SESSION 2019-20

INSURANCE, BANKING & NEGOTIABLE

INSTRUMENT ASSIGNMENT

TOPIC-

STATUTORY GOVERNANCE IN INSURANCE SECTOR

SUBMITTED BY: SUBMITTED TO:

Aairah Zaidi Mr . Sukesh Mishra

B.A.LL.B (Hons) Faculty of Law

X Semester [Sec A; Roll no. 1]

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 ACKNOWLEDGEMENT

On the very outset of this project, I would like to extend my

sincere and heartfelt obligation towards all the personages
who have helped me in this endeavor.
I extend my gratitude to Mr. Sukesh Mishra for giving me
this opportunity and for his conscientious guidance and
encouragement to accomplish this assignment.
I also acknowledge with a deep sense of reverence, my
gratitude towards my parents and family members who has
always supported me morally as well as economically.

Aairah Zaidi

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 TABLE OF CONTENTS

1. CONCEPT OF INSURANCE ..................................................................... 4

2. GOVERNANCE IN INSURANCE SECTOR............................................... 5

3. INSURANCE REGULATORY AND DEVELOPMENT .......................... 6

AUTHORITY OF INDIA (IRDAI)

3.1 IRDAI MISSION

3.2 ENTITIES REGULATED BY IRDAI

3.3 ROLES AND FUNCTIONS

4. CORPORATE GOVERNANCE ................................................................ 8

4.1 CORPORATE GOVERNANCE GUIDELINES, 2016

4.1.1 GOVERNANCE STRUCTURE

4.1.2 DELEGATION OF FUNCTIONS-

COMMITTEES OF THE BOARD

4.1.3 KEY MANAGEMENT PERSONS

4.1.4 DISCLOSURE REQUIREMENTS

4.1.5 INTERACTION WITH THE REGULATOR

4.1.6 REPORTING TO THE IRDAI

4.1.7 WHISTLE BLOWER POLICY

5. THE WAY FORWARD- CONCLUSION ............................................... 26

6. BIBLIOGRAPHY ..................................................................................... 27

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 1. CONCEPT OF INSURANCE

The ever growing economic transactions and the advent of technology facilitating those
transactions have a number of factors involved which make it happen. This results in large
number of activities and investments which can involve risk as a major factor. It involves the
issue of risk management and how effectively that can be done, hence Insurance. The details
of any insurance policy can be complex; however it's relatively easy to  explain the concept
of insurance. 

The concept of insurance involves a transfer of risk from one party to another. It basically
is a legal agreement between two parties i.e. the insurance company known as the insurer and
the individual known as the insured. As per the agreement, the insurance company promises
to make good the losses of the insured on happening of the insured contingency. The
contingency is the event which causes a loss. The contingency can be the death of the
policyholder or damage/destruction of the property. It’s called a contingency because there’s
an uncertainty regarding the happening of that event. The insured person pays a premium in
return for the promise made by the insurer. It is a contract in which an individual or entity
receives financial protection or reimbursement against losses which are faced by it falling
into the described contingencies from an insurance company. The contract is represented by a
policy. The insurer i.e. the insurance companies pools their clients' risks to make payments
more affordable for the insured.

Insurance policies are used to hedge against the risk of financial losses, both big and small,
that may result from damage to the insured or her property, or from liability for damage or
injury caused to a third party1. The basic principle of insurance is that an entity will choose to
spend small periodic amounts of money against a possibility of a huge unexpected loss 2.
Basically, all the policyholders having different policies on varied terms pool their risks together.
The losses that they suffer are to be paid out of their premiums which they pay.

1
Insurance Definition, available at: https://www.investopedia.com/terms/i/insurance.asp (last visited on April 4,
2020).
2
Ibid.

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 2. GOVERNANCE IN INSURANCE SECTOR

Governance refers to all processes of governing, whether undertaken by a government,

market or network, whether over a family, tribe, formal or informal organization or territory
and whether through laws, norms, power or language3.

Moreover, corporate governance is the continuous process of maximizing shareholders equity

and ensuring fairness to all other stakeholders who may include employee,
supplier, distributer, customer, banker, Government, project affected people etc. Corporate
governance is a precondition for long-term success of an organization. This not only
encompass the for profit companies but also include benevolent institution like nonprofit
trust, educational institute like universities, administrative bodies of game or cultural activity

Corporate governance is of great important in the financial sector because various financial
companies act as intermediaries between investor and borrower. In that case, failure of these
companies to govern their business in a morally expected way would have long lasting
impact on economy forcing it to contract. In any economy the insurance sector plays an
important role as it helps in transferring of risk and mobilization of saving. It plays a role of
an intermediary for ensuring greater liquidity of the financial markets. Insurance sector in
India is regulated by IRDAI. It follows the corporate governance guidelines issued by IRDAI.
These guidelines were issued in 2009 however, in the light of amendments made in the
Companies Act, 2013, IRDAI has revised its guidelines in 2016 which shall be applicable to
insurance companies from 2016-17.

