Corporate Governance for insurers in India :IRDA Guidelines

4. Governance Structure

4.1 General

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 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. As the listing requirements are available in public domain they are not being repeated. The Authority advises all Indian Insurance Companies to familiarize themselves with Corporate Governance structures and requirements appropriate to listed entities. The companies, even if unlisted, are also well advised to initiate necessary steps to address the extant “gaps” that are so identified to facilitate smooth transition at the time of their eventual listing in course of time.

4.2  Chairman of the Board

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.

4.3 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.

5. Board of Directors

5.1 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 size and composition should ensure that they collectively provide knowledge, skills, experience and commitment. Further, the Board Members should be in a position to dedicate sufficient time and commitment to fulfill their responsibilities.

·         It is expected that the shareholders of the companies elect or nominate Directors from various areas of financial and management expertise such as accountancy, law, insurance, pension, banking, securities, economics, etc., with qualifications and experience that is appropriate to the company.

·         It is essential that the Directors possess the knowledge of group structure, organizational structure, process and products of the insurer and the Board generally complies with the following requirements:-

The Board of Directors and Key Management Persons should understand the operational structure of the insurer and have a general understanding of the lines of business and products of the insurer, more particularly as the insurer grows in size and complexity.

The Board of Directors of an insurer belonging to a larger group structure/ conglomerate should understand the material risks and issues that could affect the group entities, with attendant implication on the insurer.

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. 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 of interests that affect the group entities.

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.

An independent Director shall fulfill all the conditions specified under Section 149 of the Companies Act, 2013. An appointment letter shall be issued to the Independent director laying down the terms and conditions, including his duties, responsibilities, sitting fees, etc.  In case the number of independent directors falls below the required minimum laid down, such vacancy shall be filled up before the immediately following Board meeting or 3 months from the date of such vacancy, whichever is later, under intimation to the Authority.

Similarly, where the Chairman of the Board is non-executive, the Chief Executive Officer should be a whole time director of the Board.

5.2 The Role and responsibility of the Board

The specific areas of responsibilities of the Board of insurers are detailed in the Annexure 1. 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. The Board can delegate its authority to the Board Committees in the discharge of this responsibility but such delegation does not absolve the Board from its primary responsibilities. In this regard, the Board should seek detailed and transparent information flow from the senior management (CEO and other KMPs) through well documented agenda notes and also devise appropriate systems to serve as effective monitoring arrangements. 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 structure of the Board of Directors should be oriented to setting-up of objectives to meet the expectations of various stakeholders, strategies for their fulfillment and for monitoring the achievements. The Boards of insurance companies need to consider interests of all stakeholders, and especially their policyholders as a specific group. Further, since there could arise a conflict of interest amongst the various stakeholders, a key board function would be to establish strategies and policies that define ethical individual and corporate behaviour and ongoing, effective processes that ensure adherence to these strategies and policies.

Thus, with a view to being effective, 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.

5.3 Fit and Proper Criteria

In line with the international and domestic norms, the Directors of insurers have to meet the “fit and proper” criteria. 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. With a view to ensuring that the Directors comply with the above requirement, a due diligence enquiry should be undertaken on the person to be appointed as Director or for the continuance of the existing Directors only after obtaining a declaration from the proposed/existing Directors in the format given in Annexure 2, at the time of their appointment/re-appointment.

5.4 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)

6. 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.

6.1 The Board shall be responsible for the oversight over the control functions of an Insurer.

6.2 For insurers within a group, appropriate and effective group-wide risk control systems should be in place in addition to the control systems at the level of the insurer. It is essential to manage risks appropriately on a group-wide basis as well as at the level of the insurer. The Boards of the respective insurers are required to lay down requisite policy framework to ensure that such risks are adequately addressed.

7. 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. In particular, 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

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:-

7.1 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 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).

·         The Audit Committee shall have the oversight on the procedures and processes established to attend to issues relating to maintenance of books of account, administration procedures, transactions and other matters having a bearing on the financial position of the insurer, whether raised by the auditors or by any other person.

·         The Audit Committee shall discuss with the statutory auditors before the audit commences, about the nature and scope of audit as well as have post-audit discussions to address areas of concern.

