Insurance under FEMA: Treatment of Policies

Varun Hariharan

03 Oct, 2020

The insurance sector is highly regulated. Even before independence, there were many corporations regulating insurance in India. After Independence, nationalisation occurred and hundreds of private sector insurance dealers collaborated through nationalisation. This collaboration brought about new insurance dealers. Some famous insurance dealers included Life Insurance Corporation of India^[1] (LIC), which is the primary corporation for issuing life insurance products. This corporation also issues general insurance products and allied products.

Previously foreign dealings with insurance were regulated under the Foreign Exchange Regulation Act, 1973 (FERA). This regulation had its flaws and did not allow any form of foreign exchange development in the area of Insurance. Hence the Government in 1999 brought out the Foreign Exchange Management Act, 1999 (FEMA). Insurance under FEMA is more lenient when compared to the predecessor. Regulation and policy development is allowed for insurance under FEMA. This article is going to critically analyse the treatment of different policies of insurance under FEMA.

FEMA Regulation

The Foreign Exchange Management Act, 1999 was brought out by the Government of India with the primary purpose of increasing the number of foreign exchange reserves in India. Apart from this, FEMA liberalised and brought out major reforms in foreign investments which were allowed in India. After the enactment of the FEMA, foreign investors, as well as companies, were allowed to invest in particular sectors in India.

Insurance under FEMA will include all categories. The following categories will be dealt with FEMA:

• Life Insurance;
• General Insurance; and
• Reinsurance Business.

Under the Foreign Exchange Management Act, 1999 regulation 2(47) deals with the treatment of insurance under FEMA. All companies that deal with insurance have to register with the concerned authority, i.e. IRDAI (Insurance Regulatory and Development Authority of India).

The Reserve Bank of India (RBI) is the main regulatory authority that brings out notifications and circulars on Foreign Exchange Matters in India. Under the RBI, agencies such as authorised dealers are meant to carry out all the transactions for foreign entities and Indian entities that deal with foreign exchange. All authorised dealers have to comply with the directions issued by the RBI from time to time.

Under section 11 of the FEMA authorised dealers are provided guidelines from RBI which has to be compiled from time to time. These instructions have to be followed by authorised dealers.

Master Direction (MD) for Insurance (FED Master Direction No. 9/2015-16)

For Insurance under FEMA, the RBI brought out a master direction FED Master Direction No. 9/2015-16 for treating all the different transactions of insurance under FEMA.

All foreign exchange transactions under this master direction have to be conducted through authorised dealers. If compliance is not followed for carrying out different transactions, then such transactions will not be permitted.

This master direction brought out by the RBI deals with Insurance regulation at a particular place. Insurance at a particular place will include how insurance policies are introduced under this framework, how premiums are paid under the framework for insurance, and how different individuals (Residents and Non-Residents) for insurance meet compliance.

All companies that carry out insurance business have to be registered with the IRDAI. The Insurance Regulatory and Development Authority of India regulates domestic as well as International Insurance for India.

Specific Features of this Master Direction

As mentioned earlier, this Master Direction deals with insurance which is carried out at a particular place. Insurance at a particular place will include all aspects which relate to the issuance of policies, payment of premium, and remittance of an excess of policy funds back to the policyholder. This master direction does not deal with reporting of insurance compliance. Reporting of insurance compliance is dealt with under a separate master direction.

The concerned foreign exchange master direction that deals with reporting is the Master Direction – Reporting under Foreign Exchange Management Act, 1999. This Master Direction has been amended from time to time by the RBI. The latest amendment was in 2018.

The following features are present under this master direction for insurance under FEMA:

• There is a different form of insurance business that is carried out by an entity; this will include life insurance business, general insurance business, reinsurance business, and other types of insurance. While there is no specific mention for insurance businesses to carry out compliances under FEMA, the general rule is to abide by the provisions of this master direction.
• All businesses that carry out the business of dealing with insurance and insurance-based products have to comply with the provisions of the IRDAI. Apart from the IRDAI, companies also have to comply with the rules of the RBI.
• Insurance under FEMA would include dealing with insurance policies for residents of India (People resident in India) and Non-Resident Individuals (NRI and People Resident outside India). The scope of this master direction is not just limited to the treatment of insurance-based products for resident’s as well as non-resident individuals.
• The following is also dealt under this Master Direction:
  • Rules related to the treatment of insurance for resident individuals as well as non-resident individuals.
  • Rules related to the issuance of policy for residents as well as non-resident individuals.
  • Collection of policy amounts.
  • Payment of premiums for residents who are outside India for a particular period and come back to India after the period gets over.
  • Settlement of claims between respective insurance providers and beneficiaries of insurance agreements.
  • Maintenance of foreign currency accounts with respective foreign banks for carrying out recurring payments for maintaining the insurance account.
  • Rules related to receipt and payments for the policies.
• Definitions- For interpretation, it is crucial to understand the meaning of specific terms under the MD.
  • Resident Individual- A resident individual is a person who has domiciled within India. This would also include any individual coming under the meaning of the Citizenship Act, 1955.
  • Person Resident outside India/ NRI- A Person Resident outside India is an individual who resides out of India for a particular period. A Non-Resident Indian (NRI) is an individual who stays outside India for more than 182 days. As per the recent amendment of the Finance Act, 2020, the definition of NRI includes an individual who has stayed in India for 120 days. This definition will only be applicable if the individual satisfies the threshold, which is earning more than INR 15, 00,000 per annum.

