Insurance and Reinsurance in India 2024

Insurance and Reinsurance in India 2024

Insurance and Reinsurance in India 2024

INSURANCE AND REINSURANCE 2024

INDIA

Neeraj Tuli, Celia Jenkins

(Tuli & Co)

REGULATION

Regulatory agencies

  1. Identify the regulatory agencies responsible for regulating insurance and reinsurance companies.

Insurance and reinsurance companies and insurance intermediaries in India are governed by the Insurance Regulatory and Development Authority of India (IRDAI). The primary legislation regulating the Indian insurance sector comprises the Insurance Act 1938 (Insurance Act) and the Insurance Regulatory and Development Authority Act 1999 (IRDA Act). Under the powers granted to the IRDAI under the IRDA Act, the IRDAI has issued various regulations governing the licensing and functioning of insurance and reinsurance companies and insurance intermediaries.

An Indian or overseas insurance or reinsurance company may establish a presence in the International Financial Services Centre (IFSC) and obtain registration as an IFSC insurance office (IIO) for carrying on insurance or reinsurance business. These entities are then governed by the International Financial Services Centers Authority (IFSCA) and the various regulations and guidelines issued by the IFSCA.

Appeals from orders issued and decisions made by the IRDAI may be referred to the Securities Appellate Tribunal under the specified procedural rules for filing appeals from IRDAI orders.

The Reserve Bank of India (RBI)’s ‘Master Direction – Insurance’ of 1 January 2016 (as amended) consolidates the foreign exchange regulations applicable to insurance businesses and provides guidance on various issues, including the manner and extent to which an Indian insurance company can issue and settle claims in respect of overseas residents. Separately, the Foreign Exchange Management (Insurance) Regulations 2015 regulate the manner and extent to which a person resident in India can take or continue to hold a general, life or health insurance policy issued by an overseas insurance company.

Formation and licensing

  1. What are the requirements for formation and licensing of new insurance and reinsurance companies?

Under the Insurance Act, an Indian insurance company is permitted to carry out insurance business in India. An Indian insurance company is a public limited company formed under the Companies Act 2013 (Companies Act) that exclusively carries out life insurance, general insurance, health insurance or reinsurance business. Pursuant to the Insurance (Amendment) Act 2021 (Amendment Act 2021), the foreign direct investment limit in Indian insurance companies has been increased from 49 percent to 74 percent, and the norms issued earlier by the IRDAI, which required an Indian insurance company to be Indian owned and controlled, were withdrawn.

An entity seeking to carry out insurance business is required to apply for a certificate of registration from the IRDAI following a three-stage process set out under the IRDAI (Registration of Indian Insurance Companies) Regulations 2022 (Registration Regulations) and the IRDAI’s Master Circular on Registration of Indian Insurance Companies 2023. A certificate for registration is required for each category of insurance business (i.e, life, general, stand-alone health and reinsurance). Also, the Registration Regulations set out the essential requirements that an applicant applying for registration is required to fulfil, including, but not limited to:

  • permissible foreign investment limits;
  • minimum capitalization requirements;
  • minimum qualifications of the directors and persons in management of the promoters, investors and the applicant;
  • planned infrastructure;
  • proposed business expansion plan; and
  • general track record of conduct and performance of each of the Indian promoters and foreign investors in the business or profession they are engaged in.

In addition, the applicant must also provide adequate documentation in support of its application as prescribed under the Registration Regulations.

The Insurance Act was significantly amended through the Insurance Laws (Amendment) Act 2015 (Amendment Act 2015) and is now perhaps set to undergo another round of significant amendments. The Central Government issued the Insurance Laws (Amendment) Bill 2022 (Draft Insurance Bill), which has proposed significant amendments to various provisions under the Insurance Act and the IRDA Act. The Draft Insurance Bill is yet to be taken up for discussion before Parliament, but, if brought into force in its present form, it would result in significant changes in terms of the norms and procedures for registering entities in the insurance sector, permitted forms of business and various operational matters. In addition, several existing regulations would need to be amended or new guidance introduced to implement the changes.

Apart from registering an Indian reinsurance company, reinsurance companies have the following options for writing reinsurance of Indian risks:

  • Establish a foreign reinsurer branch under IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations 2015 (Branch Office Regulations). The Branch Office Regulations specify the eligibility criteria for a foreign reinsurer, such as credit rating, infusion of minimum assigned capital into the foreign reinsurer branch, in-principle clearance from the home country regulator and a commitment to meet all liabilities of the foreign reinsurer branch.
  • Syndicates of Lloyd’s may participate under the Lloyd’s India framework through a service company set up in India under the IRDAI (Lloyd’s India) Regulations 2016.
  • Set up a presence in the IFSC and obtain registration as an IIO for carrying on reinsurance business. The IFSCA (Registration of Insurance Business) Regulations 2021 and the IFSCA (Operation of International Financial Services Centers Insurance Office) Guidelines 2021 set out the registration requirements for an entity seeking to undertake insurance or reinsurance business in the IFSC.
  • Write reinsurance of Indian risks from overseas offices by registering as cross-border reinsurers with the IRDAI under the IRDAI’s Guidelines on issuance of File Reference Numbers (FRN) to Cross Border Reinsurers of 3 January 2023 (CBR Guidelines). The process comprises a single-stage application for the allotment of an FRN, made through Indian cedants who wish to cede insurance business with such cross-border reinsurers (CBRs). The CBR Guidelines specify the eligibility criteria for CBRs such as authorization from the home country regulator, credit rating, solvency margin and claims settlement experience. Further, the CBR Guidelines now allow automatic renewal of FRNs for CBRs who meet the specified criteria.

The IRDAI has recently issued an exposure draft on the IRDAI (Registration and Operations of Foreign Reinsurers Branches & Lloyd’s India) Regulations 2024, which proposes to combine the IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations 2015 and the IRDAI (Lloyd’s India) Regulations 2016.

The IRDAI has also issued the guidelines for overseas insurance companies to open liaison offices in India. The IRDAI’s Guidelines on Establishment and Closure of Liaison Office in India by an Insurance Company registered outside India of 17 October 2022 prescribe a single-stage application process to the IRDAI and the documentation required for opening a liaison office in India.

Other licenses, authorizations and qualifications

  1. What licenses, authorizations or qualifications are required for insurance and reinsurance companies to conduct business?

Other than registration under the Insurance Act and general company law, no additional licenses, authorizations or qualifications are required for insurance and reinsurance companies to conduct business. Banks that intend to set up insurance joint ventures with equity contributions on a risk participation basis or make investments in insurance companies are required to obtain the prior approval of the RBI before engaging in such business.

Officers and directors

  1. What are the minimum qualification requirements for officers and directors of insurance and reinsurance companies?

The Registration Regulations prescribe that the IRDAI will examine the following considerations for officers and directors of insurance and reinsurance companies while granting registration to an insurance or reinsurance company:

  • the performance record of the directors and persons in the management of the promoters, investors of the applicant and the applicant;
  • the level of actuarial and other professional expertise within the management of the applicant company; and
  • the academic and professional qualifications, professional experience, reputation and character of the directors and key persons, and whether any censure or disciplinary actions, dismissals and litigations have been instituted against them.

