Chapter 1:

LECTURE 1.4: LEGISLATIONS GOVERING

INSURANCE
The Insurance sector in India is regulated by the following Acts:

1) The Insurance Act, 1938

2) The Life Insurance Corporation Act, 1956
3) Marine Insurance Act, 1963
4) General Insurance Business (Nationalization) Act, 1972
5) Insurance Regulatory and Development Authority (IRDA) Act, 1999

Legislative Regime
 The principal legislation regulating the insurance business in India is the Insurance Act of
1938.
 Some other existing legislations in the field are – the Life Insurance Corporation (LIC) Act,
1956, the Marine Insurance Act, 1963, the General Insurance Business (GIB) (Nationalization)
Act, 1972 and the Insurance Regulatory and Development Authority (IRDA) Act, 1999.
 The provisions of the Indian Contract Act, 1872 are applicable to the contracts of insurance,
whether for life or non-life.
 Similarly, the provisions of the Companies Act, 1956 are applicable to the companies
carrying on insurance business.
 The subordinate legislation includes Insurance Rules, 1939 and the Ombudsman Rules, 1998
framed by the Central Government under Sec.114 of the principal Act as also 32 regulations
made by the IRDA under Sec.114 A of the principal Act and Sec.26 of the IRDA Act 1999.

Background to recent legislative

changes
 The announcement of the new industrial policy in 1991, envisaged the transition of the
economy from a regulated to a liberalized and deregulated regime leading to the
privatization of insurance sector to provide a better coverage to citizens and to augment the
flow of long-term financial resources.
 This transition also meant that competition was bound to intensify in future with the entry
of several private players in the field, particularly the foreign companies in joint venture with
Indian partners. In order to prevent misuse by insurers of policyholders ‘and shareholders
‘funds and to ensure accountability, it was imperative to have in place an effective
regulatory regime.
 Insurers being repositories of public trust, efficient regulation of their business became
necessary to ensure that they remained worthy custodians of this trust.
 Further, insurance cash flows generated funds needed for investment in the social sector
and for the development of infrastructure.
 Therefore, the regulation of insurance required a paradigm shift from just supervisory and
monitoring role to development role so that the insurance business promoted economic
growth.

Malhotra Committee Report

In the backdrop of new industrial policy, the Government of India set up in 1993 a high-powered
committee headed by Mr. R. N. Malhotra to examine the structure of the insurance industry, to
assess its strength and weaknesses in terms of the objective of providing high quality services to the
public and serving as an effective instrument for mobilization of financial resources for development,
to review the then existing structure of regulation and supervision of insurance sector and to suggest
reforms for strengthening and modernizing regulatory system in tune with the changing economic
environment.

The Malhotra Committee submitted its report in 1994. Some of the major recommendations made
by it were as under: -

(a) the establishment of an independent regulatory authority (akin to Securities and Exchange Board
of India);

(b) allowing private sector to enter the insurance field;

(c) improvement of the commission structure for agents to make it effective instrument for
procuring business especially rural, personal and non-obligatory lines of business;

(d) insurance plans for economically backward sections, appointment of institutional agents;

(e) setting up of an institution of professional surveyors/loss assessors;

(f) functioning of Tariff Advisory Committee (TAC) as a separate statutory body;

(g) investment on the pattern laid down in s.27;

(h) marketing of life insurance to relatively weaker sections of the society and specified proportion
of business in rural areas;

(i) provisions for co-operative societies for transacting life insurance business in states;

(j) the requirement of specified proportion of the general business as rural non-traditional business
to be undertaken by the new entrants;

(k) welfare-oriented schemes of general insurance;

(l) technology driven operation of General Insurance Corporation of India (GICI); GIC to exclusively
function as a reinsurer and to cease to be the holding company;

(m) introduction of unlinked pension plans by the insurance companies; and

(n) restructuring of insurance industry.

OVERVIEW OF INSURANCE LAW

The Insurance Act, 1938
It is the first comprehensive piece of insurance legislation in India governing both life and non-life
branches of insurance. The Act applies to all type of insurance business-life, fire, marine etc. done by
companies incorporated in India or elsewhere.

According to Sec. 2(C) of the Act, there is prohibition of transaction of insurance business by certain
persons. Save as hereinafter providing, no person shall after the commencement of the Insurance
Act, begin to carry on any class of insurance business in India shall after the expiry of one year, from
such commencement, continue to carry on any such business unless he is –

a) A public company or
b) A society registered under the Cooperative Societies Act, 1912 or under any other law for the time
being in force in any state relating to cooperative societies or,

c) A body corporate incorporated under the law of any country outside India not being of the nature
of a private company.