The guidelines have been revised by the Authority which broadly covers the Corporate
Governance practices, appointment of MD/ CEO and other Key Management Persons
(KMPs) and the appointment of statutory auditors of insurers. These guidelines also
contemplate to oversee the compliance position with reference to the adherence of corporate
governance guidelines.

Those Corporate Governance requirements of companies which were listed in the Stock
Exchanges were guided by the requisite compliance to Clause 49 of Listing Agreement of the
Stock Exchanges. Indian insurance companies are not listed in stock exchanges till date but

3
Governance in Insurance Sector, available at:
https://www.icsi.edu/media/webmodules/GOVERNANCEININSURANCESECTOR.pdf (last visited on April
5, 2020).

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 IRDAI advised insurers to familiarize themselves with Corporate Governance structures
already prevailing in the market which are general in nature and the requirements appropriate
for listed entities.

3. INSURANCE REGULATORY AND DEVELOPMENT

AUTHORITY OF INDIA (IRDAI)

Insurance Regulatory and Development Authority of India (IRDAI), is a statutory body

formed under an Act of Parliament, i.e., Insurance Regulatory and Development Authority
Act, 1999 (IRDAI Act 1999) for overall supervision and development of the Insurance sector
in India4.
The powers and functions of the Authority are laid down in the IRDAI Act, 1999 and
Insurance Act, 1938. The main objectives of the IRDAI include promotion of competition so
that there is enough consumer choice and fair premiums so as to enhance customer
satisfaction, while ensuring the financial security of the Insurance market.
The Insurance Act, 1938 is the principal Act governing the Insurance sector in India. It
provides the powers to IRDAI to frame regulations which lay down the regulatory framework
for supervision of the entities operating in the sector. Further, there are certain other Acts
which govern specific lines of Insurance business and functions such as Marine Insurance
Act, 1963 and Public Liability Insurance Act, 1991.

3.1 IRDAI MISSION5

 To protect the interest of and secure fair treatment to policyholders;
 To bring about speedy and orderly growth of the Insurance industry (including
annuity and superannuation payments), for the benefit of the common man, and to
provide long term funds for accelerating growth of the economy;
 To set, promote, monitor and enforce high standards of integrity, financial
soundness, fair dealing and competence of those it regulates;
 To ensure speedy settlement of genuine claims, to prevent Insurance frauds and
other malpractices and put in place effective grievance redressal machinery;

4
IRDAI, available at: https://financialservices.gov.in/insurance-divisions/Insurance-Regulatory-&-
Development-Authority (last visited on April 6, 2020).
5
Ibid.

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 To promote fairness, transparency and orderly conduct in financial markets dealing
with Insurance and build a reliable management information system to enforce high
standards of financial soundness amongst market players;
 To take action where such standards are inadequate or ineffectively enforced;
 To bring about optimum amount of self-regulation in day-to-day working of the
industry consistent with the requirements of prudential regulation.

3.2 ENTITIES REGULATED BY IRDAI

 Life Insurance Companies 
- Both public and private sector Companies
 General Insurance Companies 
- Both public and private sector Companies. Among them, there are some standalone
Health Insurance Companies which offer health Insurance policies.
 Re-Insurance Companies
 Agency Channel
 Intermediaries which include the following:
(i) Corporate Agents
(ii) Brokers
(iii) Third Party Administrators
(iv) Surveyors and Loss Assessors.

3.3 ROLES AND FUNCTIONS

The objective of supervision as stated in the preamble to the IRDAI Act is “to protect the
interests of holders of Insurance policies, to regulate, promote and ensure orderly growth of
the Insurance industry”, both Insurance and Reinsurance business.

Section 14 of the IRDAI Act, 1999 specifies the Duties, Powers and functions of the
Authority. These include the following6:
 To grant licenses to (re) Insurance companies and Insurance intermediaries
 To protect interests of policyholders,

6
Supra note 4.

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 To regulate investment of funds by Insurance companies, professional
organizations connected with the (re)Insurance business; maintenance of margin of
solvency;
 To call for information from, undertaking inspection of, conducting enquiries and
investigations of the entities connected with the Insurance business;
 To specify requisite qualifications, code of conduct and practical training for
intermediary or Insurance intermediaries, agents and surveyors and loss assessors
 To prescribe form and manner in which books of account shall be maintained and
statement of accounts shall be rendered by insurers and other Insurance intermediaries;

Reinsurer
General Insurance Corporation of India (GIC of India) is the sole National Reinsurer,
providing Reinsurance to the Insurance companies in India. The Corporation’s Reinsurance
programme has been designed to meet the objectives of optimising the retention within the
country, ensuring adequate coverage for exposure and developing adequate capacities within
the domestic market. It is also administering the Indian Motor Third Party Declined Risk
Insurance Pool – a multilateral Reinsurance arrangement in respect of specified commercial
vehicles where the policy issuing member insurers cede Insurance premium to the Declined
Risk pool based on the underwriting policy approved by IRDAI.

