Corporate Governance of Insurance Companies in India

Introduction:

• The general corporate structures of the corporations allow the managers to conduct the firm under the leadership of the board members, who are accountable to the company’s shareholders. Managers are in charge of day-to-day operations, whereas the board will review managers’ performance regularly in light of agreed-upon goals and policy standards.
• The shareholders have the right to choose directors, ensuring that the most powerful directors are likewise accountable to the shareholders. In the Indian context, however, a typical organizational structure is frequently found when the significant shareholder also serves as a board member and manager.
• A business operates on the principle of perpetual succession to satisfy all stakeholders. Customers, suppliers, employees, managers, shareholders, and the government are examples of such stakeholders. Every party or stakeholder has one thing in common: they all have a financial interest in a corporation.
• To achieve their economic interests, all stakeholders enter into any or all types of contractual or economic relations with a corporation as authorized by law. This economic interest may be pursued properly or illegally, and it may also be pursued in a biased manner, so undermining the rightful benefit of other deserving stakeholders.[1]

Corporate Governance

Corporate governance is the process of prohibiting the fulfillment of economic interests in an illegal, immoral, or prejudiced manner in favor of any single stakeholder.

• Ethical satisfaction of various economic interests is guided by either set rules that encompass broad acts (Example: income tax act concerning government), company culture and practice (Example: rewarding effective employees), or specific contracts (Example: purchase agreement concerning customer) in the first part, together with the existence of a supervisory body confirming the company’s action is in line with the Act, culture, or contract in the second part, and transparency provision in the third part.
• Corporate governance is the ongoing process of maximizing shareholder equity while maintaining justice to all other stakeholders such as employees, suppliers, distributors, customers, bankers, governments, project-affected individuals, and so on. Corporate governance is a prerequisite for an organization’s long-term success. This includes not just for-profit businesses, but also charitable institutions such as non-profit trusts, educational institutions such as universities, and administrative organizations for sports or cultural activities.
• Corporate governance is increasingly crucial in the financial industry since financial firms operate as middlemen between investors and borrowers. Failure of these corporations to conduct their businesses in a morally expected manner would have long-term consequences for the economy, causing it to decline. The insurance industry is a subset of the financial industry. The Insurance Regulatory and Development Authority of India (IRDAI) regulates the insurance industry in India (Insurance Regulatory and Development Authority of India).

Insurance offers a crucial shield against unforeseeable negative future events. The insurance industry employs the notion of risk pooling and the likelihood of occurrence of a loss event. Insurance is a legally binding arrangement between an insurer and an insured in which a portion or all of the risk is transferred from the policyholder to an insurance provider in exchange for a premium paid by the policyholder.

• The IRDAI’s corporate governance guidelines govern corporate governance in the insurance business. On May 18, 2016, the IRDAI announced comprehensive Corporate Governance Guidelines, which would apply to insurance businesses beginning in the fiscal year 2016-17.
• The updated standards extensively encompass Corporate Governance processes, the selection of MD/CEO and other Key Management Personnel (KMPs), and the nomination of insurers’ statutory auditors. The standards also propose overseeing the compliance situation in terms of corporate governance principles adherence.

The necessary compliance with Clause 49 of the Stock Exchanges’ Listing Agreements drove the Corporate Governance norms of enterprises listed on the Stock Exchanges. Although Indian insurance companies are not yet listed on stock exchanges, the IRDAI has advised insurers to familiarize themselves with the Corporate Governance standards and rules that apply to listed corporations.

