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Capital requirements of new insurance companies

This is the third in a series on insurance. The first two articles appeared on September 14 and 28.

ANY NEW life insurance company or non-life insurance company will not be registered unless the company has a paid-up equity capital of a minimum Rs. 100 crores. In the case of a re-insurance company the minimum paid-up equity capital will have to be Rs. 200 crores (Sec. 6 of the Insurance Act, 1938).

Further, Sec. 6 provides that in determining the paid-up capital requirement, the deposit to be made under Sec. 7 and any preliminary expenses incurred in the formation and registration of the company shall be excluded.

Restrictions on equity holding

* The aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, should not exceed twenty six per cent of the paid-up equity capital of the Indian insurance company. (Sec. 2, clause 7A (b) of the Insurance Act).

* No promoter, whether Indian or foreign, shall hold more than twenty six per cent of the equity of an insurance company. The Indian promoters shall have to divest in a phased manner the share capital in excess of the twenty six per cent of the equity after ten years of the commencement of business, or within such period as may be prescribed by the Central Government. The manner and procedure for divesting the excess share capital shall be specified by the regulations made by the Authority. (Sec. 6AA of the Insurance Act.)

* Prior approval of the regulator will have to be obtained if the nominal value of the shares intended to be transferred by any individual, firm, corporate under the same management, jointly or severally exceeds one per cent of the paid-up equity capital of the insurer. (Sec. 6A, clause 4(b)(iii) of the Insurance Act.)

* Prior approval of the regulator will have to be obtained where, after the transfer, the total paid-up holding of the transferee in the shares of the company is likely to exceed five per cent of its paid-up capital or where the transferee is a banking or investment company, is likely to exceed two and a half per cent of such paid-up capital, unless previous approval of the authority has been obtained for the transfer. (Sec. 6A, clause 4(b)(ii) of the Insurance Act.)

Equity capital held by a foreign company

The IRDA has issued detailed guidelines regarding the manner in which the quantum of foreign investment will be calculated. The calculation of the holding of equity shares by a foreign company either by itself or through its subsidiary companies or nominees in the applicant company, shall be the aggregate of the quantum of paid-up equity share capital held by the foreign company either by itself or through its subsidiary companies or nominees in the applicant company; the quantum of paid-up equity share capital held by other foreign investors, non-resident Indians, overseas corporate bodies and multinational agencies in the applicant company; and the quantum represented by that proportion of the paid-up share capital to the total issued equity share capital of an Indian promoter company held or controlled by the category of persons mentioned in (i) and (ii) above.

However, for purposes of calculation referred to above, account need not be taken of the holdings of equity in an Indian promoter company held by foreign institutional investors, other than the foreign promoters of the applicant and their subsidiaries and nominees, and Indian mutual funds.

On account of the above guidelines, in the case of the HDFC- Standard Life insurance venture, the equity holding of the foreign company in the Indian insurance venture has been reduced from the maximum allowable 26 per cent. The IRDA had to issue such strict guidelines as the upper cap on foreign equity limit in the new insurance companies was insisted upon by Parliament. This also means that any dilution of norms would also have to be passed by Parliament. This makes the insurance industry different from other industries where foreign direct investment norms can be changed by administrative fiat.

Deposits

Sec. 7 of the amended Insurance Act, 1938 provides that every insurer shall, in respect of the insurance business carried out by him in India, deposit with the Reserve Bank of India (RBI) either in cash or in approved securities estimated at the market value of the securities on the day of deposit:

* In the case of life insurance business, a sum equivalent to one per cent, of his total gross premium written in India in any financial year commencing March 31, 2000, not exceeding Rs. 10 crores.

* In the case of general insurance business, a sum equivalent to three per cent, of his total gross premium written in India, in any financial year commencing March 31, 2000, not exceeding Rs. 10 crores.

* In the case of re-insurance business, a sum equivalent to Rs. 20 crores; solvency margin; assets and liabilities how to be valued; Sec. 64V provides the details and valuation of liabilities (general insurance).

In the case of reserves for unexpired risks for general insurance business, the following provisions are required to be made in addition to those listed in the Section: fire and miscellaneous business 50 per cent; marine cargo business 50 per cent; and marine hull business 100 per cent of the premium, net of re- insurances, during the preceding 12 months.

Sufficiency of assets

The new IRDA Act (Sec. 64VA of the Insurance Act) has introduced detailed provisions regarding the levels of solvency margins to be maintained by insurance companies. However, on a simple level the following solvency margins have to be maintained:

Life company: The minimum amount of the value of assets over liabilities will be a sum of a percentage of mathematical reserves and a percentage of the sum at risk. The IRDA has to specify the percentages. The minimum solvency margin shall be Rs. 50 crores.

Non-life company: The required solvency margin shall be the highest of the following amounts. Twenty per cent of net premium income; 30 per cent of net incurred claims Rs. 50 crores. No risk to be assumed unless premium is received in advance.

Sec. 64VB provides that no risk is to be assumed unless premium is received in advance. This is welcome to the new players as the risk of insurance business is reduced considerably on account of this clause.

Re-insurance with Indian insurers: Sec. 101A provides that every insurer shall re-insure with Indian re-insurers such percentage of the sum assured on each policy as may be specified by IRDA. However, no percentage so specified shall exceed 30 per cent of the sum assured on such policy.

The IRDA has laid down that the reinsurance programme to be followed will continue to be guided by the following objectives to maximise retention within the country; develop adequate capacity; secure the best possible protection for the reinsurance costs incurred; and simplify the administration of business.

Guidelines have been laid down regarding the conduct of reinsurance business in India. Penalty for default in complying with, or act in contravention of, the Insurance Act Sections 102 to 105 provide the details. For example, the penalty for failure to maintain solvency margin will be a maximum of Rs. 5 lakhs for each such failure. A further Sec. 105C has been added which states that an insurer will have to pay a fine of Rs. 25 lakhs for violation of the provisions of Sec. 32C (relating to obligations of insurer in respect of rural or unorganised sector and backward classes business).

Constitution of consultative committee: Sec. 110G of the Insurance Act provides that the Central Government shall constitute a consultative committee consisting of the chairman of the IRDA (who shall be the chairman of the consultative committee) and not more than four other members having special knowledge and experience of the business of insurance.

Abhijit Roy

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