4. CORPORATE GOVERNANCE

In order to guard long- terms interests of policyholders, the IRDAI has outlined

appropriate governance practices applicable to Insurance companies for maintenance of
solvency, sound long-term investment policy and assumption of underwriting risks on a
prudential basis from time to time. The IRDAI has issued comprehensive guidelines for
adoption by Insurance companies on the governance responsibilities of the Board  within
the management of the Insurance functions. These guidelines are additionally to
provisions of the businesses Act, 1956, Insurance Act, 1938 and other applicable laws.
Corporate Governance Guidelines issued by IRDAI, requires insurers to possess in
situ requisite control functions. The oversight of the control functions is vested with the
Boards of the respective insurer. It lays down the structure, responsibilities and functions

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of Board of Directors and the senior management of the companies. Insurers are required
to adopt sound prudent principles and practices for the governance of the corporate and
will have the power to quickly address problems with non-compliance or weak oversight
controls.

The Guidelines mandated the insurers to constitute various committees viz., Audit
Committee, Investment Committee, Risk Management Committee, Policyholder
Protection Committee and Asset-Liability Management Committee. These committees
play a critical role in strengthening the control environment in the company.

4.1. CORPORATE GOVERNANCE GUIDELINES, 2016

The Insurance Regulatory and Development Authority of India (IRDAI) has outlined in
general terms, governance responsibilities of the Board in the management of the insurance
functions under various Regulations notified by it covering different operational areas. It has
now been decided to put them together and to issue the following comprehensive guidelines
for adoption by an Insurer.7

In the light of changes brought in by the Companies Act, 2013, the existing guidelines on
Corporate Governance practices of insurers are being revised as below. These revised
Guidelines shall replace the existing guidelines on Corporate Governance issued by the
Authority and shall take effect from FY 2016-17. These guidelines shall also
supercede the rules on Reporting of Key Persons dt. 9th October, 2013 and
conditions regarding appointment of Statutory Auditors issued vide Circulars
dt.25.07.2005 and 22.04.2009.

The objective of the guidelines is to ensure that the structure, responsibilities and
functions of Board of Directors and the management of the company recognize the
expectations of all stakeholders as well as those of the regulator. The structure should
take steps required to adopt sound and prudent principles and practices for the
governance of the corporate and will have the power to quickly address issues of non-

7
Corporate Governance Guidelines, 2016, available at:
https://www.irdai.gov.in/ADMINCMS/cms/LayoutPages_Print.aspx?page=PageNo2852 (last visited on April 6,
2020).

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compliance or weak oversight and controls. These guidelines therefore amplify on
certain issues which are covered in the Insurance Act, 1938 and the regulations framed
there under and include measures which are additionally considered essential by IRDAI
for adoption by insurers.

Significant Owners, Controlling Shareholders – Role of Board

Section 2 (7A) of the Insurance Act, 1938 has prescribed the ceiling of Foreign
Investment in Indian Insurance Companies at 49%, subject to the Indian  insurance
firm being Indian owned and controlled. The manner of computation of Foreign
Investment to satisfy this requirement is specified in the Rules and Regulations issued by
the Government and IRDAI.

Explanation to sub-clause (b) of clause 7A of Sec 2 of the Insurance Act, 1938, which
defines ‘Indian Insurance Company’ provides that the expression “control” shall include
the right to appoint a majority of directors or to regulate the management or policy
decisions including by virtue of their shareholding or management rights or shareholders
voting agreements. Therefore, it has to be demonstrated through express provisions in
the agreements between the promoters/ shareholders and/ or the Articles of Association
of the Insurance companies that the ownership as well as control does not lie with
foreign entities but ultimately rests with resident Indian citizens at all times.

The Insurance Act, 1938 stipulates prior approval of the IRDAI for registration/transfer
of shares, exceeding one per cent and /or which involve holding of share capital, after
such transfer, in excess of 5 per cent of the paid-up capital of the corporate. The Board
of Directors of the company shall ensure that the registration of shares is in compliance
with the above provisions of the Act, Regulations and circulars issued by IRDAI from
time to time.

4.1.1 GOVERNANCE STRUCTURE

Insurers in India are yet to go public and get their shares listed on the stock exchanges. The
composition of the Boards of the Public Sector Undertakings in the insurance sector is also
laid down by the Government of India. It is relevant to observe here that the Corporate

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Governance requirements of companies listed in the Stock Exchanges have evolved over time
and are outlined in SEBI (Listing Obligations and Disclosure Requirements) Regulations
2015.
Subject to the above, the insurance companies presently could have different structures with
the Board of Directors headed by a Executive or Non-executive Chairman with distinct
oversight responsibilities over the other Directors and Key Management Persons. It is
expected that whatever form is taken, the broader elements of good Corporate Governance
are present.

Groups and Conglomerates

The governance structure of the insurer could also be influenced by its association with an
insurance group or a larger financial/ non-financial conglomerate. Insurers who are a part of a
financial group could also be subject to the regulatory requirements on governance policies
and practices established for the group level and implemented uniformly across the group.
However, these practices should be reoriented at the level of the insurer taking into account
its specific business and risk profile and sectoral regulatory requirements. Such insurers
should nevertheless strive to maintain consistency in policies and practices in order to
reinforce controls across the group.

