Despite the headwinds that reduced private equity (PE) and venture capital (VC) activity in India in the past year, the insurance sector has continued to attract interest from financial investors. One part of the growth story is the technology infrastructure being developed by players in this sector. However, another key factor contributing to the allure of insurance is the liberalisation of the regulatory framework brought about by the Insurance Regulatory and Development Authority of India (IRDAI). This has greatly eased the doing of business.
The amendments have focussed mainly on two aspects: easing access to capital and debt by insurers and insurance intermediaries, and providing greater flexibility to insurance players to structure their businesses and operations.
Following the liberalisation of foreign investment in the insurance sector in 2021, which raised the cap on investment from 49% to 74%, regulators have introduced a number of changes to enable the inflow of foreign capital to Indian insurance companies. These include measures such as the easing of lock-in requirements for insurance entities with listed equity shares apart from minimum promoter holdings, and allowing the taking on of debt by way of non-convertible preference instruments and subordinated debt without the prior approval of the IRDAI. As a consequence, Indian insurers can access larger capital and debt pools. However, the issuing of compulsorily convertible preference shares by insurers remains restricted.
In March 2023, the IRDAI issued regulations governing management expenses for both life and general insurers, which have impacted insurers at an operational level. The previous regulatory framework prescribed limits on the maximum amount of commission payable to insurance intermediaries for each category of insurance product. There has been a departure from this approach and the regulations for general insurers now provide that the total commissions which may be paid to intermediaries shall not exceed the limits specified for management expenses under the regulations. However, for life insurers, certain segments of their product portfolio continue to have caps on commissions.
Instead of prescribing caps on commissions for individual insurance products, regulators have prescribed overall limits on the expenses of management and, except in certain cases for life insurance entities, have left it to insurers themselves to allocate expenses to commission payments accordingly. The regulations also permit insurers to make payments in excess of the prescribed limits on management expenses. These are for insure-tech expenses, insurance awareness expenses and expenses incurred in promoting IRDAI schemes for the rural sector.
In effect, these changes resulted in the deregulation of the commission payable on individual products and replaced them with an aggregate limit on expenses. This has led to simpler and more transparent models of the payment of commission by insurers to intermediaries. The changes have been well received by most in the industry. Some have predicted that they will lead to greater product innovation and distribution and insurance penetration. They have also been hailed as a more flexible method of regulation as they acknowledge the different business models applying to the various players in the market.
In November 2022, the Department of Financial Services issued an office memorandum proposing amendments to the Insurance Act, 1938, and the Insurance Regulatory and Development Authority Act, 1999, two of the main pieces of legislation governing insurance in India. The memorandum proposes several key changes such as lowering minimum capitalisation requirements and solvency margins for insurers depending on their classification, a revised list of classifications being provided for under the memorandum. It allows insurers to provide ancillary services and allied financial products, introduces the concept of “captive insurers” in India and many other reforms.
It is clear from the recent amendments and the proposals in the memorandum that the IRDAI is moving away from a prescriptive, rule-based regulatory framework to a principle-based mechanism. It is widely thought that these regulatory changes will lead to increased and sustained PE and VC activity in the insurance sector in India.
Swathi Girimaji is a partner and Sajeev Srivatsava is an associate at Bharucha & Partners.