“AN ANALYTICAL STUDY OF NUANCES OF MODERN•

INSURANCE WITH RESPECT TO PRE- AND POST-

LIBERALIZATION STAGES IN THE INDIAN INSURANCE
INDUSTRY”

RESEARCH SUBMITTED IN LIEU OF DISSERTATION FOR

LL.M. FINAL YEAR FROM CCS UNIVERSITY MEERUT
SESSION 2018-19

UNDER SUPERVISION SUBMITTED BY

Dr Shailesh Kumar Singh ANSHUL Goel
LLM YEAR 2 SEM-4
Enrol.: M-9431086

FACULTY OF LAW,

Angoori Devi College of Law Education

Bulandshahr

1
 CERTIFICATE

This is to Certify that the dissertation entitled “AN ANALYTICAL STUDY OF

NUANCES OF MODERN• INSURANCE WITH RESPECT TO PRE- AND POST-
LIBERALIZATION STAGES IN THE INDIAN INSURANCE INDUSTRY” has been
prepared by Anshul Goel under my guidance and supervision.

I recommend that above dissertation which is being submitted by Anshul

Goel be accepted in fulfilment of the required one paper. He has submitted this dissertation in
lieu of Sem-4 for LL.M. Final.

Dr Shailesh Kumar Singh

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 DECLARATION

I hereby declare that this dissertation entitled AN ANALYTICAL STUDY

OF NUANCES OF MODERN• INSURANCE WITH RESPECT TO PRE- AND
POST-LIBERALIZATION STAGES IN THE INDIAN INSURANCE
INDUSTRY” was carried out by me in lieu of Sem-4 dissertation for LL.M. Final
year under the guidance and supervision of Dr Shailesh Kumar Singh

The interpretations put forth are based on my reading and understanding of

the original texts and they are not published anywhere in the form of books,
monographs or articles. The other books, articles and websites, which i have made use
of are acknowledged at the respective place in the text.

For the present dissertation, which I am submitting to the university, no

degree, diploma or distinction has been conferred on me before, either in this or in
other university.

ANSHUL Goel

LLM YEAR 2 SEM-4

Enrl.: M-9431086

3
 ACKNOWLEDGMENT
As one lamp lights another, so does knowledge kindles form one person to another Dr
Shailesh Kumar Singh has tremendous potentials and his reservoir of knowledge is ever
ready to light the lamps of knowledge of his student.

I find no words of potency for expression my gratitude to him. It was he who

suggested me to present study. I am full of gratitude towards him. I am extremely grateful for
his able guidance valuable suggestions, readiness to help, giving proper shape to this
dissertation and parental behaviour which contributed immensely in completion of this work.

I express my gratitude to respected teachers of Law Faculty, and particularly to

Professors for their academic patronage and persistent encouragement extended to me.
Thanks are also due to the library staff of Law Faculty, and Office staff of Law Faculty,
Angoori Devi College of Law Education Bulandshahr.

ANSHUL Goel

LLM YEAR 2 SEM-4

Enrl.: M-9431086

4
 CHAPTER 1
UNDERSTANDING THE NUANCES OF MODERN•
INSURANCE
Human existence is hinged on the purpose of a struggle for perfection and excellence. Nature
has endowed man with the talent to perceive, attempt and create and maintain the necessities
for making his life more creative and comfortable and also satisfy his intellectual pursuit.
Man is engaged in an everlasting exercise of discovering and improving the existing faculties
that nature has vested in him. Unless he engages himself in this pursuit, he is not performing
the duty imposed upon .him by nature. In fact it is not an overstatement to say that nature's
best attempt at creation is the human, creating in him all the faculties necessary to discover,
innovate and also be prepared to face the intermittent difficulties involved in such attempts.
Difficulties have never stood as a stumbling block in human pursuit.

What makes this pursuit so special? Is it the difficulties and hurdles involved in this pursuit
that make it so very challenging? Is it the essential nature of creativity that nature has
endowed man with? Is it the realization of the challenges involved in this eternal pursuit of
man to achieve excellence? Or is it that element of human nature which makes challenges
give strength to human efforts? Or is it the preparedness of man to face .challenges and
difficulties while engaging in this pursuit of perfection?

All these attributes put together contribute to this wonderful and everlasting pursuit of man.
But most importantly it is the knowledge of the involved in this pursuit and also being
prepared for the risks involved and yet constantly endeavouring for excellence is what makes
human effort so very endearing.

The words above mentioned explain the fact that human effort is endowed with risk and risk
preparedness. In fact risk preparedness is one of the essential features of human effort. Risk
preparedness is not just preparing oneself regularly for risk involved in human effort; it is
much more than that. When we say risk preparedness what we essentially are referring to is
making attempts at protecting oneself from the rigours of risk and making good the loss that
is likely to result from the risk involved in any venture.

This risk preparedness in any venture in legal terms is called as insurance. While risk is an
essential feature of any ownership and any venture of man, being prepared for the risk and
managing the risk effectively is also seen as a necessary feature of business of human
endeavour. Risk preparedness and risk management gives rise to the insurance business. The
goal of all this preparedness is to gain protection against any anticipated and perceived risks
involved in any venture.

1.1 What is insurance

Insurance is a co-operative device to spread the loss caused by a particular risk over a number
of persons who are exposed to it and who agree to insure themselves against the risk. Thus it
is essentially a method to spread the loss perceived in any venture.

5
The aim of all insurance is to protect the owner from a variety of risks which he anticipates.
He who seeks this protection is called the assured or insured and the other person who takes
the risk by undertaking to protect that other from loss is called the underwriter or insurer and
he does this for a small consideration called the premium. So a contract of insurance may be
defined as a contract whereby one person, called the 'insurer' undertakes, in return for the
agreed consideration, called the premium, to pay to another person, called the assured, a sum
of money or its equivalent on the happening of a specified event. The happening of the
specified event must involve some loss to the assured or at least should expose him to
adversity which is in the law of insurance commonly called the risk. Thus the nature of
insurance depends upon the nature of the risk sought to be protected.

1.2 History of Insurance

Almost 4,500 years ago, in the anicteric land of Babylonia, traders used to bear risk of the
caravan trade by giving loans that had to be later repaid with interest when the goods arrived
safely. In 2100 BC, the Code of Hammurabi granted legal status to the practice. That,
perhaps, was how insurance made its beginning. Life insurance had its origins in ancient
Rome, where citizens formed brutal clubs that would meet the funeral expenses of its
members as well as help survivors by making some payments

As European civilization progressed, its social institutions and welfare practices also got
more and more refined. With the discovery of new lands, sea routes and the consequent
growth in trade, medieval guilds took it upon themselves to protect their member traders
from loss on account of fire, shipwrecks and the like.

Since most of the trade took place by sea, there was also the fear of pirates. So these guilds
even offered ransom for members held captive by pirates. Burial expenses and support in
times of sickness and poverty were other services offered. Essentially, all these. revolved
around the concept of insurance or risk coverage. That's how old these concepts are, really.

In 1347, in Genoa, European maritime nations entered into the earliest known insurance
contract and decided to accept marine insurance as a practice.

Insurance as we know it today owes its existence to 17th century England. In fact, it began
taking shape in 1688 at a rather interesting place called Coffee House in London, where
merchants, ship-owners and underwriters met to discuss and transact business. By the end of
the 18th century, Lloyd's had brewed enough business to become one of the first modern
insurance companies. In 1693, astronomer Edmond Halley constructed the first mortality
table to provide a link between the life insurance premium and the average life spans based
on statistical laws of mortality and compound interest. In 1756, Joseph Dodson reworked the
table, linking premium rate to age.

The century saw the entry of stock companies into the insurance business.

The first stock companies to get into the business of insurance were chartered in England in
1720. The year 1735 saw the birth of the first insurance company in the American colonies in
Charleston, SC. In 1759, the Presbyterian Synod of Philadelphia sponsored the first life

6
insurance corporation in America for the benefit of ministers and their dependents. However,
it was after 1840 that life insurance really took off in a big way. The trigger: reducing
opposition from religious groups.

The 19th century saw huge developments in the field of insurance, with newer products being
devised to meet the growing needs of urbanization and industrialization.

In 1835, the infamous New York fire drew people's attention to the need to provide for
sudden and large losses. Two years later, Massachusetts became the first state to require
companies by law to maintain such reserves. The great Chicago fire of 1871 further
emphasized how fires can cause huge losses in densely populated modern cities. The practice
of reinsurance, wherein the risks are spread among several companies, was devised
specifically for such situations

There were more offshoots of the process of industrialization. In 1897, the British
government passed the Workmen's Compensation Act, which made it mandatory for a
company to insure its employees against industrial accidents.

With the advent of the automobile, public liability insurance, which first made its appearance
in the 1880s, gained importance and acceptance.

In the 19th century, many societies were fol.1Iided to insure the life and health of their
members, while fraternal orders' provided low-cost, members-only insurance.

Even today, such fraternal orders continue to provide insurance coverage to members as do
most labour organizations. Many employers sponsor group insurance policies for their
employees; providing not just life insurance, but sickness and accident benefits and old-age
pensions. Employees contribute a certain percentage of the premium for these policies.

Insurance in India can be traced back to the Vedas. For instance, yogakshema, the name of
Life Insurance Corporation of India's corporate headquarters, is derived from the Rig Veda.
The term suggests that a form of "community insurance" was prevalent around 1000 BC and
practiced by the Aryans. Burial societies of the kind found in ancient Rome were formed in
the Buddhist period to help families build houses, protect widows and children.

Bombay Mutual Assurance Society, the first Indian life assurance society, was formed in
1870. Other companies like Oriental, Bharat and Empire of India were also set up in the
1870-90s. It was during the swadeshi movement in the early 20th century that insurance
witnessed a big boom in India with several more companies being set up. As these
companies grew, the government began to exercise control on them. The Insurance Act was
passed in 1912, followed by a detailed and amended Insurance Act of 1938 that looked into
investments, expenditure and management of these companies' funds. By the mid-l 950s,
there were, around 170 insurance companies and..80 provident fund societies in the country's
life insurance scene. However, ill the- absence of regulatory systems, scams and irregularities
were almost a way of life at rhost of these companies. As a result, the government
decided nationalize the life History of Insurance, the official website of the IRDA

7
assurance business in India. The Life Insurance Corporation of India was set up in 1956 to
take over around 250 life companies.

For years thereafter, insurance remained a monopoly of the public sector. It was only after
seven years of deliberation and debate - after the RN Malhotra Committee report of 1994
became the first serious document calling for the re- opening up of the insurance sector to
private players -- that the sector was finally opened up to private players in 2001.6

The Insurance Regulatory & Development Authority, an autonomous insurance regulator set
up in 2000, has extensive powers to oversee the insurance business and regulate in a manner
that will safeguard the interests of the insured.

1.3 Nature of the Insurance Contract

The contract of insurance is basically governed by the rules which form part of the general
law of contract. But equally there is no doubt that over the years it has attracted many
principles of its own to such an extent that it is perfectly proper to speak of a law of
insurance. Some of these principles owe their existence to the fact that the documents of the
standard insurance contract, principally the proposal form and the policy, has long been
drafted in a fairly uniform way. In addition the reason for many of the principles of insurance
can be found by looking at the history of insurance and of the insurance contract.

Insurance law has its peculiar principles, for example the doctrine of uberrima fides, and its
may be necessary to know whether a contract is one of insurance in order to know whether
this doctrine applies. Furthermore, a statute may include within or exempt from its operation
'contracts of insurance' without defining these. The obvious case is the exemption of such
contracts from the Unfair Contract Terms Act, 1977. One area which has given rise to
litigation and to

Arjun Bhattacharya and O'Niel Rane, Nationalization of Insurance in India, Centre for Civil
Society. Working paper No.0073, 2003 at p.no.377. difficulties is that of distinguishing
bdtract of insurance from the contracts of guarantee.

It is suggested that a contract of insurance is any contract whereby. one party assumes the
risk of an uncertain event, which is not within his control, happening at a future time, in
which event the other party has an interest, and under which contract the first party is bound
to pay money or provide its equivalent if the . uncertain event occurs.It would follow that
anyone who regularly enters into such contracts as the party bearing the risks is carrying on
insurance business for the purposes of the statute regulating insurance business.

The fundamental function of insurance to shift the loss suffered by a sole individual to a
willing and capable professional risk-bearer in consideration of a comparatively small
contribution called the premium. From the viewpoint of an economist, insurance is a process
whereby the risk of financial loss arising from death or disability of a person or damage,
deterioration, destruction or loss of prope1iy owing to perils to which they ate exposed, is
assumed by another process, the professional risk-bearer collects some small rate of
contribution from a large number of people and if there is any unfortunate person amongst

8
them, the risk-bearer, i.e., the insurer, relieves the sufferer from the effects of the loss by
paying the insurance money.

According to MACLEAN, "insurance is a method of spreading over a large number of

persons a possible 1 financial loss too serious to be conveniently borne by an individual.

Thus insurance serves two-fold purpose, the immediate short" h.ge and .the proximate
purpose and the far-sighted long range purpose. The pr6ximate purpose is to protect the
individual assured from any loss or damage to his; life or

"It serves the social purpose; it is a social device whereby uncertain risks of individuals may
be combined in a group and thus made more certain; small periodic contribution by the
individuals providing a fund out of which those who suffer losses may be reimbursed."

The larger and the much-wider purpose is the social purpose accelerating the economic
growth of the nation. The insurers collect the savings of numerous policy-holders and these
funds are invested in organized commerce and industry, thus helping in mobilizing capital
formation and establishment of industries.

Insurance thus reduces the fears of future risk to the individual insured and by capital
formation it helps the growth of industry, accelerates production, lubricates the machinery of
production and distribution and improves the economy of the nation. It mobilizes the
resources, accelerates and stabilizes growth and helps in the establishment of a welfare state.

In modem times, the happening of any event may be insured against at a premium directly
proportional to the risk involved on its happening. An element of uncertainty must be present
in the course of happening of the event insured against; in some cases, in almost all non-life
insurance contracts, the happening of the event itself is uncertain while in life insurance the
event insured, that is the death of an individual is a certain event, but the uncertainty lies in
the time when it happens.

The essentials of an insurance contract are

1. general nature of a contract

2. insurable interest

Riegel and Miller, Insurance principles and practice, P.10.

3. utmost good faith and

4. representation warranties.

Since insurance contract is seen as a . contract between two parties for a consideration,
the general principles under the law of contract apply to insurance contracts also. These
general principles applied to the insurance contracts are offer and acceptance, consideration,
competence of parties, legality of object and free consent of pannies.

9
While the above recital has answered the questions raised by the general principles of
contract, it is also necessary to look at the exclusive nature of an insurance contract.

Legal entitlement - First there must clearly be a binding contract, and the insurer. must be
legally bound to compensate the other part.

Uncertainty - Secondly, the uncertainty which is a necessary feature of insurance, as we have

already seen, is in most cases as to whether or not the event insured against will occur. In life
insurance, it is as to the time when it will occur.

Insurable interest - Thirdly, the other party, the insured, must have an insurable interest in the
property or life or liability which is the subject of the insurance.

This is the most important requirement of the contract of insurance.: It is assimilated into an
actionable claim transferable to the same extent and within the same limitations. In fact, it is
this element alone which distinguishes an insurance contract from a contract of wager

The term insurable interest has been defined by PATTERSON as 'a elation between the
insured and the event insured against, such that the occurrence of the event will cause
substantial loss or injury of some kind to the insured'. 13

II M.N.Mishra -Law of lnsuance (7111 ed. 2006) p.no.5.

12 Supra note 7 at p.no.14.

13 E W Patterson -Elements of Insurance, Supra note 1 at p.no.60.

W.H.RODDA defined this term as 'an interest of such a nature that the occurrence of the
event insured against would cause financial loss to the insured'.

When the assured is so situated that the happening of the event on which the insurance money
is to be payable would as an appropriate result involve in the loss or diminution of any right
recognized by law or in any legal liability there is an insurable interest to the extent of the
possible loss or liability. Thus it is any interest which the assured is deemed to have in the
subject matter of insurance if in the event of its loss, damage, or destruction that person will
be subject to risk of losing some economic benefit or advantage. It is an interest or right
which the law will recognize in the preservation of the thing or the continuance of the life
which has been insured. In Lucena V. Crawford 14, Lawrence, J defined the concept in a
very lucid mahner, 'if the event happens, the party will gain advantage, if it is frustrated, he
will suffer a loss. The above explanation emphasizes the benefit and detrimental aspects of
the legal interests that the assured must necessarily possess to be a rightful party to take out a
valid policy of insurance. Insurable interest thus is a property in the nature of an actionable
claim.

Control - Fourthly, it seems essential that the event insured against be outside the control of
the party assuming the risk.

