, nature and complexity of operations of the insurer.
The maximum tenure for any audit firm appointed as an insurer’s statutory auditor has been reduced to 4 (four) years.

Concluding Remarks

The changes introduced by the IRDAI through the Regulations and the Master Circular make the corporate governance framework for insurers more robust in nature. A number of changes are aimed at ensuring the independence of the Board and the committees of the Board. The Regulations and the Master Circular are also aimed at putting in place measures for eliminating any conflict of interest and ensuring that the KMPs and the Board of an Indian insurer are focused on operating the company independently and without any direct or indirect influence. The IRDAI has historically been focused on protecting the interest of the policyholders through the various guidelines/regulations that it issues from time to time. The Regulations and the Master Circular are another attempt towards this end where one of the key objectives is the protection of policyholders’ interests through more independent and well-structured corporate governance mechanisms being adopted and implemented by insurers.