Board of Directors

Composition

The Insurance Act stipulates that the insurance companies in India would be public
companies and hence, would require a properly constituted Board.
Insurance companies should ensure that the Board comprises of competent and qualified
Directors to drive the strategies in a manner that would sustain growth and protect the
interests of the stakeholders in general and policyholders in particular.

The size of the Board in addition to being compliant with legal requirements (where
applicable), should be consistent with scale, nature and complexity of business.

The Board of Directors is required to have a minimum of three “Independent Directors”.

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However, this requirement is relaxed to ‘two’ independent directors, for the initial five years
from grant of Certificate of Registration to insurers. The optimum composition of
Independent and Non-Executive Directors enhances the quality of business judgment and
benefits the shareholders and policyholders. This is especially important in respect of
insurance companies under conglomerate structure and where there is potential scope for
transfer of risks and conflicts

An independent Director shall fulfill all the conditions specified under Section 149 of the
Companies Act, 2013. Similarly, where the Chairman of the Board is non-executive, the
Chief Executive Officer should be a whole time director of the Board. As required under
Section 149 of the Companies Act, 2013, there shall be at least one Woman Director on the
Board of every Insurance company.

The Role and responsibility of the Board

The Board would primarily concentrate on the direction, control and governance of the
insurer and in particular should articulate and commit to a corporate philosophy and
governance that will shape the level of risk adoption, standards of business conduct and
ethical behaviour of the company at the macro level. The Board should also set clear and
transparent policy framework for translation of the corporate objectives.

Fit and Proper Criteria

In line with the international and domestic norms, the Directors of insurers have to meet the
“fit and proper” criteria8. The criteria to be satisfied, at a minimum, would relate to integrity
demonstrated in personal behaviour and business conduct, soundness of judgment and
financial soundness. 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. Currently, the fit and proper
requirements seek to ensure that the Director should not have been convicted or come under
adverse notice of the laws and regulations involving moral turpitude or of any professional
body.

8
Guidelines 2016 with special reference to formation of committees, available at:
http://www.managejournal.com/download/646/4-2-31-256.pdf (last visited on April 8, 2020).

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Disclosures about Meetings of the Board and its Committees

Insurers shall ensure compliance with the provisions of the Companies Act, 2013 and the
Secretarial Standards issued by the ICSI from time to time as regards conduct of the meetings
of the Board of Directors and their committees. In addition to the above, all insurers shall
disclose the following in the Director’s Report:
(a) Number of meetings of the Board of Directors and Committees mandated under these
Guidelines, in the financial year
(b) Details of the composition of the Board of Directors and Committees mandated, setting
out name, qualification, field of specialization, status of directorship held etc.
(c) Number of meetings attended by the Directors and members of the Committee
(d) Details of the remuneration paid, if any, to all directors (including Independent Directors)

Control Functions

Given the risks that an insurer takes in carrying out its operations, and the potential impact it
has on its business, it is important that the Board lays down the policy framework to put in
place:
 robust and efficient mechanisms for the identification, assessment, quantification,
control, mitigation and monitoring of the risks;
 appropriate processes for ensuring compliance with the Board approved policy, and
applicable laws and regulations;
 appropriate internal controls to ensure that the risk management and compliance
policies are observed;
 an internal audit function capable of reviewing and assessing the adequacy and
effectiveness of, and the insurer’s adherence to its internal controls as well as
reporting on its strategies, policies and procedures; and
 Independence of the control functions, including the risk management function, from
business operations demonstrated by a credible reporting arrangement.

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4.1.2 DELEGATION OF FUNCTIONS- COMMITTEES OF THE BOARD

With a view to providing adequate Board time for discharge of the significant corporate
responsibilities, the Board can consider setting up of various Committees of Directors by
delegating the overall monitoring responsibilities after laying down the roles and
responsibilities of these Committees to the Board.
Insurers may establish several Committees to undertake specific functions depending on the
size and level of the complexity of the operations. Typically, the Committees that assist the
Board are Audit Committee, Risk Management Committee, Nomination and Remuneration
Committee, Investment Committee, Ethics Committee and Asset-Liability Management
Committee.

However, the Authority advises all insurers that it is mandatory to establish Committees for
Audit, Investment, Risk Management, Policyholder Protection, Nomination and
Remuneration, Corporate Social Responsibility (only for insurers earning profits).

In addition, Regulation 45d of the IRDA (Non-linked Insurance Products) Regulations, 2013
requires constitution of a ‘With Profits’ Committee by Life Insurance Companies comprising
of one Independent Director of the Board, the Chief Executive Officer, the Appointed
Actuary of the Company and an Independent Actuary. Establishment of the other Committees
is left to the option of the insurer. The role and responsibilities of the Committees would
generally be as detailed below:-

