Government of India Volume I: Analysis and Recommendations

ANNEXES
2. General development of markets has to be distinguished from specific measures
that need to be taken to achieve the financial inclusion agenda. The mechanisms
for achieving financial inclusion in the field of insurance should be aligned with the
decisions that the Commission may take for promoting inclusion in the banking
sector.
Prudential regulation
3. Capital regulation
(a) The capital resources maintained by insurance companies should be commensurate
with the specific risks arising from their business activities. To
achieve this, the primary law should provide that the prescribed capital requirements
should be determined in a risk-based manner. Subject to this
principle, the regulator will frame subordinate legislations to lay down the
actual capital requirements and the process for computation of capital.
(b) The regulator should also be permitted to prescribe the minimum capital requirement
for the setting up of an insurance company, instead of having the
rupees 100 crores requirement laid down in the primary law. This will allow the
entry conditions to be revised from time to time without requiring an amendment
to the law.
4. The law should provide that insurance companies are permitted to hold different
classes of capital. The classification of capital into different tiers will be done by the
regulator through subordinate legislation. The regulator will also be empowered to
restrict the extent to which insurers may rely on different tiers of capital for satisfying
their capital requirements.
5. Insurance law should not specify foreign investment limits for investments in the
sector. As in all other sectors, this power should be with the Central Government.
In making its determination, the government may consider adopting different FDI
limits for different types of insurance activities. In particular, a higher limit may be
considered for the health insurance sector to promote more robust growth in the
sector.
6. High-level principles relating to sound governance and management of insurance
firms need to be enshrined in the law. The law should also mandate self-assessment
of solvency and risk profile by insurers. The regulator should then use its supervisory
powers to assess the adequacy and effectiveness of the measures adopted by
the insurance company.
7. The law should specify that investments are to be made as per the prudent person
principle and quantitative investment requirements and restrictions should be
removed from the primary law. To the extent necessary, the regulator should be
empowered to specify appropriate investment norms through subordinate legislation.
This power would be subject to certain restrictions to be specified under the
law. Specifically, the regulator will not be able to prescribe the composition of the
investment portfolio or the minimum levels of investment for any given category of
investment.
8. The law should not prohibit insurance companies from investing overseas. Insurers
may choose to globally diversify their portfolio in accordance with the prudent
person principle and risk-based capital requirements. The regulator may, however,
choose to set out reasonable limits on the currency mismatch risks that may be
held by an insurer.
Consumer Protection
9. The law should set out the principles of consumer protection to be observed by the
insurance service providers and the framework within which these principles may
be implemented by the regulator.
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 167