GUIDELINES ON REMUNERATION OF DIRECTORS AND KEY MANAGERIAL PERSONS OF INSURERS

IRDAI vide Circular bearing no. IRDAI/F&A/GDL/MISC/141/6/2023 dated June 30, 2023 has issued Guidelines on Remuneration of Directors and Key Managerial Persons (KMP) of Insurers.

IRDAI draws attention towards the Background for issuing such guidelines, which are as follows:

• IRDAI had previously issued Guidelines on Remuneration of: Non-Executive Directors (NED) Managing Directors (MD) Chief Executive Officer (CEO) Whole-Time Directors (WTD)

vide Circular bearing no. IRDA/F&A/GDL/LSTD/155/08/2016 dated August 5, 2016 which provided the framework for remuneration in private sector Insurers. These guidelines were based on Principles set out by the Financial Stability Board, International Association of Insurance Supervisors, G20 Nations Forum and Basel Committee on Banking Supervision.

• These Guidelines have been in force for more than 6 years and after analysing its implementation and compliance over due course, IRDAI has decided to:
• bring KMPs also within the ambit of these guidelines;
• give more clarity to various aspects;
• issue revised guidelines on remuneration of Directors and KMPs of Insurers.

IRDAI further gives a general overview of these guidelines and proclaims that sound remuneration policy and practices are a part of Corporate Governance. IRDAI further clarifies that these Guidelines neither unduly restrict nor reduce an insurer’s ability to attract and retain skilled talent but the motive behind introducing such guidelines is to ensure that the Individuals do not take inappropriate and excessive risks. The guidelines also focus on making remuneration based on effective achievement of the objectives and shall not be linked to the performance of any business units which are under their control or oversight.

IRDAI in addition to Background and General overview also refers to the Objectives of these guidelines as follows:

• To ensure effective governance of compensation
• To ensure alignment of compensation with prudent risk taking
• To ensure effective supervisory oversight and stakeholder engagement
• To ensure safety of interest of policyholders and other stakeholders

Under the above overview, IRDAI has exercised its powers and has issued two guidelines namely:

• Insurance Regulatory and Development Authority of India (Remuneration of Non-Executive Directors of Insurers) Guidelines, 2023
• Insurance Regulatory and Development Authority of India (Remuneration of Key Managerial Persons of Insures) Guidelines, 2023

Note:

These Guidelines are not applicable to Foreign Reinsurance Branched (FRBs) operating in India. These Guidelines shall replace and supersede the Guidelines issued vide Circular bearing no. IRDA/F&A/GDL/LTSD/155/08/2016 dated August 5, 2016 and shall come into effect from FY 2023-2024.

Major Highlights of the Guidelines are as follows:

Insurance Regulatory and Development Authority of India (Remuneration of Non-Executive Directors of Insurers) Guidelines, 2023

• Background:
• NEDs play a crucial role for facilitating independent functioning of the Board. They bring in an external and wider perspective to decision making as they oversee and constructively challenge management in implementation of strategy.
• There is an Increase in demands regarding NEDs’ participation in the board and committee meetings, therefore to attract and retain professional NEDs, it is necessary these directors are appropriately compensated.
• Applicability:
• These Guidelines shall be applicable for remuneration payable to NED of private sector insurers from FY 2023-2024.
• Within 3 months of issuance these guidelines, the process of framing/ reviewing the remuneration policy shall be done.
• Remuneration Policy:
• The Board of Directors (BOD) in consultation of Nomination and Remuneration Committee (NARC), shall formulate a remuneration policy in accordance of Companies Act, 2013.
• The Board shall ensure that while implementing and reviewing the remuneration policy, there shall be identification and management of Conflict of Interest.
• Maximum Remuneration of each NED shall not exceed 20 lakhs per annum and if the Chairperson is a NED, then BOD shall decide his/her remuneration.
• NED shall not be eligible for any equity-linked benefits.
• Sitting fees and reimbursement of expenses:

In addition to directors’ remuneration mentioned in 2(iii)[seems like an error, maybe read as 3(iii)] the NED may receive sitting fees and can receive reimbursement for participation in the Board and other meetings.

• Age limit and tenure of NED:
• Maximum age limit for NED shall be 75 years.
• An Independent Director (ID) may be appointed for 5 consecutive years and can be re-appointed after passing a special resolution. Maximum period cannot exceed 10 years and can be re-appointed only after a cooling period of 3 years.
• Disclosures:

Remuneration paid to each NED shall be disclosed in the Notes of Accounts of the Annual Financial statements.

