IRDA Act

In order to control private sector insurance companies, the

Government of India passed the IRDA Act (Insurance
Regulatory and Development Authority Act, 1999) which
enabled it to regulate the private sector companies in
insurance business. What was the sole monopoly of the LIC is
now thrown open to the private sector for covering the life and
property of individuals. Now, the IRDA controls the entire
insurance business in India.

Image: IRDA Powers Composition Duties and Functions

Powers of IRDA
The following are the powers of IRDA

1. All insurance companies have to register with IRDA

compulsorily.

2. Companies can undertake only insurance business.

3. The capital structure of the companies will be determined

by IRDA.
4. Companies have to deposit with RBI the amount stipulated
by IRDA.

5. Accounts and balance sheets of companies have to be

submitted to IRDA.

6. Insurance companies have to appoint actuaries and they

will value the liabilities of the insurance companies and report
the same to IRDA.

7. Investment of assets will be prescribed by IRDA in the form

of approved securities.

8. The nature of general insurance business will be prescribed

by IRDA.

9. Statements of investment assets to be submitted to IRDA

every financial year.

10. All insurance companies have to devote certain percentage

of their business including insurance for crops. This should
cover unorganized sector including the economically weaker
sections.

11. The appointment of chief executive officer requires prior

permission of the IRDA.

12. All insurance agents must obtain license from IRDA.

13. IRDA has powers for levying penalty on companies which

fail to comply with the rules and regulations.

Composition of IRDA
One chairperson and not more than 9 members of whom not
more than 5 would be full time members and they are
appointed by the government. Those who have experience in
life and general insurance, actuarial service, finance,
economics etc., are appointed.

Duties of IRDA
1. Regulates insurance companies
The working of insurance companies will be regulated in the
following aspects

 the persons to be employed,

 the nature of business,
 covering of risks,
 terms and agreements for covering risks etc., will be
prescribed by IRDA.
2. Promotes insurance companies
Corporate set-up is a must for establishing an insurance
company and they have to submit periodical reports to IRDA.
Different kinds of policies and different types of insurance are
also suggested by IRDA to these insurance companies.

3. Ensures growth of insurance and reinsurance companies

Here, the promotion of new companies is encouraged. Even
banks are also permitted to promote insurance companies as a
subsidiary.

Functions of IRDA
1. Issuing certificate of registration.

2. protecting the interest of policy holders.

3. issuing license to agents.

4. Specifying code of conduct for surveyors and loss assessors.

5. Promoting efficiency in the insurance business.

6. Undertaking inspection, conducting enquiries etc., on

insurance companies.

7. Control and regulations of rates, terms and conditions by

insurance company to policy holders.

8. Adjudication of disputes between insurance company and

others in the insurance business.

9. Fixing the percentage of insurance business to rural and

social sectors.

Insurance Ombudsman by IRDA:

On the lines of Bank ombudsman, an insurance ombudsman
was created by IRDA. The main purpose of the creation of the
ombudsman is to cover disputes arising between the insured
and the insurer. Any complaint made on insurance companies
will be settled by the insurance ombudsman. It is more a
watch dog by which the functioning of the insurance company
will be disciplined.

Insurance Ombudsman is basically a consumer protection

exercise. The insured need not worry about their policy
amount as any complaint lodged with the ombudsman will
have legal sanctity and even criminal action can be initiated
against the erring insurance company.

Thus, enough judiciary powers are given to insurance

ombudsman by which speedy settlement of cases connected
with individual policy holder is possible.
 IRDA - Role, Objectives and Functions
Published on Thursday, September 24, 2015

IRDA - Insurance Regulatory Development and Authority is the statutory, independent and apex body
that governs and supervise the Insurance Industry in India.

It was constituted by Parliament of India Act called Insurance Regulatory and Development Authority of
India (IRDA of India) after the formal declaration of Insurance Laws (Amendment) Ordinance 2014, by
the President of India Pranab Mukherjee on December 26,2014.