The IRDAI guidelines place the burden for good governance squarely on the board of directors of insurance companies, while the IRDA will also supervise the compliance with the criteria in this respect. These recommendations supplement the applicable sections of the Companies Act of 2013, as well as any other laws or regulations enacted thereunder. Where the requirements of these guidelines conflict with other regulations or guidelines established by legislation, the tougher guideline shall take precedence.[2]

THE Standards Govern VARIOUS Conditions, COVERING THE Key STRUCTURAL ELEMENTS BELOW:[3]

• Overall Governance structure
• Constitution of Board of Directors
• Broad tasks of BOD.
• Control Functions to be exercised by the board
• Formation of the different mandatory committees and their function
• Disclosures requirement
• Outsourcing policy guideline
• Relationship with stakeholders
• Reporting to IRDAI for compliance
• Whistleblowing policy
• Evaluation of Board of Directors including Independent Directors

Overall Governance Structure

In general, this guideline defines the required structure of an insurance company’s board of directors, as well as the method in which they would exert oversight through the appointment of an actuary, auditor, compensation committee, and policyholder protection committee. They will have to have a whistleblowing strategy that appropriately protects the whistle-blower, whereas the board or IRDA might know of internal wrongdoing. The insurer must submit a report to IRDAI demonstrating compliance with the guidelines.

Constitution of Board of Directors

Insurance companies/corporations must have at least three independent directors on their boards of directors. However, in the early years of an insurance company, this condition is eased. They can have two independent directors on their board if they haven’t been in business for five years since receiving their Certificate of Registration.

• Any independent director must meet the requirements outlined in Section 149 of the Companies Act of 2013. The independent director will be given an appointment letter outlining the terms and circumstances, duties and obligations, sitting fees, and so on. If the number of independent directors falls below the statutory minimum, such vacancy must be filled by the next Board meeting or within three months of the date of such vacancy, whichever is later, with notification to the Authority.
• If the Chairman of the Board is a non-executive director, the Chief Executive Officer should be a full-time Board director. According to Section 149 of the Companies Act of 2013, every insurer must have at least one female director on the Board. The Board will establish ethical guidelines that will assist the employee in efficiently resolving the disagreement. At the macro level, the board must commit to a corporate philosophy and governance that includes a degree of risk adoption that is correctly linked to its investment policy and strategy to mitigate any additional risk.
• The board will be held accountable for the actions of the insurance firm, even if the board can transfer responsibility to several committees or executives. The board’s composition should be geared toward meeting the varying expectations of various stakeholders. The board must evaluate company policies regularly to ensure that they address new demands and are sufficiently changed to become appropriate with time.

The Insurance Act forbids an insurance intermediary/agent from serving as a director of the insurance business (unless with the IRDAI’s prior consent). A financial intermediary sells policies to policyholders, and as such, if brought on board, he may be unable to take an impartial view due to his relationship with selling policies and so receiving commission.[4]

Disclosures Requirement by the Board

The insurance firm must maintain appropriate processes and guidelines for the conduct of board meetings and committees. In this respect, the ICSI Secretarial Standards as released from time to time, as well as the applicable laws of the Companies Act, 2013, must be followed.

Broad Tasks of BOD

The Board, in cooperation with the Key Management Personnel, should develop and implement plans and policies to address the broad range of issues listed below.

• Financial projections on the capital requirements, estimated revenue, expenses, and projected profitability intend to meet the expectations of policyholders and shareholders.
• Full compliance with the Insurance Act and adherence to secondary legislation.
• Broader policy for resolving conflicts of interest between stakeholders.
• Fair treatment of policyholders and employees.
• Establishing adequate business disclosures procedures.
• Establishing a channel enabling whistle-blowers to raise their voices. Adequate protection to whistle-blowers.
• Developing a corporate culture that rewards ethical behavior.

Control Functions to be exercised by the Board

The board should also put in place the following control mechanism,

• Appropriate and severe processes for quantifying agreed-upon risk levels, identifying current risk levels, identifying more investment opportunities, or strategies to manage additional risks.
• Because the board is responsible for the compliance, systems must be in place to ensure not just compliance with relevant laws and regulations, but also adherence to board-approved policies.
• Establishment of an internal audit unit to examine and analyze the efficacy of policies and guarantee the company’s adherence to internal control mechanisms as well as its disclosures to stakeholders on plans, policies, or procedures.
• The creation of a long-term organizational structure must guarantee that the control function stays separate from business operations.

