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REGULATIONS & LEGISLATIVE MATTERS

Introduction

Insurance Legislation

Norms

Insurers---Financial Viability and Strengths

Business Practices

Professional Standards, Rules & Ethics

Insurance Legislation

Over a period of time, life becoming moreand more complicated insurance hasdeveloped into a complex one. As suchState intervention became necessary and

so a legislation to govern the insurancecontracts was enacted namely The TrustLaw or Act

Later to regulate the functions of insurancecompanies the Insurance Act 1870 waspassed.

Further to regulate the activities of the Insurance

companies (both Foreign and Indian) operatingin India and force them to act on sound actuarial

principles the Life Insurance Companies Actwas passed in 1912

Subsequently to consolidate and amend the

laws relating to both Life and Non-Life insurancebusiness the Insurance Act 1938 was enacted

The Insurance Act 1938 came into being witheffect from 1.7.1939

Important provisions of the

Insurance Act 1938

Registration of insurance companies

Maintenance and scrutiny of accounts and

valuation

Investment and utilisation of funds

Placing limits on expenses of the Insurers

Maintaining solvency levels

Powers to take over the management of

the Insurers and appoint Administrators

Constitution of Insurance Associations,Insurance Councils and Tariff AdvisoryCommittees

Licensing of Agents and their remuneration

Prohibition of rebates

Protection of policyholders interests byprohibiting policies from being called intoquestion after 2 years by Insurers

Guaranteed Surrender Value

LIC Act 1956

The life insurance business was

nationalised with effect from 19.01.1956

and LIC of India started functioning from

01.09.1956

General Insurance Business

(Nationalisation) Act 1972

This Act came into force on 01.01.1973

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IRDA Act 1999

IRDA Act was passed by the Parliament in

December 1999

IRDA is a Corporate Body, set up by an

Act of Parliament

IRDA

- IRDA consists of:-

(a) Chairperson

(b) Not more than 5 whole time members

(c) Not more than 4 part-time members

- The members are appointed by the Central

Government

- Insurance Advisory Committee---25 Members

IRDA Functions of IRDA

(i) To issue certificate of registration,

renew, withdraw, suspend or cancel such

registration

(ii) To protect the interest of policyholders

(iii) To undertake inspection, conduct

enquiries etc of the insurers and insurance

intermediaries(iv) To regulate investment of funds by the

insurance companies

(v) To regulate and control the rates,terms etc offered by insurers in respect ofgeneral insurance business

(vi) To specify requisite qualifications,code of conduct and practical training ofinsurance intermediaries or agents

(vii) To specify code of conduct forSurveyors and Loss Assessors

(viii) To promote efficiency in the conductof insurance business

(ix) To promote and regulate professionalorganisations connected with insuranceand reinsurance business

(x) To regulate maintenance of solvencymargin

(xi) To adjudicate disputes betweeninsurers and insurance intermediaries

(xii) To supervise the functioning of theTariff Advisory Committee

(xiii) To specify the percentage of Lifeinsurance and General insurance to beundertaken in Rural or Social sectors

Insurance Companies Under Sec 3 of the Insurance Act 1938, a

certificate of registration for that particularclass of insurance business has to beobtained from the IRDA, to do insurance

business in India.

In this regard the conditions to besatisfied, have been prescribed in Section2, 2c, 3 & 6 of the Insurance Act as well asvarious regulations framed by IRDA

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The Company must be a Public Company or a

Co-op Society.

An application for registration has to be

submitted along with the relevant data /information.

Foreign entrepreneurs participation cap as of

now 26% of the equity capital.(49% shortly)

The Indian promoters shall divest their

shareholding in excess of 26% in a phasedmanner after 10 years.

Minimum Paid up Capital

Rs.100 crores forLife or Non life business.

Minimum Paid up Capital

Rs. 200 crores for

Reinsurance business.

Minimum Deposit with RBI

Life Insurance : 1% of the gross premium

income in a year not exceeding

Rs.10 crores.

Non- Life Insurance: 3% of the gross

premium income in a year not exceeding

Rs.10 crores.