Further, the application process for the registration of insurance or reinsurance companies requires various details in terms of the qualifications and professional background of the key management personnel (KMP) of the applicant.

With the increase in foreign direct investment in insurance companies, the Registration Regulations require an insurance company having foreign investment to maintain, at the minimum, the following personnel who are resident Indian citizens: (1) the majority of directors; (2) the majority of KMP; and (3) at least one among the chairpersons of its board, its managing director and its chief executive officer.

Additionally, the IRDAI’s Guidelines for Corporate Governance for Insurers in India of 18 May 2016 requires all directors and KMP of an insurance company to be compliant with the ‘fit and proper’ criteria stipulated by the IRDAI.

For reinsurance companies having branch offices in India, the Branch Office Regulations prescribe similar registration requirements as above, and require some of the KMP of the foreign reinsurer branch to be appointed with the prior approval of the IRDAI. Apart from the said registration requirements, the Branch Office Regulations further prescribe that an executive committee of the foreign reinsurer branch must be constituted by the board of directors of the foreign reinsurer to perform the functions of the board with a clearly defined delegation from the board of the foreign reinsurance company.

Capital and surplus requirements

  1. What are the capital and surplus requirements for insurance and reinsurance companies?

The insurance regulatory framework prescribes varying capital and surplus requirements for different insurance and reinsurance companies:

  • insurance companies are required to have a minimum paid-up equity capital of 1 billion rupees;
  • reinsurance companies are required to have a minimum paid-up capital of 2 billion rupees;
  • a foreign reinsurance company seeking to set up a branch office in India is required to have a minimum net owned funds of 50 billion rupees and is further required to infuse a minimum assigned capital of 1 billion rupees into the branch office;
  • an IIO set up by an Indian or foreign insurance or reinsurance company or other permissible entities is required to have a minimum net owned funds of 10 billion rupees and maintain a minimum assigned capital of 124 million rupees;
  • a Lloyd’s India branch is required to have a minimum assigned capital of 1 billion rupees; and
  • syndicates of Lloyd’s India are required to maintain an assigned capital of 50 million rupees through their service companies in India.

Further, the Draft Insurance Bill proposes to remove the minimum paid-up equity capital requirements and specifies that the determination of minimum paid-up equity capital will be in accordance with the regulations specified by the IRDAI, depending on the ‘size and scale of operations, class or sub-class of insurance business and the category or type of insurer’. If the Draft Insurance Bill is brought into force as presently proposed, the capital requirements applicable to insurance/reinsurance companies would change accordingly.

If the above-mentioned drafts are brought into force as presently proposed, the applicable capital requirements would change accordingly.

Reserves

  1. What are the requirements with respect to reserves maintained by insurance and reinsurance companies?

Insurance and reinsurance companies are required to maintain, at all times, a solvency margin of assets over the number of liabilities of not less than 50 percent of the amount of the minimum capital requirements of such insurance or reinsurance company. The required solvency margin is calculated by insurance companies based on their mathematical reserves and the sum at risk. The IRDAI periodically specifies the factors that must be considered in the calculation of the required solvency margin.

Further, the Amendment Act 2021 and the Indian Insurance Companies (Foreign Investment) Amendment Rules 2021 (Amendment Rules) stipulate conditions where foreign investment in an insurance company exceeds 49 percent, such as:

  • at least 50 percent of the net profit is required to be retained in general reserves, for a financial year in which dividend is paid on equity shares and at any time the solvency margin is less than 1.2 times the control level of solvency; and
  • at least 50 percent of its directors are required to be independent directors, unless the chairperson of the board is an independent director, in which case at least one-third of its board shall comprise independent directors.

In terms of foreign entities transacting insurance or reinsurance business in India, the following requirements have been prescribed:

  • the Branch Office Regulations prescribe that the foreign reinsurer setting up a foreign reinsurer branch shall fully comply with the solvency margin requirements under the home country’s regulatory requirements;
  • the foreign reinsurer branch and the service companies registered under the Lloyd’s India framework are also required to maintain their solvency margin in accordance with the applicable regulations issued by the IRDAI;
  • an IIO is required to maintain such solvency margin as is specified by its home country regulatory or supervisory authority; and
  • the CBR Guidelines require a CBR, while filing an application for allotment of FRN, to confirm whether such CBR complies with the solvency margin and capital adequacy prescribed by the respective home regulator.

Product regulation

  1. What are the regulatory requirements with respect to insurance products offered for sale? Are some products regulated by multiple agencies?

All insurance products are required to be filed with the IRDAI, in accordance with the applicable product filing procedures issued by the IRDAI.

Until recently, products across lines of insurance business had to be filed under a ‘file and use’ procedure (whereby products required the IRDAI’s prior approval before they could be launched) and a few products (such as commercial products in general insurance) could be filed under a ‘use and file’ procedure (whereby products can be launched immediately after the insurer’s internal committee’s approval subject to certain conditions such as the submission of quarterly reports to the IRDAI, and the completion of use and file documents). Following a series of recent circulars issued by the IRDAI, insurers are now permitted to file most of their insurance products under the use and file procedure, whereby the product is approved and certified by the insurer’s internal committees.

The construction of health insurance products is regulated under the IRDAI-specified general terms and conditions, and defined terms and certain terms and conditions specified under various standardization guidelines and the IRDAI (Health Insurance) Regulations 2016. Life insurance products are regulated by the IRDAI (Non-Linked Insurance Products) Regulations 2019 and the IRDAI (Unit Linked Insurance Products) Regulations 2019.

Further, the IRDAI (Protection of Policyholders’ Interests Regulations) 2017 (Policyholders Regulations) prescribe certain matters to be mandatorily incorporated in life insurance, general insurance and health insurance policies. Some of the key requirements are as follows:

  • the name and unique identification number allotted by the IRDAI to the product, its terms and conditions, and details of the salesperson;
  • benefits payable and the contingencies upon which these are payable and the other terms and conditions of the insurance contract, including any riders or endorsements;
  • details of the nominee;
  • the premiums payable, frequency of payment, grace period allowed and the implication of discontinuing the payment of an instalment of the premium;
  • any special clauses, exclusions or conditions imposed on the policy;
  • the address and email of the insurance company to which all communications in respect of the policy must be sent;
  • details of the insurance company’s internal grievance redressal mechanism, along with the right of the insured to approach the insurance ombudsman with requisite territorial jurisdiction; and
  • the list of documents that are normally required to be submitted in case of a claim.

Where exclusions are to be stipulated in the policy, the Policyholders Regulations require that, wherever possible, insurance companies must endeavor to classify the exclusions into the following:

  • standard exclusions applicable in all policies;
  • exclusions specific to the policy that cannot be waived; and
  • exclusions specific to the policy that can be waived on payment of an additional premium.

