Exposure Draft on IRDA (Issue of Capital and Disclosure Requ

anthony (Finance) (7918 Points)

23 June 2011

Exposure Draft on IRDA (Issue of Capital and Disclosure Requirements for Life Insurance Companies) Regulations, 2011

CIRCULAR, DATED 21-6-2011

The Authority proposes to issue the Regulations on IRDA (Issue of Capital and Disclosure Requirements for Life Insurance Companies) Regulations, 2011. Accordingly, the Authority has prepared the Draft Regulations (attached as pdf and doc. documents) for the same. In this regard, comments/suggestions of all stake holders (including insurers, policyholders, academics, analysts etc.) on the Exposure Draft are invited

The comments/suggestions on the said draft may be forwarded at mamta @ irda.gov.in by June 30, 2011.

Draft Regulations

IRDA (Issues of Capital and Disclosure Requirements for Life Insurance Companies) Regulations, 2011

In exercise of powers conferred under section 14 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), the Authority, in consultation with the Insurance Advisory Committee, hereby makes the following regulations, namely:-

Short title and commencement

1. (1) These Regulations shall be called the IRDA (Issues of Capital and Disclosure Requirements for Life Insurance Companies) Regulations, 2011

(2) They shall come into force on the date of their publication in the Official Gazette.

Definitions:

(3) (1) In these Regulations, unless the context otherwise requires:

(a) 'Act' means the Insurance Act, 1938 (4 of 1938);

(b) 'Authority' means Insurance Regulatory and Development Authority established under section 3 of the Insurance Regulatory and Development Authority Act, 1999;

(c) 'Application' means application submitted to the Authority under the IRDA (Issues of Capital and Disclosure Requirements for Life Insurance Companies) Regulations, 2011

(d) 'Insurance company' means the 'Indian Insurance Company' as defined in section 2(7A) of the Insurance Act, 1938;

(e) 'SEBI' means the Securities and Exchange Board of India

(f) 'ICDR Regulations' means the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

(2) All words and expressions used herein and not defined in these Regulations but defined in the Insurance Act, 1938 (4 of 1938), or the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), shall have the same the meaning respectively assigned to them in those Acts.

(4) In terms of the provisions of section 14 of the IRDA Act, the Authority hereby lays down the following:

(a) Manner and procedure for issuing capital/divesting the excess share capital under section 6AA(2) of the Act; and

(b) Additional disclosure requirements with respect to all issues of capital made by insurance companies under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations).

II. Manner and Procedure:

(1) Any insurance company which proposes to raise share capital through a public issue in terms of the ICDR Regulations for any purpose and promoters of any insurance companies which seek to reduce their stake under the provisions of section 6AA of the Act or otherwise may do so only on completion of 10 years from the date of commencement of operations by the Insurer or such other period as may be prescribed by the Central Government.

(2) The manner of divestment by the insurance company may be through any of the following options:

(i) Issue of capital under the ICDR Regulations;

(ii) Divestment of equity by one or more of the promoters through a public offer for sale under the ICDR Regulations; and/or

(iii) Issue of capital/divestment of equity stake through other than (i) and (ii) above.

Provided that no issuance and allotment of capital by an insurance company shall be, in any form other than as fully paid up equity shares.

Further provided that any divestment in the manner as indicated at (iii) above shall require the specific prior approval of the Authority in terms of section 6A of the Insurance Act, 1938.

(3) Prior to filing of the draft document for issue of share capital or for making an offer of sale to public with SEBI, the insurance company which proposes to issue capital under the ICDR Regulations, whether or not as part of divestment of its promoter stake under the provisions of section 6AA of the Act, shall approach the Authority for its 'formal approval'. The Authority shall consider the applicant company's overall financial position, the regulatory record and the proposal for issue of capital prior to giving its 'formal approval' to the proposal to get its shares listed on the stock markets/raise funds through an issue of capital.

(4) Any approval by the Authority in terms of the Regulations herein, shall not in any manner tantamount to or serve as validation of the representations by the insurer in any offer document, which fact shall be disclosed in bold letters in any offer document.

(5) Insurance companies seeking the approval of the Authority under the Regulations shall apply in Form 'A' placed at Annexure. The Authority reserves the right not to accord its prior approval if, in its opinion, (i) the applicant company is not fit to tap the markets through a public issue or (ii) where it may be detrimental to the interests of policyholders or (iii) it may not be in the interest of the insurance business in the country.

The eligibility criteria and the disclosure requirements are applicable to all issuances which are in the nature of those indicated as at II 2(i) and (ii) above.