Formation of the different Mandatory Committees and their Function

• To preserve enough board time, the board may assign key corporate duties to several committees of directors after establishing the overarching aim, role, and responsibilities. The board of directors may establish such committees to properly supervise the firm as a whole.
• IRDAI urges all insurers to create mandatory Policyholder Protection, Risk Management, Investment, Audit, Nomination and Remuneration, and Corporate Social Responsibility Committees (only for-profit earning insurers).
• However, while not required, the board may organize other committees such as the Asset-Liability Management Committee, the Ethics Committee, and so on.

Audit Committee (Obligatory)

• According to Section 177 of the Companies Act of 2013, every insurance company/corporation is required to have an Audit Committee.
• The Audit Committee’s role is to monitor the accounting procedures used to prepare financial statements, cash flow statements, and disclosure on an annual and quarterly basis. The audit committee will also monitor the insurance company’s adherence to financial reporting rules and oversee the distribution of accurate facts and statistics. The audit committee may also establish necessary procedures and processes to implement necessary checks and control measures.
• The Audit Committee will be chaired by an independent director of the Board. She or he should have accounting/finance/audit experience and a good financial analytical background.

Investment Committee (Obligatory)

• The Board of Directors of the Insurance Corporation shall establish an Investment Committee. The committee should include the Chief Executive Officer, Chief Risk Officer, Chief Investment Officer, the insurer’s actuary, and at least two non-executive directors.
• This Committee will be in charge of recommending investment policies and developing the operational framework for the insurance company’s investment activities.
• The policy should be centered on Asset Liability Management (ALM), and it should be backed up by strict internal control measures. The investment policy and operational framework must include liquidity features as needed for smooth operations, compliance with prudential regulatory requirements applicable to investments, a risk management role to assure matching yield on investments, and funds protection for policyholders.

Risk Management Committee (Obligatory)

• Insurance is considered a dangerous industry because it accepts and distributes risk. The success of an insurance firm is entirely contingent on how successfully the various risks are managed within the organization.
• Insurers must organize a monitoring mechanism to define and monitor the company’s risk management process to create an effective risk management framework.
• The risk management function will be guided and supervised by the Chief Risk Officer (CRO). The risk management committee’s many duties must be arranged in such a manner that it can monitor all risks across all lines of business of the organization, and the Chief Risk Officer must have direct access to the Board.
• Rather than focusing just on compliance, this risk management committee will concentrate on bringing value to the organization. This position should collaborate closely with the financial department while maintaining the independence and objectivity necessary to examine and evaluate capital, finance, and other operational choices.

Policyholder Protection Committee (Obligatory)[5]

The mission of IRDAI is to defend the interests of policyholders as required by law. As a result, the IRDAI, via the proclamation of different secondary legislation, requires the adoption of healthy market practices in terms of sales, marketing, ads, promotion, publicity, redressal of customer concerns, consumer awareness, and education. The following is a list of pertinent Regulations/Guidelines/Circulars:

• Regulations for Protection of Policyholders’ Interests, 2002
• Insurance Advertisements and Disclosure Regulations, 2002
• Guidelines on Advertisements, Promotion & Publicity of Insurance Companies and Insurance Intermediaries in May 2007.
• Guidelines on Grievance Redressal by Insurance Companies in July 2010 and Handling of Complaints/Grievances of Policyholders, April 2015
• Master Circular in the matter of Insurance Advertisements’ August 2015
• Guidelines on Public Disclosure for insurance companies
• Different Circulars on Handling and Disclosure of the Unclaimed Amounts of the policyholder.
• Guidelines on Electronic Mode/online mode of Payments for Claims

Nomination and Remuneration Committee (Obligatory)