·         Act as a Compliance Committee to discuss the level of compliance in the Company and any associated risks and to monitor and report to the Board on any significant compliance breaches.

·        Any additional work other than statutory/internal audit that is entrusted to the auditor or any of its associated persons or companies shall be specifically approved by the Board keeping in mind the necessity to maintain the independence and integrity of the audit relationship. All such other work entrusted to the auditor or its associates shall be specifically disclosed in the Notes to Accounts forming part of the annual accounts of the insurance companies. However, it may be ensured that insurance companies comply with Section 144 of the Companies Act, 2013 before deciding to provide any additional work to the Statutory Auditors. 

7.2 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.

·         Members of the Committee should familiarize themselves and be conversant with the various Acts, Rules, Regulations, Guidelines, Circulars, etc., issued by the Authority as amended from-time-to-time.

·         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 and ensure that support by the internal due diligence process is an input in making appropriate investment decisions.

·         The Committee shall formulate an effective reporting system to ensure compliance with the policy set out by it apart from Internal /Concurrent Audit mechanisms for a sustained and on-going monitoring of Investment Operations.

·         The Committee shall meet at least once in a quarter to review investment operations and submit a report to the Board on the performance of the investment portfolio with regard to its safety and soundness.

7.3 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. It shall be organized in such a way that it is able to monitor all the risks across the various lines of business of the company and the operating head has direct access to the Board. It should not focus solely on compliance; it should focus on adding value to rest of the business. Risk management function should work in close co-ordination with the finance function, but independently assess and evaluate the capital, finance and other operating decisions. 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.

·           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. 21^st January, 2013, issued by the Authority.

7.4 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 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 expeditiously. 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.

·         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 guidelines issued by the Authority.

The Board shall review the status report on policyholders’ protection issues, submitted by the Committee, in each of its meeting.

7.5 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 insurance companies are further advised that they should obtain an annual declaration from the Directors/ KMPs that the information provided in the declaration at the time of appointment/ reappointment has not undergone any change subsequently and the changes, if any, are apprised by the concerned Director to the Board. The Directors are also required to enter into a Deed of Covenant as per the format placed at Annexure 3, with the insurance company, duly approved by the Board, pursuant to their terms of appointment to ensure that there is a clear understanding of the mutual role of the company, the Directors and the Board in Corporate Governance. More particularly, the appointment and reporting of Key Management Persons should be as per the directions given in Annexure 4.

It is pertinent to draw attention to the provisions of Section 34 (A) (1) of the Insurance Act, 1938 which stipulates that the remuneration of CEOs/Whole-time Directors of Indian insurance companies is subject to statutory approval of the IRDAI. Further, the overall management costs of the insurer are also additionally governed by the limits prescribed statutorily in the Insurance Act and Regulations framed there under in order to protect the interests of the policyholders. The setting up of a Nomination and Remuneration Committee should keep the above requirements in view. Further, the envisaged role of the Committee includes the following aspects:-

·         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.

·         The remuneration package shall be aligned appropriately with the performance objectives laid down for the Key Management Persons.

·         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.

·         The Nomination and Remuneration Committee shall ensure that the remuneration packages of the Key Management Persons of the company are as per the Remuneration Policy approved by the Board.

·         The Committee shall also ensure that the proposed appointments/ re-appointments of Key Management Persons or Directors are in conformity with the Board approved policy on retirement/ superannuation.

    

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

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.

7.7 With Profits Committee:

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

The report of the With Profits Committee in respect of the above matters should be attached to the Actuarial Report and Abstract furnished by the insurers to the Authority. The Board of an insurer shall ensure that any other stipulations regarding the constitution and/ or functioning of the With Profits Committee as indicated in the Regulations made by the Authority from time to time shall be complied with at all times.

The other Committees which can be set up by the Board, include the Ethics Committee and ALM Committee (other than life insurers). In cases where Board decides not to constitute such Committees, their functions and responsibilities can be addressed in such manner as the Board may deem fit. However, once these Optional Committees are in place, the insurer is required to comply with the requirements on the “Role and Responsibilities” of such Committees as laid down under these Guidelines.