Similarly, to give clarity and understanding of the conditions to the policyholder, insurance companies are required to endeavor to broadly categorize policy conditions into the following:

  • conditions precedent to the contract;
  • conditions applicable during the contract;
  • conditions when a claim arises; and
  • conditions for renewal of the contract.

A number of regulations and guidelines issued by the IRDAI specify that, broadly, product literature must be in simple language and easily understandable to the public at large, and technical terms used in the policy wording must be clarified to the insured.

The terms and conditions of property and engineering insurance covers are currently governed by the policy wording specified by the former Tariff Advisory Committee. Very few modifications to this policy wording have been permitted.

The IRDAI has over the past few years notified standardized or tariff products such as individual health insurance products, standard non-linked non-participating individual pure risk life insurance products, standard products for fire and allied perils for dwellings, small and micro businesses, personal accident, and domestic travel, and standard individual immediate annuity products, which are mandatorily required to be offered by all insurers. The IRDAI has also introduced a model product for persons with disabilities, persons afflicted with HIV/AIDS, and those with mental illness whereby the IRDAI has made it mandatory for every general and stand-alone health insurance company to offer their respective products to the foregoing categories.

The IRDAI has also issued specific additional guidance for certain forms of insurance contracts such as life, health, trade credit and surety insurance contracts. As an illustration, for health insurance, the IRDAI has issued standardized wordings for general clauses for indemnity-based health insurance policies (excluding personal accident and domestic or overseas travel) and for certain standard exclusions used under health insurance contracts. The IRDAI has also specified a standard set of definitions, a standard nomenclature for certain critical illnesses, a standard list of non-medical expenses that are permitted to be excluded, a list of exclusions that are not allowed and certain existing diseases that may be permanently excluded. It has also specified several other conditions for health insurance policies, making these policies highly regulated.

Regulatory examinations

  1. What are the frequency, types and scope of financial, market conduct or other periodic examinations of insurance and reinsurance companies?

Insurance companies, reinsurance companies and insurance intermediaries are amenable to inspections and investigations by the IRDAI. No specific frequency has been prescribed for these investigations and inspections.

Even service providers and contractors to insurance companies or insurance intermediaries are obliged to furnish to the IRDAI, if required, during any investigation or inspection, all books of accounts, registers, and other documents and databases in their custody or power that relate to the affairs of the insurance company or the insurance intermediary. Directors and other officers of such service providers or contractors may also be called on by the IRDAI to furnish statements on oath.

Investments

  1. What are the rules on the kinds and amounts of investments that insurance and reinsurance companies may make?

Investments made by insurance and reinsurance companies are governed by:

The Insurance Act mandates that:

  • life insurance companies should invest assets of at least 25 percent in government securities, a further sum equal to not less than 25 percent in government securities or approved securities and the balance in any other approved investment under the Investment Regulations;
  • general insurance companies are required to invest 20 percent of the assets in government securities, a further sum equal to not less than 10 percent of the assets in government securities or approved securities and the balance in any other approved investment under the Investment Regulations; and
  • reinsurance companies and foreign reinsurer branches are required to invest and keep invested at all times 20 percent of the assets in government securities, a further sum equal to not less than 10 percent of the assets in government securities or approved securities and the balance in any other approved investment under the Investment Regulations.

The Investment Regulations, which contain the exposure or prudential norms, set out, inter alia, the limits on investments to be made by insurance or reinsurance companies based on the investee company, group or industry. Also, subject to the Investment Regulations, insurance companies cannot invest more than 5 percent of their assets in companies belonging to promoters. Moreover, insurance companies are also prohibited from investing the funds of policyholders, directly or indirectly, outside India.

Change of control

  1. What are the regulatory requirements on a change of control of insurance and reinsurance companies? Are officers, directors and controlling persons of the acquirer subject to background investigations?

Under section 6A of the Insurance Act, read with the Registration Regulations, prior approval from the IRDAI must be obtained in the event of a change in shareholding of an insurance or reinsurance company where, after the transfer, the total shareholding of the transferee is likely to exceed 5 percent of the total paid-up capital of the company.

Also, prior approval of the IRDAI must be obtained if the nominal value of the shares intended to be transferred by any individual, firm, group, constituents of a group or body corporate under the same management, jointly or severally, exceeds 1 percent of the total paid-up equity capital of the insurance or reinsurance company.

There are no express provisions mandating background investigations of officers and directors of acquirers. However, while seeking the IRDAI’s approval for the transaction, information may need to be submitted regarding whether the directors of the transferee have ever been refused a license or authorization in the past to carry out regulated financial business, or whether any company, firm or organization with which such directors have been associated as directors, officers or managers has been investigated by a regulatory or professional body.

Financing of an acquisition

  1. What are the requirements and restrictions regarding financing of the acquisition of an insurance or reinsurance company?

The Indian insurance regulatory framework does not expressly regulate the financing of the acquisition of an Indian insurance or reinsurance company.

Minority interest

  1. What are the regulatory requirements and restrictions on investors acquiring a minority interest in an insurance or reinsurance company?

There are no specific provisions or requirements under the Indian insurance regulatory framework on the acquisition of a minority interest in an insurance company or reinsurance company.

Foreign ownership

  1. What are the regulatory requirements and restrictions concerning the investment in an insurance or reinsurance company by foreign citizens, companies or governments?

The Amendment Act 2021 has increased the foreign direct investment limit in insurance and reinsurance companies from 49 percent to 74 percent.

Further, the IRDAI has notified the Registration Regulations, repealed the earlier IRDAI (Registration of Indian Insurance Companies) Regulations 2000 and IRDAI (Transfer of Equity Shares of Insurance Companies) Regulations 2015 and which broadly set out the various requirements for investment in an insurance company, namely:

  • a lock-in period for investment in the form of equity shares either in the capacity of a promoter or an investor. The minimum lock-in period has been classified in accordance with the time at which the investment is being made; and
  • the maximum investment that may be made by a single investor or collectively by all the investors in insurance companies that are not listed on an Indian stock exchange.

Private equity or alternative investment funds are permitted to invest in Indian insurance companies as either investors or promoters in accordance with the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines 2017 of 5 December 2017 (PE Guidelines) and the Registration Regulations. However, the IRDAI issued the Master Circular on Registration of Indian Insurance Company 2023, which repealed the PE Guidelines, and the norms for investment by a private equity or alternative investment funds are now only governed by the Registration Regulations.

Group supervision and capital requirements

  1. What is the supervisory framework for groups of companies containing an insurer or reinsurer in a holding company system? What are the enterprise risk assessment and reporting requirements for an insurer or reinsurer and its holding company? What holding company or group capital requirements exist in addition to individual legal entity capital requirements for insurers and reinsurers?

