The government is examining a sector-specific insolvency framework for insurance companies under the Insolvency and Bankruptcy Code (IBC), similar to the one for the real estate sector.
Additional protection for insurance policyholders may be a key feature of the framework. Besides, the proposed changes might also clearly define the respective roles of the Insurance Regulatory and Development Authority of India (IRDAI), the insolvency regulator IBBI and the adjudicators — NCLT and NCLAT— for bankruptcy settlement in the sector.
However, insurance policyholders may not necessarily receive rights equivalent to homebuyers in the real estate insolvency regime. Homebuyers have had the tag of financial creditors since 2018 and a Supreme Court ruling in February this year further buttressed their position by stating that their claims would get precedence over that of others including lenders.
The need for a separate framework for dealing with stress in the insurance sector stems from a long-standing gap. While insurance companies are classified as “financial service providers” under the IBC, the government is yet to implement the relevant adjudicating rules for the sector notified in 2019.
As a result, distressed insurance companies continue to be dealt with under the Insurance Act, 1938 instead of the IBC. The Act also gives the IRDAI powers to seek the winding up of an insurer if it becomes insolvent or if allowing it to continue operating could harm policyholders.
“There is a recognition within the government that the existing insolvency framework might not adequately address the unique challenges faced by the insurance sector, where the interests of millions of policyholders must be balanced alongside those of creditors,” an official said.
The source, however, added that the government may still not enact a standalone insolvency law for insurers. Instead, the more practical approach would be to resolve insurance insolvency within the IBC while introducing sector-specific provisions covering policyholder protection.
“If insurance companies are brought under the FSP (adjudicatory rules) in future, the insolvency proceedings can be initiated only by IRDAI, unlike ordinary companies where creditors can move the National Company Law Tribunal (NCLT). The framework is also expected to clearly define the respective roles of IRDAI and the insolvency authorities to avoid regulatory overlap,” the official said.
Additionally, the framework will likely propose the formation of an advisory committee constituted by the IRDAI to assist during the insolvency process, while the final resolution plan would continue to require approval from the NCLT.
Experts said that insurer insolvencies have historically remained outside the IBC’s purview because the Insurance Act already provides a regulatory mechanism for dealing with distressed insurers.
“The move towards sector-specific insolvency frameworks for insurance reflects the natural progression of India’s insolvency regime,” said Manish Gupta, lead (corporate legal and secretarial) at AKM Global.
“In the insurance sector, policyholder protection and financial stability considerations often take precedence alongside creditor interests. A tailored framework can help address these sector-specific realities while ensuring faster resolutions, greater regulatory coordination and better value preservation,” he said.
Meanwhile, Siddharth Srivastava, partner at Khaitan & Co, said that it’s possible that the proposed insurance insolvency framework will strengthen policyholder protection, however they would not necessarily receive rights equivalent to homebuyers which have been categorised as “financial creditors” in a real estate insolvency.
According to experts, any dedicated insolvency framework would have to be designed almost from scratch because of the sheer number of policyholders and the need to ensure continuity of insurance coverage during resolution.
The instances of insolvency proceedings against insurance companies are rare. A prominent example is Sahara India Life Insurance, where IRDAI directed the transfer of its insurance business to SBI Life Insurance in 2023 citing concerns over the Sahara’s financial health and policyholder interests. The move, aimed at ensuring continuity of policyholders’ coverage, was subsequently upheld by the Securities Appellate Tribunal (SAT), and the IBC was not invoked in the process.
