Introduction

The Insurance Act 1938 provides guidance on certain conflict of interest situations – for example:

  • Sections 48A and 48B set out the norms regarding common directors of an insurer and an insurance agent or intermediary; and
  • under Section 32A, a managing director or other officer of an insurer conducting life insurance business is prohibited from being a managing director or other officer of another insurer conducting life insurance business, a banking company or an investment company.

However, with the rapid growth of the insurance industry over the past few years, there has been a surge in insurers and insurance intermediaries and multiple insurers being established under the umbrella of the same corporate group. This has led to an increase in multiple insurance entities having the same directors and thus an increase in situations where such directors may have to deal with a direct or indirect conflict of interest.

To address such conflicts of interest, the Insurance Regulatory and Development Authority (IRDAI) has issued the Exposure Draft on Insurance Regulatory and Development Authority of India (Conflict of Interest) Guidelines 2019, which seek to provide guidance on the conflicts of interest that arise between insurers and other insurance companies or intermediaries which have the same directors.

The draft guidelines define the term 'conflict of interest' as a situation in which:

  • a person or organisation is involved in multiple interests (financial or otherwise); and
  • the serving of one interest could involve working against another.

This includes situations in which a person's impartial and objective performance of duties or decision making could be jeopardised because of their personal interests.

Conflict due to common promoter group

The draft guidelines propose norms to address the material conflicts of interest arising due to common promoter groups. These norms may be summarised as follows:

  • The draft guidelines expressly stipulate that an entity cannot be a promoter for more than one life insurance, general insurance, standalone health insurance or reinsurance company.
  • Where a promoter of a general insurance company seeks to be a promoter of a health insurance company or vice versa, the application for a certificate of registration filed by such promoter must be accompanied by:
    • a note duly approved by the promoter's board of directors providing the manner in which the segregation of business of the general insurance company and the standalone health insurance company will occur;
    • the value that the promoters of the existing company hopes to add by establishing a standalone health insurance or general insurance company (as the case may be); and
    • the measures to deal with any conflicts of interest that may arise between the general insurance and health insurance company.
  • Where the promoter of an insurance intermediary wants to set up an insurer or vice versa, the applications filed with the IRDAI must be supplemented with necessary disclosures as to the manner of dealing with conflicts of interest.

Conflict due to common director

The draft guidelines propose norms to address the material conflicts of interest which arise due to an insurer and other insurers or insurance intermediaries having the same directors. These rules may be summarised as follows:

  • The board of directors of the insurer or insurance intermediary must formulate a policy to address conflicts of interest that may arise due to common directors or officers, in accordance with the provisions of the applicable guidelines. The policy must establish the procedures to be followed and the measures to be adopted to prevent conflicts of interest and manage such conflicts in an independent manner.
  • The board must take all reasonable efforts to resolve conflicts of interest; however, where such a conflict is unavoidable, the board must seek to address it on an arm's-length basis and make proper disclosures.
  • No person can be appointed as a director or officer if, at the time of the appointment, there is a material conflict of interest between the person's role as director or officer and any other role which they perform.
  • A director or officer must, within 30 days of becoming aware that a material conflict of interest exists:
    • eliminate the conflict of interest; or
    • resign from office.
  • Where an insurer learns of a conflict of interest, it must take immediate steps to ensure that the director or officer in question has their authority withdrawn and is denied participation in the company's day-to-day activities. Further, an enquiry, headed by an independent director, must be conducted. If the individual is found guilty, they will no longer be considered fit and proper.
  • Where a director or officer is found guilty and has not acted according to the IRDAI guidelines, their services will be terminated with immediate effect. Further, such a person will not be considered fit and proper to hold any position in an insurer or insurance intermediary for at least five years.
  • Common directors are prohibited from:
    • holding key managerial personnel or CEO positions in more than one insurer or insurance intermediary;
    • maintaining business relationships with other insurers or insurance intermediaries other than through non-executive director positions; or
    • achieving or attempting to achieve any undue gain or advantage for themselves or their relatives, partners or associates.
  • Insurers and other insurers or insurance intermediaries in different groups are prohibited from having the same independent directors. Further, insurers and other insurers or insurance intermediaries are prohibited from having the same full-time directors.

No permission is required where a person proposing to act as a common director is an independent director within the same group and the remuneration payable to such director does not exceed Rs1 million per year.

The draft guidelines also propose establishing a procedure for obtaining IRDAI approval under Section 48A of the Insurance Act. The draft guidelines stipulate that directorships among insurers and insurance intermediaries are allowed subject to the prescriptions set out in the table under Annexure A to the guidelines. Insurers and insurance intermediaries cannot appoint common directors under the 'not allowed' categories; however, certain kinds of common director may be permitted on the boards of the insurance entities which fall under these categories.

Comment

The draft guidelines seek to provide much-needed clarity to market players in regard to the establishment of general insurance companies, health insurance companies and insurance intermediaries within the same group and provide guidance on addressing conflicts of interest. However, the draft guidelines' retrospective effect (if any) on common directors who have already been appointed to the boards of insurers and insurance intermediaries remains unclear.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.