This country-specific Q&A gives a pragmatic overview of the law and practice of insurance & reinsurance law in the India.
It addresses topics such as contract regulation, licensing, penalties, policyholder protection, alternative dispute resolution as well as personal insight and opinion as to the future of the insurance market over the next five years.
This Q&A is part of the global guide to Insurance & Reinsurance. For a full list of jurisdictional Insurance & Reinsurance Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/insurance-reinsurance
How is the writing of insurance contracts regulated in the jurisdiction?
All insurance contracts are required to be filed with the Insurance Development and Regulatory Authority of India (IRDAI), ie, the Indian Insurance Regulator, in accordance with the applicable product filing guidelines issued by the IRDAI.
Insurers are permitted to market group health insurance products and commercial general insurance products without the prior approval of the IRDAI, subject to compliance with applicable laws. However, life insurance products, retail general insurance products and individual health insurance products can only be offered if the terms and conditions of these products have been approved by the IRDAI.
Further, there are extraneous rules that impact policy terms. For example, the Insurance Act 1938 gives the policyholder a right to override contrary policy terms in favour of Indian law and jurisdiction, and Indian policyholders cannot be stopped from approaching the Consumer Courts.
Are types of insurers regulated differently (i.e. life companies, reinsurers)?
Yes, the IRDAI issues specific regulations/guidelines/circulars which govern the establishment, licensing and functioning of life insurers, general insurers, health insurers, Indian reinsurers and foreign reinsurers, including branch offices of foreign reinsurers set up in India under the IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations 2015 (Branch Offices of Foreign Reinsurers) and syndicates of reinsurers operating through service companies set up in India under the IRDAI (Lloyd’s India) Regulations 2016 (Syndicates of Lloyd’s India).
Are insurance brokers and other types of market intermediary subject to regulation?
Yes, all insurance intermediaries (including insurance brokers) are subject to the regulations issued by the IRDAI. Insurance intermediaries are required to be licensed in accordance with the applicable regulations for that form of intermediary and are required to comply with, inter alia, the specific code of conduct prescribed by the IRDAI. Only licensed insurance intermediaries are permitted to distribute insurance products for Indian insurers.
Is authorisation or a licence required and if so, how long does it take on average to obtain such permission?
Yes, all insurers, insurance intermediaries, Indian reinsurers, Branch Offices of Foreign Reinsurers and Syndicates of Lloyd’s India, are required to be registered in accordance with the applicable regulations issued by the IRDAI.
Broadly, for most of these entities the registration process is divided into stages. The timelines for obtaining registration are not expressly specified under the applicable regulations and therefore, vary on a case to case basis and depending on the form of entity being registered.
Are there restrictions over who owns or controls insurers (including restrictions on foreign ownership)?
Any direct or indirect foreign investment in an insurer or insurance intermediary is restricted to 49% of paid up equity capital. Further, under Indian law, all insurers and insurance intermediaries are required to be Indian-owned and controlled at all times. ‘Indian control’ is defined to mean control by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens. The term ‘Indian ownership’ has been defined to mean more than 50% of the equity capital beneficially owned by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens.
Is it possible to insure risks without a licence or authorisation? (i.e. on a non-admitted basis)?
Non-admitted insurers are not permitted to directly insure property situated in India or any ship or other vessel or aircraft registered in India.
However, a person resident in India is permitted to take or continue to hold a health insurance policy issued by an insurer outside India provided the aggregate remittance does not exceed the limits prescribed by the Reserve Bank of India (RBI).
Further, a person resident in India may take or continue to hold a life insurance policy issued by an Insurer outside India, provided that the policy is held under a specific or general permission of the RBI.
Non-admitted insurers who are listed with IRDAI as Cross Border Reinsurers can reinsure risks in India in accordance with the IRDAI’s regulations on the reinsurance of life and general insurance business.
In addition to the above, foreign reinsurers are now allowed to access the Indian market and are permitted to set up branch offices in India or operate through service companies set up in India under the IRDAI (Lloyd’s India) Regulations 2016 (Lloyd’s India).
What penalty is available for those who operate without appropriate permission?
A person carrying out direct insurance business in India without valid registration is liable to a penalty of up to INR 25 crores (c. US$ 3,750,000) and imprisonment for a term up to ten years.
A person acting as an insurance intermediary (including an insurance broker) without being registered is liable to a penalty of up to INR 10 lakh (c. US$ 15,000). In addition, the appointment of an unlicensed person to act as an insurance intermediary is punishable with a penalty of up to INR 1 crore (c. US$ 150,000).
How rigorous is the supervisory and enforcement environment?
The insurance regulatory regime is highly regulated in India. The IRDAI has suo motu powers for undertaking inspection, conducting enquiries and investigations (including audit) of the insurers, insurance intermediaries and other organizations connected with insurance business.
Further, by way of the Insurance Laws (Amendment) Act 2015, the maximum penalty for non-compliance of the applicable regulations or directions issued by the IRDAI has been significantly increased from INR 5 lakh (c. US$ 7,500) to INR 1 crore (c. US$ 150,000).
How is the solvency of insurers (and reinsurers where relevant) supervised?