III. Eligibility Criteria:

While considering the proposal filed with the Authority, IRDA shall at the minimum, be guided by the following eligibility criteria:

(i) The insurance company should have been in the life insurance business for a period of ten years from the date of commencement of such business or such other period as may be prescribed in the Insurance Act by the Central Government;

(ii) The insurance company should have maintained a satisfactory regulatory record with IRDA;

(iii) The insurance company should have maintained the prescribed regulatory solvency margin as at the end of the preceding six quarters;

(iv) The insurance company should have been fully compliant with the disclosures requirements as mandated in the IRDA Circular No. IRDA/F&I/CIR/F&A/ 012/01/2010 dated 28th January, 2010;

(v) The insurance company should have been fully compliant with the Corporate governance Guidelines issued by IRDA;

(vi) The insurance company's record of Policyholder Protection and the pendency of the policyholder complaints should be satisfactory; and

(vii) The insurance company should have embedded value of at least twice the paid up equity capital.

The applicant company shall submit its application in Form 'A' accompanied by the Embedded Value calculation prepared by two independent auditing/actuarial experts [For the purposes of this clause, the calculation of Embedded Value is to be done in the manner prescribed in IRDA Circular No. ________, dated ________].

The Authority may seek such further information as it may deem necessary while considering the Application.

Only after obtaining the consent of the IRDA to make an application, the concerned insurance company may proceed with complying with various requirements as may be laid down by the Securities and Exchange Board of India (SEBI) under the ICDR Regulations, 2009.

IV. Disclosure Requirements for Insurance Companies:

The Securities and Exchange Board of India (SEBI) has laid down the framework for issue of capital and disclosure requirements in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR). Part 'A' of Schedule VIII of the ICDR lays down the disclosure requirements in the Draft Red Herring Prospectus, Red Herring Prospectus, Shelf Prospectus and Prospectus.

Any insurance company which is seeking to issue capital under the ICDR Regulations shall make the following disclosures in the offer document. These disclosures shall be in addition to the prescripttions laid down by SEBI in the ICDR Regulations:

(a) Risk factors specific to the insurance companies

(b) Overview of the insurance industry

(d) Glossary of terms used in the insurance sector

(e) Particulars of the Issue

(f) Particulars about the Issuer

(g) Legal and Other Information.

For the purpose of clarity, against each disclosure requirement, a cross reference has been made to the relevant clause of the ICDR, 2009 (In brackets in italics). These disclosures shall be made against the specified clause as indicated below:

(a) Risk factors specific to the insurance companies (Clause IV of Part A of Schedule VIII):

The Offer Document shall list out the risk factors specific to the insurance sector, to be broadly segregated into the following categories:

(1) Insurance Risk: Risk arising because of mis-estimation of the best estimate or because of random fluctuations in the frequency and size of the claims and other cash flows.

(2) Market Risk: Risk arising out of variations in the level or volatility of the market prices of assets, liabilities and financial instruments due to external market and economic factors.

(3) Credit Risk: Risk of default of a counterparty or obligor, including the risk of default to risk mitigating contracts like reinsurance and financial derivatives.

(4) Liquidity Risk: The risk that the business will encounter difficulty in realizing assets or otherwise raising funds to meet commitments.

(5) Operational Risk: The risk of loss, resulting from inadequate or failed internal processes, people and systems, or from external events.

At the minimum, the associated risks shall cover the illustrative list as indicated at Annexure I.

(b) Overview of the insurance industry ( Clause VIII (A) of Part A of Schedule VIII):

The overview of the insurance industry shall briefly cover the background of the insurance industry, the global and domestic insurance environment, industry outlook, analysis of trends, Investment of funds by the sector, FDI in Insurance Sector, Intermediaries, changes in Insurance Legislation, and compliance status with the applicable Corporate Governance Guidelines furnishing particulars on the following aspects:

1. Introduction

2. Background about Insurance Industry

2.1 Overview of the Insurance Industry

2.2 Insurance Regulatory and Development Authority

3. Global Insurance Environment- A brief on global and domestic scenario covering Insurance Penetration, Density, growth of Industry etc.

