IRDA prescribes five-yr lock-in for promoters of Insurance cos

Promoters of insurance companies would have a lock-in period of 5 years, insurance regulator IRDA said in the final guidelines on corporate governance for the sector, which has to report compliance by next fiscal.

“IRDA prescribes a minimum lock-in period of 5 years from the date of certificate of commencement of business of an insurer for the promoters of the insurance company and no transfer of shares of the promoters would be permitted within this period,” the regulator said.

Guidelines
The Insurance Regulatory and Development Authority (IRDA) has issued the guidelines focusing on system of financial and other controls, and the relationship between the directors, senior management and shareholders. “The corporate governance framework should clearly define the roles and responsibilities and accountability within an organisation with built-in checks and balances,” it said.

“It is expected that all the arrangements would be in place to ensure full compliance with the guidelines from the financial year 2010-11,” IRDA said.

Auditors, actuaries, directors and senior managers would not simultaneously hold two positions in the company, it said.

Where the insurance company has a non-executive Chairman, at least one third of the directors should be independent and in other cases at least 50 per cent of the directors should be independent, IRDA said.

So long as the companies are unlisted, they should have a minimum of two independent directors, the guidelines said. Further, not more than one member of a family or a close relative or an associate should be on the board of an insurer.

A due diligence enquiry should be undertaken on the person to be appointed as director or for the continuance of the existing directors after obtaining a declaration from the proposed/ existing directors in a given format, it said.

The directors are also required to enter into a Deed of Covenant with the insurance company, duly approved by the Board to ensure that there is a clear understanding of the mutual roles.

Formation of committe
IRDA said formation of committees, which are mandatory, to assist the board include audit, investment, risk management, policyholder protection, and asset liability management (in case of life insurers).

“(These committees) have a critical role in strengthening the control environment in the company,” the regulator said.

IRDA also asked insurers to disclose in the annual accounts information on the basis, methods and assumptions on which the information is prepared and the impact of any changes therein.

Barred from outsourcing
Further, insurers are barred from outsourcing any of the company’s substantive functions other than those explicitly permitted such as in the case of calculation of NAV of investments.

Each proposal to outsource any function of the insurer would have to be reported to IRDA before entering into the arrangement, which would not be more than 3 years. The guidelines further said the company must ensure complete transparency in operations and make periodic disclosures to protect the interests of the various stakeholders. The IRDA would at periodic intervals bring to the attention of the Board and senior management, concerns which have been detected through supervisory activities, it said.

IRDA said the insurers are to put in place a “whistle blowing” policy, where by mechanisms exist for employees to raise concerns internally about possible irregularities, governance weaknesses, financial reporting issues or other such matters.“The appointed actuary and the statutory/ internal auditors have the duty to ‘whistle blow’, i.e., to report in a timely manner to the IRDA if they are aware that the insurer has failed to take appropriate steps to rectify a matter which has a material adverse effect on its financial condition,” it said.

“This would enable the IRDA to take prompt action before policyholders’ interests are undermined,” the regulator added.