The IRDAI directly regulates only those insurance companies, reinsurance companies and insurance intermediaries operating in the Indian insurance sector, and currently does not regulate the operations of the group entities of such insurance companies or insurance intermediaries. However, there are some restrictions on insurance companies and insurance intermediaries operating in the same group, where the IRDAI has discretion (in some cases) to determine the scope of ‘group’:

  • an Indian corporate group can have an insurance company and an insurance broker or corporate agent within the same group, subject to certain conditions being fulfilled;
  • typically, within a group, the IRDAI will grant one certificate of registration to only one entity for insurance intermediation, unless a case on merits and with no conflict of interest is made before the IRDAI;
  • a web aggregator cannot be a related party of an insurance company;
  • there is no express restriction on insurance companies and surveyors operating in the same group, but the IRDAI is likely to view this as an inherent conflict of interest; and
  • there is no express restriction on insurance companies and TPAs operating in the same group.

Reinsurance agreements

  1. What are the regulatory requirements with respect to reinsurance agreements between insurance and reinsurance companies domiciled in your jurisdiction?

The IRDAI (Reinsurance) Regulations 2018 (Reinsurance Regulations) issued by the IRDAI define a reinsurance contract as a commercial agreement that is legally binding on all the parties and that is evidenced by a reinsurance slip, cover note or another such document. Reinsurance arrangements need not be pre-approved by the IRDAI, but they must be documented and filed with the IRDAI within the stipulated time frame.

The overarching regulatory framework for the reinsurance of all insurance risks in India is set out in the Reinsurance Regulations. The guiding principle is maximizing retentions within India, so each Indian insurance company must maintain the maximum possible retention commensurate with its financial strength, quality of risks and volume of business. Regarding addition, both Indian reinsurance companies and foreign reinsurer branches are required to maintain a minimum retention of 50 percent of their Indian business. An Indian insurance company is also strictly prohibited from fronting for a foreign insurance company or reinsurance company. ‘Fronting’ is defined as a process of transferring risk in which an Indian insurance company cedes or retrocedes most or all of the assumed risk to a reinsurance company or a retrocessionaire.

Further, Indian insurance companies are required to mandatorily cede a certain percentage of the sum assured on each policy for different classes of insurance written in India to Indian reinsurance companies as defined under the provisions of the Insurance Act. Apportionment of obligatory cession for the financial year 2024-25 has remained consistent with the previous year’s requirement of 4 percent. The requirement to place the entire obligatory cession only with the General Insurance Corporation of India also continues to be applicable.

Subject to the retention limit and the obligatory cession to the Indian reinsurance company for other cessions, every cedent, is required to comply with the ‘order of preference for cessions’ set out in the Reinsurance Regulations, where ‘cedent’ is defined under the Reinsurance Regulations as an Indian insurance company writing ‘direct’ insurance business that contractually cedes a portion of the risk. Pursuant to the IRDAI (Reinsurance) (Amendment) Regulations 2023, the Reinsurance Regulations were recently amended which amended the order of preference for cessions. A cedent is required to first offer its facultative and treaty surpluses to Indian reinsurance companies transacting reinsurance business during the immediate past three continuous financial years, and thereafter to IIOs which meet the required investment criteria and foreign reinsurer branches. The Indian insurance company may then proceed to offer the surplus to other IIOs, followed by overseas reinsurance companies and Indian insurance companies (only for facultative placements).

Although the order of preference does not apply to Indian insurance companies transacting life insurance business, the Reinsurance Regulations require them to endeavor to utilize the Indian domestic capacity before offering reinsurance placements to CBRs. Life insurance companies are also required to obtain the prior approval of the IRDAI before entering into reinsurance arrangements with their promoter company, or associate or group companies, except where the arrangements are on commercially competitive terms and an arm’s-length basis.

Indian insurance companies are also required to comply with various requirements set out in the Reinsurance Regulations, including filing requirements for the reinsurance program, and the wordings of each reinsurance contract, as well as details of their shares in the reinsurance arrangements entered into.

Further, proposals for alternative risk transfer – namely non-traditionally structured reinsurance solutions tailored to the specific needs and profile of an insurance or reinsurance company – are also required to be submitted to the IRDAI.

Ceded reinsurance and retention of risk

  1. What requirements and restrictions govern the amount of ceded reinsurance and retention of risk by insurers?

Indian insurers are mandated to retain risk proportionate to their financial strength, quality of risks and business volume. The IRDAI has issued no specific guidance on the appropriate minimum amount to be retained by non-life insurers. However, life insurers are required to maintain a minimum retention of 25 percent of the sum at risk for pure protection life insurance business portfolios and 50 percent otherwise. Further, Indian insurers are also required to mandatorily cede the prescribed percentage of the sum assured on each policy for different classes of insurance written in India to the Indian reinsurer.

For cedents transacting other than the life insurance business, the surplus over the domestic reinsurance arrangements shall be placed outside India with only those CBRs that satisfy the prescribed criteria and have the details filed with the IRDAI.

Specifically, the Reinsurance Regulations stipulate the maximum limits on reinsurance cession that can be made by an Indian insurer to a particular CBR under any insurance segment, and are as follows:

  • if Standard and Poor’s (S&P) rating of the CBR is BBB or BBB+, up to 10 percent cession is allowed;
  • if S&P’s rating of the CBR is greater than BBB+ and up to and including A+, up to 15 percent cession is allowed; and
  • if S&P’s rating of the CBR is greater than A+, up to 20 percent cession is allowed.

The above-mentioned cession limits are not applicable to such cedents who have placed total reinsurance premium of up to 750 million Indian rupees outside India with CBRs of a minimum rating of BBB+. The percentages of the cession limits are calculated on the total reinsurance premium ceded outside India. Any cession to a CBR that does not satisfy the eligibility criteria, or where the cession is above the prescribed limit, requires the prior approval of the IRDAI for placement.

Collateral

  1. What are the collateral requirements for reinsurers in a reinsurance transaction?

The Indian insurance regulatory framework does not specify any collateral requirements for reinsurers in a reinsurance transaction.

Credit for reinsurance

  1. What are the regulatory requirements for cedents to obtain credit for reinsurance on their financial statements?

Presently, the Indian insurance regulatory framework does not expressly regulate requirements for cedents to obtain credit for reinsurance on their financial statements.

Insolvent and financially troubled companies

  1. What laws govern insolvent or financially troubled insurance and reinsurance companies?

Insolvency and bankruptcy law in India was overhauled by way of the Insolvency and Bankruptcy Code 2016 (Insolvency and Bankruptcy Code). It provides the insolvency and liquidation process for corporate persons. However, insurers have been excluded from the scope of ‘corporate debtor’ as defined under the Insolvency and Bankruptcy Code.

The Insurance Act specifically provides that the winding-up of an insurance company shall be under the procedure laid out in the Companies Act. Also, the Insurance Act specifies certain other conditions under which the court may order the winding-up of an insurance company. The process for winding up involves compliance with various procedural requirements set out in the Companies Act. The process includes:

  • the appointment of a company liquidator;
  • the realization of the assets of the company;
  • repayment of all the outstanding creditors and any other statutory dues owed by the company; and
  • dissolution of the company.