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The above discussion highlights that the insurance contracts follow certain general principles
of contract law which can be listed in the following words. 16

INDEMNITY

A contract of insurance contained in a fire, marine, burglary or any other policy (excepting
life assurance and personal accident and sickness insurance) is a contract of indemnity. This
means that the insured, in case of loss against which

14 (1806) 2 B&P 269, 301 (NR). Supra note 1 at p.no.61.

15 Supra note 7 at P.no.14.

16 uamp.wits.ac.za/sebs/downloads/2006/general_principles of_insurance_law .doc accessed

on 15-6-2008 the policy has been issued, shall be. paid the achtual amolint of loss not
exceeding the amount of the policy, i.e. he shall be fully indemnified. The object of every
contract of insurance is to place the insured in the same financial position, as nearly as
possible, after the loss, as if the loss had not taken place at all. it would be against public
policy to allow an insfired to make a profit out of his loss or damage.

UTMOST GOOD FAITH

Since insurance shifts risk from one party to another, it is essential that there must be utmost
good faith and mutual confidence between the insured and the insurer.

In a contract of insurance the insured knows more about the subject matter of the contract
than the insurer. Consequently, heavy duty bound to disclose accurately all material facts and
nothing should be withheld or concealed. Any fact is rhaterial, which goes to the root of the
contract of insurance and has a bearing on- the risk involved. It is only when the insurer
knows the whole truth that he is in a position to judge (a) whether he should accept the risk
and (b) what premium he should charge. If that were so, the insured might be tempted to
bring about the event insured against in order to get money.

Insurable Interest - A contract of insurance effected without insurable interest is void. It

means that the insured must have an actual pecuniary interest and not a mere anxiety or
sentimental interest in the subject matter of the insurance. The insured must be so situated
with regard to the thing .insulted that he would have benefit by Its existence and loss from its
destruction. The owner of a ship run a risk of losing his ship, the charterer of the ship runs a
risk of losing his freight and the owner of the cargo incurs the risk of losing his goods and
profit. So, ail these persons have something at stake and all of them have insurable interest. It
is the existence of insurable interest in a contract of insurance, which distinguishes it from a
mere watering agreement. Causa Proxima - The rule of causa proxima means that the cause
of the loss must be proximate or immediate and not remote. If the proximate cause of the loss
is a peril insured against, the insured can recoyer. When a loss has been brought about by two
or more causes, the question arises as to which is the causa proxima, although the result could
not have happened without the remote cause. But if the loss is brought about by any cause
attributabie to the misconduct of the insured, the insurer is not liable. Risk - In a contract of

11
insurance the insurer undertakes to protect the insured from a specified loss and the insurer
receive a premium for running the risk of such loss. Thus, risk must attach to a policy.

Mitigation of Loss - In the event of some mishap to the insured property, the insured must
take all necessary steps to mitigate or minimize the loss, just as any prudent person would do
in those circumstances. If he does not do so, the insurer can avoid the payment of loss
attributable to his negligence. But it must be remembered that though the insured is bound to
do his best for his insurer, he is, not bound to do so at the risk of his life.

Subrogation - The doctrine of subrogation is a corollary to the principle of indemnity and

applies only to fire and marine insurance. According to it, when an insured has received full
indemnity in respect of his loss, all rights and remedies which he has against third person will
pass on to the insurer and will be exercised for his benefit until he (the insurer) recoups the
amount he has paid under the policy. It must be clarified here that the insurer's right of
subrogation arises only when he has paid for the loss for which he is liable under the policy
and this right extend only to the rights and remedies available to the insured in respect of the
thing to which the contract of insurance relates.

Contribution - Where there are two or more insurance on one risk, the principle of
contribution comes into play. The aim of contribution is to distribute the actual amount of
loss among the different insurers who are liable for the same risk under different policies in
respect of the same subject matter. Any one insurer may pay to the insured the full amount of
the loss covered by the policy and then become entitled to contribution from his coinsds
.proportion to the amount which each has undertaken to pay in case of loss of the same
subject-matter.

In other words, the right of contribution arises when (I) there are different policies which
relate to the same subject-matter (ii) the policies cover the same peril which caused the loss,
and (iii) all the public are in force at the time of the loss, and (iv) one of the insurers has paid
to the insured more than his share of the loss.

1.4 The Different Categories of Insurance

A classification well recognized in law and meaningful m msurance circles, distinguishes

between life insurance on the one hand and all other forms of insurance on the other. asically
insurance activity is studied under two categories, life and non-life. Both of them are studied
as insurance contracts, only the insurable interest is different. The general principles remain
almost the same.

There is a great variety of forms of insurance, ranging from pure, whole life insurance, an
undertaking to pay a certain sum on the death of the life 'insured whenever this occurs, to
endowment policies whereby the insured receives a sum if he survives beyond a certain age,
and to modern devices which com?ine an element of life insurance with the more substantial
element of investrhent in securities or property. Accordingly, contracts of life insurance and
related ones . such as personal accident insurances are regarded simply as contracts for
contingency insurance, in other words, contracts to pay an agreed sum o(money when the

12
event insured against occurs. Non-life insurance contracts :are, in general, contracts to
indemnify the insured only in respect of the loss suffered if it is actually suffered and only to
the amount of the loss suffered. We shall return to this distinction at the relevant points
throughout this book.

1.4.1 - Life insurance

The life insurance is, by far, seen as the most important aspect of the busihess of the
insurance industry. Under this form of insurance, the insurable interest is the indemnification
of any loss of life of the assured person. As has been discussed in the preceding paragraphs,
the first form of life insurance was seen in Rome, were citizens came together to form burial
clubs to meet their funeral expenses as well as help survivors make payments. Such practices
were also seen in the Buddhist period to help the surviving dependents build houses and meet
their economic needs.

The essential features of life insurance are the following:

1) It is a contract relating to life.

2) There need not be an express provision that the payment is due on the death of the
person.

3) The contract provides for payment of lumpsum money.

4) The amount is paid at the expiration of a certain period or on death of the person.20

Life insurance has both short range and long. range advantages. Primarily it encourages thrift
in the individual and serves also to form capital. It protects the potential estate of the policy
holder as distinguished from acquired estate. It saves the insured from worry and makes him
a little more carefree.

Life insurance manifests in different permutations. Some of the standard versions of life
insurance are whole life insurance, endowment insurance, joint-life insurance, annuity
insurance, fixed-terms marriage endowment insurance, two year temporary insurance,
children's deferred insurance, limited payment life insurance.

Another modern form of assurance is the advance insurance in which the policy provides for
the payment of a lumpsum amount to the assured in consideration of his agreeing to pay the
premiums for a specified period or for the life of the assured if his life should terminate
before the end of that period. Examples of this kind of insurance may be found in contracts to
furnish funds for the building of a house, to be repaid by monthly or quarterly installments,
which shall cease on death.

Every person has unlimited insurable interest on his own life. From this viewpoint every
individual is a prospect for life insurance. In reality, financial status effectually limits this
potential, not only because of the practical consideration of insurable worth of a person to the
insurer in financial terms but more so owing to the prospect's capacity to pay insurance
premium after meeting other pressing needs. Then again, there are many practical factors

13
affecting 'insurability', such as-old age, past and present illness, various physical and mental
impainnents (including defective genes), etc. Apart from these very basic aspects, at the time
of assessing the real potential for life insurance business it is important to consider the
feasibility of reaching all these prospects with available resources and also the profitability of
providing life insurance to them - in other terms, the cost and profitability of exploiting the
life insurance potential otherwise calculated.

In fact, the concept of insurance potential has two dimensions. One dimension is the
'extension' of coverage, in terms of ;number' of prospects, the other dimension relates to the
'intensity' of coverage, i.e., in terms of 'amount' of insurance: cover (and consequential
insurance premium) in view of paying capacity and real need for insurance. The population in
the age group 15 to 59 is usually regarded as the insurable population, since this can be
considered as the main 'active' age :group (in the sense of working, earning, supporting others
etc.) and beyond :.this :range life risk may be considered to be too low or too high, not worth
insuring. The intensity of insurance coverage will, however, be largely determined by the
pattern of distribution of income in society, level of employment in the country, area-wise
concentration of people in the middle to high income range, level of insurance awareness, etc.
One relative measure of insurance penetration is defined in the international market as
premium volume as a share of the gross domestic product which measures the significance of
the insurance industry in relation to the country's entire economic productivity.

It is obvious that for assessing the practical business potential of life insurance in terms of
population, the eligible population needs to be 'qualified' in relation to other factors including
those mentioned above.

1.4.2 - Non-life insurance

The other important part of the classification of insurance is the non-life insurance category.
Insurance other than 'Life Insurance' falls under the category of General Insurance. General
Insurance comprises of insurance of property against fire, burglary etc, personal insurance
such as Accident and Health Insurance, and liability insurance which covers legal liabilities.
There are also other covers such as En-ors and Omissions insurance for professionals, credit
insurance etc.

Non-life insurance companies have products that cover property against Fire and allied perils,
flood storm and inundation, earthquake and so on. There are products that cover property
against burglary, theft etc. The non-life companies also offer policies covering machinery
against breakdown, there are policies that cover the hull of ships and so on. A Marine Cargo
policy covers goods in transit including by sea, air and road. Further, insurance of motor
vehicles against damages and theft forms a major chunk of non-life insurance business.

In respect of insurance of property, it is important that the cover is taken for the actual value
of the property to avoid being imposed a penalty should there be a claim. Where a prope1iy is
undervalued for the purposes of insurance, the insured will have to bear a rateable proportion
of the loss. For instance if the value of a prope1iy is Rs. l00 and it is insured of Rs.5.0/ ' in the
event of a loss to the extent of say Rs.50/-, the maximum claim amount payable Would be

14
Rs.25/- (50% of the loss being borne by the insured for .underinsuring the property by 50% ).
This concept is quite often not understood by most insured. Personal insurance covers
include policies for Accident, Health etc. Products offering Personal Accident cover are
benefit policies. Health insurance covers offered by non-life insurers .are mainly
hospitalization covers either on reimbursement or cashless basis. The cashless service is
offered through Third Party Administrators who have arrangements with various service
providers, i.e., hospitals. The Third Party Administrators also provide service for
reimbursement claims. Sometimes the insurers themselves process reimbursement claims.

Accident and health insurance policies free available for individuals as well as groups. A
group could be a group of employees of an organization or holders of credit cards or deposit
holders in a bank etc. Normally when a group is covered, . insurers offer group discounts.

Liability insurance covers such as Motor Third Party Liability Insurance, Workmen's
Compensation Policy etc offer cover against legal liabilities tht may arise under the
respective statutes- Motor Vehicles Act, The Worldmen's Compensation Act etc. Some of
the covers such as the foregoing (Motor Third Party and Workmen's Compensation policy)
are compulsory by statute. Liability Insurance not compulsory by statute is also gaining
popularity these days. '.Many industries insure against Public liability. There are liability
covers available for Products as well.

There are general insurance products that are in the nature of package policies offering a
combination of the covers mentioned above. For instance:, there are package policies
available for householders, shop keeps; and other professionals such as doctors, chartered
accountants etc. Apart from offering standard covers, insurers also offer customized or tailor-
made ones.

Suitable general Insurance covers are necessary for every family. It is important to protect
one's property, which one might have acquired from one's hard earned income. A loss or
damage to one's property can leave one shattered. Losses created by catastrophes such as the
tsunami; earthquakes, cyclones etc have left many homeless and penniless. Such losses can
be devastating but insurance could help mitigate them. Property can be covered, so also the
people against Personal Accident. A Health Insurance policy can provide financial relief to a
person undergoing medical treatment whether due to a disease or an injury.

Industries also need to protect themselves by obtaining insurance covers to protect their
building, machinery, stocks etc. They need to cover their liabilities as well. Financiers insist
on insurance. So, most industries or businesses that are financed by banks and other
institutions do obtain covers. But are they obtaining the right covers? And are they insuring
adequately are questions that need to be given some thought. Also organizations or industries
that are self-financed should ensure that they are protected by insurance. Most general
insurance covers are annual contracts. However, there are few products that are long-term.

It is important for proposers to read and understand the terms and conditions of a policy
before they enter into an insurance contract. The proposal form needs to be filled in
completely and correctly by a proposer to ensure that the cover is adequate and the right one.

15
Certain important and .traditional categories of general insurance are manne insurance, fire
insurance, aviation insurance and accident risk insurance. I shall now explain each of these
important categories.

1.4.2.1 - Marine insurance

Marine insurance has been the torchbearer for the modern insurance law and had in effect
supplied the major part of modern insurance law. It is not an overstatement to say that
composition of modern insurance law largely borrowed from the practices of risk coverage
adopted by the merchants at sea. The origins of the modern insurance contract are to be
found in the practices adopted by Italian merchants from the fourteenth century onwards,
although there is• little doubt that the concept of insuring was known long before then.
Maritime risks,• the risk of losing ships and cargoes at sea, instigated the practice of medieval
insurance and dominated insurance for many years. The habit spread to London merchants
but not, it appears, until the sixteenth century. At first, there are no separate insurers. A
group of merchants would agree to bear each others' risks

among themselves. For a long time, the common law played little or and part in the
regulation of disputes concerning insurance. For this purpose merchants in 1601 secured the
establishment by statute of a chamber of assurance. Towards the eighteenth century, the
common law courts took an interest in insurance ccinttacts. In Lloyd v. Fleming Blackbum J
defined a policy of marine insurance as a contract of indemnity against all losses occurring to
the subject-matter of the policy from certain perils during the adventure. 28 A contract of
marine insurance may, by its express terms, or by usage of trade, be extended so as to protect
the assured against losses on inland waters or on any land risk which 'may be incidental to
any sea voyage.

In a contract of marine insurance, what is insurance is notthe prope1iy exposed to peril but
only the risk or adventure of the assured. There is marine adventure where:

a) Any ship, goods or other movable property are exposed to maritim perils;

b) The earning or acquisition of any freight, passage money, commission, profit or other
pecuniary benefit, or the security for any advances; loan on disbursements, is endangered by
the exposure of the properties described aforesaid to maritime perils;

c) Any liability to a third party may be incurred by the owner of, 'or other person
interested in or responsible for such property by reason of maritime perils.Maritime perils are
the perils consequent on, or incidental to, the navigation of the sea, that is to say, perils of the
seas, fire, war perils, pirates, rovers, thieves, captures, seizures, restrains and detainments of
princes and peoples, jettisons, barratry and any other perils either of the like kind, or which
may be designated by the policy.

EVIDENTIARY VALUE OF COVERNOTE

In marine insurance generally the broker contacts the parties and takes the particulars on a
slip of a paper. He takes them to different insurance companies

16
and the insurance company which is willing to insure makes a mark or initials of the officer
on the covernote.32 From the period of marking by the insurance company, the covernote
becomes a legal document though of limited legal value.

In Ionides v. Pacific Marine Insurance Co., Lord Blackburn said, "as the slip is clearly a
contract for marine insurance and is equally clearly not a policy it is by virtue of these
enactments (the stamp laws) not valid, that is not enforceable at law or in equity; but it may
be given in evidence wherever it is, though not valid material."

A covernote therefore is admissible in evidence not only to prove that contract but also to
explain the meaning of any ambiguous term in the policy. The policy may be rectified if it is
contrary to the covernote and for such collateral purposes it can be used in evidence.

The Indian law on marine insurance holds similar view. In Lateef Ali V. Royal Exchange
Corp. it was held tat the cover note is not a policy and according to S.7 of the Stamp Act,
a contract of sea insurance should be expressed in a sea policy and duly stamped. As the
practice is not to stamp a covernote it is admissible only to prove the agreement. It cannot be
used for any purpose except to compel the delivery of a policy in accordance with its
tertns.3 in Bhagawandas v. Netherlands Insurance Co,.35 it was laid down that the f Ontract
was not enforceable under a covernote; but an action for specific perfor alice is maintainable
for the issue of a policy. In .sutajmal v. Trefon Insurance Co., the • Privy Council laid down
that an agreement of sea.insurance otherwise tfian in a policy is forbidden in public interest
and the statutory insistence on a policy is hot• a mere collateral requirement.

In India, the Government of India enacted the Marine lnsurance Act, 19631 'to give a
statutory clarity on matters concerning marine insurance and also coify the principles lying
scattered hitherto. Section 24 of the Act lays down that a contract of marine insurance shall
be admitted. evidence unless it is embodied in a marine policy according to the Act. The
policy may be issued after the contract is concluded. Section 25 lays down the contents of
the marine policy:

a) The name of the assured or the person who effects the insurance

b) The subject matter insured and the risk insured against; '

c) The voyage or the period of time or both;

d) The sum or sums insured; and

e) The name of the insurer or insurers.