Requirement as to capital

According to Sec.6, no insurer carrying on the business of life insurance, general insurance or
insurance in India on or after the commencement of the Insurance Regulatory and Development
Authority Act, 1999, should be registered unless he has:

i. A paid-up equity capital or rupees one hundred crores, in case of a person carrying on the business
of life insurance or general insurance; or

ii. A paid-up equity capital of rupees two hundred crores, in case of a person carrying on exclusively
the business as a reinsurer:

Provided that in determining the paid-up equity capital specified under clause (i) or clause (ii) the
deposit to be made under section 7 and any preliminary expenses incurred in the formation and
registration of the company should be excluded: Provided further that an insurer carrying on
business of life insurance, general insurance or Re-insurance in India before the commencement of
the Insurance Regulatory and Development Authority Act, 1999 and who is required to be registered
under the Act, should have a paid-up equity capital in accordance with clause (i) and (ii), as the case
may be, within six months of the commencement of that Act.

Deposit

According to Section-7, every insurer should, in respect of the insurance business carried on by him
in India, deposit and keep deposited with the Reserve Bank of India, in one of the offices in India of
the bank for and on behalf of the Central Government, the amount hereafter specified, either in
cash or in approved securities, estimated at the market values of the securities on the day of deposit
or partly in cash and partly in approved securities so estimated.

i. In the case of the life insurance business, a sum equivalent to one percent of his total gross
premium written in India in any financial year commencing after the 31st day of March, 2000 not
exceeding rupees ten crores;

ii. In the case of general insurance business, a sum equivalent to three percent of his total gross
premium written in India, in any financial year commencing after the 31st day of March 2000, not
exceeding rupees ten crores;

iii. In the case of Re-insurance business a sum of rupees twenty crores.

Provided that, where the business done or to be done is marine insurance only and relates
exclusively to country craft or its cargo or both, the amount to be deposited under this sub-section
will be one hundred thousand rupees only.

Registration

Registration of insurance companies is covered under Sec.3 of the Act and the Insurance Regulatory
and Development Authority (Registration of Indian Insurance Companies) Regulations, 2000. An
applicant desiring to carry on insurance business in India should make a requisition for registration
application in Form IRDA/R1. An applicant, whose requisition for registration application has been
accepted by the Authority, should make an application in Form IRDA/R2 for grant of a certificate of
registration.

Every application for registration should be accompanied by –

a) A certified copy of the memorandum and articles of association.

b) Names, addresses and occupation of directors.

c) A statement of the class or classes of insurance business to be done.

d) Principal place of business or domicile outside India.

e) A certified copy of the published prospectus.

f) Documentary proof evidencing the making of deposit required under section 7 of the Act.

g) Evidence of having rupees one hundred crore or more paid up equity share capital, in case the
application for grant of certificate is for life insurance business or general insurance business.

h) Evidence of having rupees two hundred crore or more paid up equity share capital, in case the
application for grant of certificate is for reinsurance business.

i) An affidavit by the principal officer and the promoters of the applicant certifying that the
requirements of the first proviso to section 6 of the Act to the effect that paid-up share capital is
adequate after excluding any preliminary expenses incurred in the formation and registration of the
company and the deposit required to be made under section 7 of the Act have been satisfied.

j) A statement indicating the distinctive numbers of shares issued to each promoter and shareholder
in respect of share capital of the applicant.

k) An affidavit by the principal officer and the promoters of the applicant certifying that the paid-up
equity capital referred to in sub-clause (b) of clause (7A) of section 2 of the Act, calculated is in
accordance with regulation 11 does not exceed twenty six percent.

l) A certified copy of the standard forms of the insurer and statements of the assured rates,
advantages, terms and conditions to be offered in connection with insurance policies together with a
certificate by an actuary in case of life insurance business that such rates, advantages, terms and
conditions are workable and sound.

m) A certified copy of the memorandum of understanding entered into between the Indian
promoter and the foreign promoter, if any, or amongst the promoters as a whole including details of
the support comfort letters exchanged between the parties.

n) The original receipt showing payment of the fee of Rupees fifty thousand for a class of business.

o) A certificate from a practising chartered accountant or a practising company secretary certifying

that all the requirements relating to registration fees, share capital, deposits, and other
requirements of the Act have been complied with by the applicant.

p) Any other information required by the Authority during the processing of the application for
registration.