Concerning repayment of the creditors and outstanding dues of the company, the Companies Act provides that certain dues are required to be paid on priority, including dues to employees of the company, and the statutory dues owed to governmental authorities.

Further, the Insurance Act provides that the voluntary winding-up of an insurance company is subject to certain restrictions. An insurance company cannot be wound up voluntarily except to effect an amalgamation or a reconstruction of the company, or on the ground that because of its liabilities it cannot continue its business.

An insurance company may also be partially wound up, whereby a class of its business is wound up but another class either continues to operate or is transferred to another insurance company. In this scenario, a scheme may be prepared and submitted in court that should provide for the following: the allocation and distribution of the assets and liabilities of the company between any classes of business affected (including the allocation of any surplus assets that may arise on the proposed winding-up) for any future rights of every class of policyholders in respect of their policies; and the manner of winding up any of the affairs of the company that are proposed to be wound up. The scheme may also include provisions for altering the memorandum of association of the company concerning its objects and such further provisions as may be expedient for giving effect to the scheme.

Moreover, the Insurance Act also authorizes the IRDAI, after allowing being heard, to appoint an administrator to manage the affairs of the insurer (under the direction and control of IRDAI), if at any time the IRDAI has reason to believe that the insurer carrying out life insurance business is acting in a manner likely to be prejudicial to the interests of holders of life insurance policies. In June 2017, the IRDAI, in the exercise of this authority, appointed an administrator for Sahara Life Insurance Company.

Claim priority in insolvency

  1. What is the priority of claims (insurance and otherwise) against an insurance or reinsurance company in an insolvency proceeding?

The Indian insurance regulatory framework does not specifically regulate the priority of claims against an insurance or reinsurance company in an insolvency proceeding. However, because the winding-up of an insurance company would be under the Companies Act and the Insolvency and Bankruptcy Code, the priority of claims prescribed thereunder would apply to an insurance and a reinsurance company as well.

Intermediaries

  1. What are the licensing requirements for intermediaries representing insurance and reinsurance companies?

The IRDAI has issued various specific regulations to govern individuals and entities that can represent insurance and reinsurance companies and are permitted to offer and distribute insurance products on their behalf. Broadly, an individual can be registered as an insurance agent, and entities may be registered as insurance intermediaries through one of the following:

  • corporate agents;
  • insurance brokers;
  • insurance marketing firms (IMFs);
  • third-party administrators;
  • surveyors and loss assessors; and
  • web aggregators.

Insurance intermediaries need to obtain registration from the IRDAI under the provisions of the specific regulations that apply to them given the nature of the business proposed to be undertaken by them, which include details of eligibility criteria, capital and net worth requirements, qualification requirements for the principal officer and directors or partners of the concerned entity. Registration is typically granted for three years and may be renewed thereafter.

In 2019, the Amendment Rules were notified, which effectively increased the permissible limit of foreign direct investment in insurance intermediaries to 100 percent. However, where an entity whose primary business is outside the insurance sector, is allowed by the IRDAI to function as an insurance intermediary, the foreign equity investment caps applicable in that sector (if any) shall continue to apply to such intermediary, subject to the condition that the revenues of such entities from the primary (non-insurance related) business remain above 50 percent of their total revenues in any financial year.

An individual may be appointed as an insurance agent by an insurance company on complying with the conditions provided under the regulations notified by the IRDAI in this regard. An insurance agent is required to have passed the relevant examination and is also required to possess the requisite knowledge for soliciting insurance business and providing necessary services to policyholders. An insurance agent is permitted to solicit insurance business for only:

  • one life insurance company;
  • one general insurance company;
  • one health insurance company; and
  • one each of the monoline insurance companies.

Entities eligible to operate as corporate agents include:

  • firms;
  • banks;
  • non-banking financial companies;
  • cooperative societies;
  • non-governmental organizations; and
  • companies.

An entity registered as a corporate agent may either exclusively carry out the business of insurance distribution or engage in any business other than insurance distribution as its main business. Where a corporate agent has a main business other than insurance distribution, that agent is not permitted to make the sale of its products contingent on the sale of an insurance product, or vice versa. The IRDAI also notified the IRDAI (Insurance Intermediaries) (Amendment) Regulations 2022 (Intermediaries Amendment Regulations), which amended the maximum number of arrangements that a corporate agent is permitted to enter into with life, general and health insurance companies. A corporate agent is now permitted to enter into a maximum of nine arrangements with each category of insurance companies, from the earlier limit of three.

Insurance brokers are required to exclusively carry out the distribution of insurance products. Any company, limited liability partnership or cooperative society may apply to the IRDAI for the grant of an insurance broker certificate of registration. Applicants may register as a direct broker (life, general, or life and general), a reinsurance broker or a composite broker (involved in both direct and reinsurance broking). The minimum capital for a direct broker is 7.5 million rupees; a reinsurance broker, 40 million rupees; and a composite broker, 50 million rupees. All insurance brokers are required to be members of the Insurance Brokers Association of India.

Entities such as companies, limited liability partnerships or cooperative societies that are registered as IMFs are permitted to distribute insurance products along with mutual funds, pension products and certain other financial products, provided that permissions from the respective regulator are in place to distribute these financial products. IMFs are now permitted to distribute the insurance products of only six life insurance companies, six general insurance companies and six health insurance companies at any one time from the earlier limit of two, per the Intermediaries Amendment Regulations, and a change in the insurance company whose products are to be distributed may take place only on the prior approval of the IRDAI. Further, the Intermediaries Amendment Regulations also increased the area of operation of IMFs to the entire state territory, which was earlier restricted to a maximum of three districts. IMFs are required to have a net worth of 500,000 rupees, if the IMF is operating out of only one district (aspirational district), and a net worth of 1 million rupees in all other cases. IMFs are also permitted to undertake survey functions through licensed surveyors employed on its rolls, policy servicing activities and other activities that are permissible to be outsourced by insurance companies under the applicable regulatory framework.

An entity such as a company or a limited liability partnership that is registered as a web aggregator is permitted to display on its website information on insurance products of insurance companies with whom the web aggregator has partnered. The web aggregator is also permitted to display product comparisons on its website, carry out activities for lead generation and share leads with insurance companies. A web aggregator is required to have a minimum capital of 2.5 million rupees.

INSURANCE CLAIMS AND COVERAGE

Third-party actions

  1. Can a third party bring a direct action against an insurer for coverage?

There is no equivalent in India of the UK Third Parties (Rights against Insurers) Act 2010. As a general rule, Indian law recognizes the principle of privity of contract, and thus a third party would be unable to bring a direct action against an insurer.