The policy must be signed by the insurer himself. Section 28 states that the subject matter
must be designated with reasonable certainty. The nature and extent of the interest of the
assured need not be specified. Section 32 provides that the policy maybe in the form given in
the schedule and subject to the provision of the Act and unless the context of the policy
othetis requires, .the terms and expressions mentioned in the schedule shall be construed as
having-the scope and meaning assigned to them in the schedule.

17
34 Supra note 1 at page 257

35 (1888) 161 LA 60. Supra note 1 at page 257.

36 S.25 of the Marine Insurance Act, 1963. http://vlex.in/vid/the-marine

insurance-act 29631517 on

The principles developed in regard to marine insurance have by and large been applied to the
other types of insurance subsequently developed.

1.4.2.2 - Fire insurance

Fire insurance is a contract to indemnify the insured for destruction of or damage to property
or goods, caused by fire, during a specified period. The contract specifies the maximum
amount, agreed to by the parties at the time of the contract, which the insured can claim in
case of loss. This amount is not, however, the measure of the loss. The loss can be
ascertained only after the fire has occurred. The insurer is liable to make good the actual
amount of loss not exceeding the maximum amount fixed under the policy.

CAUSA PROXIMA

It is a rule of law that in actions on fire policies, full regard must be had to the causa proxima.
If the proximate cause of the loss is fire, the loss is recoverable. If the cause is not fire but
some other cause remotely connected with fire, it is not recoverable, unless specifically
provided for. Fire risks do not cover damage by explosion, unless the explosion causes actual
ignition, which spreads into fire. The cause of the fire is immaterial, unless it was the
deliberate act of the insured.

STEPS TO BE TAKEN IN FIRE INSURANCE CLAIMS

It is the duty of the insured, or any other person on his behalf, to give immediate notice of fire
to the insurance company so that they can safeguard their interest, such as, deal with the
salvage, judge the cause and nature of fire and assess the extent of loss caused by the fire.
Failure to give notice may avoid the policy altogether. The insured is further required by the
terms of the policy, to furnish within the specified time, full particulars of the extent of loss
or damage, proof of the value of the prope1iy and if it is completely destroyed, proof of its
existence.

Delivery of all these details to, the. company is a condition precedent to the claim of the
assured to recover the loss. If the assured prefers a fraudulent

claim, whether for whole or part of the policy, he would forfeit all benefits under the policy,
whether or not there is a condition to this effect in the policy. Generally, the fraud consists i:n
over -valuation, but overvaluation due to mistake is not fraudulent. In a majority of fire
insurance claims, the expert assessors of the company are able to archive at mutually
acceptable valuation.

18
1.4.2.3 - Aviation Insurance

Since the end of World War the aerospa2' industry has developed at a vertiginous speed and
the aviation insurance market has followed that pace. The upstjrge and present importance of
the aviation insurance business is definitely due to the uprising costs of new generations of
modem, enormous aircraft, and to the increase in liability limits for international air transport
passengers. Consequently, insurance has become the essential protection mechanism of the
aviation industry against loss and damages. Also, it has enabled large aircraft financing
entatities to protect their property in cumbersome leasing contracts.

Although some sources indicate that the first aviation insurance policy was written by
Lloyd's of London in 1912 and others contend that the first invitation

insurance contract was entered into to insure third-party liability during the 1910 London-
Manchester race ('which did result in several accidents), there is an authority that reports that
insurance for flying machines and their inherent risk can be traced back to the year 1908 in
London. Yet another source that the birth of aviation insurance dates back to the year 1911
but this comment perhaps refers to the birth of aviation insurance at Lloyd's.

The first standard policy issued by Lloyd's came into existence in 1911 and was commonly
known as the White Wings Policy. It afforded coverage for only third party liability claims.
In 1912, a draft policy by Messrs. Matthews, Wrightson & Company Limited was accepted
by the Executive Committee of the Royal Aero Club. The policy carried an endorsement
stating that it was approved and recommended by the Royal Aero Club of the United
Kingdom.

In 1919 the first attempt was made to unify laws relating to international aviation. Certain
European countries met in Paris to formulate Rules for the Regulation of International
Aviation. This meeting became known as the Convention of Paris.

International law regarding aviation insurance has been primarily concerned with the
regulation of liabilities to third parties and passengers injured by aircraft operations in
international civil aviation. At present, there are no international legal instruments ruling
aircraft hull insurance matters. They are usually deemed the exclusive province of the aircraft
operator, or, at best, of the State of registry. Whenever there is an accident resulting from the
operation of an aircraft, two categories of claims for damages are filed against the operator.
One category includes claims made by injured passengers and consignors of luggage or
goods, in which case, liability arises from a contractual obligation derived from the contract
of carriage. The other category consists of claims by third parties who suffered damages on
the surface and which have no contractual relation with the operator, in which case liability
arises from a tort (civil offence). Under Article 12 in The Rome Convention, every aitcraft
registered in the territory of a Contracting Party shall, for the purpose of flying above the
territory of another Contracting Party, be insured within some limits of maximum amount of
liability. The municipal law of each Contracting Party may agree to substituting another form
of guarantee for insurance. These provisions give rise to many doubts and mistrust
concerning the effectiveness of the Convention as an instrument of unification of Law

19
because it remits the question of the insurer's obligation regarding insured persons to the
respective legislation. The Rome Convention canonized the existing principles ofliability in
the following words:

a) the aircraft operator has objective liability for damage caused to third party oil the
surface b) the aircraft operator has limited liability at fixed sums; an c) the
fulfillment of the obligations resulting from liability is guaranteed by the requirement of
insurance or another security.

The aviation insurance policy is structured to divide the insurable risks into three main
sections, which are Section I- Loss of or Damage to the Aircraft, Section 11- Legal Liability
to Third Parties (Other than Passengers), and Section III- Legal Liability to Passengers. 39
Some operators request additional coverage for bodily injuries and/or death for the
operational crew of the aircraft which do not have a transportation contract, and such
coverage is granted through personal accident coverage, commonly called "seat insurance".
The AVN lA policy is generally used for undertaking risks associated with aviation in
general, that is to say civil and commercial operations, but not for. the operation of
commercial airlines -as a .whole. This is due to the fact that the nature of the operations of an
airline and the particular characteristics of each airline (e. g.: their operating experience)
require stipulating special conditions to satisfy the individual needs of each comparty.

In addition to these policies, there are others, less frequently used, that cover sporadic risks or
very rare risks; these are issued by companies specialized in these kinds of risks. The contents
of the policies may vary according to the risks covered or to the particular demands of each
legislation; however, in general, the model contains a description of the insured risk(s),
exclusions, general conditions applicable to all of the sections, warranties, definitions of
relevant terms, and obviously, the policy schedule.

Hull coverage is granted either based on the "insured value" or on the "agreed value". In the
first situation, the parties agree upon a figure that normally represents the market value of the
aircraft and this figure will be the maximum insured limit that can be claimed, even if the loss
exceeds such quantity. In the second situation, the parties agree to 'write the policy for an
aircraft value that satisfies the purposes of the contracting parties. This figure is used when
the insured wants to be certain that it will be completely indemnified in the event of a total
loss or a total constructive loss, especially in events in which there are very high mortgages
or warranties on the aircraft. It is also useful when there are relatively few aero planes of a
particular kind and when it is difficult to establish a market value for the aircraft, in case of
loss.

If a total loss or total constructive loss occurs - 'which in aviation insurance occurs when the
aircraft has suffered damage of such a magnitude that it is economically impossible to repair
it, no matter what its insured or agreed value and the policy is issued under the insured value,
the insurer has the option of replacing the aircraft or paying the insured amount. In the latter
case, according to the policy, the insurer will be empowered to take possession of the aircraft
(along with its documents, titles and registrations) as salvage. Unless there is an agreement

20
stating otherwise. Payment must be made for the market value of the aircraft upon the day of
the occurrence, making sure that such value does not exceed the insured amount stipulated in
the policy; if that should be the case. The insurer would only respond for up to the insured
amount.

LEGISLATIVE STRUCTURE WITH REGARD TO AVIATION LAW AND

AVIATION INSURANCE

One of the most impo1iant legislations in this area has been the Carriage by Air Act, 1972
which is a refurbished version of the legislation in its earlier incarnation, the Aircraft Act,
1934. This legislation is in fulfilment of the treaty responsibility that India has contracted to
by signing the treaties of Warsaw on Air traffic regulation and insurance of 1938 and The
Hague and Montreal protocols that have been added to the Warsaw convention later. Some of
the amendments effected by the Hague Protocol to the Warsaw Convention are-

(a) An increase in the amount specified as the maximum which the carrier may be liable
to a passenger, that is to say: the limits of the liability of the carrier in respect of a passenger
has been doubled, and unless a higher, figure is agreed to by a special contract, the liability is
raised from 1,25,000 gold francs per passenger to 2,50,000 gold francs per passenger:

(b) Making the carrier liable where the damage was caused by an error in piloting . or in
the handling of the aircraft or in navigation.

The Act provides that the carrier is responsible for any loss suffered by the passengers and
in the event of death to the-relatives in damages. Section 5 of the legislation explains the
nature of the liability of the carrier in the event of the death of the passenger

Liability In case of death

(1) Notwithstanding anything :contained in the Fatal Accidents Act, 1855or any other
enactment or rule of law in force in any part of India, the rules cont;;rined in the First
Schedule and in the Second Schedule shall, in all cases to which those rules apply, detennine
the liability of a carrier in respect of the death of a passenger.

(2) The liability shall be enforceable for the benefit of such of the members of the passenger's
family as sustained damage by reason of his death.

Explanation: - In this sub-section, the expression "member of a family'' means wife or

husband, parent, step-parent, grant-parent, brother, sister, half-brother, half-sister, child, step-
child, grand-child;

Provided that in deducing any relationship as aforesaid any illegitimate person and any
adopted person shall be treated as being or as having been, the legitimate child of his mother
and reputed father or, as the case may be, of his adopters.

(3) An action to enforce the liability may be brought by the personal representative of the
passenger or by any person for whose benefit the liability is under sub-section (2)
enforceable, but only one action shall be brought in India in respect of the death of any one

21
passenger, and every such action by whomsoever brought shall be for the benefit of all such
persons so entitled as aforesaid as either are domiciled in India or not being domiciled there
express a desire to take the benefit of the action.

(4) Subject to the provisions of sub-section (5) the amount recovered in any such action,
after deducting any costs not recovered from the defendant, shall be divided between the
persons entitled in such proportion as the Court may direct.

(5) The Court before which any such action is brought may, at any stage of the
proceedings, of any such order as appears to the Court to be just and equitable in view of the
provisions of the First Schedule or of the Second Schedule, as the case may be, limiting the
liability of a can-ier and of any proceedings which have been or are likely to be commenced
outside India in respect of the death of the passenger

.4.2.4 Accident Insurance

In order to give effective rights to the person injured or expired in an accident, Fatal
Accidents Act, 1885 was enacted in India. This Act provided only a procedure and a right of
named legal heirs to claim compensation from the person committing negligence. This
enactment has worked in India for a comfortable long period. Because of increase in
automation and consequential losses of life and property in accident, it was considered that to
give relief to the victims of accident claims an effective law should be brought in. To
facilitate this, provisions have been inserted for compulsory third party insurance and to
provide a machinery of adjudication of claim in Motor Vehicle Act by amending Act No.110
of 1956, by which Section 93 to 109 with reference to third party

44 This section's material has been largely resourced from Avtar Singh - MN
Srinivasan's Principles of Insurance Law (2004) at pages 386-390.

insurance and Section 11O(A) to 11O(F) with reference to creation of Moto Accident Claims
Tribunal and procedure for adjudication of claim has been provided. Initially the liability was
restricted to a particular sum but after 1982 the liability of the Insurance Company has
been made unlimited and even the defences of the Insurance Companies have been
restricted so as to ensure payment of compensation to third parties.

In the year 1982 a new concept of providing interim compensation on 'No Fault' basis have
been introduced by addition of Section 92(A) to 92(E). By the same amendment, relief has
also been given those persons who expire by hit and run accidents, where the offending
vehicles are not identified.

(Section 145 to 164) provides for compulsory third party i which is required to be taken by
every vehicle owner. It has been spt. Section 146(1) that no person shall use or allow using a
motor vehicle place unless there is in force a policy of insurance complying \ requirement of
this chapter. Section 147 provides for the requirement o and limit of liability. Every vehicle
owner is required to take a policy against any liability which may be incurred by him in
respect of death or injury including owner of goods or his authorized representative carried
vehicle or damage to the property of third party and also death or bodily injured any

22
passenger of a public service vehicle. According to this section the police require covering
the liability of death or injuries arising to the employees i course of employment except to the
extent of liability under Work Compensation Act. Under Section 149 the insurer have been
statutorily liabl satisfy the judgment and award against the person insured in respect of third
p: risk.

(1) Use of vehicle for hire .

(2) For organizing racing and speed testing

(3) Use of transport vehicle not allowed by permit.

(4) Driver not holding valid driving license or have been disqualified for holding such
license.

(5) Policy taken is void as the same is obtained by non-disclosure of material fact.
Section 163A has been added in this Chapter by amending Act 54 of 1994 w.e.f.

14.11.94 whereby special provision as to payment of compensation on structural formula

basis has been provided. This provision is being introduced to provide compensation to the
third party victims without proving negligence or tortious act.

Schedule-II has been appended to the give such structural formula. Hon'ble Supreme Court
has held that award under Section 163A is final, independent and not in addition of award in
claim petition under Section 166 where claim is sought on negligence basis. Thus, one can
claim compensation in either of the Section.

Claim Application:

Claim application can be filed under Section 163A for claim to be determined on structural
formula basis provided in Schedule-IL Schedule-II has been adjudged as suffering from
severe mistakes and the Supreme Court has held that total reliance cannot be placed on this
schedule. Further the Schedule do not provide any computation chart for the persons having
m:ore than Rs.40,000/-' annual income. Claim petition can alo be filed under Section 166 of
Motor Vehicle Act pleading negligence where the claim shall be assessed by the Judge not on
the basis of structural formula but on the basis of evidence led.

The injured or the legal representatives of deceased can file claim application ina prescribed
format making driver, owner and insurer as party. Driver is not a necessary party in some
states. For e.g. in the Rajasthan Motor Accident Claims Tribunal Rules only owner and
insurer ate required to be party. No limitation has been prescribed for filing of •the claitn
application. Initially when the law has come into force the limitation was 6 months which
was later increased to one year and ultimately in the garb of welfare legislation the provision
of limitation has been deleted. In my humble view when there is limitation prescribed for all
type of causes, some limitation of 2 or 3 years must be prescribed for filing of claim
application. It should not be made indefinite, as it will cause serious problems to the

23
defendant. The procedure has been prescribed as a summary procedure for determining the
compensation.

Accidents arising out of use of Motor Vehicle:

Section 165 provides the form of constitution of Claim Tribunal in adjudging claims of
compensation in respect of accidents involving the death of bodily injury to persons "arising
out of the use of Motor Vehicle". Being welfare legislation the scope of this tetrn have been
widened which includes accident by a stationery vehicle, injuries suffered by passengers in
bomb blast, injuries due to fire in petrol tanker. Murder in a motor vehicle has also been
covered as a motor accident.

Assessment of Claim:

The assessment of compensation, however, be made good but cannot be said to be foolproof.
In every such assessment certain assumptions are to be made and there is all possibility of
variance from Judge to Judge in applying the various principles enunciated by the Courts
from time to time. Lord Viscount Simon has evolved a method of assessment known as
"Nance's method" more popularly as "discounting method". The another popular method,
which is known as Davis Method was evolved by Lord Wright.

Hon'ble Supreme Court while dealing with a matter evolved a formula. Yearly Income
Yearly expenditure on Deceased gives the sum expended on legal representatives. If this
amount is capitalized subject to certain deductions, pecuniary loss to the family can be
assessed. While improving the above f01mula Supreme Court in CKS Iyer's case has stated
that there is no exact uniform rule

for measuring the value of human life and measure of damages cannot be arrived . at by a
mathematical calculation but the amount recoverable depends upon life expectancy of legal
representative beneficiaries. In the same period Lord Diplock has evolved Interest
Capitalization method by calculating net pecuniary loss on annual basis and multiplied with
number" of years purchase. The Hon'ble Supreme Court of India with the development of
accident claims has decided the landmark case of Susamma Thomas47 has started giving
appreciation to the annual income of deceased. This appreciation ranges to the double of
income depending upon the nature of job, age, future prospects etc. Supreme Court has
held that after determining and doubling annual income, 1/3 should be deducted towards
the expenses to be incurred on the deceased and the remaining• amount should be multiplied
by a multiplier depending or the age of deceased and beneficiary. The maximum multiplier
approved by Supreme Court in this case was 16. Later,. Supreme Court's 3 Judges bench
have approved the Davis formula along with determination of dependency on unit basis in
which the adults have been taken as- 2 units ar.id the minors has been taken as 1 unit. The
multiplier, which was approved as 16 in Susamma Thomas case, was increased to maximum
of 18. In this case the court did not allow double of the amount except that a premium may be
given looking to the future prospects. But, in a recent Supreme Court judgment, in
order to make compensation just and to take consideration of love rall . factors multiplier was
reduced from 16 to 12 in case of deceased of 38 years. In same facts and circumstances, in

24
another case Supreme Court has said for determination of multiplier depends upon (1) age of
deceased (2) age of claimants

(3) marital status (4) education and employment of the claimants; and (5) loss of
pecuniary benefits. The Supreme Court has also held that criterja of awarding compensation
include some guess work, some hypothetic.al --og;fd atin and some amount of sympathy
linked with the nature of disability caused are all involved. But, all such elements ate
required to be viewed with the objective standard. (1994) 4 sec 176.