If, on the receipt of an application for registration and after making such inquiry as he deems fit, the
authority is satisfied that:

a) The financial condition and the general character of management of the applicant are sound;

b) The volume of business likely to be available to, and the capital structure and earning prospects
of, the applicant will be adequate;

c) The interests of the general public will be served.

Then the authority may register the applicant as an insurer and grant him certificate of registration
in Form IRDA/R3.
An applicant granted a certificate of registration should commence insurance business for which he
has been authorised within 12 months of the date of registration.

The authority shall withhold registration shall, or cancel a registration already made if any
requirement is not satisfied or in so far as it relates to a particular class of insurance business as the
case may be:

a) If the insurer fails to comply with the provisions Section – 7 or of deposits, or

b) If the insurer is in liquidation or is adjudged an insolvent, or

c) If the business has been transferred to any other insured, or

d) If the whole of the deposit made in respect of insurance business has been returned to the insurer
under Section – 9, or

e) When clause 9 of Section – 2 related to insurer ‘s definition ceased of, cancelled or suspended, or

f) Defaults in complying with any rules.

g) Carries on any business other than insurance business or any prescribed business.

Submission of returns

The audited accounts and balance sheet and actuarial report and abstract and four copies there of
shall be furnished as returns to the authority in the case of the accounts and balance sheet and the
actuarial report within six months and in the case of the abstract within nine months from the end of
the period to which they refer. If the principal place is outside India, the period of submission may
be extended by three months. Of the four copies so furnished one shall be signed in the case of
company by the Chairman and two directors and by the principal officer of the Company and, if the
company has a managing director or managing agent, by the director or managing agent in the case
of a firm by two partners of the firm, and, in the case of an insurer being an individual, by the insurer
himself and one shall be signed by the auditor who made the audit or the actuary who made the
valuation, as the case may be. Where the insurer ‘s principal place of business or domicile is outside
India, he should forward to the authority, along with the documents, certified statement showing
the total assets and liabilities of the insurer at the close of the period covered by the said
documents.

Commission and Rebates

No person should pay or contract to pay any remuneration or reward whether by way of commission
or otherwise for soliciting or procuring insurance business in India to any person except an insurance
agent or a principal, chief or special agent.

No insurance agent shall be paid or contract to be paid by way of commission or as remuneration in

any form an amount exceeding, in the case of life insurance business, 40% of the first year‘s
premium payable on any policy or policies effected through him and 5% of a renewal premium,
payable on such a policy, or, in the case of business of any other class, 15% of the premium.

No person should pay or contract to pay to an insurance agent, and no insurance agent should
receive or contract to receive by way of commission or remuneration in any form in respect of any
policy of life insurance issued in India by an insurer and effected through an insurance agent, an
amount exceeding:

a) Where the policy grants an immediate annuity or a deferred annuity in consideration of a single
premium, or where only one premium is payable on the policy, 2% of that premium,

b) Where the policy grants a deferred annuity in consideration of more than one premium, 7½% of
the first year ‘s premium, and 2% of each renewal premium, payable on the policy, and
c) In any other case, 35% of the first year ‘s premium, 7½% of the second and third year ‘s renewal
premium, and thereafter 5% of each renewal premium payable on the policy:

Provided that in a case referred to in clause (c), an insurer, during the first 10 years of his business,
may pay to an insurance agent, and an insurance agent may receive from such an insurer, 40% of the
first year ‘s premium payable on the policy.

Investments

Every insurer shall invest and at all times keep invested assets equivalent to not less than the sum of:

a) The amount of his liabilities to holders of life insurance policies in India of account of matured
claims, and

b) The amount required to meet the liability on policies of life insurance maturing for payment in
India, less:

(i) The amount of premiums which have fallen due to the insurer on such policies but have not been
paid and the days of grace for payment of which have not expired, and

(ii) Any amount due to the insurer for loans granted on and within the surrender values of policies of
life insurance maturing for payment in India issued by him or by an insurer which business he has
acquired and in respect of which he has assumed liability.

In the following manner, namely, twenty-five percent of the said sum in Government securities, a
further sum equal to not less than twenty five percent of the said sum in Government securities or
other approved securities and the balance in any of the approved investments specified in sub-
section (1) of section 27A or, subject to the limitations, conditions and restrictions specified in sub-
section (2) of that section, in any other investment.