Establishment:
o IRDA Act was passed upon the recommendations of Malhotra Committee report (7 Jan,1994),
headed by Mr R.N. Malhotra (Retired Governor, RBI)
o Main Recommendations - Entrance of Private Sector Companies and Foreign promoters & An
independent regulatory authority for Insurance Sector in India
o In April,2000, it was set up as statutory body, with its headquarters at New Delhi.
o The headquarters of the agency were shifted to Hyderabad, Telangana in 2001.
Objectives of IRDA:
o To promote the interest and rights of policy holders.
o To promote and ensure the growth of Insurance Industry.
o To ensure speedy settlement of genuine claims and to prevent frauds and malpractices
o To bring transparency and orderly conduct of in financial markets dealing with insurance.
Organisational Setup of IRDA:
IRDA is a ten member body consists of :

o One Chairman (For 5 Years & Maximum Age - 60 years )

o Five whole-time Members (For 5 Years and Maximum Age- 62 years)
o Four part-time Members (Not more than 5 years)
The chairman and members of IRDAI are appointed by Government of India.

The present Chairman of IRDAI is Mr T.S Vijayan.

Functions And Duties of IRDA:

Section 14 of IRDA Act,1999 lays down the duties and functions of IRDA:

o It issues the registration certificates to insurance companies and regulates them.

o It protects the interest of policy holders.
o It provides license to insurance intermediaries such as agents and brokers after specifying the
required qualifications and set norms/code of conduct for them.
o It promotes and regulates the professional organisations related with insurance business to
promote efficiency in insurance sector.
o It regulates and supervise the premium rates and terms of insurance covers.
o It specifies the conditions and manners, according to which the insurance companies and other
intermediaries have to make their financial reports.
o It regulates the investment of policyholder's funds by insurance companies.
o It also ensures the maintenance of solvency margin (company's ability to pay out claims) by
insurance companies.
Related News:
o FDI limit in Insurance Sector has been increased to 49% from 26%,approved by The Union
Cabinet. The proposal was made by Finance Minister Arun Jaitley.
o IRDAI has celebrated 19th April,2015 as Insurance Awareness Day at Hyderabad. (came into
existence in 2000)
o IRDAI has imposed a fine of Rs.10 lakh on TATA AIA Life Insurance for violation of excess
payment to corporate agents. TATA AIA Life Insurance is joint venture company formed by
Tata Sons Ltd. and AIA Group Ltd. CEO and MD of the company is Mr Naveen Tahilyani.
o IRDAI has changed the norms related to cancellation and change of name of nominee. The
insurer will charge fee for any such modification. The fee is up to Rs. 50 for policies obtained
online and up to Rs.100 for others.
o IRDAI has imposed a fine of Rs.20 lakh on APPOLO MUNICH HEALTH INSURANCE
COMPANY for selling its policies through non-authorised insurance selling website
makemytrip.com. The CEO of APPOLO MUNICH HEALTH INSURANCE COMPANY is
Antony Jacob and the Chairman and CEO of makemytrip.com is Deep Kalra.
1.To(protect)the interest of and secure fair treatment to
policyholders
2.To bring about (speedy) and orderly growth of the insurance
industry (including annuity and superannuation payments), for
the benefit of the common man, and to provide long term funds
for accelerating growth of the economy.
3. To set, promote, monitor and enforce high standard
s of (integrity), financial soundness, fair dealing and c
ompetence of those it regulates.4. To ensure that insur
ance customers receive precise, clear and correct (infor
mation) about products and services and make them a
ware of their responsibilities and duties in this regard.
5. To ensure speedy settlement of genuine (claims), to
prevent insurance frauds and other malpractices and
put in place effective grievance redressal machinery.6.
To promote fairness, (transparency) and orderly conduct
in financial markets dealing with insurance and build
a reliable management information system to enforce
high standards of financial soundness amongst market
players.7. To take (action) where such standards are
inadequate or ineffectively enforced.8. To bring about
optimum amount of (self-
regulation)in day to day working of the industry consi
stent with the requirements of prudential regulation.
Insurance and economic development

1. Saving and Insurance

Saving involves refraining from present consumption. The
investment can take place only when there are savings. The
relationship between. saving, investment and growth of GDP
can be explained as:

G = S / K. Where G – Rate of GDP growth, S – Saving Ratio

and K – Capital output ratio.
Insurance companies lead to economic development by
mobilizing savings and investing them into productive
activities. Indian insurance companies are able to mobilize
long-term savings to support economic growth and also
facilitate economic development by providing insurance cover
to a large segment of our people as well as to business
enterprise throughout India.
2. Capital Formation and Insurance
Capital formation maybe defined as increase in capital stock of
the country consisting of plant, equipment, machinery, tools,
building, means of transport, communication, etc. The
process of capital formation envisages three essential steps.
These are:
a. Real saving: Mobilization of saving through financial and
non-financial intermediaries to be placed at the disposal of
investor.
b. The act of investment: The contribution of insurance
companies in the process of capital formation appears at all
these stages. Insurance services act as a tool to mobilize
saving, function as financial intermediary and at times also
indulge in direct investment. Also govt. has made regulations
under which every insurer carrying on business of life
insurance shall invest 25% of funds in Govt. securities and not
less than 15% in infrastructure and social sector.
The importance of Indian insurance industry is gauged by the
fact that annual amount of investible funds of LIC and GIC
and its subsidiaries amounted to over Rs. 20,000 crore and
Rs. 10,000 crore are invested in nation building activities,
housing and other infrastructural areas.

c. Increased Employment: Prior to the liberalization of

insurance sector in India, the opportunities for employment
were limited with the LIC of India as sole employer. While
some of the professionals left the country looking for
opportunities elsewhere, those who remained, worked within
the confines and constraints of public sector monopoly. This
has further constrained the opportunities for exposure to the
development in rest of the world. Liberalization and the
opening up of sector to private players has now created a vast
opportunity for employment.
3. Obligation to Rural and Social Sector
In India, the insurance companies are required to fulfill their
obligation towards rural and social sector. For this, Life
insurers are required to have 5%, 7%, 10%, 12%, 15% of total
policies in first five years respectively in rural sector. Like wise
General Insurers are required to have 2% 3% and 5%
thereafter of total gross premium income written in first five
financial years respectively in rural sector.

4. Insurance as financial intermediary

Financial intermediaries perform the function of channelizing
saving into domestic investment. They facilitate efficient
allocation of capital resources, which in turn improve
productivity and economic efficiency which result in reduced
capital output ratio. The insurance companies perform
extremely useful function in economy as financial
intermediaries. These are as follows:

a. Reduction in transaction cost: Insurers help in reducing

transaction cost in economy by collecting funds from
policyholders and investing the same in different projects
scattered over different regions. It is a specialized and time
consuming job.
b. Creating liability: The policyholders, in case of loss, are not
required to wait for a long period for the amount of claim. It
improves their liquidity.
c. Facilitates Economies of scale in Investment: Insurers are in
the position of financing large projects, railways power
projects, etc. These large projects create economies of scale,
facilitate technological innovation and specialization and thus
promote economic efficiency and productivity.
5. Promotes Trade and Commerce
The increase in GDP is positively correlated to growth of trade
and commerce in economy. Whether it is production of goods
and services, domestic or international trade or venture
capital projects, insurance dominates everywhere. Even banks
demand insurance cover of assets while granting loans for
purchase of assets. Thus insurance covers, promotes
specialization and flexibility in the economic system that play
contributory role in healthy and smooth growth of trade and
commerce.

6. Facilitates efficient capital allocation

Insurance provides cover to large number of firms, enterprises
and businesses and also deploy their funds in number of
investment projects. The vast pool of knowledge and expertise
so gained enable them to distinguish between productive and
high return projects. Therefore, they promote efficient and
productive allocation of capital resources, which in turn lead
to increased productivity and efficiency in the system.

7. Encouraging Financial Stability and Reducing Anxiety

Insurer promotes financial stability in economy by insuring
the risks and losses of individuals, firm and organizations.
Because of uninsured large losses, firm may not be able to
compensate for it leading to its insolvency which may cause
loss of employment, revenue to supplier & Govt., loss of
products to customer, etc. Moreover, it relieves the tensions
and anxiety of individuals by securing the loss of their lives
and assets.

8. Reducing Burden on Govt. Exchequer

Insurance companies, particularly life insurers provide a
variety of insurance products covering needs of children,
women and aged etc under social security network and
thereby reduce the burden on Govt. exchequer in providing
these services. This Govt., saves expenditure on these items
and amount can be utilized for more productive projects. To
conclude, we can say that insurance companies play an
important role in economic development of country.