15-year cap on tenure of MD, CEOs of insurance companies on cards

Proposed remuneration to be divided between fixed/variable pay, perquisites

The insurance regulator has proposed to cap the tenure of managing directors (MDs) and chief executive officers (CEOs) of insurance firms at 15 years, aligning it with what the Reserve Bank of India (RBI) has mandated for the top honchos of banks. It has also proposed changes to the compensation structure of the top management at insurance companies, so as to ensure sound compensation practices and avoid situations resulting from excessive risk-taking behaviour due to inappropriate compensation structures or incentive plans.

In an exposure draft, the regulator has said that the post of MD and CEO or whole-time directors (WTDs) cannot be held by an incumbent for more than 15 years. After 15 years, the incumbent will only be eligible to be appointed 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 MD and CEO or WTD of an insurance company beyond the age of 70 years. Also, if the MD and CEO or WTD is a promoter or a major shareholder (holding more than 5 per cent) of the insurance company, he/she cannot hold those posts beyond 12 years, unless the regulator permits the individual to continue up to 15 years. “The cap on tenure proposed by the regulator is aimed at bringing in benefits of change over the long term with sufficient opportunity for leadership to make a difference. A forced change after 15 years is good for any organisation. Importantly, there is directional alignment with the practice in the banking space,” said Rushabh Gandhi, deputy CEO, IndiaFirst Life Insurance. 

According to Nilesh Sathe, former Insurance Regulatory and Development Authority (Irdai) member, “The intent behind the exposure draft is to nudge insurance companies to have a succession plan in place. The regulator is giving sufficient time to insurers to do so. The intent of the regulator is not to be disruptive. In that sense, 15 years’ time should be enough for an MD and CEO to raise the insurance company to a higher platform,” said Sathe.

“Irdai’s efforts to emulate the banking model looks somewhat far-fetched. In case of banks, the loan assets are created and some of the bad examples in the banking system should not be the basis for the regulator to bring out similar guidelines. In any case, I don’t think the regulator will not contemplate the application of the new regulations on a retrospective basis,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services.

As far as remuneration is concerned, the regulator said it would be divided between fixed pay, perquisites, and variable pay. The fixed pay part of the remuneration will comprise all the fixed items, including perquisites. The variable pay will be at least 50 per cent of the remuneration structure or a maximum of 300 per cent of the fixed pay. Further, the regulator has proposed that the variable pay paid to MD and 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 regulator has proposed a variable pay formula, wherein 70 per cent weighting has been prescribed to quantitative parameters, such as premium growth, rise in market share, profitability, and persistency ratio, while 30 per cent weighting has been prescribed to qualitative parameters.

"In case the annual remuneration of the MD/ CEO/WTD individually exceeds Rs 1.5 crore (including all perquisites plus bonuses), such excess shall be borne by the shareholders’ account," said the regulator.

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. After attaining the age of 75, no person can continue in the said position. The total tenure of an NED, continuously or otherwise, on the board of an insurer, will not exceed eight years.

The apex body for insurers in India has asked all stakeholders to offer their comments and suggestions on the exposure draft by January 19.