The solvency of Insurers, Indian reinsurers, Branch Offices of Foreign Reinsurers and service companies representing Syndicates of Lloyd’s India is required to be calculated in accordance with the applicable regulations issued by the IRDAI. The respective entities are required to file a periodical statement of solvency with the IRDAI in accordance with the format prescribed under the applicable regulations.
What are the minimum capital requirements?
An insurer/Indian reinsurer is required to have a minimum paid up equity share capital of INR 100 crores (c. US$ 15,000,000).
A foreign reinsurer seeking to set up a branch office in India is required to have a minimum net owned fund of INR 5,000 crores (c. US$ 750,000,000) and is further required to infuse a minimum assigned capital of INR 100 crores (c. US$ 15,000,000) into the branch office.
Syndicates of Lloyd’s India are required to maintain a minimum assigned capital of INR 5 crores (c. US$ 750,000) through their service companies set up in India.
The minimum capital requirement for brokers is in the following terms:
- Direct brokers - INR 50 lakh (c.US$ 75,000);
- Reinsurance brokers - INR 2 crore (c.US$ 300,000);
- Composite brokers - INR 2.5 crore (c.US$ 375,000).
Is there a policyholder protection scheme?
The IRDA (Protection of Policyholders’ Interests) Regulations 2002 (Policyholders’ Regulations) issued by the IRDAI are the primary regulations on the protection of policyholders in India.
The Policyholders’ Regulations prescribe the practices that are required to be undertaken by the insurers and insurance intermediaries at the point of sale of the insurance policy to ensure that the policyholder understands the terms of the policy properly.
In addition to the above, the Policyholders’ Regulations prescribe the claims procedure that is required to be followed by the insurers to ensure expeditious processing of claims. Insurers are required to pay interest at the rate of 2% above the prevalent bank rate, in cases where there is delayed payment of the claim amount.
Insurers are also required to put in place proper grievance redressal procedures and mechanisms in accordance with the applicable provisions for the resolution of grievances of the policyholders.
The Policyholders’ Regulations are set to be amended to bring them in line with the recent amendments under applicable law. In this regard, the IRDAI has issued the Exposure Draft on IRDAI (Protection of Policyholders’ Interests) Regulations 2017 to obtain comments from various stakeholders.
How are groups supervised, if at all?
To avoid conflict of interest, ordinarily, two entities of the same group are not permitted to undertake the same line of insurance business. Furthermore, two entities under one group are ordinarily not granted licenses to act as insurance intermediaries.
However, the IRDAI has expressly stated that an Indian Corporate Group may have an insurance company as well as an insurance broking entity with the same group.
Do senior managers have to meet fit and proper requirements and/or be approved?
All directors and key managerial personnel of insurers and insurance intermediaries are required to be compliant with the fit and proper criteria stipulated by the IRDAI under the respective regulations.
Are there restrictions on outsourcing parts of the business?
The outsourcing of business by Indian insurers/reinsurers, Branch Offices of Foreign Reinsurers and service companies set up under Lloyd’s India, is subject to the restrictions prescribed under the applicable law. Broadly, these entities are prohibited from outsourcing their core functions (including underwriting and investments) to third party service providers.
How are sales of insurance supervised or controlled?
Insurers are permitted to place insurance business either though their sales executives or through licensed insurance intermediaries. Insurers are prohibited from engaging unlicensed persons for soliciting and procuring insurance business or providing introductions or leads to insurers.
Payment of commission/remuneration to insurance intermediaries is required to be in accordance with the limits prescribed by the IRDAI. Insurers are now expressly permitted to pay “rewards” to insurance intermediaries in accordance with the limits prescribed under the applicable regulations.
Are consumer policies subject to restrictions? If so, briefly describe the range of protections offered to consumer policyholders.
Insurance policies are structured to incorporate comprehensive mechanisms for customer protections that they are required to include by law, and typically include the following:
- Details of the Insurance Ombudsman, who is appointed by the Insurance Council to address complaints by the insured against the insurer, in relation to the settlement of claims.
- The IRDAI requires insurers to formulate a grievance redressal policy and file it with the IRDAI. Policyholders who have complaints against insurers are first required to approach the grievance or customer complaints Department of the insurer.
- In cases of delay or no response relating to policies and claims, the IRDAI can take up matters with the insurers to ensure speedy resolution. Only policyholders, claimants or the insured can approach the IRDAI for assistance and advocates, agents and other third parties are not allowed to approach the IRDAI.
IRDAI Regulations provide, amongst other obligations, that insurers follow certain practices at the point of sale of the insurance policy to ensure that the insured can understand the terms of the policy properly.
In addition to the above, as a consumer, while there are no exclusive procedures or judicial venues for resolution of insurance or reinsurance disputes, insurance policies are contracts of indemnity and parties can approach a civil court (or arbitration) to claim for a breach of contract in accordance with the appropriate territorial jurisdiction.
The Consumer Protection Act, 1986 lists insurance as a service. As an alternate remedy, the insured can opt for a summary procedure and approach the consumer courts, which are empowered to provide compensation for any deficiency of the insurer in servicing a claim.