Insurance Regulatory and Development Authority of India (Remuneration of Key Managerial Persons of Insures) Guidelines, 2023

• Applicability:
• These Guidelines shall be applicable for remuneration payable to NED of private sector insurers from FY 2023-2024.
• Within 3 months of issuance these guidelines, the process of framing/ reviewing the remuneration policy shall be done.
• Definitions:
• Remuneration- means any money or its equivalent given to KMP for services rendered by him/her.
• Key Managerial Persons (KMPs)- is defined in IRDAI (Registration of Indian Insurance Companies) Regulations, 2022.
• Shared Link Instruments- means:
• Employee stock option schemes.
• Employee stock purchase schemes.
• Stock appreciation rights schemes.

3. Remuneration policy:

• A comprehensive policy shall be adopted covering all KMPs. The policy shall not encourage KMPs to take excessive risks and the Board shall also consider Conflicts of Interests. The members of the Board shall not be placed in a position of actual or perceived conflict of interests with respect to remuneration decisions.
• The policy shall cover all aspects of remuneration which shall include the fixed as well as:
• Allowances.
• Perquisites.
• Retirement Benefits.
• Variable pay which shall Include:
• Incentives.
• Bonus.
• Share Linked Instruments.
• Joining/Signing Bonus etc.

All of the above aspects shall be incorporated in a single document and the remuneration policy shall be reviewed annually by the NARC.

• NARC shall consult with the Risk Management company to have a integrated approach to formulate the remuneration policy and shall ensure that:
• Remuneration is adjusted for all types of risk;
• Remuneration outcomes are symmetric with risk outcomes;
• Remuneration payouts are sensitive to the time horizon of the risk;
• Mix of cash, equity and other forms of remuneration are consistent with risk alignment;
• To implement Risk Adjustment a variety of measures of credit, market and liquidity risks may be used.
• Parameters for determination of performance assessment of KMPs for payment of variable pay or incentives are:
• Overall financial soundness such as Net-worth position, solvency, growth in AUM etc.
• Compliance with Expense of Management Regulations.
• Claim Efficiency..
• Improvement in Grievance redressal status.
• Reduction in Unclaimed Amounts of Policyholders.
• Persistency:
• 37 th month to 61 st month in case of Life insurers.
• Renewal rate in case of Non-Life Insurers and SAHI .
• Overall Compliance status with respect to applicable laws.

The above parameters shall constitute at least 60% of total weightage in the performance matrix of MD/CEO/WTD and 30% in case of KMPs. Additional parameters may also be set out which shall be mentioned in the remuneration policy.

• These parameters may also be used to revise Fixed Pay.
• Annual Remuneration:

It Shall be an aggregate of Fixed Pay (FP) (including monetary and non-monetary perquisites) and Variable Pay (VP) for a FY.

• Fixed Pay:

The fixed amount of remuneration shall be reasonable and as per all statutory requirements. It includes Basic Pay, allowances, perquisites, contribution towards retirement benefits and all other fixed items of compensation.

• Variable Pay:
• VP shall be in form of cash and/or share linked instruments.
• VP shall include incentives, bonus, share linked instrument etc. Any VP or performance-based Incentive shall be paid to KMP only once during a FY.
• VP shall at least be 50% of FP and cannot exceed 300% of FP. If VP is up to 200% of FP, then minimum of 50% of the VP shall be in non-cash instruments. Similarly, the limit would be 70% if VP is more than 200% of FP.
• A minimum of 50% of the total variable pay must invariably be under deferral arrangements and the deferral period shall be a minimum of three years. The first such vesting shall accrue after one year from the commencement of the deferral period. Vesting shall be no faster than on a pro rata basis and shall not take place more frequently than on a yearly basis to ensure a proper assessment of risk before the application of ex-post adjustments. No deferment of variable pay shall be required for an amount of up to Rs Twenty-Five lakhs for a particular year.
• In case of an insurer which is not listed:
• the fair value of the equity shares certified by a Category 1 merchant banker registered with SEBI shall be considered for the purpose of benefit calculation. The insurer which is not listed may issue the ESOPs of their listed promoter company provided that such cost shall be borne by the respective insurer only.
• the total number of ESOPs granted in a year shall not exceed 1% of the paid-up capital of the insurer. The total number of ESOPs issued, granted, vested or outstanding at any point of time shall not exceed 5% of the paid- up capital of any insurer.
• For a listed insurer, Share-Linked Instruments shall be reckoned at the fair value as on the date of grant. The norms for grant, valuation and disclosure of share-linked instruments shall be framed by the insurers in conformity with the relevant statutory provisions and applicable guidelines and shall form part of the insurers’ remuneration policy.
• KMPs shall not be granted any sweat equity shares.
• The negative financial performance of the Insurer and other parameters as defined in the remuneration policy shall lead to reduction is VP which may even be reduced to zero.
• In case of retirement/resignation/death of KPMs prior to deferral period, then the deferred pay may be paid as per the employment contract. In case of re-appointment on retirement the pay shall be paid only for the respective years to which it was originally deferred.
• In certain scenarios deferred pay can be forfeited, where there is termination of services as per the directives of court/tribunal/other competent Authorities or termination due to fraud/criminal offences.
• Malus and Claw-Back (MACB):
• VP shall be subject to MACB provisions and the provisions are required to be a part of the remuneration policy. In the event of negative trend in the pre-defined parameters, the VP can be reduced or cancelled.
• Malus Arrangement- permits Insurer to prevent vesting of all or part of the amount of deferred remuneration. It does not reverse vesting after it has already occurred.

