The insurance regulator of India, Insurance Regulatory and Development Authority of India (IRDAI), has come out with an exposure draft that proposes changes to tenures and compensation of the top management at insurance companies and intends to replace the existing guidelines so as to ensure sound compensation practices and avoid situations resulting from excessive risk-taking behaviour due to inappropriate compensation structures or incentive plans. The insurance regulator has sought to align the tenure of MD&CEO and whole-time directors (WTDs) of insurance companies with the Reserve Bank of India (RBI) stipulation in this regard. In the exposure draft the regulator has said that the post of MD&CEO, or WTDs cannot be held by an incumbent for more than 15 years. After 15 years, the incumbent will only be eligible for appointment as the CEO of the company after a gap of three years, but in those three years, the individual cannot be associated with the company or its group entities either directly or indirectly. Further, the regulator has said, no individual can continue as the MD&CEO, or WTD of an insurance company beyond the age of 70 years. Also, if the MD&CEO, or WTD is a promoter or a major shareholder (holding more than 5 per cent) of the insurance company then he cannot hold those posts beyond 12 years. “However, in extraordinary circumstances, at the sole discretion of the Authority, such MD & CEO or WTDs may be allowed to continue up to 15 years,” the regulator said.

       “The intent behind the exposure draft is to nudge the insurance companies to have a succession plan in place. This is an exposure draft so a lot of discussion will take place before the Irdai finalises the guidelines. Having said that, the regulator is giving sufficient time to insurers to put a succession plan in place. The intent of the regulator is not to be disruptive. In that sense, 15 years’ time should be enough for an MD&CEO to raise the Insurance Company to higher platform,” said Nilesh Sathe, former Irdai Member. As far as their remuneration structure is concerned, it will be divided between fixed pay, perquisites, and variable pay. The fixed pay part of the remuneration will comprise all the fixed items, including perquisites. So far as variable pay is concerned, the insurance regulator has said, atleast 50 per cent of the remuneration structure or a maximum of 300 per cent of the fixed pay can be the variable component. “In case the variable pay is up to 200 per cent of the fixed pay, a minimum of 50 per cent of the variable pay should be via non-cash instruments; and in case the variable pay is above 200 per cent of fixed pay, a minimum of 70 per cent of the variable pay should be via non-cash instruments,” the regulator said. Further, the regulator has proposed that the variable pay paid to MD&CEO, or WTDs can be reduced if there is deterioration in the financial performance of the insurer so much so that it can be even reduced to zero. The insurance regulator has also proposed a variable pay formula, wherein 70 per cent weightage has been prescribed to quantitative parameters such as premium growth, increase in market share, profitability, persistency, and others, while 30 per cent weightage has been prescribed to qualitative parameters. For non-executive directors (NEDs), apart from sitting fees and other expenses, the exposure draft proposes for payment of remuneration commensurate with an individual director’s responsibilities and demands on time. Having said that, such remuneration should not exceed Rs 20 lakh per annum for each such director excluding the Chairman. For the chairman of the board, the remuneration may be decided by the Board of Directors of the respective company. Further, the regulator has said, the upper age limit for NEDs, including the chairman of the board, will be 75 years and after attaining the age of 75 years no person can continue in the said position. And, the total tenure of an NED, continuously or otherwise, on the board of an insurer, will not exceed eight years. “After completion of eight years on the board of an insurer, the person may be considered for re-appointment only after a minimum gap of three years. This shall, however, not preclude him / her from being appointed as a director in another insurer subject to meeting the requirements”, the regulator said. The apex body for insurers in India has asked all stakeholders to offer their comments and suggestions on the exposure draft by January 19.