Public issues by Insurance Companies

Transcription

1 Public issues by Insurance Companies 1. Objective This Memorandum seeks to place a proposal to amend the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (hereinafter referred to as SEBI (ICDR) Regulations ) and about disclosure requirements for insurance companies as per the recommendations of SEBI Committee on Disclosures and Accounting Standards (SCODA). 2. Background 2.1 SEBI noted from the media reports that some of the life insurance companies in India were planning to raise money from the capital market through initial public offers. Following such reports, some global/local merchant bankers as well as international consultants gave presentations to SEBI on valuations and disclosure parameters followed in other jurisdictions by insurance companies accessing the securities markets. In the light of this and keeping in view the nature of business and risks involved in insurance sector, it was decided to review the adequacy of present requirements contained in SEBI (ICDR) Regulations. In the meantime, SEBI also received suggestions from Insurance Regulatory and Development Authority (IRDA), which is the sectoral regulator for insurance companies, on this matter. 2.2 A preliminary discussion paper on this matter was placed before the SCODA in its meeting held on August 24, In this regard, SCODA formed a sub-group to review the existing provisions of SEBI (ICDR) Regulations and also to examine whether insurance companies need to make any additional disclosures. 3. Report of the sub-group 3.1 The sub-group studied the existing provisions of the SEBI (ICDR) Regulations, suggestions given by IRDA and disclosures made by insurance companies in other jurisdictions. The report submitted by the sub-group was discussed in the SCODA meeting held on March 15, SCODA accepted the recommendations of the sub-group and suggested the following: 1 P age

2 i. To narrow down the disclosures relating to risk factors ii. To re-work on the formats specified in Clause 41 of the Listing Agreement and retain only critical portions, as the same needs to be published in the newspapers and classify those disclosures which need to be filed with the exchanges and those which need to be published. iii. To deliberate and give its recommendations on disclosure requirements for non-life insurance companies. 3.2 As suggested by SCODA the disclosure requirements for non-life insurance companies and continuous disclosures to be made by the insurance companies are being worked out and would be submitted separately to the Board. The other changes suggested by SCODA have been carried out in the report submitted by sub-group. 4. Recommendations of SCODA 4.1. A summary of the recommendations of SCODA, based on the proposals of the sub-group are given below:- i. Monitoring Agency: Regulation 16(1) of SEBI (ICDR) Regulations provides that if the issue size exceeds Rs. 500 crores, the use of issue proceeds has to be monitored by a public financial institution or a scheduled commercial bank. The Regulation also states that the said provision is not applicable in case of issues made by a bank or a financial institution. It was noted that the said dispensation was given as banks generally raise funds to meet the capital adequacy norms set out and monitored by RBI, the sectoral regulator. It was further noted that in case of insurance companies too, the funds would be raised primarily to maintain/enhance solvency requirement, as stipulated by IRDA and that IRDA has also specified investment regulations for investing the funds raised for meeting the solvency margin and has put in place periodic reporting requirements of the same. In view of the above, it is recommended that insurance companies may be exempted from Regulation 16(1) of SEBI (ICDR) Regulations, in line with the exemption given to banks and financial institutions. 2 Page

3 ii. Disclaimer clause: Clause XI (K) of part A of Schedule VII to SEBI (ICDR) Regulations provide for a disclaimer clause of RBI, which generally states that RBI is not responsible for any incorrect disclosures or opinions made in the offer document. SCODA recommended that similar disclaimer clause of IRDA may also be provided for in the offer documents of insurance companies In addition to the above, SCODA has also recommended the following proposals relating to disclosure, including formats for disclosure of financial information on annual and continuous basis: Risk factors specific to the insurance companies Glossary of terms used in the insurance sector Broad headings under which an overview of the insurance industry shall be disclosed. Disclosures specific to the insurance companies as prescribed in other jurisdictions. It was however noted that the SEBI (ICDR) Regulations are sector-neutral and prescribes only the broad framework for disclosures to be made by issuer companies. Therefore, it was recommended that these additional disclosures may be mandated by SEBI either by issuance of circulars to the Merchant Bankers or by way of standard observations while giving observation on the draft offer documents of insurance companies filed with SEBI. It was further suggested that these additional disclosure requirements can be made available on the website of IRDA for reference of the insurance companies. 5. Other issues raised by IRDA 5.1 The report also includes the discussions and views of the sub-group on the other issues raised by IRDA. A summary of the recommendations of SCODA based on proposals of sub-group on the issues raised by IRDA are given below:- (i) Advertisements of issues: IRDA requires that all advertisements issued by insurance companies be filed with IRDA for vetting at least 30 days before 3 Page

