15-year term limit on MDs, CEOs of insurance companies on cards
The insurance regulator has proposed capping the tenure of managing directors (MDs) and CEOs of insurance companies at 15 years, bringing it in line with what the Reserve Bank of India (RBI) has mandated for big business bosses. banks. It also proposed changes to the compensation structure of senior executives in insurance companies, in order to ensure sound compensation practices and avoid situations resulting from excessive risk-taking behavior due to inappropriate compensation or incentive plans.
In an exposure draft, the regulator said the position of managing director and CEO or full-time director (WTD) cannot be held by an incumbent for more than 15 years. After 15 years, the holder may only be appointed CEO of the company after an interval of three years, but during these three years, the person may not be associated with the company or its group entities, directly or indirectly .
Additionally, the regulator said that no individual can continue as a managing director and CEO or WTD of an insurance company beyond the age of 70. In addition, if the CEO and CEO or WTD is a major sponsor or shareholder (holding more than 5%) of the insurance company, he cannot hold these positions beyond 12 years, unless the regulatory body only allows the individual to continue for up to 15 years. “The term cap proposed by the regulator aims to deliver the benefits of long-term change with enough opportunity for leadership to make a difference. Forced change after 15 years is good for any organization. It is important to note that there is directional alignment with practice in the banking industry,” said Rushabh Gandhi, Deputy Managing Director, IndiaFirst Life Insurance.
According to Nilesh Sathe, former member of the Insurance Regulatory and Development Authority (Irdai), “The intention behind the exposure draft is to encourage insurance companies to put in place a succession plan. The regulator gives sufficient time to insurers to do so. The intention of the regulator is not to be disruptive. In that sense, 15 years should be enough for a managing director and CEO to elevate the insurance company to a higher platform,” Sathe said.
“Irdai’s efforts to emulate the banking model seem somewhat far-fetched. In the case of banks, loan assets are created and some of the bad examples of the banking system should not be used as a basis for the regulator to establish similar guidelines. In any case, I don’t think the regulator will not consider applying the new regulations on a retrospective basis,” said Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services.
As for compensation, the regulator said it would be split between fixed salary, perquisites and variable salary. The fixed part of the remuneration will include all fixed elements, including perquisites. The variable remuneration will represent at least 50% of the remuneration structure or a maximum of 300% of the fixed remuneration. In addition, the regulator has proposed that the variable remuneration paid to MDs and CEOs or WTDs can be reduced if the financial performance of the insurer deteriorates, to such an extent that it can even be reduced to zero.
The regulator proposed a variable remuneration formula, in which a 70% weighting was prescribed for quantitative parameters, such as premium growth, market share increase, profitability and retention rate, while that a weighting of 30% has been prescribed for the qualitative parameters.
“In the event that the annual remuneration of the MD/CEO/WTD individually exceeds Rs 1.5 crore (including all perquisites plus bonuses), such excess will be borne by the shareholders’ account,” the regulator said.
For non-executive directors (NEDs), in addition to attendance fees and other expenses, the exposure draft proposes the payment of remuneration commensurate with the responsibilities and time requirements of an individual director. That said, this remuneration should not exceed Rs 20 lakh per year for each of these directors, excluding the chairman. For the chairman of the board of directors, the remuneration may be decided by the board of directors of the company concerned.
Additionally, the regulator said the upper age limit for NEDs, including the chairman of the board, will be 75. After reaching the age of 75, no one can continue in the said position. The total tenure of an NED, whether continuous or not, on an insurer’s board of directors will not exceed eight years.
The umbrella body of insurers in India has asked all stakeholders to submit their comments and suggestions on the exposure draft by January 19.