1. Audit Committee (Mandatory)

 Every Insurer shall constitute an Audit Committee as per Section 177 of the
Companies Act, 2013.
 The Audit Committee shall oversee the financial statements, financial reporting,
statement of cash flow and disclosure processes both on an annual and quarterly basis.
It shall set-up procedures and processes to address all concerns relating to adequacy
of checks and control mechanisms.
 The Chairperson of the Audit Committee should be an Independent Director of the
Board with an accounting/finance/audit experience and may be a Chartered
Accountant or a person with a strong financial analysis background. The association
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 of the CEO in the Audit Committee should be limited to occasions where the Audit
Committee requires eliciting any specific information concerning audit findings. As
required under Section 177 of the Companies Act, 2013, the Audit Committee shall
comprise of a minimum of three directors, majority of whom shall be Independent
Directors.
 The Audit Committee will oversee the efficient functioning of the internal audit
department and review its reports. The Committee will additionally monitor the
progress made in rectification of irregularities and changes in processes wherever
deficiencies have come to notice.
 The Audit Committee shall be directly responsible for the recommendation of the
appointment, remuneration, performance and oversight of the work of the auditors
(internal/statutory/Concurrent). In case of statutory audit, the independence of the
external auditors shall be ensured (although the approval of appointment,
remuneration and removal of the statutory auditors shall be done by the shareholders
at the general body meeting).

2. Investment Committee (Mandatory)

 The Board of every Insurer shall set up an Investment Committee comprising of at

least two Non-Executive Directors, the Chief Executive Officer, Chief of Finance,
Chief of Investment, Chief Risk Officer and, the Appointed Actuary.
 The Committee shall be responsible to recommend investment policy and lay down
the operational framework for the investment operations of the insurer. The policy
should focus on a prudential Asset Liability Management (ALM) supported by robust
internal control systems. The investment policy and operational framework should,
inter alia, encompass aspects concerning liquidity for smooth operations, compliance
with prudential regulatory norms on investments, risk management / mitigation
strategies to ensure commensurate yield on investments and above all protection of
policyholders’ funds.
 The Investment Committee shall be responsible for implementing the Investment
Policy duly approved by the Board.

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  For assessment of credit risk and market risk, the members of the Committee should
not be influenced only by the credit rating. The committee should independently
review their investment decisions.

3. Risk Management Committee (Mandatory)

It is now well recognized that the sound management of an insurance company, as in the case
of other financial sector entities, is dependent on how well the various risks are managed
across the organization. In pursuit of development of a strong risk management system and
mitigation strategies, insurers shall set up a separate Risk Management Committee to
implement the company’s Risk Management Strategy. The risk management function should
be under the overall guidance and supervision of the Chief Risk Officer (CRO) with a clearly
defined role. Broadly, the Risk Management Committee shall:
 Establish effective Risk Management framework and recommend to the Board the
Risk Management policy and processes for the organization.
 Set the risk tolerance limits and assess the cost and benefits associated with risk
exposure.
 Review the Company’s risk- -reward performance to align with overall policy
objectives.
 Discuss and consider best practices in risk management in the market and advise the
respective functions;
 Assist the Board in effective operation of the risk management system by performing
specialized analyses and quality reviews;
 Maintain an aggregated view on the risk profile of the Company for all categories of
risk including insurance risk, market risk, credit risk, liquidity risk, operational risk,
compliance risk, legal risk, reputation risk, etc.
 Advise the Board with regard to risk management decisions in relation to strategic
and operational matters such as corporate strategy, mergers and acquisitions and
related matters.
 Report to the Board, details on the risk exposures and the actions taken to manage the
exposures; review, monitor and challenge where necessary, risks undertaken by the
Company
 Review the solvency position of the Company on a regular basis.

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  Monitor and review regular updates on business continuity.
 Formulation of a Fraud monitoring policy and framework for approval by the Board.
 Monitor implementation of Anti-fraud policy for effective deterrence, prevention,
detection and mitigation of frauds.
 Review compliance with the guidelines on Insurance Fraud Monitoring Framework
dt. 21st January, 2013, issued by the Authority.

4. Policyholder Protection Committee (Mandatory)

The Authority is mandated by statute to protect poliycholders’ interests and therefore

adoption of sound and healthy market practices in terms of sales, marketing, advertisements,
promotion, publicity, redressal of customer grievances, consumer awareness and education is
essential. The Authority has, therefore, notified the following
Regulations/Guidelines/Circulars:-
i) Protection of Policyholders’ Interests Regulations, 2002;
ii) Insurance Advertisements and Disclosure Regulations, 2002;
iii) Master Circular on Insurance Advertisements in August, 2015
iv) Guidelines on Public Disclosure for insurance companies
v) Guidelines on Advertisements, Promotion & Publicity of Insurance Companies and
Insurance Intermediaries in May 2007.
vi) Various Circulars on Handling and Disclosure of the Unclaimed Amounts pertaining to
the Policyholders
vii) Guidelines on Grievance Redressal by Insurance Companies in July 2010 and Handling
of Complaints/Grievances from Policyholders in April 2015
viii) Guidelines on Electronic Mode of Payments for Claims Indian Insurance companies are
also required to report on the number and nature of complaints to the IRDAI at monthly
intervals to enable IRDAI to assess the governance and market conduct issues with respect to
each insurance company.
With a view to addressing the various compliance issues relating to protection of the interests
of policyholders, as also relating to keeping the policyholders well informed of and educated
about insurance products and complaint-handling procedures, each insurer shall set up a
Policyholder Protection Committee. Such Committee shall be headed by a Non-Executive