4 publishing the same. It was noted that issue advertisements are typically made post the filing of the red herring prospectus which leaves a very short time between the date of filing of RHP and issue opening date. It was decided that the issue advertisements made by insurance companies being statutory advertisements, may be as per the provisions of SEBI (ICDR) Regulations only. (ii) Objects of the issue: IRDA suggested that insurance companies should be allowed to raise money only for the following objectives (i) to augment the solvency requirement or (ii) general corporate purposes or (iii) for any other purpose which has a specific approval of IRDA. It was noted that SEBI (ICDR) Regulations does not have any specific restriction on nature of objects for which a company can raise money from the public. Therefore, IRDA may, if it considers necessary, issue guidelines to the insurance companies in this regard. (iii) Issuance of partly paid shares: IRDA desired that issuance of partly-paid shares should not be allowed as it may inflate the capital. It was noted that the Companies Act, 1956 permits issuance of partly paid up shares by companies. Hence, placing such restriction through subordinate legislation may not be appropriate and may not also be legally tenable. The restrictions, if considered necessary, can be put by IRDA under its regulatory powers. (iv) Definition of promoters: It was noted that as per the existing provisions of IRDA, all the shareholders of insurance companies are treated as promoters and employees who have been issued shares under ESOP scheme are excluded. Further, it was also noted that any transfer of shares of more than one percent by the pre- IPO shareholders requires IRDA s prior approval. IRDA suggested that Promoter definition under SEBI Regulations may be amended to reflect the above. It was decided that the existing definition of promoters as per the SEBI (ICDR) Regulations should be applicable to insurance companies as well and that IRDA may issue separate guidelines to insurance companies in relation to transfer of shares by pre-ipo shareholders, if so considered necessary. However, disclosure 4 P age

5 regarding any such restriction shall be made in the offer document. (v) Relaxation from eligibility criteria: IRDA had represented for relaxation from eligibility requirement (i.e. profitability criteria), stating that insurance companies may find it difficult to comply since gestation period of life insurance business is comparatively longer, and it takes around 6 to 7 years for a life insurer to achieve break even. It was decided that there is no need to provide relaxation from the eligibility criteria since companies which do not comply with the profitability criteria can still raise capital through compulsory book building process as per SEBI (ICDR) Regulations. (vi) Key management personnel: IRDA suggested the inclusion of the officers in an insurance company in the definition of key management personnel. It was noted that the key management personal generally means and includes only employees in management and suggested that the provisions of extant SEBI (ICDR) Regulations may apply as it is. It was decided that IRDA, if it so considers necessary, may issue guidelines to insurance companies specifying inclusion of additional persons as key management personnel. 6. Proposal to the Board 6.1. The Board is requested to consider and approve the recommendations of the SCODA mentioned in para 4 above and authorise the Chairman to take necessary consequential steps including amendment to SEBI (ICDR) Regulations to give effect to the decisions The Board is also requested to take note of recommendations of SCODA on the other issues raised by IRDA in para 5 above. 5 P age

6 Report of Sub-group on Public Issues by Insurance Companies SEBI Committee on Disclosures and Accounting Standards (SCODA) 1 P age

7 Table of contents Section No Section Page Number 1 Background 3 2 Constitution of the Sub-group 3 3 Scope of the Sub-group 4 4 Recommendations of Sub-group 4 5 Other issues raised by IRDA 10 List of Annexure Annexure Number Details of Annexure Page No. Annexure I Industry specific risk factors for insurance sector 13 Annexure II Overview of Insurance Industry 15 Annexure III Comparison table on disclosures made in offer documents of life insurance companies in other jurisdictions Annexure IV Glossary of terms used in Insurance Industry P age

8 Public Issues by Insurance Companies 1. Background: 1.1. There have recently been media reports that insurance companies in India are planning to raise money from the capital market through initial public offers. Till now, no company from the insurance sector has accessed the capital markets in India. Since the nature of business and risks involved in insurance sector are of a different kind, it was felt that there is a need to review whether the present disclosure requirements in offer documents as well as those on a continuous basis are suitable and sufficient for the insurance companies In this context, SEBI has been in receipt of suggestions/ observations from merchant bankers and international consultants on additional insurance sector-specific disclosures. SEBI has also received suggestions/comments from IRDA on the disclosures in offer documents by insurance companies. The areas of disclosures as identified taking into account the practices followed in other jurisdictions and suggestions/ comments of the merchant bankers and IRDA were discussed in the SEBI Committee on Disclosures and Accounting Standards (SCODA) in its meeting held on August 24, SCODA during its deliberations suggested that the suitability/sufficiency of the existing provisions of SEBI (ICDR) Regulations to insurance companies may be examined. 2. Constitution of the Sub-group: 2.1. In order to examine the extant regulatory requirements vis a vis the disclosure requirements for insurance companies, SCODA decided to constitute a sub-group comprising following members: Sl Name Designation Organization 1. Ms. Dipti Neelakantan MD & Group COO JM Financials Ltd 2. Shri Prithvi Haldea CMD Prime Database Ltd 3. *Shri R K Sharma Deputy Director Insurance Regulatory and Development Authority 3 P age