In view of the above case laws, one can say that the assessment of compensation is to be
guided by way of applying precedents on the facts and circumstances of a particular case. It
should not be misunderstood that an injured or legal representatives of the deceased should be
given exorbitant claim, but the law restrict them to be "just compensation" so as to save the
injured or legal representatives of deceased from possible pecuniary and non-pecuniary losses
guided by the above judgments.

Legal defence available to the Insurance Companies towards third party:

The Insurance Company cannot avoid the liability except on the grounds and not any other
ground, which have been provided in Section 149(2). In recent time, Supreme Court while
dealing with the provisions of Motor Vehicle Act has held that even if the defence has been
pleaded and proved by the Insurance Company, they are not absolve from liability to make
payment to the third party but can receive such amount from the owner insured. The courts
one after one have held that the burden of proving availability of defence is on Insurance
Company and Insurance Company has not only to lead evidence as to breach of condition of
policy or violation of provisions of Section 149(2) but has to prove also that such act happens
with the connivance or knowledge of the owner. If knowledge or connivance has not been
proved, the Insurance Company shall remain liable even if defence is available.

Driving License:

Earlier not holding a valid driving license was a good defence to the Insurance Company to
avoid liability. It was been held by the Supreme Court that the Insurance Company is not
liable for claim if driver is not holding effective & valid driving licence. It has also been held
that the learner's licence absolves the insurance Company from liability, but later Supreme
Court in order to give purposeful meaning to the Act have made this defence very difficult. In
Sohan Lal Pasi's case it has been held for the first time by the Supreme Court that the breach
of condition should be with the knowledge of the owner. If owner's knowledge with reference
to fake driving licence held by driver is not proved: by the Insurance Company, sue defence,
which was . otherwise available, can not absolve insurer from the liability. Recently in a
dynamic judgment :in case of Swaran Singh,48 the Supreme Court h'fl.s almost taken away
the said right• by . holding;

(i) Proving breach of condition or not holding driving licence or holding fake licence or
carrying gratuitous passenger would not absolve the Insurance Company until it is proved
that the said breach was with the knowledge of owner.

25
(ii) Learner's licence is a licence and will not absolve Insurance Company from liability.

(iii) The breach of the conditions of the policy even within the scope of Section 149(2) should
be material one which must have been effect cause of accident and thereby absolving
requirement of driving licence to those accidents with standing vehicle, fire or murder during
the course of use of vehicle.

This judgment has created a landmark history and is a message to the Govrnment to remove
such defence from the legislation as the victim has to be given compensation.

Gratuitous Passenger:

A gratuitous or fare paying passenger in a goods vehicle or fare paying passenger in private
vehicle has been proved to be a good defence. In Motor Vehile Act 1939 the gratuitous
passenger was not covered under the insurance policy but a fare passenger in a goods vehicle
was considered to be covered by 5 :Judges Bench judgment of Rajasthan High Court. In new
Motor Vehicle .A(a Division Bench of Supreme Court held that Insurance Company is liable
for a passehget in goods vehicle. In another judgment of 3 Judges Bench of Supreme Court it
was held that the Insurance Company is not liable for the gratuitous passenger 2004
(3) sec 291 : 2004-SLT-345 traveling in the goods vehicle. In number of other cases this
judgment has been reiterated with a direction that the Insurance Company shall first make
payment of the compensation to the claimant and then recover it from the owner.49

The time is now for bringing legislation for award of the fixed compensations as in case of
rail or airways. A person dying in rail accident cannot get beyond Rs. 4 lakh but a person
dying in road accident• can get Rs.4 crore. The payment of compensation based on the
vehicle is not reasonable and a structural basis compensation formula without reference to
income or age may be brought in so that each and everybody can get compensation of their
life irrespective of his poverty or richness. A Scheme should be formulated with the State
Police Authorities and the Insurance Companies by which the Insurance Company must
know immediately after happening of accident and can make necessary investigations.
Insurance Company comes in picture when the claim petition is filed and by that time the
evidence can be created to convert the non-accident into accident and also on quantum. The
intention of legislation is to provide just compensation and not exorbitant compensation. This
should always be kept in mind.

1.4.2.5 Health Insurance

The term health insurance is generally used to describe a form of insurance that pays for
medical expenses. It is sometimes used more broadly to include insurance covering disability
or long-term nursing or custodial care needs. It may be provided through a government-
sponsored social insurance program, or from private insurance companies. It may be
purchased on a group basis (e.g., by a firm to cover its employees) or purchased by individual
consumers. In each case, the covered groups or individuals pay premiums or taxes to help
protect themselves from high or unexpected healthcare expenses. Similar benefits paying for
medical

26
Further readings on this topic included the judgment of Justice KT Thomas in NEW
INDIA ASSURANCE COMPANY v. SATPAL SINGH AND OTHERS. 2000-(099)-
COMPCAS - 0258 -SC sourced from http://www.vakilno1.com/
juclgements/companiesact/2000- 099co!I!Qcas025 8sc.htm on 21-8-2008.

expenses may also be provided tfuough social welfare programs funded by the government.

By estimating the overall risk of healthcare expenses, a routine finance structure (such as a
monthly premium or annual tax) can be developed, ensuring that money is available to pay
for the healthcare benefits specified in the insurance agreement. The benefit is administered
by a central organization, most often either a government agency or a private or not-for-
profit entity operating a health plan.so A health insurance policy is a contract between an
insurance company and an individual or his sponsor (e.g. an employer). The contract can be
renewable annually or monthly. The type and amount of health care costs that will be
covered by the health insurance company are specified in advance, in the member contract or
"Evidence of Coverage" booklet. The individual insured person's obligations may take
several forms Premium: The amount the policy-holder or his sponsor (e.g. an employer) pays
to the health plan each month to purchase health coverage.

Deductible: The amount that the insured must pay out-of-pocket before the health insurer
pays its share. For example, a policy-holder might have to pay a $500 deductible per year,
before any of their health care is cov6red by the health insurer. It may take several doctor's
visits or prescription refills before the insured person reaches the deductible and the insurance
company starts to pay for care.

Co-payment: The amount that the insured person must pay out of pocket before the health
insurer pays for a particular visit or service. Fo1\exam:ple, and insured person might pay f
$45 co-payment for a doctor's visit, or.to obtain a prescription. A co-payment must be paid
each time a particular service is obtained.

How Private Insurance Works: A Primer by Gary Claxton, Institution for Health Care
Research and Policy, Georgetown University, on behalf of the Henry J. Kaiser Family
Foundation www.en.wikipedia.org on 2-1-2009.

Co-insurance: Instead of, or in addition to, paying a fixed amount up front (a co-payment),
the co-insurance is a percentage of the total cost that insured person may also pay. For
example, the member might have to pay 20% of the cost of a surgery over and above a co-
payment, while the insurance company pays the other 80%. If there is an upper limit on
coinsurance, the policy-holder could end up owing very little, or a great deal, depending on
the actual costs of the services they obtain.

Exclusions: Not all services are covered. The insured person is generally expected to pay the
full cost of non-covered services out of their own pocket.

Coverage limits: Some health insurance policies only pay for health care up to a ce1iain
dollar amount. The insured person may be expected to pay any charges in excess of the health
plan's maximum payment for a specific service. In addition, some insurance company

27
schemes have annual or lifetime coverage maximums. In these cases, the health plan will stop
payment when they reach the benefit maximum, and the policy-holder must pay all remaining
costs.

Out-of-pocket maximums: Similar to coverage limits, except that in this case, the insured
person's payment obligation ends when they reach the out- of-pocket maximum, and the
health company pays all further covered costs. Out-of-pocket maximums can be limited to a
specific benefit category (such as prescription drugs) or can apply to all coverage provided
during a specific benefit year.

Capitation: An amount paid by an insurer to a health care provider, for which the provider
agrees to treat all members of the insurer.

In-Network Provider: (U.S. term) A health care provider on a list of providers preselected .by
the insurer. The insurer will offer discounted coinsurance or co-payments, or additional
benefits, to a plan member to see an in-network provider. Generally, providers in network are
providers who have a contract with the insurer to accept rates further discounted from.the
"usual and customary" charges the insurer pays to out-of-network providers.

Prior Authorization: A certification or authorization that . an insurer provides prior to medical

service occurring. Obtaining •afi authorization means that the insurer is obligated to pay for
the service, assume it matches what was authorized. Many smaller, routine services do not
require authorization.

Explanation of Benefits: A document sent by an insurer to a patient explaining what was

covered for a medical service, and how they arrived at the payment amount and patient
responsibility amount.

Crop Insurance

The two general categories of crop insurance ate called cropyield insurance and crop-revenue
insurance. Crop insurance is purchased by agricultural producers,

including farmers, ranchers, '1;11d others to protect themselves against either the loss of their
crops due to natural disasters, such as hail, drought, and floods, or.the loss of revenue due to
declines in the prices of agricultural commodities.

Crop-yield insurance: There are two main classes of . crop-yield insurance:

Crop-hail insurance is generally available from private insurers (in countries with private
sectors) because hail is a narrow peril that occurs in a limited place and its accumulated
losses tend not to overwhelm the capital reserves of private insurers. The earliest crop- hail
programs were begilil by fatmets cooperatives in Frane and Gel'many in the 1820s.

Multi-peril crop insurance (MPCI): covets the broad perils of drought, flood, insects, disease,
etc., which may affect many insured's at the same time and present the insurer with exces
V:ejosses. To make this class of insurance, the perils are often bundled to.gether frr a single
policy, called a multi-peril crop insurance (MPCI) policy. MPCI coverage is usually offered

28
by a government insurer and premiums are usually partially subsidized by the government.
The earliest MPCI program was first implemented by the Federal Crop Insurance

Corporation (FCIC), an agency of the U.S. Department of Agriculture, in 1938. The FCIC
program has been managed by the Risk Management Agency (RMA), also a U.S. Department
of Agriculture agency, since 1996.

rop-revenue insurance: is a combination of crop-yield insurance and price insurance. For

example, RMA establishes crop-revenue insurance guarantees on corn by multiplying each
farmer's corn-yield guarantee, which is based on the fa1mer's own production history, times
the harvest.:.time futures price discovered at a commodity exchange before the policy is sold
and the crop planted. There is a single guarantee for a certain number of dollars. The policy
pays an indemnity if the combination of the actual yield and the cash settlement price in the
futures market is less than the guarantee.

Crop-revenue insurance covers the decline in price that occurs during the crop's growing
season. It does not 'cover declines that may occur from one growing season to another. That
would. be called "price support," and would raise a series of complex agricultural-policy and
international-trade issues.

1.4.2.7 Fidelity bonds

A fidelity bond is a fo1m of protection that covers policyholders for losses that they incur as
a result of fraudulent acts by specified individuals. It usually insures a business for losses
caused by the dishonest acts of its employees.

While called bonds, these obligations to protect an employer from employee- dishonesty
losses are really inurance policies. 52 These insurance policies protect from losses of
company monies, securities, and other property from employees

who have a manifest intent to cause the company loss. There are also many other forms of
crime-insurance policies (burglary, fire, general theft, computer theft, disappearance, fraud,
forgery, etc.) to protect company assets.

1.4.2.8 Trade Credit Insurance

Trade credit insurance, business credit insurance, export credit insurance, or credit insurance
is an insurance policy and a risk management product offered by private

insurance companies and govermenental export credit agencies to business entities wishing to
protect their balance sheet asset, accounts receivable, from loss due to credit risks such as
protracted default, insolvency, bankruptcy, etc. This insurance product, commonly referred to
as credit insurance, is a type of property

& casualty insurance and should not be Confused with such products as credit life or credit
disability insurance, which the insured obtains to protect against the risk of loss of income
needed to pay debts. Trade Credit Insurance can include a component of political risk

29
insurance which is offered by the same insurers to insure the risk of non-payment by foreign
buyers due to currency issues, political unrest, expropriation, etc.

This points to the ma1or role trade credit insurance plays m facilitating international
trade. Trade t{:edit is offered by vendors to their customers as an alternative prepayment or
cash on delivery terms, providing time for the customer to generate income from sales to pay
for the product or service. This requires the vendor to assume non-payment risk. In a
local or domestic situation as well as, in an export transaction, the risk increase when laws,
customs communications and customer's reputation are not
fully understood. In addition to increased risk of non payment, international trade
presents the problem of the time between product shipment and its availability for sale. The
account receivable is like a loan and represents capital invested, and often borrowed, by the
vendor. But this is not a secure asset until it is paid: If the customer's debt is credit insured the
large, risky asset becomes more secure, like an insured building. This asset may then be
viewed as collateral by lending institutions and a loan based upon it used to defray the
expenses of the transaction and to produce more product. Trade credit insurance is, therefore,
require finance tool

1.4.2.9 Livestock insurance

This category of insurance is one of the important categories of insurance irt the rural sector.
It is explained that livestock insurance aims to provide protection

mechanism to the farmers and cattle rearers against any eventual loss of their animals due to
death and to demonstrate the benefit of the insurance of livestock to the people and
popularize it with the ultimate goal of attaining qualitative improvement in livestock and their
products. This category sees the benefit of the rural sector as its main priority. The major
beneficiaries under this form of insurance are farmers (large/small/marginal) and cattle
rearers. This is an insurance scheme sponsored by the Central Government with budgetary
allocation.

A centrally sponsored scheme Livestock Insurance, was implemented on pilot basis during
the years 2005-06 and 2006-07 of the 10111 Five Year Plan and 2007- 08 of the Eleventh
Plan in I 00 selected districts across the country. Under the Scheme, crossbred and high
yielding cattle and buffaloes were insured at

maximum of their current market value. The premium of the insurance was subsidized to the
tune of 50% by the Central Government. Rest 50% of the premium was borne by the
beneficiaTies.

Implementation of the scheme during 2008-09 and remaining years of the XI Plan
(proposed):

The scheme was in effective, implementation for about 19 months during the financial years
2005-06 to 2007-08. The scheme was evaluated independently by Institute of Rural
Management, Anand during the year 2007-08. Based on the findings and suggestions of te

30
study, a fresh proposal for implementation of the scheme is being prepared for
implementation during 2008-09 and remaining years of the Eleventh Plan.

Under the Livestock Insurance ie Policy, cover is provided for the sum insured or the market

value of the animal at the time of death whichever is less. Animals are normally insured up to
100 percent of their market vaue. The "Cieneral Insurance Corporation of India (GIC)
implements various cattle insurance programmes.

1.5 Hypothesis of the Research

The present research is undertaken to understand and highlight the new vistas in legal
delineation of the insurance activity. This research makes an ill depth analysis of the pre- and
post-liberalization stages in the Indian insurance industry.

The researcher believes that the judiciary has in a very innovative manner made the insurance
industry more responsible and responsive to the needs of the policyholder.

31
 CHAPTER TWO
OVERVIEW OF INSURANCE LAWS IN PRE-
CONSTITUTION INDIA
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
(Manusmrithi), Yagnavalkya (Dharmasastra ) and Kautilya (Arthasastra ). The writings talk
in terms of pooling of resources that could be re-distributed in times of calamities such as
fire, floods, epidemics and famine. This was probably a pre-cursor to modem day insurance.
Ancient Indian history has preserved the earliest traces of insurance in the form of
marine trade loans and carriers' contracts. Insurance in India has evolved over titne heavily
drawing from other countries, England in particular.

Modem Insurance industry in India, like most other businesses, has its origins in the colonial
period. The first traces of the origins of this industry can be dated to the nineteenth century.
The beginnings were in the form of a few companies largely catering to the insurance
and protection needs of the urban colonial India. The early decades of the nineteenth
century saw insurance activity finding commercial roots largely in the Presidency towns.
Bach of these presidencies saw insurance business of some kind or .the. other cropping up.
These businesses largely catered to the commercial interests and their protection.
Though this period saw the first origins of the life insurance business, the other
categories of insurance took their firm roots. This chapter explores the history of the
insurance sector in India, in the colonial and pre-constitution era. It attempts to look at the
origins of both the life insurance as well as the general insurance sectors.

