Insurance 2.0: Decoding the recent amendments to Insurance Laws

1. INTRODUCTION

The highly anticipated Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Bill, 2025 (Insurance Bill), seeking to allow 100% foreign investment in the insurance sector, was recently passed by the Parliament. The Insurance Bill makes various amendments to the Insurance Act, 1938 (Insurance Act), the Life Insurance Corporation Act, 1956 and the Insurance Regulatory and Development Authority Act, 1999. While the Insurance Bill has been passed by the Parliament, it will only become effective upon receiving Presidential assent and being notified in the official gazette.

These changes have been made with the primary objective of accelerating the growth and development of the insurance sector, ensuring better protection of policyholders and improving ease of doing business for insurance companies, intermediaries and other stakeholders.

In this alert, we highlight the key changes brought about by the Insurance Bill and analyse the potential impact of these amendments.

2. Liberalisation of investment regime and licensing requirements

2.1.  Increase in foreign direct investment (FDI) limit in the insurance sector:

The foreign investment limit in the insurance sector has been increased from 74% to 100% under the automatic route, bringing it at par with the FDI cap for insurance intermediaries. Such foreign investments will however be subject to conditions prescribed under the rules framed by the Central Government. It is expected that there will be certain guardrails in terms of the manner of such foreign investments, including conditions with respect to Board composition.

While the above change permits foreign investors to hold the entire share capital of Indian insurance companies, it remains to be seen if foreign players would be willing to acquire the entire share capital of insurance companies. As such, even after the earlier liberalisation of insurance FDI limit from 49% to 74%, there are only four insurance companies that currently have an investment of 74% by a single foreign investor. Also, various existing foreign players may find it better suited to explore this option if a composite insurance license (an insurance company offering both life insurance and non-life insurance products) were to be permitted along with the permission to insurers to distribute other financial products.

2.2. Merger of insurance and non-insurance business:

The Insurance Bill has brought within its purview merger of insurance companies with a company not engaged in insurance business, which will now require an approval from the Insurance Regulatory and Development Authority of India (IRDAI). While this is a long-awaited change, especially in light of IRDAI’s view that Section 35 of the Insurance Act does not provide for the merger of an insurance company with a non-insurance company, it will be critical to review the rules prescribed by the Central Government in this context. 

Section 35 of the Insurance Act, providing for amalgamation and transfer of insurance business, has been a controversial provision, with various proposed mergers (including HDFC Life-Max Life merger in 2017) having been aborted in the past on account of this provision. We believe that the current change has been effected against the backdrop of the National Company Law Appellate Tribunal order confirming the merger of Shriram General Insurance Company Limited and Shriram Life Insurance Company Limited, with their respective non-insurance holding companies, wherein prior IRDAI approval was not obtained.

This change gains significant importance for insurance companies with holding structures, where collapsing the structure by way of a merger unlocks greater value for shareholders.

2.3. Relaxation of approval thresholds for share transfer:

The requirement for obtaining prior IRDAI approval in case of share transfers exceeding 1% of the paid-up equity capital of the insurer has now been relaxed and only share transfers exceeding 5% of the paid-up equity capital of the insurer will now require prior IRDAI approval. This is a critical amendment as this allows financial investors to pick up small stakes or exit minority investments without triggering an approval requirement, which is especially relevant in case of IPO bound companies.

2.4. Class of insurance business:

A definition of class of insurance business has been introduced which includes life insurance business, general insurance business, health insurance business, re-insurance business and such other class of insurance business as may be notified by the Central Government in consultation with the IRDAI. While composite insurance business has not been specifically recognised, we believe that the power of the Central Government to notify other classes of insurance in the future is an enabling provision which may allow for introduction of composite insurance business, which has been an industry expectation for some time now.

2.5. Reduction in net owned funds for foreign re-insurance businesses:

The net owned funds requirement for registration of foreign reinsurers establishing a branch in India has been reduced from INR 5,000 crore to INR 1,000 crore. This change has been introduced with a view to encourage foreign re-insurers to open branches in India.