9 Sl Name Designation Organization (IRDA) 4. Dr. S. Subramanian Head, IBD Enam Securities Ltd 5. Shri Shrawan Jalan Director Ernst & Young 6. *Shri Sunil Kadam General Manager Securities and Exchange Board of India (SEBI) * Shri R K Sharma, Deputy Director, IRDA and Shri Sunil Kadam, General Manager, SEBI replaced Ms Mamta Suri, Joint Director, IRDA and Shri Parag Basu, General Manager, SEBI, respectively due to internal changes in their respective organizations. 2.2 The group places on record its appreciation for the valuable contribution made by Ms Lakha Nair, Enam securities Ltd, Shri Sanjay Purao, Deputy General Manager, SEBI and Shri E Balasubramanian, Assistant General Manager, SEBI in preparation of this report. 3. Scope of the Sub-group: The following scope of work was identified by the sub-group: i. Provisions of SEBI (ICDR) Regulations vis a vis insurance companies ii. iii. Disclosures by insurance companies Continuous disclosure requirements for insurance companies 4. Recommendations of Sub-group 4.1. Amendment to SEBI(ICDR) Regulations The provisions of SEBI (ICDR) Regulations have been examined primarily with regard to its suitability and sufficiency with respect to disclosures by insurance companies. The provisions of SEBI (ICDR) were discussed. The sub-group agreed that the provisions of SEBI (ICDR) Regulations shall be applicable to insurance companies. The sub-group after deliberations gave their comments on certain provision of the SEBI (ICDR) Regulations along with the recommendations. The recommendations of the sub-group are as follows: a) Monitoring Agency: Regulation 16(1) of SEBI (ICDR) Regulations provides that if the issue size exceeds Rs. 500 crore, the use of issue proceeds has to be monitored by a public financial institution or a scheduled commercial bank. The Regulation also states that the said provision is not applicable in case of issues made by a bank 4 Page

10 or a financial institution. Sub-group noted that the said dispensation was given as banks generally raise funds to meet the capital adequacy norms set out and monitored by RBI, the sectoral regulator. Sub-group further noted that in case of insurance companies too, the funds would be raised primarily to maintain/enhance solvency requirement, as stipulated by IRDA. Further, IRDA stipulates periodic reporting of solvency ratios and has also specified investment regulations for investing the funds raised for meeting the solvency margin. In view of the above, the sub-group recommends that insurance companies may be exempted from the provision of Regulation 16 of SEBI (ICDR) Regulations in line with exemption given to banks and financial institutions. b) Disclaimer clause: In the case of banks, section XI (K) of part A of Schedule VII of SEBI (ICDR) Regulations provide for disclosure of a disclaimer clause of RBI. Similarly, a disclaimer clause of IRDA may be provided for in the offer documents of insurance companies. 4.2.Disclosures by Insurance Companies: Industry- specific Risk Factors for Insurance Companies: The insurance industry is different from other industries and has risks which are unique to it. In order to get an understanding of risks specific to the insurance industry, offer documents of certain insurance companies which came out with issue of capital in other jurisdictions were studied. Based on the risk factors disclosed in such offer documents, following are the minimum broad industry specific risk areas that needs to be disclosed: i. Claims arising out of catastrophic losses (natural and man-made), which could materially and adversely impact the profitability or cash flow of the insurance companies. ii. Concentrated surrenders which may materially affect cash flows, results of operations and financial condition. iii. Differences in future actual claims resulting from the assumptions used in pricing and establishing reserves for insurance and annuity products which may materially affect earnings. 5 Page

11 iv. Risk with reference to concentration by region/type of policies of the insurance company. v. The assumptions based on which the embedded value is calculated and disclosed may vary significantly from time to time / among industry players. vi. Deviations in mortality/morbidity rates from those predicted in determining reserve amounts. vii. Deviations in persistency/lapse rates from those predicted in determining reserve amounts viii. Inability to attract and retain productive agents in a growing competitive business environment. ix. Fluctuations in reserves due to guaranteed benefits x. Inability to obtain reinsurance on a timely basis or at all, which results in bearing increased risks or reduce the level of our underwriting commitments. xi. Default by one or more of our reinsurers which could materially affect the financial condition and results of operations. xii. Regulatory restrictions on investments by insurance companies xiii. Exposure to recovery related risks including for foreclosure of the mortgages xiv. Inability to accurately predict benefits, claims and other costs or to manage such costs through loss limitation methods, which could have a material adverse effect on the operations and financial condition The sub-group recommends that the aforementioned list may act as guidance for companies while disclosing the risk factors in the offer documents. The sub-group also compiled detailed risk factors for insurance companies which are placed at Annexure I. The sub-group recommends that: a. The detailed risk factors as identified by sub-group may be placed on the website of IRDA which may act as guidance to insurance companies coming out with IPO. 6 P age

12 b. SEBI may prescribe the disclosure of aforementioned list of risk factors in the offer documents of insurance companies through circular or standard observations Disclosure on Overview of the Insurance Industry: The SEBI (ICDR) Regulation does not prescribe the format or the contents of industry overview which need to be disclosed in the offer documents for any industry. However, considering the fact that no insurance company in India has come out with an issue so far, it is felt necessary that the investors get a broad overview of the insurance industry. In view of this, broad parameters under which the disclosure on insurance industry overview may be made have been listed and placed in Annexure II. The sub-group recommends that this list may be placed in the website of IRDA, which may act as guidance for insurance companies coming out with issues Disclosure of Financial Information: It is observed that the components of financial statements of insurance companies are significantly different from other companies. An insurance company prepares two types of income accounts i.e. policy holder s account (Revenue account) and shareholder s account (profit and loss account). IRDA has prescribed the formats in which the financials of the insurance companies need to be submitted to them on a periodic basis. On the other hand, provisions regarding disclosure of financial information in SEBI (ICDR) Regulations are general and are applicable to all companies. The subgroup noted that banking companies follow format of financial statements prescribed under Banking Regulation Act, 1949 and similarly insurance companies may follow formats specified by IRDA. Sub-group recommended that the financial disclosure for insurance companies may be as per the format specified by IRDA. 7 P age