An Actuarys certificate regarding thesoundness and workability of terms of lifeinsurance business

Registration fee of Rs.50,000/- , to berenewed annually

Registration can be cancelled if anyclaim under a policy of Insurance ispending for more than 3 months afterfinal judgment in a regular Court ofLaw

Insurance Business PracticesDistribution Channels

Individual Agents

Corporate Agents

Brokers

Insurance Consultants

Remuneration

First Commission

First year Commission

Renewal Commission

Hereditary Commission

INSURANCE AGENTS

Sec 42 of the Insurance Act 1938

defines the functions of Insurance Agent

IRDA is the licence issuing authority and

IRDA has laid down some conditions / pre-requisites for an Insurance Agent.

Renewal of Agency is also subject to theagent satisfying some conditions regardingtraining, submission of renewal applicationform along with fees as per guidelines.

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Termination of Agency

In the event of not

satisfying the

conditions or acquiring

any disqualification asstipulated by IRDA

Corporate Agents

Any Firm / Company / Bank / Co-operative

Society / N G O / N B F C etc

Corporate Insurance Executive to obtain

licence ------------------Licence Fee Rs 250

Specified Persons (working for Corporate

Agents) to obtain certificates--Fee Rs 500

BROKERS

Under IRDA (Insurance Brokers Regulations

2002) any Individual / Firm / Company / BankNBFC / NGO etc can act as Insurance Broker

after obtaining a licence from the IRDA

Conditions regarding Capital as well as Deposit

norms to be satisfied.

Broker can be a Direct / Reinsurance /Composite Broker

Licence Fee Rs25000 / 100000 / 125000

Sec 40 A (1) of the Insurance Act 1938stipulates the maximum rate ofcommission that can be paid to anInsurance Agent.

Sec 44 of the Insurance Act 1938

guarantees payment of RenewalCommission even after the agency hasbeen terminated for any reason other thanfraud as well as payment of HereditaryCommission to the nominees or legal heirsof a deceased agent subject to someconditions

Solvency Margins

The IRDA (Assets, Liabilities & Solvency

Margin of Insurers) Regulations 2000

has prescribed rules for valuation

parameters, policy options, methods of

determination of mathematical reserves,

assets, liabilities and solvency margins.

Separate statements in prescribed form for

business in India and abroad to be

submitted to the IRDA

Valuation Parameters

The basis of computation and

discounting

Mortality rates Morbidity rates

Policy maintenance expenses

Rate of interest

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Valuation of Assets

Valuation of Liabilities

Life Insurance (Sch II A)

Non Life Insurance (Sch II B & Form HG)

Valuation of Liabilities (Life Insurance)

Method of determination of mathematical

reserves

To be determined separately for each contract

Insurance Funds Investment

Guidelines

Sections 27, 27A, 27B, 27C &

27D of the Insurance Act 1938regulate the investment of funds

of an Insurance Company

Life Insurance BusinessBroadly speaking the guidelines are : -

1. 25% in Government Securities

2. Not less than 50% in Government

Securities or other approved securities

including (1) above

3. Not less than 15% in Infrastructure &

Social sector4. Not exceeding 35% in other investments

governed by Exposure Norms

Non Life Insurance Business1. Not less than 25% :

in Central Government Securities

2. Not less than 30% :

In State Government Securities and other

Guaranteed Securities including (1) above3. 5% in Housing and loans to State Government

for Housing etc

4. Not less than 10% in Infrastructure & Socialsector

5. Not exceeding 55% in other investmentsgoverned by Exposure Norms

Exposure & Prudential norms

Limits fixed for the individual

companies, for the entire group to

which the investee company belongs

and also for the industry sector to

which the investee company belongs

as well as in the Public FinancialInstitutions

Moreover norms for investments invarious instruments like Fully / Partly

Convertible Debentures with

specifications regarding Asset cover,Debt Equity Ratio and Interest cover

etc. also applicable

Every Insurer shall draw up annuallyan Investment Policy and get it

approved by its Board of Directors

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Proposal for Insurance

An Insurer shall communicate the

decisions in writing within 15 days from the

date of receipt of proposals by the Insurer.

An Insurer has to supply a copy of the

proposal form to the policy holder within

30 days of acceptance of the proposal.