It is common practice, however, for third parties to name the defendant’s insurer in motor accident-related proceedings. The Motor Vehicles Act 1988 (MVA) provides that the rights of an insured under a policy are transferred to a third party claiming against the insured in the event of the insured’s insolvency. The MVA empowers the Motor Claims Tribunal to seek the insurers’ involvement in a third-party action against the insured if the tribunal believes the claim is collusive or if the insured fails to contest the claim. Through the Motor Vehicles (Amendment) Act 2019 (effective from 1 April 2022) the liability of insurance companies under a third-party liability cover is limited to: (1) 500,000 rupees (in cases of death of third party); (2) 250,000 rupees (in cases of grievous hurt to third party), and (3) 1.5 million rupees (in cases of death of owner-driver). In terms of (3), the insured may also obtain a higher sum insured upon payment of additional premium, which may potentially increase the insurance company’s liability.

Late notice of claim

  1. Can an insurer deny coverage based on late notice of claim without demonstrating prejudice?

Insurance contracts require that the claims or circumstances of the claims are intimated to an insurance company within the period specified in the policy. This requirement may be expressed as a condition or a condition precedent to the insurer’s liability under the policy, and the consequences of non-compliance will to some extent depend on whether the notification clause is expressed as a condition or a condition precedent. If a notice clause is a condition, the insurer will have to show that it suffered prejudice on account of a delayed notice; if the clause is a condition precedent, in theory, no prejudice is required to be shown for placing reliance on the clause.

Usually, the notification of a claim is required ‘immediately’, ‘as soon as practicable’ or ‘as soon as reasonably practicable’, etc. The Insurance Regulatory and Development Authority of India (IRDAI) through its circulars dated 20 September 2011, 28 October 2016 and 28 June 2017, also guided reporting requirements. This is an evolving sphere, but at present, we see courts adopting a strict approach towards adherence to policy terms and conditions, including the notification requirement.

Wrongful denial of claim

  1. Is an insurer subject to extra-contractual exposure for wrongful denial of a claim?

Insurance companies must have an internal grievance redressal mechanism that addresses complaints raised against them by insured parties. If a policyholder feels that an insurance company has not adequately addressed his or her grievance, he or she may approach the Grievance Cell of the IRDAI or the insurance ombudsman (depending on the nature of the grievance) or initiate formal legal proceedings against the insurance company before the consumer protection forums. Consumer forums, and Indian courts in general, often award reasonable sums against insurance companies as compensation for the consequential loss, harassment and legal costs of policyholders if it is deemed that the claim was wrongly denied, especially where the conduct of an insurance company is inferred to be arbitrary or harmful.

Defense of claim

  1. What triggers a liability insurer’s duty to defend a claim?

A liability insurer’s ‘duty to defend’ a claim is determined by the terms of the insurance policy. The insurer usually has either a ‘right to defend’ or a ‘duty to defend’. The duty to defend is when a claim made against the insured is to be defended by the insurer, even if it is subsequently found to not be covered. Until a claim is admitted or repudiated, an insurer must manage the claim defense. However, if the wording is ‘right to defend’, the insurer can opt to defend or associate with the defense.

Indemnity policies

  1. For indemnity policies, what triggers the insurer’s payment obligations?

Once an insured has established that the claim (usually defined to mean a written demand or civil suit, et cetera) falls within the insuring clause, and the insurer is satisfied that none of the exclusions apply and none of the conditions have been breached, the insurer’s obligation to pay would trigger as soon as the insured incurs and satisfies a liability.

Incontestability

  1. Is there a period beyond which a life insurer cannot contest coverage based on misrepresentation in the application?

Under the provisions of the Insurance Act, a life insurance policy cannot, on any grounds whatsoever, be called into question by the insurer three years after the date of issuance or commencement of risk, or the date of revival of the policy or the date of the rider to the policy, whichever is latest.

Punitive damages

  1. Are punitive damages insurable?

There are no judicial precedents to suggest that punitive damages are insurable. In the authors’ experience, insurance policies typically exclude punitive damages from the scope of insurance cover.

Excess insurer obligations

  1. What is the obligation of an excess insurer to ‘drop down and defend’, and pay a claim, if the primary insurer is insolvent or its coverage is otherwise unavailable without full exhaustion of primary limits?

No legislative or regulatory obligation requires excess insurers to defend and pay a claim if the primary insurer is insolvent or its coverage is unavailable without full exhaustion of the primary limits.

Self-insurance default

  1. What is an insurer’s obligation if the policy provides that the insured has a self-insured retention or deductible and is insolvent and unable to pay it?

Self-insured retentions and deductibles are not governed by any statute or regulation as such. The respective obligations of the insurer and the insured concerning deductibles and self-insured retentions are usually governed by the wording of the policy or the insurance contract.

The obligation to make payment, if any, to the insolvent insured will be under the general insolvency or bankruptcy laws. In the authors’ view, the insolvency of the insured will not affect the liability of the insurer to pay the insured. If the insurer is to recover the retention amount or deductible from the insolvent insured, for such recovery, the insurer will be treated as an unsecured creditor whose claim will be settled under the insolvency laws.

Claim priority

  1. What is the order of priority for payment when there are multiple claims under the same policy?

The terms of the insurance policy entered into between the insurer and the insured usually determine the order of priority for payment when there are multiple claims under the same policy. For example, there are order-of-payments clauses in some directors’ and officers’ policies that specify that the losses will be satisfied in the order in which the losses are presented to the insurer.

Allocation of payment

  1. How are payments allocated among multiple policies triggered by the same claim?

The allocation of payments between the various insurers depends on the allotment of risk set out in the policy. Most policies contain an ‘other insurance’ clause that sets out that the policy in question would sit over any other existing and valid insurance that has been taken out by the insured in respect of the same insurable interest.

Disgorgement or restitution

  1. Are disgorgement or restitution claims insurable losses?

Claims for restitution and disgorgement are usually not covered under insurance policies in India.

Definition of occurrence

  1. How do courts determine whether a single event resulting in multiple injuries or claims constitutes more than one occurrence under an insurance policy?

What constitutes an occurrence may differ in scope from one policy to another, but it is usually defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

Rescission based on misstatements

  1. Under what circumstances can misstatements in the application be the basis for rescission?

Under Indian law, an insurance contract is one of utmost good faith, and insurers are entitled to a fair presentation of any risk before inception. If there has been a misrepresentation or non-disclosure of a material fact, an insurer may avoid the policy ab initio. Unless the misrepresentation or non-disclosure was fraudulent, the premium must be tendered back to the policyholder. However, under the terms of the Insurance Act, a life insurance policy cannot be called into question on any grounds whatsoever (including fraud) after the passing of three years from the date of issuance or commencement of the risk.

REINSURANCE DISPUTES AND ARBITRATION

Reinsurance disputes

  1. Are formal reinsurance disputes common, or do insurers and reinsurers tend to prefer business solutions for their disputes without formal proceedings?

There have been very few fully adjudicated reinsurance disputes in India, and there is, therefore, very limited Indian case law or judicial guidance concerning reinsurance disputes. Though it is true that, as a general trend, parties do prefer business solutions for their disputes, this is now changing. Reinsurance disputes are being increasingly referred to arbitration and are pending litigation in various courts in India. The Commercial Courts Act 2015 allows for adjudication of reinsurance disputes before the Commercial Courts. As, in most of the cases, the disputes have not been finally adjudicated, the case law and precedent on the subject remains limited. However, the general principles of insurance and contract law apply.