2.1 The Colonial Period

The colonial era saw a mushrooming of insurance business in India, catering to almost all
categories of insurance that can be conceived . of. It could be emphatically said that
the foundations of a sound industry were sown in the early decades of the nineteenth century
itself. In fact it would not be an overstatement to say that the British era saw more than 130
companies dealing in insurance business, both life and non-life. The first known attempts of
insurance business in India was in the year 1818 by the Oriental Life Insurance company in
Calcutta, but this business failed in the year 1834. Later Madras Equitable began its business
in the Madras presidency in the year 1829.Apart from these two attempts it was rather a dull
phase which was largely attributed to the inexperience and mismanagement of these foreign
insurance companies.

This era, however, was dominated by foreign insurance offices which did good business in
India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe
Insurance and the Indian offices were up for hard competition from the foreign companies.2
Some of the important characteristics of the insurance industry during this period have been
high premium quotient, absence of fair value of the insured product and a sectarian and
unequal approach to providing insurance contracts by these companies. These features will be
discussed in this chapter.

32
Also the colonial period saw the growth of indigenous companies and finding their place in
the business. Many Indian companies have entered the industry during this period, but they
had to face problems in the shape of prevailing prejudice against life insurance and also the
natural ignon:mce of the people. 3 This chapter also traces the origins bf the Indian insurance
offices in this sector.

The early years of the twentieth century saw the Government involving itself in the activities
of this industry. But such involvement was very much peripheral in the beginning largely
catering to the publishing of returns of these companies. This publication procedure helped
the government have some level of minimal information about the happenings of the
insurance industry. The Government

interest was restricted only to this • activity and was not connected •to any regulatory activity
or such other functions; The publication rule could not serve any major purpose like public.
information or notification. The major benefit that came out of this publication of retums was
that the government could now have information as to who. was operating as ihsurers in the
industry. This puolication activity continued for a couple of yeats till 1928 when a
comprehensive statutory effort was made by the Government of India.

2.1.1 Early Twentieth Century Governmental regulation

Earlier to 1928, there were a few sporadic attempts by the Governtrtent. Some of these
attempts are:

1) In 1914, the Government of India started. publishing returns of Insurance Companies

in India.

2) The Indian Life Assmance Companies Act, 1912 was the first statutory measure to
regulate life insurance business.

It is pertinent here to understand the reasons that necessitated the government's involvement
and interference with the Industry. A little overview of the origin of the Industry is discussed
here. ;

2.2 Nature of the Insurance Industry in India •

Insurance industry in India has been categorized under the life and non-life general
insurance businesses.. Though the initial steps were taken by: the life insurance business, the
beginnings saw a film footing of the non-life general insurance business and the life
insurance business was only a bare minimum. The reasons for this will be discussed in the
forthcoming paragraphs, but •it is pertinent here to make a mention here about the first
beginnings of the Industry.

1818 saw the first foundation of the Industry in India. Life insurance in the modem form was
set up in India through the British company called Oriental Life Insurance Company. This
Company however failed in 1834. Similar efforts were made in other presidency towns.
These efforts were the Bombay Assurance

33
Company in 1823 and the Madras Equitable Life Insurance Society in 1829. In 1829, the
Madras Equitable had begun transacting life insurance business in the Madras Presidency.
1870 saw the enactment of the British Insurance Act and in the last three decades of the
nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897)
were started in the Bombay Residency. This era, however, was dominated by foreign
insurance offices which did good business in India, namely Albert Life Assurance, Royal
Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard
competition from the foreign companies, which had much indirect support from the inaction
of the government in this sector.

2.2.1 Insurance practices adopted by non-Indian insurance offices

Some of the characteristic features of the insurance business of these companies were,
they all operated in India, but they did not cater to the needs of the Indians.

l}:1 Jie insured the lives of non-Indians working in India, the British employees of HTAKt
East India Company only. They did not concern themselves with the

$1• ance needs of the native population. The simple and clear reason explained was that
native Indian lives were not worth the trouble and bother of insurance.

Some of the companies did change their business methods a little later and did extend their
business to the native population. But they adopted different standards for contracting
insurance with the native population. Some of these whimsical standards are, treating native
Indians as 'substandard' and using such basis while deciding the terms of contract of
insurance, charging an extra over the premium, sometimes this extra could be as much as a
phenomenal 20% over and above and in addition to the normal premium of the insurance
contract. The idea of fair value of contracts which is a prime feature of the insurance business
was unknown in India as far as the native population is concerned. It was only in the second
half of the nineteenth century, 1871, to be specific, that the idea of fair value was introduced
in the insurance contracts for native Indians, thanks to the large-heaiiedness of the company
by name the Bombay Mutual Life Assurance

Society. A certain level of equality and parity was thus introduced into the life insurance
business in India.

The recital in the preceding paragraph was in regard• to the life insurance business. The non-
life general insurance was more entrenched in India. . The history of general insurance
dates back to the Industrial Revolution in the west and the consequent growth of sea-faring
trade and commerce in the 17th century. 1 It came to India as a legacy of British occupation.
The first general insurance company, Triton Insurance Company Limited was established in
1850 in Calcutta. It was owned and operated by the British and catered to the insurance needs
of only the British population, as has been the general characteristic of the insurance business
•

in India. In 1907, the Indian Mercantil Insurance Limited, was set up. This was

34
the first company to transact all classes of general insurance business.

The first indigenous company in the non;..life general insurance business was the Indian
Mercantile Insurance Company Limited set up in Bombay in 1907.

By 1938, the Indian insurance industry was flourishing, there were a phenomenal number of
176 companies, both life and non-life, functioning with every :possible business practice,
both legal and illegal, with a minimal interference from the government, especially with
regard to insurance practices concerning tlie native population.

2.3 The Initial Legislative Attempts

While there was a mushrooming of the players in the insurance business at the dawn of the
century, most of them functioned according to the needs• of their balance sheets, rather than
on any specific standards and .' regulations. The situation is even more surprising to believe
when we find that unscrupulous trade

practices were adopted by the foreign companies in India, a practice that they desist from in
the country of their incorporation and registration.

Also this was the period when swadeshi movement was finding feet in India; and the
activities of the swadeshi movement were beginning to show their effect on

the Indian industry, insurance sector being no exception. The swadeshi movement gave
encouragement to the indigenous talent and capital.4

Another reason that influenced government's interference were the practices adopted by the
industry for its functioning. Most of the companies did not really publish their premium rate
tables and there was no authoritative record of the premium rates. As was mentioned earlier
in this chapter, premium rates were largely decided upon individual needs and status, race
also being a deciding factor. Again even after 1912, when the government made it mandatory
to publish insurance details, most of the companies did not publish and where they did
publish, the figures suffered from various anomalies ranging from unexplained figures to lack
of certification of premium rates tables by actuary. Also the regulation of publication of
periodical valuations along with their certification was largely known only for its non-
compliance. Disparage still existed as discrimination between Indian and foreign companies.
Fraud was also a feature that was plaguing the insurance industry at this time.

The government sought to correct the systemic errors in the industry, by enacting legislation
for the regulation of the insurance industry. The Indian Life Assurance Act (Act 6) of 1912
was enacted on the lines of the English Assurance Companies Act of 1909. This and the
Provident Fund Act, 1912 put together are the first authoritative statements on the insurance
industry in India.

2.3.1 The Indian Life Assurance Act, 1912

Enacted as Act 6 of 1912, this small piece of legislation achieved much more than its volume.
It had, at least on paper, removed the discrimination that existed between the foreign and the

35
just initiated Indian companies. But more important than this is the authoritative recording of
Indian insurance that it made mandatory. The legislation made it compulsory for every player
in the industry to submit a signed statement periodically recording the returns of the
company. Such returns submitted by the company shall be published by the Government of
India after

Murhty and Sarma, Modern Law oflnsurance 4u' Ed. 2002, at P.No.8.

verification. Experts inthe .field felt.tha .his,regulation ensured the presence of some level of
governmental control, even .if. its minimal. The limited purpose served by this legislation
was that it allowed a parity for Indian players in the sector along with the British, and it
brought some faith to the sector which was plagued with fraud and fraudulent figures? Most
importantly an authoritative recording of Indian insurance began with this legislative effort.

2.3.2 The Place of the Indian insurance offices in the industry

Before we get on to the next legislative effort, a brief recital of the history in the interregnum
period should be mentioned here. The period between the two world wars, saw an economic
slump because of the war. Also the swadeshi movement

gave an impetus to the Indian industry;:but this had its pitfalls too. The sudden growth of
business brought with • it the evils of accumulation of wealth in unexplained methods and
inexperience in business. 6 The economic slump' resulted in the business struggling for
growth. Many small companies that . have found their origins thanks to the changes in the
political climate, had to wind up and the few that survived found the going tough from the
flourishing foreign companies.

Persistent demands were made at various public forums in the country for statutory protection
which would standardize rules regarding disclosure and publication of the business carried on
in India by foreign companies.

2.3.3 The Indian Insurance Act, 1928

1925, a comprehensive piece of insurance legislation was to be passed but it was postponed
because the Government of India thought it necessary to understand the working of the
legislation on insurance law.:in,.England. Mr. AC Clauson, K.C. was appointed to revise the
insurance legislation in that country.

While the report of the Clauson committee could not be acted upon in a legislative effort,
attempts were still on to review the working and performance of this

sector. The government of India passed a legislation in 1928 called the Indian Insurance
companies Act for the purpose collecting statistics regarding insurance sector so that the
information collected would be of value when a comprehensive

legislation would be enacted.8 This act of the government goes to prove that the

36
government was seriously concerned with the regulation of the insurance business activity in
India and also made positive efforts to fill in for a comprehensive legislation till it was
enacted. It was in fact known as a the precursor to a complete legislative effort by the
government.

2.3.4 The Insurance Act, 1938

The next legislative effort was in 1938, based on the report submitted by Shri SC Sen,
appointed by the government to investigate and suggest reforms in insurance law. Shri Sen's
report was fmiher supplemented by the Shri NN Sircar committee which examined the report
of Shri Sen. A draft insurance bill was introduced in

1937 and it resulted in being approved and enacted as the Insurance Act, 1938.9

The basic objective of this legislation is to protect the interests of the general public
contracting insurance policies from fraud and maladministration by the insurance companies.
The legislation was the first example of an authentic statutory definition for life insurance
business in India. It defined life insurance business as

"life insurance business" means the business of effecting contracts of insurance upon human
life, including any contract whereby the payment of money is assured on death (except
death by accident only) or the happening of any contingency dependent on any human
life, and any contract which is subject to the payment of premiums for. a term 10dependent
upon human life and shall be deemed to include,

a) The granting of disability and double and triple indemnity accident benefits, if so
provided in the terms of the contract of insurance,

Herein after read as The Indian Insurance Act,(Act 4 of 1938) 1938.

10 Section 2(11) of The Insurapce Act, 1938.

b) The granting of annuities upon human life;

c) The granting of superannuation allowances and annuities payable out of any fund
applicable solely to the relief and maintenance of persons engaged or

who have been engaged in any particular profession, trade or employment

or of the dependents of such persons.

2.3.4.1 Salient Features of The Insurance Act, 1938

1. It attempted to regulate every aspect of insurance business, life and non-

life general insurance.

2. It eliminated discrimination between the foreign and the native players in the
insurance business, thus ending the monopoly of the foreign insurance companies.

37
3. It made specific rules with regard to registration of the insurance business and ordered
certification of the soundness of the terms of the life insurance

business before a certificate of registration or its renewal is issued.

4. The next important provision was with regard to the capital structure of the insurance
company. The legislation fixed a minimum needed equity paid-up .capital of Rs. .100 crores
for any person starting busines in life insurance or general insurance. 12 The efficacy of this
section wa:s furthe reinforced by the proviso attached to the section which said th'.at while
calculating such capital, the deposit to be made under section 7 • and any preliminary
expenses incurred in the formation and registration of the company shall be excluded.

5. Certification by the qualified actuary made compulsory

6. Made it compulsory for all the insurance businesses to cater a prcentage of their
business to the: rural sector, dealing with crop insurance, ihsurance needs of the people
working in the unorganized sector, the weaker sections

11 Sections 3, 3A and 3B of the Act of 1938.

12 Section 6 of the Act. of the society and such other categories specified by the
regulatory authority.

7. Most importantly a regulatory authority was put in place whose role begins with the
beginning of the insurance business activity, to be more specific, granting registration and
certification to initiate the business, receiving periodical rep01is of the business, inquiring
into the capital structure and utilization periodically and such other activities as the regulatory
authority may feel necessary. The authority shall have control over the management of the
insurance company in the sense that it could make rules for supervision including the power
to specify rules for appointment of managing directors and also order removal of the
management officials on suspicion of fraud or fraudulent practices.

8. Most importantly, the legislation prevented investment of funds generated in India

outside the country, the effect being that several foreign offices discontinued their businesses
in India as they were not able to plough back the funds to their parent companies outside the
country.

9. Sec.33 of the Act provides teeth to the entire legislation. It ensures that the
government has control over the insurance industry and the businesses involved in it. The
section reads as follows:

Power of investigation and inspection by Authority 13

(33). (1) The Authority may at any time, by order in writing, direct any person (hereinafter in
this section referred to as "Investigating Authority") specified in the order to investigate the
affairs of any insurer and to report to the Authority on any investigation made by such
Investigating Authority:

38
Provided that the Investigating Authority may, wherever necessary, employ an auditor or
actuary or both for the purpose of assisting him in any investigation under this section.

(2) Notwithstanding anything to the contrary contained in Section 235 of

13 S.33, The Insurance Act, 1938.

the Companies Act, 1956 (1.of.•1956), the Investigating Authority may, at any time, and
shall, on being directed so to do by the Authority, cause an inspection to be made by one or
more of his officers of any insurer and his books and accounts; and the Investigating
Authority shall supply to the insurer a copy of his report on such inspection.

(3) It shall be the duty of eatery manager, managing director or other officer of the insurer
to produce before the Investigating Authority directed to make the investigation under sub-
section (1) or inpection under sub-section (2), all such books of account, registers and other
documents in his custody or power and to furnish him with any statements and information
relating to the affairs of the insurer as the said Investigating Authority may require of him
within such time as .the said Investigating Authority may specify.

(4) Any Investigating Authority, directed to make an investigation under

subsection (1), or inspection under sub-section (2) may examine on oath, any manager,
managing director, or other officer of the insurer in relation to his bossiness and may
administer oaths accordingly.

(5) The Investigating Authority shall, if he has been directed by the Authority to cause an
inspection to be made, and may, in any other case, report to the Authority on any inspection
made under this sectiod. (4) On receipt of any report under sub-section (1) or under sub-
section. (5), the Authority may, after giving such opportunity to the insurer to , make a
representation in connection with the report as in the opinion of •the Authority, seems
reasonable by order in writing,-(a) require the insurer

to take such action in respect of any matter arising out of _the report as the Authority may
think fit; or (b) cancel the registratiort of the insurer; or

(c) direct any person to apply to the Court for the winding up of the insurer, if a company,
whether the registration of the insurer has been cancelled under C1ause (b) or not.

(7) The Authority may, after giving reasonable notice to the insurer publish the report
submitted by the Investigating Authority under sub-section (5) or such portion thereof as
may appear to it to be necessary.

(8) The Authority may prescribe the minimum information to tee maintained by
insurers in their books, the manner in which such

.information should be maintained, the checks and other verifications to be adopted by

insurer, necessary to enable the Investigating Authority to discharge satisfactorily his
functions under this section.

39
Explanation-for the purposes of this section, the expression "insurer" shall include in the case
of an insurer incorporated in India-

(a) all his subsidiaries formed for the purpose of carrying on the business of insurance
exclusively outside India; and

(b) all his branches whether situated in India or outside India.

(9) No order made under this section other than an order made under Clause (b) of sub-
section (6) shall be capable of being called in question in any Court.

(10) All expenses of, and incidental to, any investigation made under this section shall be
defrayed by the insurer, shall have priority over other debts due from the insurer and shall be
recoverable as an arrear of land revenue.10. The legislation also talked about amalgamation
and transfer of insurance business. Section 35 of the Act ordains that no person or persons
shall transfer or merge or amalgamate the insurance business activity without the permission
of the Specified Authority. Such a transfer or amalgamation of the business with any other
insurer can happen only under a scheme prepared and certified by the Authority under this
Act.