3.1 Global Insurance Environment

3.2 Domestic Market Overview

4. Industry Outlook - Life Insurance -Total Premium Underwritten

4.1 Market Share (% share)

4.2 Growth of Business

5. Analysis of Trends - Life Insurance

5.1 Enlarged Coverage

5.2 Introduction of New Products

6. Investment of Funds by the Insurance Industry

6.1 Investment Pattern

7. FDI in Insurance Sector

8. Intermediaries

8.1 Commission Structure

8.2 Life Insurance Industry

9. Corporate Governance Guidelines for Insurance Companies

10. Conclusion

Disclosures specific to the insurance industry would broadly cover the following aspects:

(1) Presentation of the financial statements: The presentation of financial statements shall be made for a period of five years as per the formats placed at Annexure II to these Regulations;

(2) Additional disclosures shall be made on the financial statements (at sub-clause ( 10) of Clause IX) . These disclosures shall be in place of the stipulations made at the said sub-clause 10 ( a) to (c):

(i) Gross premium- along with Geographic segmentation

(ii) Cross selling

(iii) Distribution network

(iv) Persistency

(v) Operating expense ratio

(vi) Investment yield

(vii) Investment of above 5% of total Funds in each sector through equity and bonds

(viii) Reinsurance

(ix) Interest rate sensitivity

(x) Liability for future policy benefits and policy holders account balances.

(xi) Manner of arriving at unrealized gain/losses –under IFRS or Indian equivalent

(xii) Solvency Coverage ratio

(xiii)Embedded Value and New Business Achieved Profit (NBAP) as per directions placed at Annexure IV (yet to be finalized).

(xiv) Accounting and other ratios: at sub-clause ( 13) of Clause IX: The ratios with specific reference to the insurance industry as indicated at Annexure II shall be disclosed.

(3) Legal and Other Information (Clause X of Part A of Schedule VIII): Compliance with the regulatory requirements laid down by the Authority under the Insurance Act, 1938, IRDA Act, 1999 and the regulations framed thereunder, including but not limited to policyholder protection, grievance redressal and ageing of claims.

(d) Definitions and Abbreviations ((C) III of Part A of Schedule VIII):

At the minimum, the illustrative glossary of terms placed at Annexure III shall be included in the Offer Document giving details of Issuer and industry related terms.

(e) Particulars of the Issue (Clause VII of Part A of Schedule VIII):

The following disclosures shall be made about the particulars of the Issue:

(1) The Objects of the Issue: (Sub-clause A(1)): The objects of the issue shall be as under:

(a) to augment the solvency requirement;

(b) general corporate purposes; and/or

(f) Particulars about the Issuer (Clause VIII of Part A of Schedule VIII):

The following additional disclosures shall be made about the insurance company:

(1) Corporate Governance:(Sub-clause E(7)( a) and (b)) :

(a) Corporate Governance: Disclosure to the effect that the insurer has complied with the requirements of Corporate Governance as laid down by IRDA in addition to those contained in the Listing Agreement.

(b) Details of all committees set up by the issuer, including the names of committee members and a summary of the terms of reference under which the committee operates.

(2) Key Managerial Personnel: (Sub-clause E(8)( a)):

The key managerial personnel shall include the key persons as defined in IRDA (Registration of Indian Insurance Companies) Regulations, 2000.

(3) Promoters/Principal Shareholders: (Sub-clause F of Clause VIII):

For the purpose of interpretation of the term 'promoter' the definition as contained in the regulations framed by IRDA shall be considered.

(g) Legal and Other Information: ( Clause X (B) of Part A of Schedule VIII):

The declaration indicating to the effect that Insurance Regulatory and Development Authority's non-responsibility for financial soundness or correctness of the statements of the insurance company for the correctness of any of the statements made or opinion expressed in this connection.

The guidance issued under these Guidelines is in addition to the requirements in place under the ICDR Regulations.

(J. Hari Narayan)

Chairman

Annexure

Form A

The Chairman

Insurance Regulatory and Development Authority

ParishramBhavan

3rd Floor,

BasheerBagh

Hyderabad – 500 004

Dear Sir,

Re.: Application for approval in terms of Issues of Capital and

Disclosure Guidelines for Life Insurance Companies, 2011

In terms of the Issues of Capital and Disclosure Guidelines for Life Insurance Companies, 2011, issued by the IRDA, M/s. ………………………..(Registration No. …………dated………..) which has completed ……. years of operations, hereby applies to the Authority seeking permission to raise share capital through a public issue/offer for sale of its promoters share under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations).

The details of the various performance parameters referred to under Clause III of the Guidelines are placed at Annexe.

On receipt of the approval from the Authority, the (insurance company) ………..shall approach the Securities and Exchange Board of India (SEBI) under the ICDR Regulations and shall ensure compliance with the requirements under the said Regulations.

