The regulation enables those life insurance companies that have completed 10 years of operation to increase equity capital under ICDR (Issue of Capital and Disclosure requirements) Regulation, 2009, of the Securities and Exchange Board of India (Sebi), either through fresh issue of equity capital or divestment of equity by one or more of the promoters through a public offer for sale. The insurance company has to get the approval of Irda before applying to Sebi.
The criteria for approval from Irda includes, among other things, the history of regulatory compliance, maintenance of the prescribed regulatory solvency margin, compliance with corporate governance guidelines, the record of policy holder protection, embedded value and other disclosures as prescribed by Sebi.
Sebi, Irda requirements. The disclosure requirements of Sebi are wide encompassing, as mandated under the listing agreement (Clause 49) of the Stock Exchanges and ICDR Regulations, 2009. Further, there are additional disclosures in seven areas, including on the various risks faced by the company.
The mandatory disclosures under the listing agreement are on composition of the board of directors, role of the independent directors, role and responsibility of the audit committee, the whistleblower policy, disclosures on risk management, corporate governance, related party transactions, etc. The Irda has also issued detailed guidelines on corporate governance for life insurance companies during August 2009 and January 2010. It has many common features with Clause 49 of the listing agreement.
Corporate governance has received emphasis in the recent times since poor governance and weak internal controls have been associated with major corporate failures. The emergence of insurance companies as a part of financial conglomerates has added a further dimension to sound corporate governance in the insurance sector, with an emphasis on overall risk management across the structure and to prevent any contagion.
Mandatory committees. The Irda guidelines cover the composition of board of directors, its role and responsibility, control functions, roles and responsibilities of senior management, including the chief executive officer and the appointed actuary, appointment of statutory auditors, whistle blowerpolicy, outsourcing policy and disclosure requirements, etc.
It also requires that the board can delegate its authority to five mandatory committees to assist it. The mandatory committees are the audit committee, the risk-management committee, the investment committee, the asset-liability management committee and the policy holder protection committee. The board can also be assisted by the nominations committee, the remuneration committee and the ethics committee, which are non mandatory.
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 levels.
The companies have been advised through the guideline 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 the course of time.
While the role of the audit committee and investment committee has stabilised to a great extent, the risk-management committee, the asset-liability management committee and the policy holder protection committee need to cover more ground. The insurance regulator has initiated steps for implementing asset-liability management by issuing the asset-liability management guideline recently.
Risk management committee. The guidelines also stipulate that the risk-management function should ensure effective monitoring of all the risks across the various lines of business of the company. The specific risks to be covered are insurance risk, market risk, credit risk, liquidity risk and operational risks. The offer document of insurance companies also shall list out the risk factors specific to the company.
Policy holder protection committee. As per the Irda annual report of 2010-11, the break-up of major complaints lodged with the grievance cell are sales related (24%), non-payment of claims/maturity (22%) and non receipt policy and refunds (17%).
Way ahead. While Irda has initiated some steps in this direction, it is important that the selling should start with the need analysis invariably in all cases, and products that address the need of the consumers are sold.
The recommendation should focus more on the insurance solutions, the adequacy of the cover, time horizon and risk appetite of the consumer. In case of unit-linked insurance plans, not only the market risk factor , but also options on the asset allocation, i.e, equity, debt or balance, need to be explained properly.
The companies should empower the sales personnel with financial planning skills, so that they can undertake need-analysis effectively. In addition to monitoring of complaints through the reported numbers, there is a need to keep the policy holders well informed and get them educated about insurance products and complaint-handling procedures. Transparency in product features will reduce misselling. Advance communication about the turnaround time norms on various services and benchmarking will be a positive step for a smooth IPO.
- The writer is chief financial planner, Max Secure Financial Planners