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Director and shall include an expert/representative of customers as an invitee to enable
insurers to formulate policies and assess compliance thereof. The Committee shall
recommend a policy on customer education for approval of the Board and ensure proper
implementation of the same. The Committee should put in place systems to ensure that
policyholders have access to redressal mechanisms and shall establish policies and
procedures, for the creation of a dedicated unit to deal with customer complaints and resolve
disputes expeditiously9. The functions and responsibilities of the Policyholders’ Protection
Committee shall include:-
 Adopt standard operating procedures to treat the customer fairly including time-
frames for policy and claims servicing parameters and monitoring implementation
thereof.
 Establish effective mechanism to address complaints and grievances of policyholders
including mis-selling by intermediaries.
 Put in place a framework for review of awards given by Insurance
Ombudsman/Consumer Forums. Analyze the root cause of customer complaints,
identify market conduct issues and advise the management appropriately about
rectifying systemic issues, if any.
 Review all the awards given by Insurance Ombudsman/Consumer Forums remaining
unimplemented for more than three (3) months with reasons therefor and report the
same to the Board for initiating remedial action, where necessary.
 Review the measures and take steps to reduce customer complaints at periodic
intervals.
 Ensure compliance with the statutory requirements as laid down in the regulatory
framework.
 Ensure adequacy of disclosure of “material information” to the policyholders. These
disclosures shall comply with the requirements laid down by the Authority both at the
point of sale and at periodic intervals.
 Provide details of grievances at periodic intervals in such formats as may be
prescribed by the Authority.
 Ensure that details of insurance ombudsmen are provided to the policyholders.
 Review of Claims Report, including status of Outstanding Claims with ageing of
outstanding claims.
9
Corporate Governance Guidelines 2016, available at: https://www.mondaq.com/india/insurance-laws-and-
products/501138/corporate-governance-guidelines-for-insurers-updated (last visited on April 10, 2020).

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  Reviewing Repudiated claims with analysis of reasons.
 Status of settlement of other customer benefit payouts like Surrenders, Loan, Partial
withdrawal requests etc.
 Review of unclaimed amounts of Policyholders, as required under the Circulars and
guideline issued by the Authority. The Board shall review the status report on
policyholders’ protection issues, submitted by the Committee, in each of its meeting.

5. Nomination and Remuneration Committee (Mandatory)

The Nomination and Remuneration Committee shall be constituted in line with the provisions
of Section 178 of the Companies Act, 2013. Indian Insurance Companies which have
constituted two independent committees for Nomination and Remuneration separately may
merge these two Committees after seeking the Board approval, under intimation to the
Authority, within a period of 180 days from the date of issue of these guidelines.
The Nomination and Remuneration Committee shall scrutinize the declarations of intending
applicants before the appointment/reappointment/election of directors by the shareholders at
the General Meetings. The Committee shall also scrutinize the applications and details
submitted by the aspirants for appointment as the Key Management Persons. The Nomination
and Remuneration Committee could also make independent/discreet references, where
necessary, well in time to verify the accuracy of the information furnished by the applicant.
The Nomination and Remuneration Committee is required to determine on behalf of the
Board and on behalf of the shareholders with agreed terms of reference, the insurance
company’s policy on remuneration packages and any compensation payment, for the CEO,
the Executive Directors, Key management Persons of the company.
In order to avoid conflict of interest, the Nomination and Remuneration Committee, may
comprise of at least three non-executive directors, with the Chairman of the Committee being
an independent director. At least one-half of the Committee shall comprise of Independent
Directors.

6. Corporate Social Responsibility Committee (‘CSR Committee’) (Mandatory)

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Section 135 of the Companies Act, 2013 requires constitution of a CSR Committee if certain
conditions as mentioned in the said Section are fulfilled. For Indian Insurance Companies, a
CSR Committee is required to be set up if the insurance company earns a Net Profit of Rs. 5
Crores or more during the preceding financial year. Further the ‘Net Profit’ for this purpose
shall be as under:-
“Net profit” means the “profit/(loss) before tax” as per its financial statements prepared in
accordance with the applicable provisions of the Insurance Act, 1938 and the Regulations
framed thereunder, but shall not include the following, namely
(i) Any profit arising from any overseas branch or branches of the company, whether
operated as a separate company or otherwise; and
(ii) any dividend received from other companies in India, which are covered under and
complying with the provisions of section 135 of the Companies Act.

Provided that net profit in respect of a financial year for which the relevant financial
statements were prepared in accordance with the provisions of the Insurance Act, 1938, shall
not be required to be re-calculated in accordance with the provisions of the Companies Act.

In line with Section 135(5) of Companies Act, 2013, the Board of Directors of the Company
shall ensure that the Company spends not less than 2% of the three years’ average Net Profits
as defined above towards the CSR activities.
(a) CSR will be based only on the average of the three years’ profit as per the Statement of
Profit and Loss Account as stated above.
(b) The CSR Committee shall formulate a CSR policy and get it approved by the Board.
Constitution of CSR Committee will be as per Companies Act, 2013.
(c) The expense incurred on CSR shall not be included for the purpose of calculation of
ceilings on Expenses of Management under Section 40B or Section 40C, as the case may be.
(d) The expenses incurred on CSR activities should not be charged to the Policyholders’
Account.