Claw Back – Is a contractual agreement between KMP and the Insurer in which KMP agrees to return previously paid or vested remuneration to Insurer under certain circumstances.

• Appropriate modalities to incorporate Malus/Claw-Back mechanism in respect of VP in accordance with relevant statutory and regulatory stipulations. Insurers shall make sure that MACB clauses are present in the employment contract along with all situations stating when it can be invoked.
• Age and tenure of MD/CEO/WTD:
• The post of MD/CEO/WTD shall not be held by a person continuously for a period more than 15 years. He can be appointed again after such period after undergoing a cooling off period of 1 year.
• MD/CEO/WTD shall not hold the office beyond the Age of 70 years. A lower limit for the same can be set in the internal policy prepared by the Board.
• If MD/CEO/WTD is appointed by a promoter or major shareholder then he shall not hold the office for more than 12 years. However, IRDAI, upon application with appropriate reasons can give permission to hold office for up to 15 years.
• A Promoter/Shareholder cannot hold a Whole-time position in the Insurer. However, this condition is not applicable if the employee receives shares through ESOP.
• Upon issue of these guidelines, if the MD/CEO/WTD has already completed the term of 12/15 years then within a period of 1 year a from date of issue of these guidelines a new incumbent shall be appointed.
• Guaranteed Bonus, Joining/Sign Bonus and Severance Pay:
• Guaranteed bonuses are inconsistent with sound risk management, therefore, shall not be a part of the remuneration policy.
• Joining/Signing bonus shall only be given in context of hiring new personnel and be limited to first year of employment. These bonuses shall not form a part of FP or VP.
• Insurers shall not grant Severance Pay other than accrued benefits like gratuity, pension etc. to KMPs except in cases where it is mandated by any statute. The Severance Pay shall not include notice period pay.\
• Disclosures:

The disclosures stated below are to be mandated in the notes of accounts forming a part of Annual Report:

• Qualitative Disclosures:
• Information relating to the composition and mandate of the Nomination and Remuneration Committee.
• Information relating to the design and structure of remuneration policy and the key features and objective of remuneration policy.
• Description of the ways in which current and future risks are taken into account in the remuneration policy. It shall include the nature and type of the key measures used to take account of these risks.
• Description of the ways in which the insurer seeks to link performance, during a performance measurement period, with levels of remuneration.
• Quantitative Disclosures:
• All details of remuneration awarded for the FY to MD/CEO/WTD shall be made in the prescribed format.
• Details of outstanding deferred remuneration of MD/CEO/WTD at the end of FY shall be also disclosed in the preferred format.

The insurers shall also comply with the Companies Act and SEBI regulations/guidelines.

• Accounting:
• If the annual remuneration of MD/CEO/WTD and other KMPs individually exceeds Rs.4 Crore then such excess shall be borne by the shareholders and debited to Profit and Loss Account.
• Liability in the respective books of accounts shall be created in respect of deferred remuneration of the reporting financial year.
• Deferred remuneration pertaining to previous financial years and paid in the reporting financial year shall not be debited to Revenue Account / Profit and Loss Account as the same shall be adjusted against the liability outstanding in the books of accounts at the beginning of the year.
• In case of forfeiture of deferred pay, the corresponding liability outstanding shall be reduced accordingly.
• In case of recovery of earlier paid remuneration, then it shall be credited to Revenue Account / Profit and Loss Account.
• Additional information required:

Following information is required to submit on an annual basis by 30 th June of the next FY in prescribed formats:

• Complete details of remuneration awarded to KMPs for each FY.
• Details of Outstanding deferred remuneration of KMPs at the end of FY.
• Complete details of reduced/ cancelled/ recovered remuneration of MD/CEO/WTD/KMPs during the year as per MACB provisions as per the prescribed format.
• The formats shall be certified by the CFO.
• Approval and Renewal of Remuneration:
• Appointment/Re-appointment or modification in remuneration shall require approval from IRDAI under Section 34A of Insurance Act, 1938.
• No revision shall be permitted by IRDAI before expiry of one year from the date of earlier approval.
• The cost of remuneration shall be borne by the respective Insurer only.

Source category: IRDAI

Attachments

• /2023/227_Annexures_AB_of_Guidelines_on_Remuneration_of_Directors_and_Key_Managerial_Persons_of_Insurers.pdf
• /2023/227_Guidelines_on_Remuneration_of_Directors_and_Key_Managerial_Persons_of_Insurers.pdf