11. The Act made specific provisions for non-life mutual insurance policy business also

12. Most importantly, the legislation made protection measures for small life insurance
policy holders.

The Act also envisaged the establishment of a Tariff Advisory Committee as a statutory body
under the enactment. The Tariff Advisory Committee controls and regulates the rates,
advantages;. terins and conditions that may be offered by insurers in respect of General
Insurance relating to Fire, Marine (Hull), Motor, Engineering and Workmen Compensation.
The fundamental success achieved by,. this legislatioh related to removal of the disparage
because of the discrimination between the foreign and native msurance companies. this
legislation enunciated uniform control by government over all the insurers, thereby offering
psychological sola6e to the fledgling native insurance industry.

2.4 The Period of Stabilization

The years between 1938 and 1950 s seen as the period of stabilization and growth. The
regulations imposed bi'the Insurance Act, 1938, espedally the uniform regulation and
supervision of the insurance industry, coupled with the rules regarding publication of returns
certification procedures, made it difficult and financially unviable for the foreign players in
the insurance industry.

Firstly, there was the regulation that restricted the transfer of capltal and assets outflow from
the country. 15 This made it difficult and prctically impossible for the foreign players to
operate in the Indian scenario; as they could not transfer their company earnings to their
parent organization in

40
England, through the guise of investment of funds outside the country. Thus the major
activity of these companies that is ploughing back of funds to the parent company is barred,
reducing their interest in managing ah India

operations. Also too many regulations and restrictions on the conduct of business and
maintenance of reserve funds to meet business commitments left too little to independent
functioning of these companies, which they had hitherto enjoyed. 16 For example, Sec.27
states that every insurer shall maintain a cash asset reserve to the amount equivalent to the
sum of -

14 http://www.banknetindia.com/finance/irda.htm visited on 29-01-2009.

15 Section 27C imposed a prohibition of investment of funds outside India.

16 Section 27, The Insurance Act, 1938.

(a) the amount of his liabilities to holders of life insurance policies in India on 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 whose
business he has acquired and in respect of which he has assumed liability in the manner
following, namely, twenty-five per cent of the said sum in Government securities, a further
sum equal to not less than twenty-five per cent 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 over investment.

The section further prohibits investment of funds in securities, debentures or as first

mortgages in any manner except in those specified in the legislation provision, referring to
those securities and debentures issued or approved by the Government in the UK or the state
government in India. This section meant that every rupee of the money collected by these
insurance companies is now subjected to significant scrutiny by the State at the time of the
registration as well as at continuous intervals. This dissuaded the foreign companies from
continuing their business activities in India and slowly they started leaving the Indian
business.

Spurred by the absence of foreign competition, the Indian offices gained stability.

They also set about the task of repairing their damaged businesses; which suffered from
inexperience and mismanagement. They brought about changes in their office organization,

41
terms and conditions of their policies to brin,g it in synchronization with the requirements of
the 1_938 legislation.

The changing political climate also furthered the cause of the industry to a very large extent.
Post-II World War, the Swadeshi movement gained strength from the soaring national spirit.
The Indian industries started to come out of their post- natal problems and were beginning to
find a firm footing. Insurance sector was one such sector which drew large capital
investments, especially in the' area of general insurance. The sector itself gained much from
the increasing industrial

activity. These insurance companies hared a symbiotic growth with the developing
industrial economy, as they -in tum invested funds in the developing industries.

The pitfalls were there, in the shape of mis-investment of insurance funds for the un-
businesslike purposes. Too inquire into such reported malpractices, a . committee
was set up undet Sir Cowasji Jehangir in the year 194$. This committee reported
rampant malpractices in the investment of funds held by the insurers. To overcome these, the
Insurance Act, 1938 was amended sevetai times bringing in new regulations. Apart from this,
another incident that happened in 1944 gave a jolt to the Indian insurance industry. The
explosion on board the SS Fort Stikine in April 1944, came as a bolt from the blue for an
industry that's just beginning to take shape as a professional industry, coming out of problems
resulting from inexperience, misadministration and external competition.

As if that wasn't enough for the industry's woe, the partition •0£.the.country had its effect on
the insurance industry ton. A huge migration of • population, unprecedented in recorded
human history of recent times, also meant that the industry dealing with their insurance needs
is put on the back foot. .A good number of policy-holders had rto leave their policies. While
the modalities on the

17 Supra note 4 at page 8.

transfer of offices and policies was still being worked out, the Indian government devalued
their currency, but the Pakistan currency was not devalued, thus creating problems for
insurance valuatfons and transfers.

To overcome these problems the Government of India set up a committee under Sir SR
Ranganathan to inquire and review the insurance laws in the country. A report was submitted
by this committee which formed the foundation for an amendment to be made to the 1938
legislation. The Indian Insurance Amendment Act was passed in 1950. Sweeping changes
were made in the legislation, to make insurance more relevant for economic development.

2.5 Salient Features of the Amendment Legislation

1) Establishment of an office of the Controller of Insurance

2) Constitution of two councils - one for life insurance and the other for general
insurance -whose role shall be advisory as well as supervisory.

42
3) Made provisions for the appointment of investigators and administrators for ill-
managed and sick companies.

4) Most importantly, the legislation made significant changes with regard to the
investment of funds by the insurers.

5) To quell the drain of . valuable foreign exchange resources, compulsory insurance

with Indian insurers was insisted upon by the amendment. 18

6) Abolished Principal Agencies.

7) The attention of the amendment was also directed at quelling the malpractices
indulged in by the insurers.

The amendment has inserted new sections in the 1938 legislation. Sections 52A to 520 have
been added in the chapter on mC)nagement of the insurance company by the administrator.
They have been added by S.45 of the Amendment Act, 1950.

18 Supra note 4 at page 9.

These new sections explain when '11h •,administrator could•be appointed and the powers and
duties of the administiatpr ard the penalties for withholding evidence from the administrator.
The administator is appointed upon a report by the Authority. Section 52A(clause 2) reads• as
follows:

(2) The Central Government, if it is of opinion after considering the report that it is necessary
or proper to do so, may appoint an Administrator to . manage the affairs of the insurer under
the direction and control of the Authority. Section 52A Clause 6 reads as follows:

(6) The Authority may issue such directions to the Administrator as to his powers and duties
as he deems desirable in the circumstances of the case, and the Administrator may apply
to the Authority at any time for instructions as to the manner in which he shall conduct the
management of the business of the insurer or in relation to any matter arising in the course of
such management.

Such an appointed administrator has vast powers ranging from activities pertaining to
requiring information and evidence, prohibiting hitherto managers of the business from
involving themselves with the concern, to proceedin' g with

attachment of prope1iy pending investigation proceedings. If the adminitrator is satisfied that

any person is likely to be proceeded against for such malpractices under the legislation, he
may pending institution of proceedings prohibit that

person from any property or prevent him from disposing of any property that is likely to be
part of attachment iproceedings. The powers exercised by the administrator for the purposes
of investigation are of quasi-judicial nature, and the proceedings are treated as procee.dings
before the court. Section 52BB clauses 8 and 9 read as under: (8) For the purpose of
enabling him to form an opinion as to whether any property would be liable to attachment in

43
proceedings under Sec. 106 or for the purpose of 19 Section 52BB of the Insurance Act,
1938 as inserted by InsuranceAmendihent Act, 1950 (Act XLVH of 1950). enabling him to
institute proceedings under that section, the Administrator may require any person to furnish
information on such points or matters as, in the opinion of the Administrator, may be relevant
for the purpose, and any person so. required shall be deemed to be legally bound to furnish
such information within the meaning of Sec. 176 of the Indian Penal Code (45 of 1860).

(9) The Administrator shall have all the powers of a civil court under the Code of Civil
Procedure, 1908 (5 of 1908), while trying a suit in respect of the following matters, namely:

(a) summoning and enforcing the attendance of witnesses and examining them on oath;

(b) requiring the production of documents; and

(c) receiving evidence on affidavits, and any proceeding before the Administrator under
this section shall be deemed to be a judicial proceeding within the meaning of Sections J 93
and 228 of the Indian Penal Code (45 of 1860). The importance attached to this power of the
government is further reinforced by Section 52E which is in the following language.

52E. Any order or decision of the Central Government made in pursuance of Section 52-A or
Section 52-D shall be final and shall not be called in question in any Court.

The amendment also prescribes penal provisions for withholding information from the
administrator. Section 52F prescribes the quantum of penalty and this applies to both the
directors, officials of the insurer and any other person having relevant info1mation or is under
such obligation to give information.

52 F If any director or officer of the insurer or any other person fails to deliver to the
Administrator any books of account, registers, or any other documents in his custody relating
to the business of the insurer the management of which has vested in the Administrator, or
tetains ,any property of such insurer, he shall be punishable with imprisonment which may
extend to six months, or with fine which may extend to one thousand rupees, or with both.

The amendment also provides saving clauses for the action taken • by the government
under these newly added sections. Section 52 G provides: that no action shall lie against the
government for action taken by the administrator under the above mentioned sections.
Section 52G reads as follows:

52G No suit, prosecution or other legal proceeding shall lie against an Administrator for
anything which is in good faith done or intended to be• done in pursuance of Section 52-A,
Section 52-B, Section 52-BB or Section 52-C.

(2) No suit or other legal proceeding• shall lie against the Central Government or the
Authority for any damage caused- or likely to be caused by anything which is

in good faith done or intended to be done under Section 52-A, Section ?2-B, or Section 52-D.

44
These provisions served a two-fold purpose. They had served as guiding standards for an
industry that's trying to find its feet, especially when thF Indian insurance offices were trying
to find their own space and stand up aginst the foreign insurance companies. These
provisions helped the industry streamline its administration and also ensured that the
insurance business takes the cohcept of securitization with great value and maintains
transparency in its terms of dontracts and the maintenance of their books ofrecord.

The Insurance Act, 1938 coupled with the Insurance Amendment Act, 1950 served as a
blueprint for the insurance industry, which was trying.:to learn[from its past mistakes and
misdemeanors. An analysis of the 1938 Act shows ithat the government had very carefully
worded every section in the legislatidn while keeping the needs and the security of the
policy-holder as its fundamental priority.

Also they were a great help in making the insurance .sector fall in line ith the economic
objectives of the country, a socialist form of governance. The new additions especially firmed
up the position of the government with repect to regulating the functioning of the insurance
industry. This amendment further brought in regulations with regard to checking unfair trade
practices adopted by the insurers. Very few legislations in India are as comprehensively
worded as the Insurance Act, 1938 and the 1950 amendment. With the passing of this
amendment, the regulation has now entered a 180 degrees angle. The two legislations stand
as the bulwark of the insurance laws in India which are referred to even today for any
authoritative statement and for change and adaptation to the current economic and social
needs.

It is time to understand the development of the insurance industry in India, albeit figuratively.
The following table depicts a study on the growth of the insurance business in India. It makes
a systemic analysis and gives us an understanding on the indigenization of the industry. The
researcher understands that the scholar who undertook this study figuratively tried to
demonstrate a comparative growth chart not just of the insurance business in India, but also
the nature of players involved as insurers. The study looks at the insurance industry before
1938 and after the first comprehensive legislation.

20 Supra note 3 at page 381.

The researcher understands that the i:eason• for initiating the analytical study has been that
1928 marked the legislative effort of the Government of India, The Indian Insurance
Company Act. The study tried to analyze the presence of foreign and Indian players in the
insurance industry. It is _noticed that that number of non-Indian offices in the insurance
•sector in the year 1928 was more than a third higher than the Indian offices.

While in the year 1929, there was a percentage growth in the number of offices of both the
Indian and non-Indian insurance offices in India, the percentage graph changed drastically in
the year 1938, the year of the government of India's comprehensive legislative effort, the
Indian Insurance Act, 1938. The table shows that while there was a quantum leap in the
number of Indian players in the industry, from 108 to 200, that's nearly a;hundred percent

45
rise, there was in fact a reduction in the number of non-Indian insurance offices, even if its
marginally. The legislation has in fact reversed the discrimination suffered by the Indian

insurance offices in the last quarter of the nineteenth century and the early ''decades of
the twentieth century.

It is noticed by the researcher that while there has been a steady increase in the number of
Indian insurance offices since the passing of the legislation, there has in fact been a steady
decline in the number of foreign insurance offices :in India. This fact goes to show what was
explained in the preceding pages, that while the government stepped in to legislate and
regulate the industry, it was in fact seen as being difficult for foreign offices to function,
the reasons being they were subjected to heavy regulation and reporting and then they
could not transfer funds outside India. This appears to be the reason for a reduction in the
number of non Indian insurance offices. But more importantly the growth of. Indian industry
and its influence on the insurance coupled with the changing political climate can be said to
be the reasons for the increase of Indian insurance offices.

From the times when it was left as an independent enterprise to a little more than a century
and a half later, we find that there is a comprehensive legislative set-up creating a role for the
government right from the inception of business to its functioning, and if found necessary,
the winding up too. These legislative attempts put together slowly but steadily created a
space for government to bring in its regulatory agenda based on socialist principles and
further in time, the goals of nationalization of the sector itself, life insurance business, to be
specific.

By the time independent India declared itself as a free Republic and gave itself a constitution
in the year 1950, the industry was well-entrenched in the country, catering to a variety of
insurance needs, life and non-life general insurance, with a plethora of policies and variations
in policies, especially in the non-life general insurance industry. Indian insurers were offering
insurance contracts for marine insurance, fire insurance, risk insurance and even there was a
semblance of crop insurance too. There were around 170 insurance companies and 80
provident fund societies in the country's life insurance scene. However, in the absence of
regulatory systems, scams and irregularities were almost a way of life at most of these
companies.

46
 CHAPTER . THREE

STATUTORY REGULATION OF INSURANCE INDUSTRY

By the year 1950, the insurance industry has become well-entrenched in India. As explained
in the previous chapter at the dawn of the Republican governance there were about 170 risk
insurance and another 80 provident fund securities fully operational and providing security
instruments for the population and also meeting the industry needs. While there has been a
good amount of legislative Activity before independence, most of the legislations made by
the British, despite being comprehensive, were falling short in regulating unfair trade .

practices and also i:eporting of the net,.:assets held on date by these insurance compames.
Also the insurers have be.en left with a complete freedom to determine the insurance terms,
which was often tilted towards the benefit of the insurer company rather than the insured
person. This situation often resulted in denial of insurance benefits to the people in dire need
of it. Also the industry, despite legal regulation, could not fall in line with the national policie
s of the country, which were socialist and high social security oriented. The unfir trade
practices adopted by the insurrs and the insurer agents were the last straw in the problematic
situation of a failing industry. This situation forced the government to do some strong re-
thinking on the role of this industry in national devefopment and social security.

In the previous chapter the researcher has explained the nature of the ir).surance industry at
the dawn of independence and the legislative support that was given for the flourishing of
the industry. The researcher also explained that the overnment's intention in making
legislative regulation was also influebced by the nationalist agenda that it had given itself, to
work for a flourishing ocialist economy, with the needs of the common man answered with
the same priority as that of a mart with means. Also the industry and the econmny shall be
State- managed or function with effective State-control. The constitution that was drafted for
independent India also gave a mandate to the government to work for the economic
development not just of the country, but also of its people, pursuing a welfare and a social
security agenda ensuring the safe and fulfi,lled lives of its citizens.

Keeping this agenda in mind and also the reasons for interference in the industry that was
necessitated by the industry's functioning, the Government of India decided upon some strong
measures, of much farther concern than making legislative provisions as and when they were
felt necessary. As has been mentioned in the ptevious chapter at the time of independence
there were about 250 insurance institutions 1 offering a variety of products, life and non-life
general insurance, to meet the needs of the domestic individual as well as industrial sector,
fully operational.

3.1 The Imperative for Nationalization

This chapter is devoted to explaining the various steps taken by the government of India post-
independence towards regulating the activities of the industry and ensuring that the insurance
industry conforms to its nationalist agenda and the constitutional mandate. As has been
discussed earlier, what spurred the governmental action was the unfair trade practices

47
adopted by the industry, and most importantly failing to meet the needs of insurance for the
common man despite being an indigenous institution.

Also the unfair trade practices that were adopted by the insurer/agent were to a large extent
directed at denying the insurance benefit to the common man, reducing therefore the security
benefit to a non-existent word.2

Also the insurer did not have an uniform risk assessment standard, which varied at his own
whimsical assessment.

Another common discrepancy that was noticed was with regard to the roles of the agent and
the certifying authority. While the 1938 legislation laid down in detail

www.kotaklifeinsurance.com/omkm3/htm on 5-02-09.

2 Arjun Bhattacharya et al. -Nationalization of Insurance business in India, working

paper, Centre for civil Society page no.379. the role and importance of the certifying
authority, these were there to a large extent in word and paper alone.