No insurer should invest or keep invested any part of his controlled fund otherwise than in any of
the following approved investment namely:

a) Approved securities;

b) Securities;

c) Debentures or other securities of Municipality in a State;

d) Debentures or other securities issued by a body constituted by any Central Act or Act of State
Legislature;

e) First Mortgage on immovable property under any housing or building scheme;

f) Debentures secured on first charge on immovable property;

g) First debentures secured by a floating charge on all its assets;

h) Preference shares of any company;

i) Shares of any company which have been guaranteed to any by any company;

j) First Mortgagee immovable property;

k) Immovable property situated in India or in any other country; loans on life interests, or on policies
of life insurance within their surrender value;

l) Loans on life interests or on policies of life insurance within their surrender values;

m) Life interests;

n) Fixed deposits with banks;

o) Debentures of, or shares in cooperative societies;

p) Such other investments as the authority may declare to be approved investment.

Prohibition of loan

No insurer should grant loans or temporary advances either on hypothecation of property or on

personal security or otherwise, except loans on life policies issued by him with their surrender value,
to any director, manager, managing agent, actuary, auditor, or officer of the insurer if the company
or where the insurer is a firm, to any partner therein, or to any other company or firm in which any
such director, manager, managing agent, actuary, officer or partner holds such position.

Overview of General Insurance

Business Nationalization Act
The General Insurance Business Nationalization Act was passed in 1972 to set up the general
insurance business. It was the nationalization of 107 insurance companies into one main company
called General Insurance Corporation of India and its four subsidiary companies with exclusive
privilege for transacting general insurance business. This act has been amended and the exclusive
privilege ceased on and from the commencement of the insurance regulatory and development
authority act 1999. General Insurance Corporation has been working as a reinsurer in India. Their
subsidiaries are working as a separate entity and plays significant role in the public sector of general
insurance.

General Insurance Corporation of India (GIC)

General insurance industry in India was nationalised and a government company known as General
Insurance Corporation of India was formed by the central government in November, 1972. General
insurance companies have willingly catered to these increasing demands and have offered a
plethora of insurance covers that almost cover anything under the sun.

Objective of the GIC:

 To carry on the general insurance business other than life, such as accident, fire etc.
 To aid and achieve the subsidiaries to conduct the insurance business and
 To help the conduct of investment strategies of the subsidiaries in an efficient and
productive manner.

Role and Functions of GIC

 Carrying on of any part of the general insurance, if it thinks it is desirable to do so.
 Aiding, assisting and advising the acquiring companies in the matter of setting up of
standards of conduct and sound practice in general insurance business.
 Rendering efficient services to policy holders of general insurance.
 Advising the acquiring companies in the matter of controlling their expenses including the
payment of commission and other expenses.
 Advising the acquiring companies in the matter of investing their fund.
 Issuing directives to the acquiring companies in relation to the conduct of general insurance
business.
 Issuing directions and encouraging competition among the acquiring companies in order to
render their services more efficiently.

Classification of Indian General Insurance Industry

General Insurance is also known as Non-Life Insurance in India. There are totally 16 General
Insurance (Non-Life) Companies in India. These 16 General Insurance have been classified into two
broad categories namely:
1. PSUs (Public Sector Undertakings)
2. Private Insurance Companies

PSUs (Public Sector Undertakings)

These insurance companies are wholly owned by the Government of India (subsidiaries of GIC).
There are totally 4 PSUs in India namely:

 National Insurance Company Ltd-Head Office-Kolkata

 Oriental Insurance Company Ltd- Head Office- New Delhi
 The New India Assurance Company Ltd- Head Office-Mumbai
 United India Insurance Company Ltd- Head Office-Chennai

Private Insurance Companies

There are mainly 12 private General Insurance companies in India namely

 Apollo DKV Health Insurance Ltd

 Bajaj Allianz General Insurance Co. Ltd
 Cholamandalam MS General Insurance Co. Ltd
 Future General Insurance Company Ltd
 HDFC Ergo General Insurance Co Ltd
 ICICI Lombard General Insurance Ltd
 Iffco Tokio General Insurance Pvt Ltd
 Reliance General Insurance Ltd
 Royal Sundaram General Insurance Co Ltd
 Star Health and Allied Insurance
 Tata AIG General Insurance Co Ltd
 Universal Sompo General Insurance Pvt Ltd

The General Insurance Business

(Nationalisation) Amendment Bill, 2021
 The General Insurance Business (Nationalisation) Amendment Bill, 2021 was introduced in Lok
Sabha on July 30, 2021.  The Bill seeks to amend the General Insurance Business
(Nationalisation) Act, 1972.  The Act was enacted to nationalise all private companies undertaking
general insurance business in India.  The Bill seeks to provide for a greater private sector
participation in the public sector insurance companies regulated under the Act.
 