Wherever the functions of the mandatory committees are capable of being merged without affecting the independence and objectivity envisaged in the corporate governance structure, insurance companies may do so under specific approval of their Boards and intimation to the Authority. However, the Audit Committee and the Investment Committee shall not be merged with any other Committee of the Board under any circumstances.

7.8.1 Ethics Committee (not mandatory)

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.

·         Advising the board on the effect of the above on the insurer’s conduct of business and helping the board set the correct “tone at the top” by communicating, or supporting the communication, at all levels of the insurer of the importance of ethics and compliance.

·         Approving compliance programmes, reviewing their effectiveness on a regular basis and signing off on any material compliance issues or matters.

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.

The functions of the ALM Committee (wherever constituted) shall include:

·         Setting the insurer’s risk/reward objectives and assessing policyholder expectations.

·         Quantifying the level of risk exposure (eg. market, credit and liquidity) and assessing the expected rewards and costs associated with the risk exposure.

·         Formulating and implementing optimal ALM strategies and meeting risk-reward objectives at both product and enterprise level.

·         Ensuring that liabilities are backed by appropriate assets and manage mismatches between assets and liabilities to ensure they remain within acceptable monitored tolerances for liquidity, solvency and the risk profile of the entity.

·         Monitoring risk exposures at periodic intervals and revising ALM strategies where required. Reviewing, approving and monitoring systems, controls and reporting used to manage balance sheet risks including any mitigation strategies.

·         Regular review and monitoring of mismatch between assets and liabilities and the acceptable tolerance limits for mismatch, if any.

·         Ensuring that management and valuation of all assets and liabilities comply with standards, prevailing legislation and internal and external reporting requirements.

·         Submitting the ALM information before the Board at periodic intervals. Annual review of strategic asset allocation.

·         Reviewing key methodologies and assumptions including actuarial assumptions, used to value assets and liabilities

·         Managing capital requirements at the company level using the regulatory solvency requirements

·         Reviewing, approving and monitoring capital plans and related decisions over capital transactions (e.g. dividend payments, acquisitions, disposals, etc).

Where an insurer does not constitute the Asset Liability Management (ALM) Committee, the functions of ALM shall form part of the Risk Management Committee.

7.9 The mandatory committees, except Nomination and Remuneration Committee, the Corporate Social Responsibility Committeeand 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.

As specified in the proviso to Section 161(2) of the Companies Act, 2013, no person shall be appointed as an alternate director for an independent director unless he/she is qualified to be appointed as an independent director under the provisions of this Act. This condition shall be applicable even while appointing an alternate director to an Independent director in any of the Committees.

It is emphasized that the overall responsibility for directing the affairs of the insurers shall be with the Board and it shall continue to exercise its oversight directly on matters that are not specifically delegated to any of its Committees.

8.1 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. In case the CEO resigns, the Authority should be kept informed of such resignation and the reasons therefor. The Insurance Act also prohibits the Managing Director or other Officer of a life insurance companyfrom being a Managing Director or Other Officer of any other Life insurance company or of a Banking company or an Investment Company. As the appointment of the CEO is made with the prior approval of the IRDAI the Board should take proactive steps to decide on the continuance of CEO well in time before the expiry of his tenure or to identify the new incumbent. 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 (Annexure 5) shall be accompanied with information as prescribed in Form B and Form C as indicated in and Annexure 6 of these guidelines.

As a corollary, the insurers should also have practices in place for succession planning for the key senior functionaries through a process of proper identification and nurturing of individuals for taking over senior management positions. A checklist of due diligence to be conducted by the Board Nomination and Remuneration Committee before recommending consideration of appointment of a person as a Managing or Whole-time Director is attached (Form A of Annexure 5 & Form B of Annexure 6). The Form ‘C’ which is required to be submitted to the Authority for considering approval to the appointment of Managing/Whole-time Director is also attached (Annexure 6).

8.2 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 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.

·         The Board shall interact directly with the Appointed Actuary wherever it considers it expedient to secure his advice, it may do so in such manner as it may deem fit. The Appointed Actuary shall provide professional advice or certification to the board with regard to:-

o   Estimation of technical provisions in accordance with the valuation framework set up by the insurer

o   Identification and estimation of material risks and appropriate management of the risks

o   Financial condition testing

o   Solvency margin requirements

o   Appropriateness of premiums (and surrender value)

o   Allocation of bonuses to with-profit insurance contracts

o   Management of participating funds (including analysis of material effects caused by strategies and policies)

o   Product design, risk mitigation (including reinsurance) and other related risk management roles.