Rider Benefits

The total premium on all health related

riders shall not exceed 100% of Basic

premium of the main policy.

The total premium on all other riders put

together shall not exceed 30% of the basic

premium of the main policy.

Matters to be stated in Life Insurance policy

A Life insurance policy shall clearly state:

Name of the Plan; terms and conditions;participating or non-participating; benefitspayable and the contingencies upon which theseare payable; contingencies excluded; riderbenefits included; to whom payable and howpayable etc

- Sec 45 of the Insurance Act 1938

- Guaranteed Surrender Value provisions underSec 113 of the Insurance Act 1938

Policy holders Servicing

An insurer has to respond within 10 days of

receipt of any communication from its

policy holders in matters pertaining to:-

Change of address

Registration of nomination or assignment

Policy status

Settlement of policy loan etc

Delay in claim settlement requires the

Insurer to pay interest:-

@ 2% above the bank interest rate

@ Savings bank interest rate if the insurer

is ready to pay but the claimant is not

ready to collect

Claims (Non-Life insurance)

An Insurer has to respond immediately on

receipt of the intimation from the insured

or the claimant

If a surveyor has to be appointed then it

shall be done within 72 hours of the

receipt of intimation

The Surveyor is governed by the Code of

Conduct laid down by the IRDA and has to

submit his report / findings within 30 days

of his appointment

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In case the Insurer requires any

clarification or additional report then the

same should be called forwithin 15 days

of the receipt of the original survey report

The Surveyor has to furnish the

requirements / reports within three weeks

from the date of receipt of communication

from the Insurer

The Insurer shall within 30 days, offer a

settlement of the claim to the Insured

If the Insurer decides to reject the claim

the same should be done within 30 days

from the date of receipt of the Surveyors

report

The payment has to be made within 7

days of acceptance of the insurers offerby the insured

For delay in payment, the insurer is liable

to pay interest @ 2% above the bank

interest rate

Under Sec 15 of the Act, IRDA is eligible to

receive grant from the Central Government

Under Sec 16 of the Act, IRDA is eligible to

receive funds from the insurers:----a percentageof their premium income and proper books of

accounts have to be maintained in respect offunds received as well as expenses incurred

The accounts shall be audited by the

Comptroller and Auditor General of India. IRDAis bound by Government directions and its

reports to be submitted to the Governmentregularly

Ombudsman Scheme

Central Government framed rules known as

Redressal of Public Grievance Rules 1998

in exercise of the powers vested in it under

section 114(1) of Insurance Act 1938

The Scheme was notified in the Gazette of Indiaon 11.11.1998

The Governing body of the Insurance Council isauthorised by law to appoint Ombudsman for the

Insurance industry and the appointment is for 3years with reappointment provisions

Ombudsman is authorised to deal with

a. Disputes with regard to premiums paid orpayable

b. Disputes with regard to legal construction of

the policy relating to claims

c. Non-issue of any documents after receipt ofpremiums

d. Partial or Total repudiation or Delay in

settlement of claims

Ombudsman is not a judicial authority; has no

right to summon witnessesOmbudsman acts as a Counsellor and Mediator

in matters within its terms of reference

Complaint Procedure

The Ombudsman has to pass the Awardwithin 3 months of receipt of complaint.

If the Award is acceptable to thecomplainant then the Insurer has tocomply with it.

Time limit to file a complaintwithin 1 yearafter the Insurer had rejected therepresentation.

Ombudsmans limit: upto Rs.20 lakhs only.

Expenses of the Ombudsman to beshared by insurance companies inproportion to their gross premium income.

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Consumer Protection Act 1986 (COPA)

This Act applies to all the goods andservices

It covers Private, Public & Co-op sectors

Rights of the Consumers

- Right to safety ; Right to be informed

- Right to be heard ; Right to choose and- Right to Consumer Education

3 Tier Quasi-judicial machinery:

District Forum : Limit up to Rs.20 lakhs

State Commission : More than Rs.20 lakhs but upto Rs.1 Crore and appeals against orders of theDistrict Forum

National Commission: More than Rs.1 Crore andappeals against Orders of the State Commission

Time Limit: Complaint to be filed within 2 yearsfrom the date on which the cause of action hasarisen