The most important reason that influenced the action of the government was something more
than just these unfair)i:ade practices. The state action was grounded on the fundamental
reason> of providing the security benefit ' for maximum number of people, .a fact that was
ignored by the insurance industry, even the indigenous institutions.

Another prime reason that pushed the nationalization agenda to the forefront was the utter
neglect of the rural sector by the insurance industry. While the 1938 legislation provided for a
variety of insurance products making insurance attractive to the rural sector, like crorr
insurance and farmer insurance, these

provisions largely remained unimplemented and remained a paper Activity.3

3.2 The Nationalization of The Insurance Industry

All the above mentioned reasons played a major role in convincing the 'government to
undertake major structural changes in the insurance industry, and not mere legislative efforts
aimed at regulating any one or a few i::naladies affecting the industry.. On the 19th of
January, 1956, the Government :of India

issued an ordinance nationalizing the life insurance business in India. At?out 250 companies
catering to the life insurance and provident fund securities needs of the population were taken
over by the State4 and brought under 'uniform administration and regulation through the
creation of a public sector government controlled corporation in the same year.5

It established a new institution catering to the life insurance neds•,of evety sector of the
population, the Life Insurance Corporation of India. The LIC absorbed 154 Indian, 16 non-
Indian insurers and 75 provident securities.

48
 CHAPTER - FOUR

INSURANCE INDUSTRY IN INDIA POST-LIBERALIZATION

With the largest number of life insurance policies in force in the world, I:i;isurance happens
to be a mega opportunity in India. It's a business growing at the rate of 15-20 per cent
annually and presently is of the order of Rs 450 billion. Together with banking services, it
adds about 7 per cent to the country's GDP. Gross premium collection is nearly 2 per cent of
GDP and funds available with LIC for investments are 8 per cent of GDP.• India is the 5th
largest market in Asia by premium following Japan, Korea, China and Taiwan. The US$ 30
billion insurance business in India is expected to grow 17 per cent in fiscal 2008-09* if the
country's economy clocks 7.6 percent GDP. In fiscal 2007-08 life insurers grew their business
by 23.3 • percent to Rs.930 billion while general •insurers posted growth of about 14 percent
in premium income to Rs 298 billion. Presently

the total number of insurers registered with the Insurance Regulatory and Development
Authority (IRDA) stands at 42 : 21 in life insurance and 21 general insurance segments

India is the fifth-largest country in Asia in terms of total insurance premium. The premium
income in the country increased to 4.7 percent of GDP in fiscal 2006-07 from 3.3 percent in
the fiscal 2002-03.Total premium in the insurance industry grew at a CAGR of 28.1 percent
during the same period. The life insurance sector grew at a CAGR of 29.3 percent
outsmarting the general insurance sector's CAGR of 21.3 percent.

The Indian insurance sector has a turnover of around Rs 26,287 crore. The current FDI in this
sector stands at around Rs 2500 crore and market experts expects FDI to zoom by about 2.5
times once the FDI cap is raised by another 23 percent to 49 percent.

4.1 Insurance penetration in India

Yet, nearly 80 per cent of Indian population is without life insurance cover while health
insurance and non-life insurance continues to be below international standards. And this part
of the population is also subject to weak social security and pension systems with hardly any
old age income security. India's insurance market lags behind other economies in the baseline
measure of insurance penetration. At only 3.1 percent, India is well behind the 12.5 percent
for the UK,

10.5 percent for Japan, 10.3 percent for Korea and 9.2 percent for the US. This itself is an
indicator that the growth potential for the insurance sector is immense. The following table
gives a graphic representation of the market penetration of the insurance business in India in
relation to its GDP, as compared to its Asian neighbours.

The above table goes to demonstrate the fact that life insurance is not a felt necessity in
India. Its purchase is driven by tax rebate and loan facilities.

A well-developed and evolved insurnce sector 1s needed for economic development as it

provides long term funds for infrastructure development and at

49
the same time strengthens the risk taking ability. It is estimated that over the next ten years
India would require investments of the order of orte trillion US dollar. The Insurance sector,
to some extent, can enable investments in infrastructure

development to sustain economic growth of the country.

4.2 A Brief Recall of the Facts that led to the Liberalization of the Insurance Industry

While it seems that there definitely was a lapse in the performance of the private insurance
companies prior to 1956, nationalization was probably not the only feasible option. The
Government should have realized as well as anticipated the potential problems common to all
Government departments and corporations. The LIC experienced similar problems faced by
the earlier big life companies. The main objective of the Government seems to have been
pooling in of people's money and mobilizing them 1 to invest in key sectors, which the
Govermrtent deemed important from the point of view of development. This is quite evident
from the fact that LIC was enacted in 1956, the year of the beginning of the Second Five-
Year Plan and the passing of the Industrial Policy Resolution. In the process, it was assumed
that private initiative, driven by profit motive, would not work in this area. The private sector
was believed to be indulging in speculative activities.

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 recources. 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. The initiative taken by the Government to open up the insurance sector in 1999 was
backed by the setting up of IRDA to regulate the insurance business. The Government, at the
time of nationalization, could have done the same. Instead of barring private initiative
completely, it could have set up a regulatory body to monitor the insurance business. This
would have taken care of the problem of speculative investments by the private companies.
Hence, in the light of the above, a partial nationalization of the sector would probably have
been a better option, with the private companies existing side by side thus keeping the
element of competition alive. It would have also served the objective of the Government of
reaching out to the masses of all strata and income groups.

4.3 Reforms in the insurance sector - Malhotra committee recommendations Although

Indian markets were privatized and opened up to foreign companies in a number of sectors in

50
1991, insurance remained out of bounds on both counts. The government wanted to proceed
with caution. With pressure from the opposition, the government (at the time, dominated by
the Congress Party) decided to set up a committee headed by Mr. R. N. Malhotra (the then
Governor of the Reserve Bank of India). Malhotra Committee Liberalization of the Indian
insurance market was recommended in a report released in 1994 by the Malhotra Committee,
indicating that the market should be opened to private-sector competition, and ultimately,
foreign private-sector competition. It also investigated the level of satisfaction of the
customers of the LIC. Curiousiy the level of customer satisfaction seemed to be high. The
union of the LIC made political capital out of this finding.

4.3.1 The Agenda before the Malhotra Committee The following are the purposes of the
committee.

(a) To suggest the structure of the insurance industry, to assess the strengths and
weaknesses of insurance companies in terms of the objectives of creating an efficient and
viable insurance industry, to have a wide coverage of insurance services, to have a variety of
insurance products with a high quality service, and to develop an effective instrument for
mobilization of financial resou.rces for development.

(b) To make recommendations for changing the structure of the insurance industry,
for changing the general policy framework etc.

(c) To take specific suggestions regarding LIC and GIC with a view to improve the
functioning of LIC and GIC.

(d) To make recommendations on regulation and supervision of the insurance

sector in India. (e) To make; recommendations on the role and functioning of

surveyors, intermediaries like agents etc. in the insurance sector.

(f) To make recommendations on any other matter which are relevant for development
of the insurance industry in India.

4.3.2 Recommendation s of the Malhotra Committee

The report of the committee submitted in 1994 had recommendations which can be broadly
categorized under the following heads:

(http://www.maoism.org/misc/india/J'upe/aspects26 _27/insurance.htm. on 22-2-2008.

4.3.2.1 Structure

Government stake in the insurance Companies to be brought down to 50%. Government

should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as
independent corporations. All the insurance companies should be given greater freedom to
operate.

4.3.2.2 Competition

51
Private Companies with a minimum paid up capital of Rs. lbn should be allowed to enter the
sector. No Company should deal in both Life and General Insurance through a single entity.
Foreign companies may be allowed to enter the industry in collaboration with the domestic
companies. Postal Life Insurance should be allowed to operate in the rural market. Only one
State Level Life Insurance Company should be allowed to operate in each state.

. 4.3.2.3 Regulatory Body

The Insurance Act should be changed. An Insurance Regulatory body should be set up.
Controller of Insurance- a part of the Finance Ministry- should be made independent.

4.3.2.4 Investments

Mandatory Investments of LIC Life Fund in government securities to be reduced from 75%
to 50%. GIC and its subsidiaries are not to hold more than 5% in any company (there current
holdings to be brought down to this level over a period of time)

4.3.2.5 Customer Service

It was suggested that the uc•be liable to pay interest on delays in payments and settlements of
claims beyond a period of 30 days. Insurance companies must be

encouraged to set up unit linked pension plans. Computerization of operations and updating
of technology to be carried out in the insurance industry.

The committee emphasized that in order to improve the customer services and increase the
coverage of insurance policies, industry should be opened up to competition. But at the same
time, the committee felt the need to exercise caution as any failure on the part of new players
could ruin the. public confidence in the industry. Hence, it was decided to allow competition
in a limited way by stipulating the minimum capital requirement of Rs. I 00 crores.

The committee felt the need to provide greater autonomy to insurance cdmpanies in order to
improve their performance and enable them to act as independent companies with economic
motives. For this purpose, it had proposed setting up an independent regulatory body- The
Insurance Regulatory and Development

4.3.3 Important recommend tions of the Malhotra committee

The committee made a number of important and far-reaching recommendations.

(a) The LIC should be selective in the recruitment of LIC agents. Trin these people after
the identification of training needs.

(b) The committee suggested that the Federation of Insurance Institute,, Mumbai should
start new courses and diploma courses for intermediaries of the insurance sector. The LIC
should use an MBA specialized in Marketing (a similar suggestion for the GIC subsidiaries).

(c) It suggested that settlement of claims were to be done within a specific time frame
without delay.

52
(d) The committee has several recommendations on product pricing, vigilance, systems
and procedures, improving customer service and use of technology.

(e) To make recommendations on the role and functioning of surveyors, intermediaries

like agents etc. in the insurance sector.

(f) It also made a number of recommendations to alter the existing structure of the LIC and
the GIC.

(g) The committee insisted that the insurance companies should pay special attention to
the rural insurance business.

(h) In the case of liberalization of the insurance sector the committee made several
recommendations, including entry to new players and the minimum capital level
requirements for such new players should be Rs. 100 crores (about USD 24 million).
However, a lower capital requirement could be considered for a co-operative sectors' entry in
the insurance business.

(i) The committee suggested some norms relating to promoters' equity and equity capital
by foreign companies, etc.

4.4 Mukherjee Committee

Immediately after the publication of the Malhotra Committee Report, a new committee
(called the Mukherjee Committee) was . set up by the Government of India to make concrete
plans for the requirements of the newly formed insurance companies. Recommendations of
the Mukherjee Committee were never made public. But, from the information that filtered out
through the media and other academic and industry sources, it became clear that the
committee recommended the inclusion of certain ratios in insurance company balance sheets
to ensure transparency in accounting. Bu{ the Finance Minister objected. He argued
(probably on the advice of some of the potential entrants) that it could affect the prospects of
a developing insurance company.

4.5 Insurance Regulatory and Development Authority Act (1999)

After the report of the Malhotra Committee was submitted to the government, changes in the
insurance industry appeared imminent. Unfortunately, due to

instability in the Central Government, changes in insurance regulation could not pass
through the parliament.

The dramatic climax came in 1999. On March 16, 1999, the Indian Cabinet approved an
Insurance Regulatory Authority (IRA) Bill that was designed to liberalize the insurance
sector. The bill was awaiting ratification by the Indian Parliament. However, the BJP
Government fell in April 1999. The deregulation was put on hold once again.

An election was held in late 1999. A new BJP-led government came to power. On December
7, 1999, the new government passed the Insurance Regulatory and Development Authority

53
(IRDA) Act. ?.is Act repealed the monopoly conferredto the Life Insurance Corporation in
1956 and to the General Insurance Corporation in 1972. The preamble to the legislation reads
as follows:

An Act to provide for the establishment of an Authority to protect the interests of holders of
insurance policies, to regulate, promote and ensure orderly growth of the insurance industry
and for matters connected therewith or incidental thereto and further to amend the Insurance
Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business
(Nationalization) Act, 1972.

The first and the most important object of the Act is to establish a rbgulatory authority as
recommended by the Malhotra Committee. Every financial institution where the ownership is
divested from the management of the institution inevitably requires an independent
regulatory authority armed with powers of supervision and regulation in clear and specific
terms. The need is immense when there is a complete overhaul of the strubtural format of the
insurance idstry bringing in private players and removing the monopoly of the Governrilent.
R¢gulatory authority's necessity is felt because it ensures a seamless functioning of the
business whose existence is owed to the trust placed in it by customers. . The regulatory
framework has been established to address and answer three major concerns. They are:

a) The protection of the interest of the consumers;

b) To ensure financial soundness of the insurance industry; and

c) To pave the way to help a healthy growth of the insurance industry, where both the
government and private parties operate simultaneously.

The imperative for a regulatory mechanism became all the more a necessity when the
business no longer remained under the monopolistic control of the Government, where
regulation and supervision were a matter of normal governmental functioning. Liberalization
made it mandatory that an independent regulatory authority be established for supervising the
functioning of the industry.

The legislation itself was a small enactment of thirty two sections, but albeit a very important
enactment. The schedules attached to it are declaratory of the fact that the exclusive dealings
of the Life Insurance Corporation and the General Insurance corporation be withdrawn by
introducing amendments of S.30 of the Life Insurance Corporatio:p Act, 1956 and S.24 of the
General Insurance Business(Nationalization) Act 1972.

After introducing amendment to S.30 of the LIC, 1956 a new section, Section 30A was added
which reads as follows:

30A -Excusive privilege of corporation to cease:

Notwithstanding anything contained in this Act, the exclusive privilege of carrying on the life
insurance business in India by the Corporation shall cease on and from commencement of
the Insurance Regulatory and Development Authority Act 1999 and the corporation shall,

54
thereafter carry on life insurance business in India in accordance with the provisions of the
Insurance Act 1938 (Act 4 of 1938).

After section 24, the following words were inserted,

Excusive privilege of corporation to cease:

Notwithstanding anything contained in this Act, the exclusive privilege of the corporation
and the accruing companies of the carrying on of general insurance business in India shall
cease on and• from the commencement of the I:ilsurari.ce Regulatory and Development
Authority Act, 1999 and the Corporation. and the acquiring companies shall thereafter carry
on general insurance business• in India in accordance with the provisions of the Insurance
Act, 1938.

The authority created by the Act is now called IRDA. It declares the Authority to

be a body corporate with perpetual succession and a common seal. It has ten members. It
can hold property, enter into contracts and is entitled to sue and is liable to be sued by its
name. Section 13 provides for the transfer of all 1property rights and liabilities of the
Provisional Insurance Regulatory and Development Authority to the present Authdrity.

Composition of Authority.

Section 4 of the Act explains the composition of the Authority. It reads as follows:

4. Composition of Authority.-The Authority shall consist of the following members,

namely:- (a) a Chairperson; (b) not more than five wliole-time members; (c) not more than
four part-time members, to be appointed by the Central Government from amongst persons of
ability, integrity and standing who have knowledge or experience in life insurance, general
insurance, actuarial science, finance, economics, law, accountancy, administration'.• or ahy .
other discipline which would, in the opinion of the Central Govefn.ment, be useful to the
Authority: Provided that the Central Government shall, while appointing the Chairperson and
the whole-time members, ensure that at least one person each is a person having knowledge
or experience in life insurance, general insurance or actuarial science, respectively.

Duties, powers and functions of the Authority

The Act has designated a separate chapter for explaining the powers, functions and the role it
envisages for the authority to perform. Chapter IV is devoted for this purpose. The chapter
reads as follows:

Duties, powers and functions of Authority. 14. Duties, powers and functions of Authority.-(1)
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. (2) Without prejudice to the generality of the provisions
contained in sub-section (1), the powers and functions of the Authority shall include,-

55
(a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend
or cancel such registration;

(b) 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;

(c) specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intem1ediaries and agents;

(d) specifying the code of conduct for surveyors and loss assessors;

(e) promoting efficiency in the conduct of insurance business;

(f) promoting and regulating professional organizations connected with the insurance and
re-insurance business;

(g) levying fees and other charges for carrying out the purposes of this Act;

(h) calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries and
other organizations connected with the insurance business;

(i) control and regulation of the rates, advantages, tertns and conditions that may be
offered by insurers in respect of g.eneral insurance business not so controlled and regulated
by the Tariff Advisory Committee under section 64U of the Insurance Act, 1 38 (4 of 1938);

G) 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;

(k) regulating investment of funds by insurance companies;

(l) regulating maintenance of margin of solvency;

(m) adjudication of disputes 'between insurers and intermediaries or insurance

intermediaries; (n) supervising the functioning of the Tariff Advisory Committee;

(o) specifying the percentage of premium income of the insurer to; finance schemes
for promoting and regulating professional organizations referred to in clause (f);

(p) specifying the percentage of life insurance business and general insurance business to
be undertaken by the insurer in the rural or social sector; and .