• The IRDAI requires that the Nomination and Remuneration Committee be formed following the provisions of Section 178 of the Companies Act, 2013. Some insurance companies that have two independent committees, one for nominations and one for remuneration, may consolidate these two committees with Board agreement and notification to IRDAI. The two firms must be amalgamated within 180 days following the publication of these corporate governance principles on May 18, 2016.
• The Nomination and Remuneration Committee is responsible for reviewing declarations of intended candidates before their reappointment/appointment/election as directors by shareholders at General Meetings. In addition, the Committee will review the applications of candidates for appointment as Key Management Personnel.
• In the remuneration section, the Committee is required to determine remuneration or compensation packages for the CEO, Executive Directors, Key Management Personnel of the company following the insurance company’s remuneration policy or other relevant documents as deemed fit on behalf of the Board or shareholders.

Corporate Social Responsibility Committee (Obligatory)

• Section 135 of the Companies Act of 2013 mandates the formation of a CSR Committee subject to the fulfillment of certain requirements outlined in the preceding section. Similarly, if an insurance firm achieves a net profit of Rs. 5 crores or more during the previous fiscal year, it must establish a CSR Committee.
• Furthermore, the ‘Net Profit’ should be as reflected in the Indian insurance company’s financial statement filed in compliance with the Insurance Act of 1938. Any profit from a foreign branch or dividend from another Indian firm that is already in compliance with Section 135 of the Companies Act is not included in net income. The net income is not needed to be recalculated following the rules of the Companies Act.

Disclosure Requirements

Certain disclosures must be displayed on the face of financial statements, according to the IRDAI (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations, 2002. The authority is also contemplating including new disclosure obligations for insurers to make at regular periods.

Before completing such new disclosures, the Board is expected to verify that the following information is provided following the appropriate standards/formats, to the degree available, and that the effect of any changes therein is likewise reported in the annual accounts:-[6]

• Qualitative and quantitative information on the insurance company’s financial and operating ratios, such as commission and expenditure ratios, incurred claims, and so on.
• The required solvency margin concerning the insurance company’s actual solvency status.
• Insurers in the life insurance market should publish the persistency ratio of the plans they issue.
• The insurance company’s financial situation, including its growth rate and present financial performance
• Commentary on the internal risk management organization.
• Details of claims made claims settled, and outstanding claims, as well as the period to which the data relates.
• Non-Executive Directors’ financial ties or transactions with the insurance firm must be reported in the Annual Accounts.
• In terms of elements The salary plan (including incentives or ESOP) of the MD and CEO, as well as all other directors and Key Management Personnel, must be disclosed.
• Payments/Advances made from the Policyholders Funds to any of the group firms.
• Any other relevant information affecting the insurer’s financial status.[7]

Outsourcing Policy Guideline

• All outsourcing agreements must adhere to the Board-approved outsourcing policy, and all outsourcing arrangements must be authorized by the Committee of Key Management Personnel.
• The Board or the Risk Management Committee must be kept informed regularly regarding the various outsourcing arrangements engaged by the insurance business, as well as confirmation of compliance with existing internal policies when entering into this outsourcing agreement.
• Any insurance business shall not outsource any of the firm’s core services unless explicitly authorized by the IRDAI. Every outsourcing contract must include a clause safeguarding the confidentiality of company data, processes, and outputs where these data were used. The insurance company/corporation will retain ownership of the data. After the outsourcing relationship, the outsourced agency is obligated to pass overall data and software programs/models, etc. in a timely way.
• The insurer’s management must monitor and evaluate the performance of agencies to whom various noncore functions have been outsourced. Management is obligated to examine and report to the Board at least once a year.