Common dispute issues

  1. What are the most common issues that arise in reinsurance disputes?

Apart from the questions of, inter alia, coverage, and the applicability of exclusions and non-disclosure that arise in any other insurance dispute, an issue that often arises is whether, in an insurer-reinsurer dispute, an insurer is entitled to approach the consumer forum. Consumer fora have a nominal court fee, and the strict rigors of evidence and civil procedure are not theoretically applicable.

A person availing a service for commercial purposes is excluded from the definition of a ‘consumer’ under Indian law.

Therefore, the question that arises is whether an insurer who opts for reinsurance support to indemnify its losses or to enable it to insure larger amounts by retaining a portion of the premium and passing on the majority of the risk, which in turn may enable it to write more business, does it in aid of its commercial purpose.

Similar questions are equally applicable to a dispute between an insurer and insured where the latter is carrying out a commercial business and the policy has been taken in the course of operation of the business.

This issue has recently been decided by the Supreme Court in National Insurance Co Ltd v Harsolia Motors and Ors, (2023) 8 SCC 362 (Harsolia Motors), where it was clarified that availing an insurance policy is an act of indemnifying a risk of loss/damages and there is, therefore, no element of profit generation generally. However, it is not the rule, and an insurer can challenge the jurisdiction of the consumer forum by demonstrating that the

transaction in reference has been done in relation to a commercial purpose. The Supreme Court held that the relevant consideration for deciding commercial purpose is whether the items sold, or services offered are directly related to the activity that generates profit.

The Harsolia Motors matter deals specifically and only with an insurer and insured relationship, as opposed to an insurer and reinsurer relationship. With respect to the right of an insurer to initiate proceedings against a reinsurer under the Consumer Protection Act 2019, the National Consumer Disputes Redressal Commission (NCDRC) in National Insurance Co Ltd v Chubb Insurance Co Europe & Ors Consumer Case No. 1 of 2010, has held that even a reinsurance contract is a contract of indemnity and therefore cannot be said to be taken for a commercial purpose. The NCDRC concluded that ‘the purpose of reinsurance is not to earn profit but to guard itself against the risk of loss’.

From the context of consumer disputes, the Indian Courts have held that a party’s right to approach a consumer forum is independent and in addition to an available right to arbitrate the dispute. Therefore, a party can approach a consumer forum even where an arbitration clause exists.

Arbitration awards

  1. Do reinsurance arbitration awards typically include the reasoning for the decision?

Section 31(3) of the Arbitration and Conciliation Act 1996 (Arbitration Act) requires an arbitral award to contain the reasons for its findings unless (1) the parties have expressly agreed that no reasons are to be given or (2) the arbitral award is made upon terms agreed between the parties in settlement. It is rare to find agreements where the parties have dispensed with the obligation of an arbitral tribunal to provide reasons in its award.

Power of arbitrators

  1. What powers do reinsurance arbitrators have over non-parties to the arbitration agreement?

Arbitration is a creature of the agreement between parties to arbitrate, and typically excludes non-parties to the arbitration agreement.

However, the law has now evolved to also include non-parties to an arbitration agreement under the ‘group of companies’ doctrine.

However, these principles have not been applied in an insurance or a reinsurance context yet by the Indian Courts.

Recently, the Constitution Bench of the Supreme Court, in Cox and Kings Ltd v SAP India Pvt Ltd, 2023 INSC 1051 has held that an arbitration agreement can bind non-signatories as well by applying the ‘group of companies’ doctrine. The doctrine provides that an arbitration agreement which is entered into by a company within a group of companies may bind non-signatory affiliates if there is a mutual intent or consent to bind such a party. The issue of impleadment of a non-party can be determined either by the Court at the referral stage or later by the arbitral tribunal.

Appeal of arbitration awards

  1. Can parties to reinsurance arbitrations seek to vacate, modify or confirm arbitration awards through the judicial system? What level of deference does the judiciary give to arbitral awards?

Section 34 of the Arbitration Act gives a party to arbitration proceedings the right to approach a court for the setting aside of an arbitral award. However, setting aside is permitted only if the person so challenging the arbitral award has proved that one of the grounds laid down under section 34 has been satisfied.

The court has limited scope while entertaining a petition under section 34 and, unlike an appellate court, it cannot re-examine the evidence to replace its interpretation or conclusions with that of the Arbitral Tribunal. A court may choose to interfere if it is satisfied that the arbitral award or finding is perverse. From an evidentiary point of view, it would mean that the finding is based on no evidence, on irrelevant evidence and/or has been arrived at by ignoring vital evidence.

Apart from patent illegality, which includes perversity, the other grounds include incapacity of a party to enter arbitration, improper notice of arbitration, ultra vires jurisdiction, invalid composition of the Arbitral Tribunal, a conflict with the public policy of India. Also, by way of the amendment to the Arbitration Act in 2015, the scope of public policy has been narrowed down to include only those instances where:

  • the making of the award is fraudulent or corrupt;
  • the award is in contravention of the fundamental policy of Indian law; or
  • the award is in conflict with the most basic notions of morality or justice.

The scope of interference is further restricted where an arbitral award has been passed in an international commercial arbitration, where the ground of patent illegality, is not available.

The courts in India follow the rule of minimal intervention in the arbitration process. Under section 34, the court can set aside the arbitral award/claim on satisfaction of any of the limited grounds specified therein. The courts, under the Arbitration Act, do not have the power to modify an arbitral award.

An order of the court under section 34 of the Arbitration Act can be appealed, under section 37, to the court having the necessary jurisdiction to hear appeals from the court in question. There is no right to appeal from an order passed under section 37, and only a special leave petition, under article 136 of the Constitution of India, can be filed before the Supreme Court. Special leave petitions are rarely entertained/admitted by the Supreme Court.

REINSURANCE PRINCIPLES AND PRACTICES

Obligation to follow cedent

  1. Does a reinsurer have an obligation to follow its cedent’s underwriting fortunes and claims payments or settlements in the absence of an express contractual provision? Where such an obligation exists, what is the scope of the obligation, and what defenses are available to a reinsurer?

The terms of the reinsurance contract usually govern the rights, obligations and processes of the insurer and the reinsurer in respect of the monitoring of claims and settlements. Claims control and claims cooperation clauses are included in reinsurance contracts, and the contracts will also occasionally contain ‘follow-the-fortunes’ clauses that require the reinsurer to follow any settlement reached by the insurer with the insured. The effect of follow-the-fortunes wording is usually that reinsurers must pay for honest settlements that fall within the terms and are under the intent of the reinsurance if such settlements have been reached by the cedent in a proper and business-like manner. ‘Settlement’ includes judgments, awards and reasonable settlements of liability and quantum. Good faith payments by a cedent that are made without admission of liability or on a without prejudice basis, or under a full reservation of rights will not fall within follow-the-fortunes wording and will relieve the reinsurer of his or her liability to indemnify. The intention of the follow-the-fortunes wording is, therefore, that the cedent, not the reinsurer, undertakes claims adjustment and settlement. If the reinsurer wishes to involve itself in the process, it should insert a proper claims control clause or stronger claims cooperation clause, and in either event, remove the follow-the-fortunes wording.