13 Specific Disclosures which are followed in other Jurisdictions: The sub-group carried out an analysis of the specific disclosures which are followed in other jurisdictions. A detailed comparative chart along with the comments of the IRDA on each disclosure item in case of life insurance companies is attached as Annexure III. It is observed that the extant disclosure norms prescribed by IRDA are by and large at par with the international practice in vogue in various jurisdictions. Sub-group recommends that following additional disclosures applicable in other jurisdictions shall be included in the offer documents of life insurance companies i. Gross premium- along with Geographic segmentation ii. Cross selling iii. Distribution network iv. Persistency v. Operating expense ratio vi. Investment yield vii. Embedded value Report comprising of: - New Business Value - Value of in force business - Embedded value viii. Investment of above 5% of total Funds in each sector through equity & bonds ix. Reinsurance x. Interest rate sensitivity xi. Liability for future policy benefits and policy holders account balances. xii. NBAP xiii. Manner of arriving at unrealized gain/losses under IFRS or Indian equivalent 8 P age

14 As regards the disclosure on NBAP (New Business Achieved Profit) IRDA has reservations on mandating the said disclosure for insurance companies due to lack of uniformity/standardization of approach adopted for calculation, as of now. Considering the nascent stage of the insurance industry in India and lack of understanding of this business by investors in general, the sub-group felt that there is a need for an expert opinion on both the Embedded Value (EV) and New Business Value (NBV) which together reflect the fair value of the business of an insurance company. Accordingly, sub-group recommends that report of an independent actuary on the EV and NBV of the insurance company should be made a part of the offer document. The contents and format of the EV/NBV reports and criteria for actuaries who are authorized to prepare such report may be prescribed by IRDA. The sub-group recommends that SEBI may mandate the disclosure of aforementioned list of disclosure items in the offer documents of insurance companies through circular or standard observations Glossary of terms used in the Insurance Industry: In order to familiarize the investors with terms used in insurance industry and to standardize the definition and understanding of such terms, the sub-group felt that a Glossary of the terms used in Insurance industry may be prepared. IRDA provided a Glossary of the terms used in Insurance industry which is placed in Annexure IV. This glossary of terms may act as guidance for insurance companies coming out with issues. The sub group recommends that the glossary may be placed on the website of IRDA Continuous Disclosure Requirements for Insurance Companies: The continuous disclosure requirements i.e the disclosure/reporting requirements of companies after its shares are listed at the stock exchanges are prescribed through the listing agreement. The provisions of the listing agreement have been examined in light of continuous disclosure requirements of the insurance companies. It may be noted that clause 41 of the listing agreement prescribes the 9 P age

15 format in which the listed companies are required to disclose the financial information on a quarterly basis to the stock exchanges. Further, a separate format of financial and a format of limited review report has been provided for banks under the clause 41 of the listing agreement. On the same lines, a separate format of financial information and a format of limited review report were recommended for the insurance companies. SCODA suggested the sub-group to re-work on the formats specified in Clause 41 of the Listing Agreement and retain only critical portions, as the same needs to be published in the newspapers. Further, SCODA suggested that the sub-group should classify those disclosures which need to be filed with the exchanges and those which need to be published. 5. Other issues raised by IRDA: 5.1. Advertisements regarding public issues: IRDA requires that all advertisements issued by insurance companies be filed with IRDA for vetting at least 30 days before publishing the same. Sub-group noted that issue advertisements are typically made post the filing of the red herring prospectus which leaves a very short time between the date of filing of RHP and issue opening date. Sub-group recommended that the issue advertisements made by insurance companies being statutory advertisements, may be as per the provisions of SEBI (ICDR) Regulations only Objects of issue: The IRDA representative suggested that insurance companies should be allowed to raise money only for the following objects: a. To augment the solvency requirement b. For general corporate purposes c. For any other purpose which has a specific approval of IRDA The sub-group noted that SEBI (ICDR) Regulations does not have any specific restriction on nature of objects for which a company can raise money from the public. Hence, the sub-group recommends that SEBI (ICDR) Regulations need not 10 P age

