CORPORATE GOVERNANCE GUIDELINES FOR INSURANCE COMPANIES

On 18^th May 2016 Insurance Regulatory and Development Authority of India issued revised guidelines on corporate governance for insurance companies. These Guidelines are applicable from finance year 2016 – 17 except a relief later on granted in respect of auditor. In this post, we will briefly discuss these revised guidelines.

Significant Owners, Controlling Shareholders’

There will be a minimum lock-in period of 5 years from the date of certificate of commencement of business of an insurer for the promoters of the insurance company and no transfer of shares of the promoters is permitted within this period without the specific approval of the Authority. [Para 3.1]

Conflict of Interest

The Board of Directors of an insurer shall formulate a Policy on Related Party Transactions laying down the following:

(a) Definition of Transactions in the ordinary course of the insurance business giving examples specific to the insurance company.

(b) Method of determination of arm’s length pricing

(c) List of items requiring approvals from various authorities, Audit Committee, Board, Shareholders etc.

(d) Any other matter relevant to the related party transactions

The Policy shall be reviewed by the Board on yearly basis.

Auditors, Actuaries, Directors and Key Management Persons shall not simultaneously hold two positions in the insurance company that could lead to conflict or potential conflicts of interest. [Para 3A]

Number of Independent Directors

The Board of Directors is required to have a minimum of three “Independent Directors”. However, this requirement is relaxed to ‘two’ independent directors, for the initial five years from grant of Certificate of Registration to insurers. Insurers which have less than three independent directors shall ensure that they comply with this requirement within one year of the date of effect of these guidelines. [Para 4]

Role and Responsibility

As the Boards generally do not meet at frequent intervals, it is imperative that the senior management is clearly made accountable for the two way information flow.

The Board in active consultation with the Key Management Persons, should establish and evaluate strategies and policies to address, at the minimum, a broad range of areas, as indicated below. There should concurrently be arrangements to review the policies from time to time to ensure that they are dynamic.

• Overall direction of the business of the insurance company, including policies, strategies and risk management across all the functions;
• Projections on the capital requirements, revenue streams, expenses and the profitability. While laying down the projections, the Board must address the expectations of the shareholders and the policyholders.
• Obligation to fully comply with the Insurance Act and the regulations framed thereunder, and other statutory requirements applicable to it;
• Addressing conflicts of interest;
• Ensuring fair treatment of policyholders and employees;
• Ensuring information sharing with and disclosures to stakeholders, including investors, policyholders, employees, the regulators, consumers, financial analysts and/or rating agencies.
• Establishing channels for encouraging and facilitating employees raising concerns or reporting a possible breach of law or regulations, with appropriate measures to protect whistle blowers;
• Developing a corporate culture that recognizes and rewards adherence to ethical standards. [Para 5.2]

Secretarial Standards

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) [Para 5.4]

Control Function

The Board shall 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.

It is essential to manage risks appropriately on a group-wide basis as well as at the level of the insurer.

Delegation of functions – Committees of the Board

The following aspects need to be defined in respect of the role and functions of the Committees:

• Constitution
• Objectives
• Responsibilities
• Frequency of meeting / quorum requirements
• Appointment and removal of members
• Reporting to the Board

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. [Para 7]

The mandatory committees, except Nomination and Remuneration Committee, the Corporate Social Responsibility Committee and the With Profits Committee shall meet at least four times in a year and not more than four months shall elapse between two successive meetings of such Committees. The quorum shall be two members or one-third of the members of the Committee, whichever is greater, however in case independent director(s) is/ are mandated to be in any of the Committees, at least one such independent director or his alternate director, should necessarily be present to form the quorum.

Key Managerial Personnel

Chief Executive Officer and the Whole Time Directors

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 requires the proposal to be submitted with the approval of the Board at least a month before the completion of the tenure of the incumbent. The application to the Authority in Form A shall be accompanied with information as prescribed in Form B and Form C. [Para 8.1]

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. [Para 8.2]

External Audit – Appointment of Statutory Auditors

The IRDAI (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations, 2002 empower the Authority to issue directions/guidelines on appointment, continuance or removal of auditors of an insurer. [Para 8A]

Disclosure Requirements

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.

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. [Para 9]

Outsourcing Arrangements

All outsourcing arrangements of an Insurer shall have the approval of a Committee of Key Management Persons and should meet the terms of the Board approved outsourcing policy. The Board or the Risk Management Committee should be periodically apprised about the outsourcing arrangements entered into by the insurer and also confirmation to the effect that they comply with the stipulations of the Authority as well as the internal policy be placed before them. An insurer shall not outsource any of the company’s core functions other than those that have been specifically permitted by the Authority. Every outsourcing contract shall contain explicit safeguards regarding confidentiality of data and all outputs from the data, continuing ownership of the data with the insurer and orderly handing over of the data and all related software programs on termination of the outsourcing arrangement.

Interaction with the Regulator

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.

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. 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. [Para 11.4]

Compliance Officer

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 in the format. [Para 11.4]

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 matters. 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 here 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.

The appointed actuary and the statutory/internal auditors have the duty to ‘whistle blow’, i.e., to report in a timely manner to the IRDAI if they are aware that the insurance company has failed to take appropriate steps to rectify a matter which has a material adverse effect on its financial condition. This would enable the IRDAI to take prompt action before policyholders’ interests are undermined. [Para 12]

Please note: This blog invite readers to share their comments, suggestions, hardship, queries and everything in comment section. This blog post is not a professional advice but just a knowledge sharing initiative for mutual discussion.