While the areas of advice/certification listed above are with specific reference to life companies, the appointed actuaries in case of non life insurance companies shall provide such advice/certification to the extent applicable. In order to facilitate the Appointed Actuary in discharging his/ her responsibilities, he/ she shall at all times be provided access to the information as required.

8A. 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. These guidelines/directions may include prescriptions on qualifications and experience of auditors, their rotation, period of appointment, etc. as may be deemed necessary by the Authority.

The detailed guidelines as regards appointment of auditors and the reporting about all the auditors appointed by insurers are given in Annexure 7 to these guidelines. The Board should therefore ensure that the statutory auditors are compliant with the regulatory requirements and there are no conflicts of interest in their appointment. The auditors should possess the competence and integrity to alert the appropriate authorities promptly of any event that could seriously affect the insurance company’s financial position or the organization structure of its administration or accounting and of any criminal violations or material irregularities that come to his notice.

8A.1 Access to Board and Audit Committee

The Audit Committee should have discussions with the statutory auditors periodically about internal control systems, the scope of audit including the observations of the auditors (where applicable) and review the quarterly/half yearly and annual financial statements as the case may be before submission to the Board of Directors and also ensure compliance with the internal control systems. The statutory auditors should also have access to the Board of Directors through the Audit Committee.

9. 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.

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.

10. Outsourcing Arrangements

10.1 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.

10.2 The management of the insurance company shall monitor and review the performance of agencies to whom operations have been outsourced at least annually and report findings to the Board.

10.3 The Authority reserves the right to access the operations of the outsourced entity to the extent these are relevant to the insurance company and for the protection of policyholder.

11. Interaction with the Regulator

11.1 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.

11.2 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.

11.3 The IRDAI would bring to the attention of the Board and senior management, concerns which have been detected by it through supervisory activities.

11.4 Reporting to IRDAI

11.4.1 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 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.

11.4.2 Each insurer should designate Company Secretary as the Compliance officer whose duty will be to monitor continuing compliance with these guidelines.

11.4.3 Annual Report of insurers shall have a separate certification from the Compliance Officer in the format attached herewith as Annexure 8.

11.4.4 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. The report shall be filed as per the format in the Annexure 9.

12. Whistle Blower Policy

12.1 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 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.

12.2 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.

As required under Schedule IV of the Companies Act, 2013, the independent directors shall meet at least once in a year to evaluate the performance of other than independent Directors. Similarly, there shall be an evaluation of the Independent Directors by the other members of the Board of Directors as required in the Schedule.

These guidelines shall be applicable to all insurers granted registration by the Authority except that:

(i) reinsurance companies may not be required to have the Policyholders’ Protection Committee; and

(ii) branches of foreign reinsurers in India may not be required to constitute the Board and its mandatory committees as indicated herein.

1) The Board should ensure that the Governance principles set for the insurer comply with all relevant laws, regulations and other applicable codes of conduct.

2) The Board should set the following policies in consultation with the Management of the Company.

a) Define and periodically review the business strategy.

b) Define the underwriting policy of the insurer.

c) Determine the retention and reinsurance policy and in particular, the levels of retentions of risk by the insurer and the nature and extent of reinsurance protection to be maintained by the insurer.

d) Define the policy of the insurer as regards investment of its assets consistent with an appropriate asset liability management structure.

e) Define the insurer’s policy on appointments and qualification requirements for human resources and ensure that the incentive structure does not encourage imprudent behaviour.

3) The Board should define and set the following standards:-

a) Define the standards of business conduct and ethical behaviour for directors and senior management.

b) Define the standards to be maintained in policyholder servicing and in redressal of grievances of policyholders.

4) The Board would be responsible to provide guidance for implementation of business strategy and review the same periodically.