16 be amended in this regard. However, IRDA may, if it considers necessary issue guidelines to the insurance companies in this regard Issuance of partly-paid shares: The IRDA representative stated that partly-paid shares should not be allowed as it may inflate the capital. Sub-group noted that the Companies Act, 1956 permits issuance of partly paid up shares by companies. Hence, placing such restriction through subordinate legislation may not be appropriate and may not also be legally tenable. Therefore sub-group recommended that restrictions, if considered necessary, can be put by IRDA under its regulatory powers Definition of Promoters: IRDA stated that as per the existing provisions, all the shareholders of insurance companies are treated as promoters and employees who have been issued shares under ESOP scheme are excluded. Further, any transfer of shares of more than one percent by the pre-ipo shareholders requires prior approval of IRDA. Therefore, IRDA suggested that the definition of Promoter under SEBI (ICDR) Regulations may be amended as follows: Promoters mean the shareholders of the company at the date of filing of the application for IPO with IRDA/ SEBI. However, employees / officers who have been issued shares under ESOP scheme should be excluded The sub-group recommends that the existing definition of promoters as per the SEBI (ICDR) Regulations should be applicable to the insurance companies as well and that IRDA may issue separate guidelines to insurance companies in relation to pre-ipo transfer of shares, if so considered necessary. However, disclosure regarding any such restriction shall be made in the offer document Relaxation from eligibility criteria: The IRDA representative was of the view that insurance companies may find it difficult to comply with the eligibility requirement (i.e. profitability criteria), since gestation period of life insurance business is comparatively longer and it takes around 6 to 7 years for a life insurer to achieve break even. IRDA representative enquired whether such companies can still raise capital through fixed price issue. 11 P age

17 The sub-group felt that there is no need to provide specific relaxation from the eligibility conditions to insurance companies since the companies which do not comply with the profitability criteria can still raise the capital through book building process Key Management Personnel : The IRDA representative suggested the inclusion of the following officers in an insurance company in the definition of key management personnel : Chief Executive, Chief Marketing Officer, Appointed Actuary, Chief Investment Officer, Chief of Internal Audit and Chief Finance Officer. In this context, sub-group noted that the key management personnel generally means and includes only employees in management. The sub-group suggested that the provisions of extant SEBI (ICDR) Regulations may apply as it is and that IRDA, if it so considers necessary, may issue guidelines to the insurance companies specifying the inclusion of additional persons as key management personnel Disclosure with regard to uniform financial denomination: The IRDA Accounting Regulations require that figures in all financial statements should be in thousands. It was brought to the notice of IRDA representative that SEBI (ICDR) Regulations do not specify any particular denomination in which the financial information shall be disclosed. The clause VIII (G) of Part A of Schedule VIII of SEBI (ICDR) Regulations requires the issuer to use one standard financial unit in the offer document. The sub-group noted that insurance companies can easily comply with the requirement of IRDA on denomination without any conflict with the provisions of SEBI (ICDR) Regulations and hence suggested no change. ***** 12 P age

18 Annexure I: INDUSTRY SPECIFIC RISK FACTORS FOR INSURANCE SECTOR Liquidity Risk Adverse impact on earnings due to differences in future actual claims resulting from the assumptions used in pricing and establishing reserves for insurance and annuity products. Concentrated surrenders. Catastrophic Losses Risk Material impact on profitability or cash flow due to catastrophic losses. Reinsurance Risk Failure to obtain reinsurance on timely basis. A default by one or more of our reinsures. Embedded Value Risk The embedded value information is based on several assumptions and may vary significantly as those assumptions are changed. Regulatory Risks Insurance sector is highly regulated and may be materially and adversely affected by future regulatory changes. Regulatory investigations and the resulting sanctions or penalties may adversely affect the reputation, business, results of operations and financial condition of the insurance company. Solvency Risks High costs associated with minimum solvency requirements stipulated by IRDA. Insurance Risk Impact of Lapse Rates, Expense Level, mortality / Morbidity Rates Market Growth Risk 13 Page

19 The low rate of growth of the Indian insurance market. Agents Risk Over dependence on agents and failure to develop other distribution channels for insurance products Difficulty in acquiring the qualification by agents as may be prescribed by IRDA from time to time. Other Risks Over dependence on select actuarial personnel. Difficulty in understanding financial statements drawn specifically for the insurance companies. The effects of unexpected emerging claims and coverage issues Risk with reference to concentration by region/type of policies of the Insurance Company Cyclical nature of Insurance Industry Difficulty in predicting benefits, claims and other costs or to manage such costs through our loss limitation methods. 14 P age

20 Annexure II: Overview of Insurance Industry 1. Introduction 2. Background- A brief history about Insurance Industry 2.1. Pre-Nationalization 2.2. Nationalization of the Sector 2.3. Insurance Reforms 2.4. Interim Insurance Regulatory Authority 2.5. Insurance Regulatory and Development Authority 2.6. Approach to Reforms 3. Global Insurance Environment- A brief on global and domestic scenario covering Insurance Penetration, Density, growth of Industry etc 3.1. Global Insurance Environment 3.2. Domestic Market Overview 4. Industry Outlook 4.1. Life Insurance -Total Premium Underwritten Market Share (% share) Growth of Business 4.2. Non Life insurer Market Share (% share) Market Share (% share) Growth of Business 5. Analysis of Trends 5.1. Life Insurance Enlarged Coverage Introduction of New Products 5.2. General Insurance Tariff and non-tariff Products Enlarged Coverage Introduction of New Products Reinsurance Supported Products 5.3. Health Insurance Enlarged Coverage 15 P age