Treatment of Insurance under FEMA

Based on the above Master direction insurance and insurance-based products which are issued are treated in different ways.

Residents

• Issue of Policies to Residents

Any form of policy which is issued by an insurance company in foreign currency to resident individual who have Indian nationality and have returned to India after being a Non-Resident. The above policy is allowed. However, there is a condition that the premium on the policy is paid out of the respective resident foreign currency account (RFC account).

• Issue of Policies and payment of premiums to Foreigners

Under this, policies can be issued to people outside India. For classifying under this, the individual must be a foreigner or an individual who is not a permanent resident of India. There are specific conditions for this. The amount of premium paid must be through the surplus amount present out of the foreign currency funds or through some form of superannuation.

• Conversion of Rupees for Transfer

If any premium is required to be transferred to a foreign individual, then the same can be carried out. However, specific permission is required from the RBI to carry out the process of conversion.

Non-Resident Indians (NRI)

Policies can be issued to individuals who are considered as Non-Resident Indians. These policies can either be issued through the Indian office or through an office which is established in the foreign country. The NRI has to ensure that compliance of insurance under FEMA is met.

These policies can be issued if specific conditions are followed. Policies can only be issued, if the premium amount on the respective policy is collected from the relevant Non-Resident External Account (NRE Account) or through the FCNR account which is maintained by the Non-Resident Indian.

• Rupee Denominated Policies

If the insurance policy is issued in the form of Rupees, then the premium amount has to be collected from the respective Non-Resident Ordinary (NRO) Account. This account is permissible for collecting any form of premium.

• Policies Issued Abroad

When it comes to transferring of respective policy, then any policy which is issued abroad can be transferred to the Indian Registrar for policies. Through this compliance for insurance under FEMA can be maintained. Along with this policy, all form of actual reserves has to be transferred to the Indian Registrar for respective policies.

There is an exception to this if the policy has been present with the beneficiary for more than three years before the beneficiary returns to India. This is an exception to the issuance and transfer of policies.

How are Policies settled for Insurance under FEMA?

• For Rupee Denominated Policies

Suppose any form of rupee-denominated policies is issued to individuals who reside outside India or person’s resident outside India (PROI). In that case, the respective payments have to be made in foreign currency. This will only be allowed if all the premiums for the policy amount have been paid in any form of foreign currency.

• For Non Residents

Suppose any individual being a Non-Resident Indian is a beneficiary of the insurance policy. In that case, the individual is allowed to transfer by way of credit of the amount of settlement to the respective NRE or the FCNR account.

• Settlement Claims/Maturity and Other Benefits

Any resident beneficiary is permitted to open respective Resident Foreign Currency Accounts for the treatment of any form of a settlement or any other benefit.

• Compliance of Insurance under FEMA

Any policy which is issued by the respective insurance company has to comply with the respective rules and regulations of FEMA. Apart from this, the insurance company has to ensure the respective rules of IRDAI have complied with.

On becoming residents, the individual policyholders under this are allowed to credit to the respective RFC account on becoming Indian residents.

• Premium Payable to NRI

Any form of premium which is collected from an NRI would be in the form of Non-Repatriable Rupee currency. This can be paid in the form of rupee through the respective NRO account of the individual or the beneficiary. These principles and rules for insurance under FEMA would also apply to life claims such as death claims.

• Foreign Resident Settlement

If a foreign resident is receiving any form of maturity proceeds or benefits from an Indian Insurance company, then the same must be credited to the account which is held by the foreign resident. The proceeds of the settlement can be transferred to the foreign resident through the bank account if the beneficiary or the resident desires the same to be carried out.

• Payment of Commission to Overseas Company (Insurance under FEMA)

Indian insurance companies have to comply with the relevant rules of IRDAI. Apart from this, payment of commission is required to be carried out by an Indian insurance company to international companies.

Treatment of Reinsurance Claims

Indian Insurance companies, as well as beneficiaries, have to comply with the respective rules for Insurance under FEMA. However, there are different rules when it comes to the treatment of reinsurance claims. A reinsurance agreement is between two or more companies that carry out the business of reinsurance.

Under FERA reinsurance companies would have to negotiate and deal with the products including settlement of claims. However, under FERA, no form of the amount was allowed to be remitted to India due to restrictive foreign exchange laws.

The treatment of reinsurance has not changed under the FEMA regime, and entities have to decide on respective reinsurance agreements. However, the restrictive policies which were under FERA have been repealed.

Opening of FCA

The Foreign Currency Accounts or FCA is allowed to be opened by an Insurance company or an Indian company carrying out work through the respective foreign office abroad. 

The foreign currency account, which is opened on behalf of the insurance company, is used for the following purposes:

• For the settlement of claims which are raised abroad.
• For making any form of payments.
• Tax Settlement Schemes.

General Insurance

The treatment of General Insurance would also go by the rules under this master direction. Insurance under FEMA compliance is required then the rules of the above master direction have to be followed.

Conclusion

Read our article:RBI Master Directions on Priority Sector Lending (PSL) Targets and Classification