5) As an integral part of proper implementation of the business strategy, the Board should take action as under:-

a) Establish appropriate systems to regulate the risk appetite and risk profile of the Company. It will also enable identification and measurement of significant risks to which the company is exposed in order to develop an effective risk management system.

b) Ensure that all directions of IRDAI are submitted to the Board and the recommendations are implemented as per the Board philosophy.

c) Ensure that the IT systems in the company are appropriate and have built-in checks and balances to produce data with integrity and put in place a business continuity and disaster recovery plan.

d) Ensure that the company has put in place a robust compliance system for all applicable laws and regulations.

e) Prescribe requirements and frequency of reporting in respect of each of the above areas of responsibility as may be decided by the Board.

6) In discharge of the above and other Governance functions, the Board may delegate the responsibilities to mandated/ other recommended Empowered Committees of Directors while retaining its primary accountability.

Declaration and Undertaking by Director

(with enclosures as appropriate as on ________________(date))

a. Full Name

b. DIN

c. Date of Birth

d. Educational qualifications

e. Relevant Background, Knowledge and Experience

f. Permanent Address

g. Present Address

h. E-mail Address and Telephone Number

i. Permanent Account Number under the

Income Tax Act and name and address of

Income Tax circle where assessed

j. Any other information relevant to Directorship

of the Insurance Company

a. List of relatives, if any, who are connected with

the insurer ( Refer Section 2(77)

of the Companies Act, 2013)

b. List of entities, if any, in which he/she is

considered as being interested (Refer Section

184 of the Companies

Act 2013)

a. Relevant professional achievements

b. Whether the director was associated as

director or officer with any entity that was

wound up or that was penalized for violation

of any law.

a. If the director is a member of a professional

association/ body, details of disciplinary

action, if any, pending or commenced or

resulting in conviction in the past against

him/her or whether he/she has been banned

from entry of at any profession/occupation at

any time.

b. Details of prosecution, if any, pending or

commenced or resulting in conviction in the

past against the director and/or against any of

the entries listed at II(b) and (c) above for

violation of economic laws and regulations.

c. Details of criminal prosecution, if any, pending

or commenced or resulting in conviction in the

last five years against the director

d. Whether the director attracts any of the

disqualifications envisaged under Section 164

of the Companies Act, 2013?

e. Has the director or any of the entities at II (b)

and (c) above been subject to any investigation

at the instance of Government department or

agency?

f. Has the director at any time been found guilty

of violation of rules/regulations/legislative

requirements of customs/excise/income

tax/foreign exchange/other revenue

authorities? If so, give particulars

g. Whether the director has at any time come to the

adverse notice of a regulator such as SEBI,

RBI, MCA? If so, give particulars.

h. Any other explanation/information in regard to items I to III above and other information considered relevant for judging his/ her fit and proper compliance for directorship.

I confirm that the above information is, to the best of my knowledge and belief, true and complete. I undertake to keep the insurer fully informed, as soon as possible, of all events which take place subsequent to my appointment which are relevant to the information provided above.

I also undertake to execute the deed of covenant required to be executed by the directors of the insurance company.

Place:                                                                                                  Signature of the Director

Date:

Place:                                                                                                              Signature

Date:

Details of Remuneration of the Chief Executive Officer / Managing director

(1) If anyofthebenefitsisofanon-monetarynature,e.g.freefurnishedhouse,its monetaryequivalentasbestasit ispossibletodetermineshouldbegiven.In casethepersontobeappointedis alreadyassociatedwiththeapplicant company, particularsofhis existing remuneration, etc. should be furnished

(2) In case of performancebonus,please ensure that the amount paideach year is specificallyapprovedbytheBoardofDirectorbypassingaseparateresolution for the payment of bonus.

(3) Thesharesofthepromoter/group/associatecompaniesofferedasESOPsto theCEO/MD/PrincipalOfficerofthe insurancecompanyshallbegovernedby the provisions SEBI (Share Based Employee Benefits) Regulations, 2014.

(4) Thesharesoftheinsurancecompany/ unlistedcompaniesofferedasESOPsto the CEO/ MD/ PrincipalOfficer of the insurance companyshallalso be governed bytheprovisionsSEBI(Share Based Employee Benefits) Regulations, 2014 exceptthose relating to pricingof the shares.

(5) Ifthecompanyproposestoincreasetheemolumentsand/orotherbenefits/

perquisites, thereasonsthereforemaybeexplainedsuitablyundercolumnno. (4)