21 Introduction of New Products 5.4. Reinsurance Business 6. Investment of Funds by the Insurance Industry 6.1. Investment Pattern 7. FDI in Insurance Sector 8. Intermediaries 8.1. Commission Structure Life Insurance Industry Non Life Insurers 9. Changes in Insurance Legislation 9.1. Changes in Insurance Legislation 9.2. Regulatory Issues and Changes 9.3. Consumer Related Changes 9.4. Removal of Redundant Clauses 9.5. Enhancement of Enforcement Powers and Levy of Penalties 10. Corporate Governance Guidelines for Insurance Companies 11. Conclusion 16 P age

22 Annexure III: Comparison table on disclosures made in offer documents of life insurance companies in other jurisdictions Particular Cathy FHC, Taiwan 1 Business Description China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations 1.a Gross Premium By business line (life V/s Non-life) and by product line 1.b Cross selling Between Insurance and banking By product profitability (group life vs. individual life/ Participating vs. traditional nonparticipating/ Singe premium vs regular premium) 1.c Distribution network Agents Branch/ Agents/ Bancassurance By business life (life vs non-life), By region (Coastal vs. others), by product (Life % of regular premium/ % of renewal premium / Bancassurnace vs. group life vs. individual life, nonlife, auto vs. nonauto Not Available Between life and non-life Branch/agents/. Bancassurance By business line (life, non-life & banking) By product (individual life vs. individual annuity vs. group life, group annuity) Between life, nonlife and bank Life planner sales employees and independent agents By business line (life vs. non-life) By region (Netherlands, Belgium) By product (Individual/ group, savings/ pension, traditional / linked) Between life, non-life and bank and fund management Covering various business lines (including the renewal premiums in case of life companies). Also disclosure on business underwritten on geography wise basis Between insurance & banking (details of referrals and bancassurance to be provided) Different channels utilized Agents, corporate agents, bancassurance, brokers and Referrals. The same will be specified by IRDA as an additional disclosure. 1.d Persistency 13-month persistency Not Available 13-month and 25- month persistency 12-months persistency Not available Applicable only for life insurance business. Already covered in the restatement of the financial statement. However, if require, the same may be repeated here giving 13months, 25th month, 37months, 49th months and 61th months persistency ratio 2 Income Statement 17 P age

23 Particular Cathy FHC, China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations Taiwan 2.a Renewals Not available Not available Mentioned Mentioned Mentioned (in MCEV) Would be covered under the Revenue Statement - specific for life companies. 2.b Agent productivity Not available Briefly discussed Annualized FYP per agent, new life policies per agent per month 2.c Margin per product line By different business line Not available By different product (bancassurance vs group life vs individual) Mentions only the number of sales employees and agents By different product lines and different business divisions Mentions number of agents By different business divisions Annualized FYP per agent; new life policies per agent per month. - case of life companies Not in vogue in India at present. However, segment wise disclosure have already been specified for revenue a/c. In case of non-life companies, disclosure would be underwriting experience segment wise. 2.d Operating expense ratio ratio given for life insurance Only expenses disclosed in P&L Expenses disclosed in detail Only expenses disclosed in P&L Mentioned only for general insurance divisions, for life insurance expenses in P&L Already covered in management expense ratio 3 Balance Sheet 3.a Investment Yield for overall investment Yield for each class of investment Yield for each class of investment 3.b Investment portfolio Loans/ overseas Deposit/fixed Deposit/fixed investment/ short maturity/ equity/ income/ equity/loan term security/ loan bonds etc. 3.c cost of liability Not available Not available Provides interest rates directly to illustrate negative spreads Yield for each class of investments Deposit /fixed income/equity/loan Provides interest rates directly to illustrate negative spreads Yield for each class of investments Deposit/fixed income/equity/loan/bonds Interest amount by type of liability provided Already covered in the financial statement and the continuous disclosures- to be disclosed for the shareholders funds; traditional portfolio and on the ULIPs in case of life com. Already covered in the financial statements to be restated In the Indian context, the only form of capital presently permitted is Equity. As such, there is presently only the notional cost of capital involved. For the present, disclosures in this context may not be required. 4 Capital and EV (including assumptions) 18 P age