2.6. Recognition of managing general agents:

The Insurance Bill recognises managing general agents (MGAs) as a specific category of insurance intermediary. MGAs act as specialised intermediaries having the power to underwrite insurance policies on behalf of the insurer and typically also have authority to price products and process insurance claims. This is an important change and is expected to expand distribution channels and increase insurance penetration. 

2.7. Removal of registration renewal requirement for insurance intermediaries:

The provision on validity of registration of insurance intermediaries being valid for a period of 3 years has been removed. While it appears that insurance intermediaries are no longer required to renew their registration every 3 years, there is some ambiguity given that a dichotomous provision suggesting a renewal of registration exists under the Insurance Bill.

This was an onerous requirement with certain insurance intermediaries having been penalised in the past for conducting insurance intermediation business after expiry of validity of registration even when an application for renewal had already been made. The removal of this requirement will certainly increase the ease of doing business and simplify compliance processes. 

3. Governance related changes

3.1. Prohibition of common directors amongst insurers and banks:

The restriction on managing director or other officers of life insurers to act as a managing director or officer of another life insurer or a banking company or an investment company has now been extended to all directors of an insurer prohibiting them from acting as a director of another insurer carrying on the same class of insurance business or of a banking company or an investment company. While this is a move aimed at avoiding conflict of interest, this has wider ramifications since directors of banks can no longer be appointed as a director (including as an independent director) of an insurance company.

3.2. Processing of policyholders’ information:

The Insurance Bill has introduced an enabling provision for IRDAI to direct insurers to process Know Your Customer (KYC) information of policyholders, solely for the discharge of their duties. Insurers need to ensure that the KYC information as well as information and documents processed during the solicitation or subsequently, are maintained with utmost confidentiality and comprehensively protected. However, such information can be shared with a third party in certain circumstances, including without the consent of the customer in cases where there is a duty to disclose to the public.

3.3. Investment in private companies:

The restriction on investment in the shares or debentures of a private company by insurers has not been carried forward under the Insurance Bill. This change will permit insurers to invest in startups and other niche businesses offering greater upside on investment. However, sufficient regulatory safeguards will need to be built in to protect the interest of policyholders.

3.4. Actuarial report to be prepared by every insurer:

The requirement for life insurers to prepare an actuarial report every financial year has now been expanded to cover all insurers. Consequently, all insurers and re-insurers have been brought under the same framework for actuarial reporting.

4. Enhanced regulatory supervision

4.1. Penalties for default/ contravention increased:

The maximum penalty of INR 1 crore for contravention of the Insurance Act has been increased to INR 10 crore under the Insurance Bill.

The Insurance Bill also lays down factors that need to be taken into account before imposition of a penalty such as gravity, repetitive nature, disproportionate gain or unfair advantage and loss caused to policyholders as a result of the default.

4.2. Power to issue subsidiary instructions:

The Chairperson or whole-time members of the IRDAI have now been empowered to issue subsidiary instructions to clarify ambiguities in regulations and to lay down ancillary procedural requirements. These instructions must be typically issued with the consultation of the Consultative Committee (proposed to be constituted in the manner specified in regulations), however, such consultation requirement can be dispensed with in urgent cases. While this change has been brought out to delegate authority to the Chairperson and members for procedural matters and administrative details, the checks and balances for exercise of such powers will need to be seen in the rules and regulations framed in this regard. 

4.3. Power to disgorge amounts:

The IRDAI is now authorised to disgorge an amount equivalent to the wrongful gain made or loss averted by a contravention, by an insurer or an insurance intermediary.

5. CMS INDUSLAW VIEW

The Insurance Bill is a turning point for the Indian insurance industry and reflects a clear policy shift towards regulatory modernisation, principle-based approach and greater thrust on growth and development of the insurance sector. The removal of foreign investment limits coupled with reduced barriers for foreign insurers and recognition of MGAs are forward looking reforms that will increase competitiveness and increase insurance penetration. While there is some disappointment for certain highly anticipated changes missing from the Insurance Bill such as open architecture framework for insurance agents and reduction in minimum capital norms for insurers, the Bill largely addresses various industry issues and demands.