7. With Profits Committee

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The Authority has issued IRDA (Non-Linked Insurance Products) Regulations 2013, which
lay down the framework about the With Profit Fund Management and Asset sharing, among
other things. In terms of these Regulations, every Insurer transacting life insurance business
shall constitute a With Profits Committee comprising of an Independent Director, the CEO,
The Appointed Actuary and an independent Actuary. The Committee shall meet as often as is
required to transact the business and carry out the functions of determining the following:
 the share of assets attributable to the policyholders
 the investment income attributable to the participating fund of policyholders
 the expenses allocated to the policyholders

8. Ethics Committee

Functions and Responsibilities of the Ethics Committee shall include:

 Monitoring the compliance function and the insurance company’s risk profile in
respect of compliance with external laws and regulations and internal policies,
including its code of ethics or conduct.
 Receiving reports on the above and on proactive compliance activities aimed at
increasing the insurance company’s ability to meet its legal and ethical obligations,
on identified weaknesses, lapses, breaches or violations and the controls and other
measures in place to help detect and address the same.
 Supervising and monitoring matters reported using the insurer’s whistle blowing or
other confidential mechanisms for employees and others to report ethical and
compliance concerns or potential breaches or violations.
9. Asset Liability Management (ALM) Committee

ALM is an ongoing process of formulating, implementing, monitoring and revising strategies

related to assets and liabilities to achieve an organization’s financial objectives, given the
organization’s risk appetite, risk tolerances and business profile. The need for ALM cannot
be over-emphasized as it lays down the framework to ensure that the insurer invests in a
manner which would enable it to meet its cash flow needs and capital requirements at a future
date to mitigate liquidity risk and solvency stipulations.
Where an insurer does not constitute the Asset Liability Management (ALM) Committee, the
functions of ALM shall form part of the Risk Management Committee.

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4.1.3 KEY MANAGEMENT PERSONS

CEO/ Managing Director/ Whole-Time Director

The Chief Executive Officer/Whole Time Director/ Managing Director of the company and
other key functionaries are responsible for the operations and day to day management of the
company in line with the directions of the Board and the Committees set up by the Board.
Section 34A of the Insurance Act, 1938 requires prior approval of the Authority for
appointment, re-appointment or termination of the Chief Executive Officer and the Whole
Time Directors. The Authority expects the CEO to be responsible for the conduct of the
company’s affairs in a manner which is not detrimental to the interests of the policyholders
and which is consistent with the policies and directions of the Board. The Board should,
therefore, carry out effective due diligence to establish that the new incumbent is ‘fit and
proper’ before recommending the name for Authority’s approval.

Role of Appointed Actuaries

IRDAI has brought out detailed Regulations on Appointed Actuary vide IRDA (Appointed
Actuary) Regulations, 2000, detailing the procedure for his appointment, qualifications,
powers along with his duties and obligations. The Regulations also stipulate that prior
approval of the Authority shall be taken for the appointment of the Appointed Actuary. The
Board should ensure that the requirements are scrupulously complied with. In brief, it is
reiterated that:
 A procedure for appointment of Appointed Actuary should be put in place.
 The Appointed Actuary should qualify and satisfy the ‘Fit & Proper’ criteria and other
eligibility conditions as mentioned in IRDA (Appointed Actuary) Regulations, 2000,
as amended from time to time.
 The insurance companies shall clearly set forth the Appointed Actuary’s
responsibilities and any advisory role vis-à-vis the Board or the management as well
as his/her rights and obligations. These shall be in addition to the duties of the

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 Appointed Actuaries as specified in the IRDA Regulations and any other directions of
IRDA in the matter.
 As soon as the Appointed Actuary realizes that the entity does not comply or is likely
to fail in complying with the requirements of solvency and other parameters of sound
operations, he/she shall inform the Board of the insurer. If no viable/acceptable action
is taken by the Board, then he/she has to inform the same to IRDAI.

4.1.4 DISCLOSURE REQUIREMENTS

The IRDAI (Preparation of Financial Statements and Auditors’ Report of Insurance

Companies) Regulations, 2002, have prescribed certain disclosures in the financial statements
and the Authority is in the process of finalizing additional disclosures to be made by insurers
at periodical intervals. In the meantime, it may be ensured by the Board that the information
on the following, including the basis, methods and assumptions on which the information is
prepared and the impact of any changes therein are also disclosed in the annual accounts:-
 Quantitative and qualitative information on the insurance company’s financial and
operating ratios, viz. incurred claim, commission and expenses ratios
 Actual solvency margin details vis-à-vis the required margin
 Insurers engaged in life insurance business shall disclose persistency ratio of policies
sold by them
 Financial performance including growth rate and current financial position of the
insurance company
 Description of the risk management architecture
 Details of number of claims intimated, disposed off and pending with details of
duration
 All pecuniary relationships or transactions of the Non-Executive Directors vis-à-vis
the insurance company shall be disclosed in the Annual Report
 Elements of remuneration package(including incentives) of MD & CEO and all other
directors and Key Management Persons
 Payments made to group entities from the Policyholders Funds
 Any other matters, which have material impact on the insurer’s financial position.