24 Particular Cathy FHC, Taiwan 4.a Value of new Business Not available with sensitivity analysis China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations With analysis sensitivity with analysis sensitivity with sensitivity analysis not required to be disclosed as there is no uniformity in the approach to be followed for computation of Value of New Business. 4.b NBAP Not available Not available New business value / first year premium (No assumptions mentioned) disclosure of NBAP and NBAP % (Assumptions mentioned) disclosure of NBAP and NBAP % (Assumptions mentioned) -do- 4.c Embedded Value Assumptions are mentioned very briefly Assumptions mentioned briefly are very Assumptions mentioned briefly are very Assumptions are mentioned in detail Assumptions are mentioned in detail The same needs to be disclosed. Institute of Actuaries of India is already in process of finalisation of the guidelines on Embedded Value. 4.d Capitalization Mentioned Mentioned Mentioned Mentioned Mentioned Already covered as a part of financial statement. 4.e Solvency margin statutory disclosure statutory disclosure statutory disclosure statutory disclosure Regulatory and IFRS basis Covered in the ratios prescribed by the Authority. 5 Risk Management 5.a Market risk Described the risk and explained the way it is managed Described the risk and explained the way it is managed Described the risk and explained the way it is managed 5.b Operational risk Not available Not available Explained the risk and the measures taken to manage it 5.c Credit risk Described the risk and explained the way it is managed 5.d Liquidity risk Described the risk and explained the 5.e Assets Liability Management 6 Investment way it is managed Described the risk and explained the way it is managed 6.a Equity Types of investment and the quality of the portfolio Described the risk and explained the way it is managed Described the risk and explained the way it is managed Described the risk and explained the way it is managed Mentions the investments in brief and the yield Described the risk and explained the way it is managed Described the risk and explained the way it is managed Described the risk and explained the way it is managed Mentions the investments in brief and the yield Described the risk and explained the way it is managed Described the risk and explained the way it is managed Described the risk and explained the way it is managed Described the risk and explained the way it is managed Described the risk and explained the way it is managed Mentions the investments, yield and the industry wise bifurcation n brief and the yield Described the risk and explained the way it is managed Described the risk and explained the way it is managed Described the risk and explained the way it is managed Described the risk and explained the way it is managed Described the risk and explained the way it is managed Types of investment and the quality of the portfolio Covered Covered Covered Covered Covered At present covered only in the financial statement. It is suggested that the investments, yield and the industry wise bifurcation in brief may also be captured. 19 P age

25 Particular Cathy FHC, Taiwan 6.b Bonds Types of investment and the quality of the portfolio China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations Mentions the investments in brief and the yield on it Mentions the investments in brief and the yield Mentions the investments in brief Types of investment and the quality of the portfolio Already covered in the periodical disclosures to be made by the insurers. However, the same may also be covered in the IPO disclosures. 7 Reinsurance 7.a No. of reinsurers Main reinsurers mentioned Main reinsurers mentioned Not available Not available Main reinsurers mentioned 7.b Rating of reinsurers Mentioned Not available Not available Not available Not available 7.c Exposure of reinsurers Not available Mentioned Not available Not available Briefly mentioned Along with disclosure of the information as indicated, the overall strategy and reinsurance policy of the insurer and the types of reinsurance treaties entered into would also need to be indicated. 8 Interest rate sensitivity 8.a Equity price sensitivity Briefly mentioned Mentioned in detail Mentioned along with the impact of the risk Not available Mentioned along with the impact of the risk Mentioned along with the impact of the risk Not availabe Not availabe Mentioned along with the impact of the risk Mentioned along with the impact of the risk Would form part of various risk factors. 9 Management Report on internal control over financial reporting Internal reporting 10 Investment control 10.a Classification Classified in to Trading securities, Held to Maturity & Available for sale Not available Not available Not available Not available Currently not available. However to be submitted by Classified in to Held to Maturity, Trading securities and Non-trading securities Classified in to Held for trading securities, Held to Maturity & Available for sale and Loans & receivables originated by enterprise Classified in to Held to maturity, Financial assets carried at cost & Available for Sale Classified financial assets at fair value through profit or loss (FV) (further classified into "held for trading" and "other than trading"), available-for-sale financial assets (AFS), or loans and receivables As part of MD&A. Presently, the portfolio is not required to be segregated into HTM/HFT/AFS. However, once the stipulation is in place, insurers would need to disclose the segregation. 20 P age

26 Particular Cathy FHC, Taiwan 10.b Valuation Trading securities and Available for sale are marked to market and Held to Maturity are stated at amortized cost China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations Held to maturity securities are reported at amortized cost and Trading and Nontrading securities are reported at fair value Held to maturity and Available for sale reported at fair value and Trading securities and Loans & receivables at cost Held to maturity are reported at amortized cost, Held for trading securities and available for sale are stated at fair value with unrealized gains or losses charged to income FV and AFS are carried at fair value. Changes in the fair value of "held for trading" and "other than trading" investments are charged to income. Changes in the fair value of AFS (except for impairment losses and relevant foreign exchanges gains and losses) are recorded in a specific investment valuation reserve within equity, mortgages and loan assets are reported at amortized cost. As per the present dispensation, listed equity is valued at market price. Debt instruments are valued at amortized cost. The same is already being covered in Significant accounting policies. 10.c Unrealized gains/ losses 11 Others 11.a Deferred acquisition cost Unrealised gains/ losses on Trading securities are taken to current earnings, on Available for sale are taken to a separate component of shareholder's equity and premiums & discounts on Held to Maturity are amortized over the period of investment Unrealised gains/ losses on Held to Maturity and Trading securities are reported in profit and loss account whereas as that on Non trading are routed through investment revaluation reserve Unrealised gains/ losses on Held for trading are included in consolidated results, for Available for Sale, they are recognised as a separate component of equity Unrealised gains or losses on securities held for trading charged to income Fair Value movement on Held for trading and other than held for trading are included in the results, gross fair value gains/ losses shown in Equity account Manner of arriving at the unrealized gains to be indicated. Amortized Amortized Amortized Not available Amortized In the Indian context, the acquisition costs are not permitted to be deferred. Thus, no disclosures required. 21 P age