 The 1972 Act set up the General Insurance Corporation of India (GIC).  The businesses of the
companies nationalised under the Act were restructured in four subsidiary companies of GIC: (i)
National Insurance, (ii) New India Assurance, (iii) Oriental Insurance, and (iv) United India
Insurance.  The Act was subsequently amended in 2002 to transfer the control of these four
subsidiary companies from GIC to the central government, thereby making them independent
companies.  Since 2000, GIC exclusively undertakes reinsurance business.
 
 Government shareholding threshold:  The Act requires that shareholding of the central
government in the specified insurers (the above five companies) must be at least 51%.  The Bill
removes this provision.
 
 Change in definition of general insurance business:  The Act defines general insurance
business as fire, marine or miscellaneous insurance business.  It excludes capital redemption and
annuity certain business from the definition.  Capital redemption insurance involves payment of a
 sum of money on a specific date by the insurer after the beneficiary pays premiums periodically. 
Under annuity certain insurance, the insurer pays the beneficiary over a period of time.  The Bill
removes this definition and instead, refers to the definition provided by the Insurance Act, 1938. 
Under the Insurance Act capital redemption and annuity certain are included within general
insurance business.
 
 Transfer of control from the government:  The Bill provides that the Act will not apply to the
specified insurers from the date on which the central government relinquishes control of the
insurer.  Control means: (i) the power to appoint a majority of directors of a specified insurer, or
(ii) to have power over its management or policy decisions.
 
 The Act empowers the central government to notify the terms and conditions of service of
employees of the specified insurers.  The Bill provides that schemes formulated by the central
government in this regard will be deemed to have been adopted by the insurer.  The board of
directors of the insurer may change these schemes or frame new policies.  Further, powers of the
central government under such schemes (framed under the Act) will be transferred to the board of
directors of the insurer.
 
 Liabilities of directors:  The Bill specifies that a director of a specified insurer, who is not a
whole-time director, will be held liable only for certain acts.  These include acts which have been
committed: (i) with his knowledge, attributable through board processes, and (ii) with his consent
or connivance or where he had not acted diligently.

OVERVIEW of Insurance Regulatory and

Development Authority (IRDA)-1999
In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor. R. N. Malhotra was
formed to evaluate the Indian Insurance Industry and recommend its future direction. The committee was
set up with an objective of complementing the reforms in the Indian Financial Sector. The reforms were
aimed at "Creating a mere efficient and come positive financial system suitable for the requirement of the
economy keeping in mind the structural changes currently underway and recognizing that insurance is an
important part of the overall financial system where it was necessary to address the need for similar
reforms."

The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of
India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which
was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is
"to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the
insurance industry and for matters connected therewith or incidental thereto."

Duties, Powers and Functions of IRDA

Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA.
 Subject to the provisions of this Act and any other law for the time being in force, the authority
shall have the duty to regulate, promote and ensure orderly growth of the insurance business and
re-insurance business.
 Without prejudice to the generality of the provisions contained in sub-section (1), the powers and
functions of the Authority shall include,
 Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or
cancel such registration
 protection of the interests of the policy holders in matters concerning assigning of policy,
nomination by policy holders, insurable interest, settlement of insurance claim, surrender
value of policy and other terms and conditions of contracts of insurance
 Specifying requisite qualifications, code of conduct and practical training for intermediary
or insurance intermediaries and agents
 Specifying the code of conduct for surveyors and loss assessors
 Promoting efficiency in the conduct of insurance business
 Promoting and regulating professional organisations connected with the insurance and re-
insurance business
 Levying fees and other charges for carrying out the purposes of this Act
  calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries and
other organisations connected with the insurance business
 control and regulation of the rates, advantages, terms and conditions that may be offered
by insurers in respect of general insurance business not so controlled and regulated by the
Tariff Committee under section 64U of the Insurance Act, 1938 (4 of 1938)
 Specifying the form and manner in which books of account shall be maintained and
statement of accounts shall be rendered by insurers and other insurance intermediaries
 Regulating investment of funds by insurance companies
 Regulating maintenance of margin of solvency
 Adjudication of disputes between insurers and intermediaries or insurance intermediaries