Reporting to IRDAI[8]

• Insurers will be required to assess their level of compliance with these criteria. In circumstances where compliance has not yet been achieved, the insurer must take rapid measures to achieve compliance. It is expected that the essential compliance structures would be put in place to ensure complete compliance with the published recommendations. This will take effect in the fiscal year 2016-2017. In circumstances when such compliance is either too difficult to accomplish or is not practicable for whatever reason, insurance firms must write to the IRDAI for additional assistance.
• Each insurer’s Company Secretary must be appointed as the Compliance Officer, whose responsibility it is to oversee ongoing compliance with these rules.
• The annual report of an insurance business must include a separate certification from the Compliance Officer (as noted above, the company secretary) in the manner specified in Annexure 8 of the guideline.

On an annual basis, all insurers must produce a report on their compliance with these Corporate Governance requirements. This report must be filed within three months of the end of the fiscal year, i.e. before June 30th. The report must be submitted in the format specified in Annexure 9 of the guideline.

Whistleblower Policy

It is recommended that insurers have an effective “whistle-blower” policy, under which staff can voice concerns internally about potential irregularities, governance difficulties, or any other subject, including financial reporting. These may also include a method for employees to report to the Chairman of the Board / Committee of the Board / Statutory Auditor in confidence.

Evaluation of Board of Directors including Independent Directors

• According to Schedule IV of the Companies Act of 2013, independent directors must meet at least once every fiscal year to examine the performance of non-independent directors. Similarly, Independent Directors will be assessed by the Board’s non-independent directors following the Schedule.
• The guideline also details the role of the CEO and other top officials, the role of appointed actuaries, external audit and the appointment of statutory auditors, and the relationship with stakeholders.[9]

Conclusion

Corporate governance is all about connecting the corporation to its many stakeholders, which include shareholders, policyholders, workers, and society at large. Before nationalization, the corporations were unconcerned about their company principles, purpose, and vision. The market echoed with complaints and counter-complaints over price rebates and consumer insensitivity. Furthermore, corporate governance at the time was characterized by a maximization concept in terms of employees, bureaucrats, and politicians. However, since IRDA, the Act has introduced various standards, including those about policyholders’ interests, sensible investment requirements, and several regulations for market discipline.

Corporate governance exists in addition to corporate law. Its primary goal is to ensure the board’s commitment to transparently operating the firm, rather than simply complying with the law. Finally, due to changes in the competitive climate and the intensity of IT applications, the business design changes about various shareholders. This dynamic must be considered while determining the framework of corporate governance.

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Refernces:

[1] Njegomir, Vladimir. (2014). Corporate Governance in Insurance Companies. Management. 19. 81-95. 10.7595/management.fon.2014.0010.

[2] Corporate Governance in Insurance: A “Bottom Up” Approach to Managing Risk Lexology, https://www.lexology.com/library/detail.aspx?g=5cd91f90-bf3b-4d2f-b128-3f35c78e774c

[3] To all Insurers www.irdai.gov.in, https://www.irdai.gov.in/ADMINCMS/cms/frmGuidelines_Layout.aspx?page=PageNo2852

[4] Ministry of Corporate Affairs :: www.mca.gov.in, https://www.mca.gov.in/Ministry/reportonexpertcommitte/chapter4.html

[5]To all Insurers www.irdai.gov.in, https://www.irdai.gov.in/ADMINCMS/cms/frmGuidelines_Layout.aspx?page=PageNo2852

[6] The Law Reviews – The Insurance and Reinsurance Law Review thelawreviews.co.uk, https://thelawreviews.co.uk/title/the-insurance-and-reinsurance-law-review/india

[7] Corporate Governance: Insurance Companies | Deloitte US Deloitte United States, https://www2.deloitte.com/us/en/pages/risk/articles/framing-the-future-of-corporate-governance-for-insurance-companies-the-time-to-look-ahead-is-now.html)

[8] Corporate Governance Naic.org, https://content.naic.org/cipr_topics/topic_corporate_governance.html

[9] To all Insurers www.irdai.gov.in, https://www.irdai.gov.in/ADMINCMS/cms/frmGuidelines_Layout.aspx?page=PageNo2852