27 Particular Cathy FHC, Taiwan 11.b Liability for Future Not available policy benefits and Policyholder Account Balances 11.c Risk Based Capital Calculated as per the regulatory guidelines prescribed by ROC 11.d Monitoring Mechanism China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations Calculated through the use of assumptions for investment returns, mortality, morbidity, expenses and persistency, as well as certain macro-economic factors such as inflation Calculated as per the regulatory guidelines prescribed by CIRC Briefly mentioned Briefly mentioned Briefly mentioned Calculated based on various actuarial assumptions in case of life insurers. In case of non life insurance companies, disclosure with respect to reserving -loss triangles/claims development would also be required to be made. Calculated as per the regulatory guidelines prescribed by CIRC Solvency margin ratio is mentioned along with the calculations Solvency margin ratio is mentioned for all divisions These prescriptions are presently not applicable to insurance companies in India. CIRC CIRC CIRC FSA Not mentioned Already decided that no monitoring agency is required. 22 P age

28 Annexure IV: Glossary of terms used in Insurance Industry (A) LIFE INSURANCE Glossary- Life Annuity Annual premium equivalent (APE) Assumptions Acquisition costs Board Bonus Certainty Equivalent Conventional withprofit or CWP Cost income ratio Deferred acquisition costs (DAC) Deferred Annuity Director Discounting Dividend cover A periodic payment made for an agreed period of time (usually up to the death of the recipient) in return for a cash sum. The cash sum can be paid as one amount or as a series of premiums. If the annuity commences immediately after the payment of the sum it is termed an immediate annuity. If it commences at some future date it is termed a deferred annuity. An industry measure of new business. The total of new annualised regular premiums plus 10% of single premiums written during the applicable period. Variables applied to data used to project expected outcomes. Expenses related to the procurement and processing of new business written including a share of overheads. The board of Directors of the Company. Surplus funds that a life insurance company allocates to its policyholders The approach adopted in calculating the value of in-force under the MCEV basis, where all cash flows are projected and discounted at riskfree rates Traditional policies which participate in the profits of the companyparticipating policies The ratio of total costs to total income for the year expressed as a percentage. These are measures by reference to which the development, performance or position of the business can be measured effectively. It indicates how much of total income is being employed to meet the cost base and measures the strategic driver of cost effectiveness. The method of accounting whereby acquisition costs on long-term business are deferred in the balance sheet as an asset and amortised over the life of those contracts. This leads to a smoothed recognition of up front expenses instead of the full cost in the year of sale. Annuities which commence after a specified number of years or at a specified age (usually on retirement), usually continuing through the policyholder s life. A director of the Company The reduction to present value at a given date of a future cash transaction at an assumed rate, using a discount factor reflecting the time value of money. The choice of a discount rate will usually greatly influence the value of insurance provisions, and may give indications on the conservatism of provisioning methods. This is a measure of how easily a company can pay its dividend from profit. It is calculated as IFRS operating profit after tax and minority interest divided by the total dividend for that financial year. The dividend for the financial year is the current year interim dividend plus the 23

29 Earnings before interest and tax (EBIT) EBIT margin Economic assumptions Embedded Value or EV Experience variances Financial options and guarantees Free surplus IFRS Income Protection In-force Interest margin proposed final dividend. EBIT is defined as earnings before interest, taxation, foreign exchange gains and losses, profit on partial disposal of investment in associate, divergence on financial guarantee costs, movement on contract for differences and restructuring costs. This KPI measures directly the underlying operating profitability. is defined as earnings before interest, taxation, foreign exchange gains and losses, profit on partial disposal of investment in associate, divergence on financial guarantee costs, movement on contract for differences and restructuring costs. This measures directly the underlying operating profitability. This is an industry measure of performance for investment management companies. It is calculated as EBIT is defined as earnings before interest, taxation, foreign exchange gains and losses, profit on partial disposal of investment in associate, divergence on financial guarantee costs, movement on contract for differences and restructuring costs. This KPI measures directly the underlying operating profitability. divided by total revenue Assumptions in relation to future interest rates, investment returns, inflation and tax. These assumptions and variances in relation to these assumptions are treated as non-operating profits/(losses) under EEV. The Embedded Value of a life insurance business is the sum of its shareholder net assets (including any surplus held in the long term business fund which is attributable to shareholders) and the value of its inforce business. The latter is calculated by projecting the after tax surpluses distributable to shareholders expected in respect of the in-force business and discounting them back to the present time at a risk rate of return Current period differences between the actual experience incurred over the period and the assumptions used in the calculation of the embedded value excluding new business non-economic experience variances which are captured in new business contribution. Terms relating to covered business conferring potentially valuable guarantees underlying, or options to change, the level and nature of policyholder benefits and exercisable at the discretion of the policyholder, whose potential value is impacted by the behaviour of financial variables. The amount of capital and any surplus allocated to, but not required to support, the in-force business covered by the EEV International Financial Reporting Standards A long-term business policy which provides cover against loss of income consequential upon certain insured events such as accident, sickness or permanent ill health. Long-term business which has been written before the period end and which has not terminated before the period end. Net interest income for the year as a percentage of average total assets during the year disclosed in basis points (1/100th of 1%). This is a measure of how much margin the Group is making on its banking assets 24