Common Directors under Section 48A of the Insurance Act, 1938
The appointment of the same individual on the Board of Directors (“Board”) of both an insurer and an insurance intermediary (brokers, corporate agents and web aggregators) (“Common Director”) is currently prohibited under Section 48A[1] of the Insurance Act, 1938 (“Act”). However, the Insurance Regulatory and Development Authority of India (“IRDAI”) is empowered to permit an intermediary to be a director on the Board of an insurance company subject to the conditions and restrictions as may be imposed by the IRDAI. Therefore, if an insurer were to appoint Common Directors on its Board, a prior IRDAI approval is a critical requirement.
The IRDAI vide a circular on Appointment or Continuation of Common Directors on the Board of Insurance Company, dated August 30, 2018, issued an advisory for insurers seeking approval under Section 48A of the Act (“2018 Circular”). The 2018 Circular provided that the insurers fulfil certain conditions, including ensuring that a conflict of interest or prejudice against the interest of policyholders were non-existent, while seeking permission from the IRDAI for appointment or continuation of appointment of common directors.
However, questions appear to have arisen in relation to a potential conflict of interest in such cases where Executive Directors/ Whole Time Directors (“ED”) of an intermediary were also serving on the Board of an insurer. To prevent such concerns, the IRDAI introduced an exposure draft dated March 8, 2019 on IRDAI (Conflict of Interest) Guidelines, 2019 (“Draft Guidelines”). However, the Draft Guidelines have not been finalised by the IRDAI.
On September 2, 2022, the IRDAI, vide a circular on Appointment or Continuation of Common Directors u/s 48A of Insurance Act, 1938 (“2022 Circular”), repealed the 2018 Circular and introduced a new framework for seeking approval for appointment and/or continuation of common directors on the Board of insurers and intermediaries.
New Framework under the 2022 Circular
The 2022 Circular provides a framework for a deemed approval of the IRDAI for appointment and/or continuation of common directors representing an intermediary on the Board of an insurer. Clause 3(a) of the 2022 Circular states that the appointment or continuation of common director representing an intermediary on the Board of an insurer shall be deemed to have been permitted upon meeting certain conditions, provided that such appointment is not inconsistent with other provisions of the 2022 Circular.
Additionally, Clause 3(b) of the 2022 Circular provides for the following:
“An individual, already acting or proposed to act as Executive Director/ Whole time Director on the Board of the Insurer/ Agent/ Intermediary/ Insurance Intermediary, shall not be appointed as nominee/ common director.”
Clause 3(b) of the 2022 Circular, on a strict reading, was thus interpreted to provide an express prohibition on appointment or continuation of an ED of an intermediary as a nominee director on the Board of an insurer. Further, the usage of the words ‘already acting’ in Clause 3(b) created confusion in the insurance industry as to the continuation of the Common Directors appointed with a prior approval of the IRDAI. It appeared that this particular clause undermined the approval procedure of the IRDAI by applying this to Common Directors already appointed on the Board of insurers. Clause 3(b) of the 2022 Circular implied that such directors would have to resign or would have to be replaced with immediate effect.
Clarification from the IRDAI
To resolve the ambiguity, the IRDAI issued a clarificatory circular dated September 13, 2022 titled Clarification on Circular on Appointment or Continuation of Common Director (“Clarification”). The Clarification inter alia provided that:
- The directors already appointed on the Board after obtaining prior approval of the IRDAI under Section 48A of the Act shall continue to hold the directorship till completion of the tenure of appointment;
- Clause 3(b) of the 2022 Circular shall not be applicable in case of a director appointed or proposed to be appointed as a nominee of the promoter of the insurer.
The above Clarification clearly provides that EDs serving on the Boards of intermediaries may be appointed as nominee directors of the promoters of insurers. Accordingly, the board structure of insurers can remain unchanged so long as the common directors are nominee directors of promoters or have been approved by the IRDAI. The EDs of an intermediary are usually sought after by the insurers to be on their Boards since they are involved in the day to day operations of an intermediary and play a critical governance role. This significantly helps the insurers in leveraging the expertise of the key insurance sector experts, thereby adding value to the services they provide by enhancing the value of business judgment, ultimately benefiting the policyholders.
Additionally, the IRDAI has provided the much-needed framework for deemed approval of common directors on the Boards of the intermediaries and insurers through its 2022 Circular, which lists conditions that have to be satisfied by the proposed directors prior to taking up the common role. This has relaxed the requirement to approach the IRDAI for appointment of common directors on the Boards of insurers and intermediaries. That said, the directors inter alia have to satisfy the fit and proper criteria and the disclosure requirements as laid down under the Corporate Governance Guidelines. This is a welcome move as it is a balanced approach wherein IRDAI has ensured adherence to the higher levels of corporate governance while simultaneously reducing administrative process around the appointment of common directors.
[1] Section 48A, Insurance Act, 1938: Insurance agent or intermediary or insurance intermediary not to be director in insurance company—No insurance agent or intermediary or insurance intermediary shall be eligible to be or remain a director in insurance company.
Provided that any director holding office at the commencement of the Insurance Laws (Amendment) Act, 2015 shall not become ineligible to remain a director by reason of this section until the expiry of six months from the date of commencement of the said Act.
Provided further that the Authority may permit an agent or intermediary or insurance intermediary to be on the Board of an insurance company subject to such conditions or restrictions as it may impose to protect the interest of policyholders or to avoid conflict of interest. (emphasis ours).