The Report on Embedded Value calculation prepared by two independent auditing/actuarial experts in compliance with the prescripttions laid down under IRDA Circular No. ________, dated ________ is placed as Annexure to the Application.

Yours faithfully

Place:

Date:

(Signature of the Chief Executive Officer)

Designation

(Signature of the Chairman of the Board)

Designation

Annexe to the Application

1. Name of the applicant Company:

2. No. and Date of Registration:

3. Renewal certificate issued on:

4. Number of years from the date of comments of operations:

5. Solvency Position for the quarter ended (for the last six quarters):

Sl. No.	Latest quarter ended backwards	Solvency Position
1.
2.
3.
4.
5.
6.

6. Status of Compliance with the expenses of management requirements under the Insurance Act, 1938 and the Rules framed thereunder for the last five years:

Sl. No.	Latest financial year backwards	Allowance expense	Actual Expenditure	Compliance status
1
2
3
4
5

7. Details of the net profit position and paid up capital of the insurer for the last five years:

Sl. No.	Latest financial year backwards	Net Profit/Loss (Rs. in crore)	Paid up capital (Rs. in crore)
1
2
3
4
5

8. Details of company's record of Policyholder Protection and the pendency of the policyholder complaints for the last five years:

GRIEVANCE DISPOSAL
Sl. No.	Particulars	Opening Balance*	Additions	Fully Accepted	Partial Accepted	Rejected	Complaints Pending
1.	Complaints made by customers
(a)	Sales Related
(b)	New Business Related
(c)	Policy Servicing Related
(d)	Claims Servicing Related
(e)	Others
	Total Number
2.	Duration wise Pending Status		Complaints made by customers		Complaints made by Intermediaries		Total
(a)	Less than 15 days
(b)	Greater than 15 days
	Total Number

*Opening balance should tally with the closing balance of the previous financial year.

9. The Embedded value of the insurance company as arrived at by two independent auditing/actuarial expert in compliance with the IRDA Circular No. ……. Dated ……………. (In case the Embedded Value arrived by the experts is at variance, the details of all valuation reports shall be furnished).

10. Confirmation of Compliance with the Disclosure Requirements:

M/s …………………………. hereby confirms that it is fully compliant with the disclosures requirements as mandated in the IRDA Circular No. IRDA/F&I/CIR/F&A/012/01/2010 dated 28th January, 2010.

(Details of deviations, if any should be brought out).

11. Confirmation of Compliance with the Corporate Governance Guidelines:

M/s …………………………. hereby confirms that it is fully compliant with the Corporate Governance Guidelines issued by IRDA vide Circular no. IRDA/F&A/CIR/025/2009-10 dated 5th August, 2009.

(Details of deviations, if any should be brought out).

12. Details of regulatory action initiated by IRDA against the insurer for the last five years are as under:

13. Confirmation that the information furnished is correct and complete to the best of my knowledge and belief and nothing has been concealed or suppressed.

Yours faithfully

Place:

Date:

(Signature of the Chief Executive Officer)

Designation

(Signature of the Chairman of the Board)

Designation

Annexure I

INDUSTRY SPECIFIC RISK FACTORS FOR INSURANCE SECTOR

At the minimum, the risks associated with the insurance company shall cover the following:

Liquidity Risk

l Adverse impact on earnings due to differences in future actual claims resulting from the assumptions used in pricing and establishing reserves for insurance and annuity products.

l Concentrated surrenders.

Catastrophic Losses Risk

l Material impact on profitability or cash flow due to catastrophic losses.

Reinsurance Risk

l Failure to obtain reinsurance on timely basis.

l A default by one or more of our reinsures.

Embedded Value Risk

l The embedded value information is based on several assumptions and may vary significantly as those assumptions are changed.

Regulatory Risks

l Insurance sector is highly regulated and may be materially and adversely affected by future regulatory changes.

l Regulatory investigations and the resulting sanctions or penalties may adversely affect the reputation, business, results of operations and financial condition of the insurance company.

Solvency Risks

l High costs associated with minimum solvency requirements stipulated by IRDA.

Insurance Risk

l Impact of Lapse Rates, Expense Level, mortality / Morbidity Rates

Market Growth Risk

l The low rate of growth of the Indian insurance market.

Agents' Risk

l Over dependence on agents and failure to develop other distribution channels for insurance products

l Difficulty in acquiring the qualification by agents as may be prescribed by IRDA from time to time.

Other Risks

– Over dependence on select actuarial personnel.

– Difficulty in understanding financial statements drawn specifically for the insurance companies.