Are the courts adept at handling complex commercial claims?
Indian litigation is slow and time consuming. This is attributed to the number of reported pending cases in courts across in India, which is presently close to 30 million. In fact, the Supreme Court and Parliament have begun the process of clearing this huge backlog. The Supreme Court has issued directions to all courts across India to conclude trials within 5 years as a starting point.
In addition, the Commercial Courts, Commercial Division & Commercial Appellate Division of High Courts Act 2015, has been introduced which carves out special benches in all existing civil courts which will adjudicate commercial matters exclusively. There are fixed schedules that all commercial civil disputes need to follow and the legislation is meant to speed up the adjudication process.
The Civil Courts have a three-tier hierarchy. The hierarchy structure of the Courts is usually as follows (in ascending order): District, State, and National which comprises circa 600 District Courts, 24 High Courts and the Supreme Court of India (the highest court in India). Among the 24 High Courts, four are termed charter High Courts (i.e. Delhi, Bombay, Madras and Calcutta High Court) which have original jurisdiction to accept and hear matters which fall above certain pecuniary thresholds, exempting the District Courts from hearing these matters due to higher pecuniary limits. The rest of the District Courts have unlimited pecuniary jurisdiction, so do the competent courts of first instance to hear any insurance dispute falling under the territorial jurisdiction.
Is alternative dispute resolution well established in the jurisdiction?
The Indian jurisdiction recognises arbitration, mediation and conciliation as means of alternative dispute resolution. Arbitration clauses are enforceable at different stages of the dispute and most courts will enforce the arbitration clause or agreement unless it suffers from a patent illegality.
The Indian Arbitration and Conciliation Act 1996 (ACA) is based on the UNCITRAL model law. The ACA preserves party autonomy in relation to most aspects of arbitration, such as the freedom to agree upon the qualification, nationality, number of arbitrators (provided it is not an even number), the place of arbitration and the procedure to be followed by the Tribunal. The principle of party autonomy has been recently confirmed by the Constitutional Bench of the Supreme Court of India in Bharat Aluminium Co v Kaiser (2012).
An arbitration agreement, as per the ACA, needs to be in writing and should reflect the intention of the parties to submit their dispute(s) to arbitration. There is no prescribed form required for the purpose of an arbitration agreement. In fact, it is not necessary for an arbitration agreement to be incorporated into an insurance/reinsurance contract at all. An arbitration agreement can come into existence if it is contained in a subsequent exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement.
Furthermore, in relation to domestic arbitration, the ACA bars intervention from the courts except for some specific instances where the courts are allowed to intervene – for example, for interim relief, reference to arbitration when an action has been instituted before the court, and for the appointment of arbitrators, where parties have failed to nominate arbitrators within the stipulated time frame.
In relation to international commercial arbitration, the tendency of the Indian judiciary to intervene is now declining. The decision of India’s Supreme Court in Bharat Aluminium Co. v Kaiser has reversed earlier authority which endorsed an interventionist approach under certain circumstances.
What are the primary challenges to new market entrants?
The IRDAI has notified the IRDAI (Branch Offices of Foreign Reinsurers (excluding Lloyd's) Regulations 2015 and the IRDAI (Lloyd’s India) Regulations 2016, thereby permitting foreign reinsurers to set up in India. However, at the same time, the IRDAI has mandated Indian insurers follow the order of preference for cessions while placing reinsurance business. Under the order of preference of cessions, the General Insurance Corporation of India, ie, the Indian reinsurer, has been granted the first right to refusal. This is a concern for foreign reinsurance players who have entered India or are considering an entry into India.
Indian insurers and insurance intermediaries are required to be Indian owned and controlled at all times. While the IRDAI has issued specific guidelines prescribing benchmarks for Indian ownership and control, the exact nature and scope of “Indian owned and controlled” is subjective and thus varies on a case by case basis. Lack of clarity on some of these points creates a challenge for foreign players who are seeking to invest and participate in the management of Indian insurance companies and insurance intermediaries.
Furthermore, with significant and frequent changes having taken place in the last few years in the insurance regulatory space, the insurance market is in a state of flux. This state of flux, combined with the complex insurance regulatory framework, also poses a challenge for new players seeking to enter the Indian insurance market.
To what extent is the market being challenged by digital innovation?
With the significant increase in e-commerce transactions over recent years, the IRDAI has recognised the sale of insurance products online. The IRDAI has also recognized web aggregators (entities engaged exclusively in solicitation and procurement of insurance products online) as insurance intermediaries and has issued specific regulations for the licensing of these entities.
In addition, the IRDAI has also recognised the issuance of e-insurance policies. The IRDAI is consistently working to make the issuance of e-insurance policies easier for both insurers as well as the prospects/policyholders. However, growing trends in digitisation are giving rise to certain practical challenges in the instantaneous issuance of e-insurance policies.
Over the next five years what type of business do you see taking a market lead?
There has been a consistent increase over the last few years in the issuance of policies to cover cyber security risks, directors and officer’s liability, errors and omissions liability and employment practices liability (including liability arising from sexual harassment claims). These forms of insurance are anticipated to grow further and take market lead over the next five years.