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Where finalization of annual accounts extends beyond 90 days from the end of the Financial
Year, the status on disclosure in the financial statements required under this clause may be
made within 15 days of adoption of annual accounts by the Board of Directors of the
Insurers.

4.1.5 INTERACTION WITH THE REGULATOR

Effective corporate governance practices in the office of the insurance company will enable
IRDAI to have greater confidence in the work and judgment of its board, Key Management
Persons and control functions.

In assessing the governance practices in place, the IRDAI would:

• Seek confirmation that the insurance company has adopted and effectively implemented
sound corporate governance policies and practices;
• Assess the fitness and propriety of board members;
• Monitor the performance of boards;
• Assess the quality of insurance company’s internal reporting, risk management, audit and
control functions;
• Evaluate the effects of the insurance company’s group structure on the governance
strategies;
• Assess the adequacy of governance processes in the area of crisis management and business
continuity.
The IRDAI would bring to the attention of the Board and senior management, concerns
which have been detected by it through supervisory activities.

4.1.6 REPORTING TO IRDAI

Insurers should examine to what extent they are currently complying with these guidelines
and initiate immediate action to achieve compliance (where not already in compliance) within
a period of three months from the date of notification of these guidelines. It is expected that
all the arrangements should be in place to ensure full compliance with the guidelines from the

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financial year 2016-2017. Where such compliance is not possible for any specific reason, the
insurance companies should write to the IRDAI for further guidance.

Each insurer should designate Company Secretary as the Compliance officer whose duty will
be to monitor continuing compliance with these guidelines.
Annual Report of insurers shall have a separate certification from the Compliance Officer.

All insurers are required to file a report on status of compliance with the Corporate
Governance guidelines on an annual basis. This report shall be filed within 3 months from the
end of the financial year, i.e., before 30 June.

4.1.7 WHISTLE BLOWER POLICY

Insurers are well advised to put in place a “whistle blower” policy, where-by mechanisms
exist for employees to raise concerns internally about possible irregularities, governance
weaknesses, financial reporting issues or other such matters10. These could include employee
reporting in confidence directly to the Chairman of the Board or of a Committee of the Board
or to the Statutory Auditor.
The Policy illustratively covers the following aspects:
 Awareness of the employees that such channels are available, how to use them and
how their report will be handled.
 Handling of the reports received confidentially, for independent assessment,
investigation and where necessary for taking appropriate follow-up actions.
 A robust anti-retaliation policy to protect employees who make reports in good faith.
 Briefing of the board of directors.

10
Supra note 8.

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 5. THE WAY FORWARD: CONCLUSION

Corporate Governance norms although being in place could not find their destination over a
very long time in our corporate sector. The financial sector merely being a sub sect struggled
with its deficiency as well. However, the infamous Satyam scam brought focus to multiple
flaws in the existing corporate governance practices. These included unethical conduct,
fraudulent accounting, dubious role of auditors, ineffective board, and failure of independent
directors and non-disclosure of pledged shares.

As a result of which, the Ministry of Corporate Affairs introduced a warning system against
these practices and also introduced a system of checks and balances by bringing changes in
the then existing Companies Act in 2013 and a new revised act came into place. On similar
lines, the IRDAI introduced revised Corporate Governance guidelines for the insurance sector
as well in 2016. The idea is fascinating since these guidelines includes proper appointment
procedure for key managerial persons, constitution and composition of the board of directors,
their duties and the disclosure requirements they have to adhere to.

However, what lacks is the implementation of these procedures since there is an old tendency
which needs to go. The public and private players in the insurance sector still adhere to their
conventional practices and thus this can be seen well in theory and lacks practical application.
Besides, the procedures themselves leave multiple loopholes to be played with. At last, we
seem to be moving forward but with an actual accountability and measures can these changes
be well implemented.

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 6. BIBLIOGRAPHY

Statutes:

1. The Companies Act, 2013

2. IRDAI Corporate Governance Guidelines, 2016.

Books and Journals:

1. K.S.N Murthy and K.V.S. Sarma: Modern Law of Insurance in India,

LexisNexis India, Gurgaon.

2. Sachin Rastogi: Insurance Law and Principles, LexisNexis India, Gurgaon.

Others:

 https://www.investopedia.com/terms/i/insurance.asp

 https://www.icsi.edu/media/webmodules/GOVERNANCEININSURANCESECTOR.pdf

 https://financialservices.gov.in/insurance-divisions/Insurance-Regulatory-&-Development-

Authority

 https://www.irdai.gov.in/ADMINCMS/cms/LayoutPages_Print.aspx?page=PageNo2852

 http://www.managejournal.com/download/646/4-2-31-256.pdf

 https://www.mondaq.com/india/insurance-laws-and-products/501138/corporate-governance-

guidelines-for-insurers-updated

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