Liaison offices: Irdai issues new rules for foreign insurers

The Insurance Regulatory and Development Authority of India (Irdai) has issued a new set of guidelines for foreign insurers to open liaison offices (LOs) in India. The insurance regulator stated that an overseas insurer should have a financially sound and profit-making track record in its home country. Also, it should have a net worth of not less than $65 million under the minimum eligibility norms.

Many foreign reinsurance companies, which have been underwriting businesses of Indian insurers, would be interested in opening liaison offices in the country after the new norms, providing a comprehensive set of guidelines on LOs, are implemented, according to analysts tracking the insurance sector.

Irdai had laid down a framework for approval of opening of liaison offices in India by insurance companies registered abroad, by issuing a circular in December 2005, and guidelines for closure of liaison offices established in India by overseas insurers in July 2007.

“The stipulations/directions have been reviewed and the following guidelines are issued on establishment and closure of liaison office in India by an insurance company registered outside India. These guidelines shall be effective from the date of issue and shall supersede all the earlier instructions/guidelines issued on the subject by the authority,” Irdai said while issuing the guidelines.

A liaison office acts as a channel of communication between the principal place of business, or head office, by an overseas insurer and entities in India. But an LO does not undertake any commercial, trading or industrial activity, directly or indirectly, and maintains itself out of foreign remittances received from the overseas insurer through normal banking channels.

An overseas insurer applying to open an LO should have a financially sound track record. A profit-making track record during the immediately preceding three financial years in the home country and a net worth of not less than $65 million would be the minimum requirements, the insurance regulator said, issuing the guidelines on Monday.

Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, said, “Many foreign reinsurance companies would be interested in opening liaison offices in India. Any reinsurer who is underwriting any business of Indian insurers would look at the opportunity of setting up an LO in India. If the reinsurer does not have a presence, it would be interested in setting up the LO.”

“Foreign reinsurance companies cannot write any businesses as a liaison office. For that, they would have to direct the business to one of their branch offices. But they can certainly enter into pre-transaction arrangements, so that they can work with the insurers and can thereafter enter into contractual arrangements with the insurers. But the actual contract happens from an office outside of India. It’s a choice of the reinsurer. It can do it from its main office or one of the local offices in Asia. That is now formalised, by saying that there will be liaison offices and they have to meet certain requirements as per the guidelines. So, it’s kind of regularising their presence in India and bringing such liaison offices under the regulatory ambit,” Parekh told FE.

“Even though Irdai had an existing framework for grant of approval for liaison offices, the notification issued by Irdai gives a comprehensive set of guidelines for foreign insurers who want to explore opportunities and study the Indian insurance market by setting up liaison offices in India,” said Conjeevaram Baradhwaj, executive vice-president (legal & compliance) & company secretary, Future Generali India Life Insurance.

Notably, the government in the Union Budget 2021 increased the permissible FDI limit in insurance companies to 74% from 49%. “In the wake of the increase in foreign investments in India to 74% last year, these guidelines give clarity to the foreign insurers, who are yet to enter the Indian insurance market, on the regulatory guidelines for such liaison offices. This is a welcome step in the right direction,” Baradhwaj added.

According to the new guidelines, Irdai shall, after exercising due diligence in respect of the applicant foreign insurer’s background and satisfying itself regarding adherence to the eligibility criteria for establishing an LO, grant approval for opening of the LO or reject the application. “An applicant whose application for grant of approval for opening of Liaison Office is rejected by the authority, may approach the authority for review of its decision within 30 days from the date of receipt of the communication,” the insurance regulator said, adding it, before granting approval for opening of an LO, may seek the views of the ministry of external affairs, in respect of an application received from an overseas insurer incorporated in a country that shares a land border with India.

“The validity of an approval granted by the authority (Irdai) shall be for a period of three years. An overseas insurer may request the authority for extension of the approval for another one year,” the guidelines said.

On closure of an LO, the guidelines stated requests for closure of the LO shall be submitted to Irdai at least two months before the date of expiry of the validity of the approval. Approval for closure and remittance of proceeds shall be granted provided the LO has submitted the annual activity certificate for all the years for which it was in operation in India. The remittances shall be made subject to the terms and conditions of RBI/FEMA/CBDT directions in force from time to time.

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If the overseas insurer intends to open a branch office (FRB) or form a joint venture/subsidiary for insurance operations in India, the existing LO in India, if any, of the overseas insurer shall be closed down at the time of obtaining the approval for opening of the branch office (FRB)/joint venture entity/subsidiary from the regulator.

On action in case of default or non-compliance, the new guidelines said, Irdai may, at any time, withdraw the approval granted to the LO. It may also direct the foreign insurer to remove the principal officer of the LO in India and share the action initiated against the LO of the overseas insurer with the home country’s insurance regulator.