Good faith

  1. Is a duty of utmost good faith implied in reinsurance agreements? If so, please describe that duty in comparison to the duty of good faith applicable to other commercial agreements.

Under Indian law, an insurance contract is a contract of the utmost good faith, and insurers are entitled to a fair presentation of the risk before inception. If there has been a misrepresentation or non-disclosure of a material fact, an insurer may avoid the policy ab initio. Unless the misrepresentation or non-disclosure was fraudulent, the premium must be tendered back to the policyholder. The duty to disclose material facts is not confined to those facts that are in the knowledge of the insured, but also extends to those facts that the insured should have known as a prudent person. Courts have interpreted the expression ‘utmost good faith’ in insurance law to constitute an obligation to deal ‘fairly’ and ‘honestly’, which is almost identical to the definition of ‘good faith’ under the Indian General Clauses Act No. 10 of 1897.

Facultative reinsurance and treaty reinsurance

  1. Is there a different set of laws for facultative reinsurance and treaty reinsurance?

Other than the provisions set out under the Reinsurance Regulations, there are no separate norms for facultative reinsurance and treaty reinsurance. In addition, the Reinsurance Regulations prescribe the order of preference for cessions by Indian insurers for their facultative and treaty surpluses. Except for facultative reinsurance placements, the Reinsurance Regulations prohibit cedents from making any offers for reinsurance protection to Indian insurers that are not licensed to exclusively carry out reinsurance business.

Third-party action

  1. Can a policyholder or non-signatory to a reinsurance agreement bring a direct action against a reinsurer for coverage?

A third party cannot bring a direct action against the reinsurer for coverage because there is no privity of contract between the original policyholder and the reinsurer.

Insolvent insurer

  1. What is the obligation of a reinsurer to pay a policyholder’s claim where the insurer is insolvent and cannot pay?

There are no legislative or statutory obligations on the reinsurer to pay a policyholder’s claim when the insurer is insolvent.

Notice and information

  1. What type of notice and information must a cedent typically provide its reinsurer with respect to an underlying claim? If the cedent fails to provide timely or sufficient notice, what remedies are available to a reinsurer and how does the language of a reinsurance contract affect the availability of such remedies?

The type of notice that a cedent must provide and within what period would be governed by the reinsurance policy wording. For example, notice may be required immediately, or when the insured expects the claim to exceed 50 percent of the deductible. This requirement may be expressed as a condition or a condition precedent to the insurer’s liability under the policy, and the consequences of non-compliance will to some extent depend on whether the notification clause is expressed as a condition or a condition precedent. If the notice clause is a condition, the insurer will have to show that it suffered prejudice on account of the delayed notice. However, if the clause is a condition precedent, in theory, no prejudice is required to be shown for placing reliance on the clause.

Allocation of underlying claim payments or settlements

  1. Where an underlying loss or claim provides for payment under multiple underlying reinsured policies, how does the reinsured allocate its claims or settlement payments among those policies? Do the reinsured’s allocations to the underlying policies have to be mirrored in its allocations to the applicable reinsurance agreements?

There is no statutory guidance concerning the mode of settlement of such claims, and this usually depends on the treaty or contractual arrangements between the insurers and the reinsurers, and the conditions specified in the treaty. Regarding facultative reinsurance, the reinsurer has the discretion to accept or reject claims. However, in treaty reinsurance, the liability of reinsurers to settle claims arises from the conditions mentioned in the treaty.

Review

  1. What type of review does the governing law afford reinsurers with respect to a cedent’s claims handling, and settlement and allocation decisions?

Under the present Indian insurance statutory and regulatory framework, there is no guidance concerning the mode of settlement of such claims, and this usually depends on the reinsurance treaty or contractual arrangements entered into between the insurers and the reinsurers, and the conditions specified in the treaty. In terms of facultative reinsurance, the reinsurer has the discretion to accept or reject claims. However, in treaty reinsurance, the liability of reinsurers to settle claims arises from the conditions mentioned in the treaty.

Reimbursement of commutation payments

  1. What type of obligation does a reinsurer have to reimburse a cedent for commutation payments made to the cedent’s policyholders? Must a reinsurer indemnify its cedent for ‘incurred but not reported’ claims?

Commutation payment terms are set out in reinsurance contracts, and there is no regulatory or legislative direction in this regard.

Extracontractual obligations (ECOs)

  1. What is the obligation of a reinsurer to reimburse a cedent for ECOs?

There are no regulations that have been issued by the Insurance Regulatory and Development Authority of India that deal with the obligation on reinsurers to reimburse a cedent for ECOs. The same will be governed in accordance with the terms of the reinsurance treaties that are entered into between the reinsurer and the cedent. In practice, several reinsurance treaties specifically relieve reinsurers from the obligation to reimburse cedents for ECOs.

UPDATES & TRENDS IN INSURANCE AND REINSURANCE IN INDIA

Key developments

  1. Are there any emerging trends or hot topics in insurance and reinsurance regulation in your jurisdiction?

The past year has seen significant introduction and modification of norms, including but not limited to amendment to Reinsurance Regulations, amendment to trade credit insurance guidelines, issuance of file reference numbers to cross-border reinsurers (CBRs) relating to anti-money laundering and counter financing of terrorism, surety insurance contracts, etc. Some other key changes in recent years in the Indian insurance and reinsurance market are as follows:

  • new norms on the payment of commission to individual insurance agents and insurance intermediaries and expenses of management of Indian insurance companies;
  • Circular on submission of advance reinsurance program by Indian insurance companies;
  • Remuneration of Indian insurance companies’ directors and key management personnel;
  • Information and cyber security guidelines.

The insurance sector is also continuously adapting to various technological advancements such as artificial intelligence, data analytics and digital marketing with regard to claims, underwriting, policyholder communication and grievance management, data security and protection mechanisms.

The Insurance Regulatory and Development Authority of India has also issued several exposure drafts in relation to the norms governing registration of Branches of Foreign Reinsurers and Lloyd’s India, collateralized reinsurance transactions for placement of reinsurance business with CBRs, norms for protection of policyholders and allied matters of insurance companies, insurance products, corporate governance, registration, capital structure, transfer of shares and amalgamation of Indian insurance companies, rural, social sector and motor third party obligations.

While the foregoing drafts are, at the time of writing, at the deliberation stage and stakeholder comments have been invited, it is anticipated that new regulations, amendments and guidelines will be issued on these and other matters in the coming year, which will impact the Indian insurance market.

* The information in this chapter was accurate as of April 2024.

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