Case Study: Composition of Board of Directors of Insurance Company

QUESTION: Preferential Life Insurance Ltd. was incorporated to conduct the insurance business. The Certificate of Registration was issued to the company on 1st June 2014. The Board of Directors of the company consists of five directors, out of which two directors are independent directors.

1. Is the composition of the Board of Directors of the Company valid?
2. Would your answer be different if a Certificate of Registration to the company was issued on 1st April 2017?

IRDAI GUIDELINES FOR COMPOSITION OF BOARD OF INSURANCE COMPANIES

Reference No.: IRDA/F&A/GDL/CG/100/05/2016

Date: 18/05/2016

GUIDELINES FOR CORPORATE GOVERNANCE FOR INSURERS IN INDIA

The Authority had initially issued Guidelines on Corporate Governance for insurance companies vide circular dt. 5th August 2009. The Authority had also issued separate guidelines for appointment/ reappointment and remuneration of MD/CEO/ WTD as well as other Key Management Persons (KMPs), as also the Appointment of statutory auditors of insurers through various circulars.

In view of the extensive changes to the governance of companies brought about by the Companies Act, 2013, it was decided to review the various guidelines of the Authority relating to the governance of insurance companies. After due consultation with the industry representatives and other stakeholders and professionals, the Authority has drawn out the revised Guidelines on Corporate Governance for insurance companies.

The revised guidelines combine the stipulations regarding the Corporate Governance practices, appointment of MD/ CEO/ WTD and other KMPs as well as the appointment of statutory auditors of insurers. These are applicable from FY 2016-17 onwards. These guidelines shall be applicable to all insurers granted registration by the Authority except that:

(i) reinsurance companies may not be required to have the Policyholders' Protection Committee; and

(ii) branches of foreign reinsurers in India may not be required to constitute the Board and its mandatory committees as indicated herein.

GUIDELINES

5.BOARD OF DIRECTORS

5.1 COMPOSITION

• The Insurance Act stipulates that the insurance companies in India would be public companies and hence, would require a properly constituted Board.
• Insurance companies should ensure that the Board comprises of competent and qualified Directors to drive the strategies in a manner that would sustain growth and protect the interests of the stakeholders in general and policyholders in particular.
• The size of the Board in addition to being compliant with legal requirements (where applicable), should be consistent with scale, nature and complexity of business. The size and composition should ensure that they collectively provide knowledge, skills, experience and commitment. Further, the Board Members should be in a position to dedicate sufficient time and commitment to fulfill their responsibilities.
• It is expected that the shareholders of the companies elect or nominate Directors from various areas of financial and management expertise such as accountancy, law, insurance, pension, banking, securities, economics, etc., with qualifications and experience that is appropriate to the company.
• It is essential that the Directors possess the knowledge of group structure, organizational structure, process and products of the insurer and the Board generally complies with the following requirements:-

1. The Board of Directors and Key Management Persons should understand the operational structure of the insurer and have a general understanding of the lines of business and products of the insurer, more particularly as the insurer grows in size and complexity.
2. The Board of Directors of an insurer belonging to a larger group structure/ conglomerate should understand the material risks and issues that could affect the group entities, with attendant implication on the insurer.
3. The Board of Directors is required to have a minimum of three "Independent Directors".

However, this requirement is relaxed to 'two' independent directors, for the initial five years from grant of Certificate of Registration to insurers.

The optimum composition of Independent and Non-Executive Directors enhances the quality of business judgment and benefits the shareholders and policyholders. This is especially important in respect of insurance companies under conglomerate structure and where there is potential scope for transfer of risks and conflicts of interests that affect the group entities.

1. Insurers which have less than three independent directors shall ensure that they comply with this requirement within one year of the date of effect of these guidelines.
2. An independent Director shall fulfill all the conditions specified under Section 149 of the Companies Act, 2013. An appointment letter shall be issued to the independent director laying down the terms and conditions, including his duties, responsibilities, sitting fees, etc.
3. In case the number of independent directors falls below the required minimum laid down, such vacancy shall be filled up before the immediately following Board meeting or 3 months from the date of such vacancy, whichever is later, under intimation to the Authority.
4. Similarly, where the Chairman of the Board is non-executive, the Chief Executive Officer should be a whole-time director of the Board.
5. As required under Section 149 of the Companies Act, 2013, there shall be at least one-Woman Director on the Board of every Insurance company.

ANSWER: The Insurance Regulatory and Development Authority of India (IRDAI) had revised its Guidelines in the light of changes brought in by the Companies Act, 2013 vide Circular dated 18th May 2016.

As per these revised Guidelines, the Board of Directors of an Insurance company is required to have a minimum of three Independent Directors. However, this requirement is relaxed to two Independent Directors for initial five years from grant of Certificate of Registration to an insurance company.

• Referring to the above provisions, since the period of five years has elapsed from the date of grant of Certificate of Registration to the insurance company, therefore the company will be required to have minimum three Independent Directors on its Board w.e.f. 01.06.2019 and thus with the appointment of two Independent Directors, the composition of Board will be treated as invalid.
• However, if the company was granted Certificate of Registration on 1st April 2017, the insurance company still has time to comply with the requirement of appointment of third Independent Director as the period of five years since grant of Certificate of Registration has not lapsed. Therefore, the composition of Board shall be treated as valid as on date.

DISCLAIMER: The case study presented here is only for sharing information with readers. In case of necessity do consult with professionals.