(q) exercising such other powers as may be prescribed.

Powers of the Central Government

56
While the functioning and supervisory role of the Authority has been kept independent to a
very large extent, the legislation also finds a place for the central government in the structure
of the insurance industry with regard to the regulation

activity, although the role has been kept to a necessary minimum. This role is like an
umbrella mechanism largely related to appointments to the authority, supersession powers
exercisable whenever necessary, and also. the finality power attached to it in a supervisory
role. Chapter Six explains this role of the central government.

Section 18 Power of Central Government to.issue.directions.

18. Power of Central Government to issue directions.-(1) Without prejudice to the

foregoing provisions of this Act, the Authority shall, in exercise of its powers or the
performance of its functions under this Act, be bound by such directions on question of:
policy, other than those relating to technical and administrative matters, as the Central
Government may give in writing to it from time to time: Provided that the Authority shall, as
far as practicable, be given an opportunity to express its views before any direction is given
under this sub-section. (2) The decision of the Central Government, whether a question is one
of policy or not, shall be final.

Section 19 Power of Central Government to supersede Authority.

19. Power of Central Government to supersede Authority.-(1) If,at any time the Central
Government is of the opinion,- (a) that, on account of circumstances beyond the control of
the Authority, it is unable to discharge the functions or perform the duties imposed on it by or
under the provisions of this Act; or

(b) that the Authority has persistently defaulted in complying with any direction given by
the Central Government under this Act or in the discharge of the functions or performance of
the duties imposed on it by or under the provisions of this Act and as a result of such default
the financial position of the Authority or the administration of the Authority has suffered; or

(c) that circumstances exist which render it necessary in the public interest so to do, the
Central Government may, by notification and for reasons to be specified therein, supersede
the Authority for such period, not exceeding six months, as may be specified in the
notification and appoint a person to be the Controller of Insurance under section 2B of the
Insurance Act, 1938 (4 of 1938), if not already done: Provided that before issuing any such
notification, the Central Government shall give a reasonable opportunity to the Authority to
make representations against the proposed supersession and shall consider the
representations, if any, of the Authority. (2) Upon the publication of a notification under
sub..:section (1) superseding the Authority,- (a) the Chairperson and other members shall, as
from the date of supersession, vacate their offices as such; (b) aiFthe powers, functions and
duties which may, by or under the provisions of this Act, be exercised or discharged by or on
behalf of the Authority shall, until the Authority is reconstituted under

sub-section (3), be exercised and discharged by the Controller of Insurance;

57
and (c) all properties owned or controlled by the Authority shall, until the Authority is
reconstituted under sub-section (3), vest in the . Central Government. (3) On or before the
expiration of the period of supersession specified in the notification issued under
subMsection (1), the Central Government shall reconstitute the Authority by a fresh
appointment of its Chairperson and other members and in such case any person who had
vacated his office under clause (a) of sub-section (2) shall not be deemed to be
disqualified for reappointment. (4) The Central Government shall .cause a copy of the
notification issued under sub-section (1) and a full report of any action taken under this
section and the circumstances leading to such action to be laid before each House of
Parliament at the earliest.

Section 20 explains the supervisory rule of the central government with regard to the
:financial affairs of the authority. It reads as follows:

20. Furnishing of returns, etc., to Central Government. (1) The Authority shall furnish to
the Central Government at such time and in such f6rm and manner as may be prescribed, or
as the Central Government may direct to furnish such returns, statements and other
particulars in regard to any proposed or existing programme for the promotion and
development of .the insurance industry as the Central Government may, from time to time,
require. (2) Without prejudice to the • provisions of sub-section (I), the Authority shall,
within nine months after the close of each financial year, submit to the Central Government a
report giving a true and full development of the insurance business during the previous
financial year. account of its activities including the activities for promotion and (3) Copies
of the reports received under sub-section (2) shall be laid, as soon as may be after they are
received, before each House of Parliament.

Section 21 explains that the authority chairperson and members and all officials and
employees connected with it are public servants. It reads as follows:

21. Chairperson, members, officers and employees of Authority to be public servants.-

The Chairperson, members, officers and other employees of the Authority shall be deemed,
when acting or purporting to act in pursuance of any of the provisions of this A t, to be public
servants within the meaning of section 21 of the Indian Penal Code (45 of 1860).

Section 22 is a technical clause which grants Protection of action taken in good faith. It reads
as follows:

22. No suit, prosecution or other legal proceedings shall lie against the Central
Government or any officer of the Central Government or any member, officer or other
employee of the Authority for anything which is in good faith done or intended to be done
under this Act or the rules or regulations made there under: Provided that nothing in this Act
shall exempt any person from any suit or other proceedings which might, apart from this Act,
be brought against him.

23 Delegation of powers.

58
23. Delegation of powers.-(1) The Authority may, by general or special order in writing,
delegate to the Chairperson or any other member or officer of the Authority subject to such
conditions, if any, as may be specified in the order, such of its powers and functions under
this Act as it may deem necesary. (2) The Authority may, by a general or special order in
writing, also form committees of the members and delegate to them the powers and functions
of the Authority as may be specified by the regulations.
24 Power to make rules.

24. Power to make rules.-(1) The Cntral Government may, by notification, make rules for
carrying out the provisions of this Act. (2) In particular, and without prejudice to the
generality of the foregoing power, such rules may provide for all or any of the following
matters, namely:- (a) the salary and allowances payable to, and other terms and conditions of
service of, the members other than part-time members under sub-section (1) of section 7; (b)
the allowances to be paid to the part-time members under sub-secti.on (2) of section 7; (c)
such other powers that may be exercised by the Authoity under

clause (q) of sub-section (2) of section 14; (d) the form of annual statement of accounts to be
maintained by the Authority under sub-section (1) of section 17; (e) the form and manner in
which and the time within which returns and statements and particulars are to be furnished to
the Central Goverrtment under sub-section (1) of section 20; (f) the matters under sub-section
(5) of section 25 on which the Insurance Advisory Committe.e; shall advise the Authority; (g)
any other matter which is required to be, or . may be, prescribed, or in respect of which
provision is to be or may be made by rules.

Section 25 relates to the establishment of the Insurance Advisory Committee for the purpose
of guiding and advising on making regulation's and on such other prescribed matters. The
committee shall have not more than 20 members to represent the interests of commerce,
industry, transport, agriculture, consumer for a, surveyors, agents, intermediaries and research
bodies engaged in study of safety and loss. The chairperson and the members of the authority
shall be ex-officio members of the committee. The section reads as follows:

25. Establishment of Insurance Advisory Committee.-(1) The Authority may, by

notification, establish with effect from such date as it may specify in such notification, a
Committee to be known as the Insurance Advisory Committee.

(2) The Insurance Advisory Committee shall consist of not more than twenty- five members
excluding ex officio members to represent the interests of commerce, industry, transport,
agriculture, consumer fora, surveyors, agents, intermediaries, organizations engaged in safety
and loss prevention, research bodies and employees' association in the insurance sector. (3)
The Chairperson and the members of the Authority shall be the ex officio Chairperson and ex
officio members of the Insurance Advisory Committee.
(4) The objects of the Insurance Advisory Committee shall be to advise the Authority on
matters relating to the making of the regulations under section

26. (5) Without prejudice to the provisions of sub-section (4), the Insurance Advisory
Committee may advise the Authority on such other matters as may be prescribed.

59
Section 26 explains the Power to make regulations. Itreads as follows:

26. Power to make regulations.-(1) The Authority may, in consultation with the Insurance
Advisory Committee, by notification, make regulations consistent with this Act and the rules
made there under to carry out the purposes of this Act. (2) In particular, and without
prejudice to the generality of the foregoing power, such regulations may provide for all or
any of the following matters, namely:- (a) the time and places of meetings of the Authority
and the procedure to be followed at such meetings including the quorum necessary for the
transaction of business under sub-section (1) of section 1O; (b) the transaction of business at
its meetings under sub-section

(4) of section 1O; (c) the terms arid other conditions of service of officers and other
employees of the Authority under sub-section (2) of section 12; (d) the powers and functions
which may be delegated to committees of the members under sub-section (2) of section 23;
and (e) any other matter which is required to be, or may be, specified by regulations or in
respect 6f which provision is to be or may be made by regulations.

Section 27 takes the power of the central government to its final culmination, by giving the
words "public servant" its true meaning. It says that all the activities of the Authority shall be
laid before the Parliament, thus ensuring parliamentary supervision on the functioning of the
Authority. The section reads as follows:

27. Rules and regulations; to be laid before Parliament-Every rule and every regulation
made under this Act shall be laid, as soon as may be after it is made, before each House of
Parliament, while it is in session, for a total period of thirty days which may be comprised in
one session or in two or more successive sessions, and if, before the expiry of the session
immediately following the session or the successive sessions aforesaid, both Houses agree in
making any modification in the rule or regulation or both Houses agree that the rule or
regulation should not be made, the rule or regulation shall thereafter have effect only in such
modified form or be of no effect, as the case may be; so, however, that any such modification
or annulment shall be without prejudice to the validity of anything previously done under:
that rule or regulation.

Pursuant to its power under the IRDA Act, the IRDA has framed 27 sets of Regulations on
various topics like preparation and submission of actuarial reports, obligations of insurers to
rural and social sectors, registration of Indian insurance companies, preparation of financial
statements and auditors repmt of insurance companies, form of annual statements of account
and record, insurance brokers, etc. These regulations are impo1tant constituents of the
Regulatory regime.

IRDA has separated out life, non-life and reinsurance insurance businesses. Therefore, a
company has to have separate licenses for each line of business. Each license has its own
capital requirements (around USD24 million for life or non- life and USD48 million for
reinsurance).

Regulations

60
On July 14, 2000, the Chairman of the IRDA, Mr. N. Rangachari set forth a set of regulations
in an extraordinary issue of the Indian Gazette. The details of the regulations are:

The first regulation is with regard to the Insurance Advisory Committee that sets out the rules
and regulation.

The second stipulates that the "Appointed Actuary" has to be a Fellow of the Actuarial
Society of India. Given that there has been a dearth of actuaries in India with the qualification
of a Fellow of the Actuarial Society of India, this becomes a requirement of tall order. As a
result, some companies have not been able to attract a qualified Appointed Actuary
(Dasgupta, 2001). The IRDA is also in the process of replacing the Actuarial Society of India
by a newly formed institution to be called the Chartered Institute of Indian Actuaries
(modeled after the Institute of Actuaries of London).

Curiously, for life insurers the Appointed Actuary has to be an internal company employee,
but he or she may be an external consultant if the company happens to be a non-life insurance
company.

Third, the Appointed Actuary would be responsible for reporting to the IRDA a detailed
account of the company.

Fourth, insurance agents should have at least a high school diploma along with training of
100 hours from a recognized institution. More than a dozen institutions have been recognized
(the list appears online at http://www.irdaonline.org/press.asp).

Fifth, the IRDA has set up strict guidelines on asset and liability management of the
insurance companies along with solvency margin • requirements. Initial margins are set high
(compared with developed countries). The margins vary with the lines of business (for
example, fire insurance has a lower margin than: aviation insurance).

Sixth, the disclosure requirements have been kept rather vague. This has been done despite
the recommendations to the contrary by the Mukherjee Committee
recommendations.Seventh, all the insurers are forced to provide some coverage for the
rural•sector.

(I) In respect of a life insurer,

(a) five percent in the first financial year;

(b) seven percent in the second financial year;

(c) ten percent in the third financial year;

(d) twelve percent in the fourth financial year;

(e) fifteen percent in the fifth year (of total policies written direct in that year).

(2) In respect of a general insurer,

61
(a) two percent in the first financial year;

(b) three percent in the second financial year;

(c) five percent thereafter (of total gross premium income written direct in that year).

4.6. Post-1999 Legislative developments in the insurance sector

The Insurance Amendment Act, 2002 permitted, by way of insertion of s.:2(8A) in the
Insurance Act, 1938, insurance co-operative societies, registered under the Co-Operative
Societies Act, 1912 or Multi-State Co-Operative_ Societies Act, 1984 or under any state law
relating to co-operative society to carry on any class of insurance business. However, the
IRDA has been empowered to exempt an insurance co-operative society from the application
of any of the provisions of the principal Act or application of its provisions with exceptions,
modifications or adaptations [see proviso to section 94A(2)]. The Amendment Act provided
for insurance intermediaries, including insurance brokers and consultants, and provisions for
the payment of commission, brokerage or fee to them, thereby introducing in this country the
business practiced the world over in this area. Further, S.49 of the Act has been modified
provide shareholders an entitlement of actuarial surplus. By virtue of amendment to S.64 VB,
the IRDA has been authorized to prescribe the mode of payment of premium, i.e., through
credit cards or through the internet which in turn might result in an increase in insurance
business. Moreover, the General Insurance Business (Nationalization) Amendment Act, 2002
made the General Insurance Corporation the only reinsurer to carry on exclusively
reinsurance business in India. It ceased to carry on general insurance business as also to
control four subsidiaries. The Central Government was authorized to discharge its functions
in respect of these subsidiaries in future.

4.7 Back to the Future: Mostly Swaraj with a Foreign Twist

At present, 312 million middle class consumers in India have enough financial resources to
purchase insurance products like pension, health care, accident benefit, life, property and auto
insurance. Only 2.5 per cent of this insurable population, however, have insurance coverage
in any form. The potential premium income is estimated at around US $80 billion. This will
place India as the sixth largest market in the world (after the US, Japan, Germany, UK and
France).

4.8 Lessons from China

China is the most populous country in the world (at 1.2 billion); India is a close second Gust
over a billion). Both have followed the path of deregulation and privatization - China started
it in 1979 and India in 1991. Comparisons of these processes are described in Sinha and
Sinha (1997). In this section, I will concentrate only on the insurance industry in the two
•countries. The insurance business in India has a premium volume of $8.3 billion in 1999
whereas in China the premium volume is $16.8 billion in 1999. However, premium per capita
is not all that dissimilar: $13.7 per person in China and $8.5 in India in 1999. As a percent of
GDP, insurance is 1.93% in India and 1.63% in China in 1999 (all data from Sigma, 2000).

62
In China, the People's Insurance Company of China (PICC) had a monopoly between 1949
and 1959. In 1959, insurance business was deemed capitalistic and all forms of insurance
were suspended (and the insurance business was taken over by the Peoples Bank of China).
The insurance business reopened in 1979, the PICC reassumed its old role as the monopoly. 3
4.8.1 China and India - a comparative analysis of the regulatory institutions There are many
differences in the way China and India have . handled deregulation.

First, in China, the China Insurance Regulatory Commission (CIRC) was set up in November
1998, well after th first Insurance Law was promulgated in: 1995. In India, the IRDA was
launched first with the authority to issue license!S. It took almost a year before it issued
licenses for the first set of private insurance • companies.

Second, in China, foreign insurers need to have a representative office for three years before
they can submit a proposal for operation (in practice, this has been reduced to two years in
some cases). In India, there is no such requirement.

Third, foreign insurers can only own 25% of the total value of tile market (although, in
reality, it has been much less than that in Shanghai). In India, the limit is set at 26% per
company. In China, there is no limit at the company level. Thus, a foreign company can own
100% of an approved insurance company in China.

www. tapen@nottingham.ac.uk Fourth, in India, the licenses are national. A company with a
license can operate in any part of the country. In China, on the other hand, foreign companies
are restricted to operation in two metropolitan areas: Shanghai and Guangzhou.

Fifth, the IRDA is a law-implementing body. It can only interpret the laws that have been
passed by the Indian Parliament. On the other hand, it seems that the CIRC has been a
lawmaking body, it is setting up rules as it sees fit. Sixth, China seems to have been forced to
issue insurance licenses to a host of foreign companies by the end of 2000 simply because it
wanted an assured entry into the World Trade Organization (WTO). In India, there is no such
pressure as India is already a part of the WTO.

4.9 Attempts at statutory rev:ision

In the year 2003, the Law Commission of India was given the task of reviewing the insurance
legislation in th2 country in the context of the IRDA Act, 1999. The task was that the
commission was asked to suggest revision of the existing legislation like the Insurance Act,
1938, the LIC Act, 1956, the marine insurance act, 1963 and similar legislation, so that
methods of streamlining the legislation can be found and any possible conflicts in reading the
legislation be avoided.

4.9.1 Some tentative grounds of revision

Some of the grounds on the basis of which the Law Commission has undertaken present
exercising in revising the Insurance Act, 1938 may be set out as under:

63
I. The Insurance Act, 1938 being a legislation of colonial era, contains provisions that are
redundant and accordingly require deletion. For example, provisions regarding provident
societies and mutual insurance as also principal agents, chief agents and special agents, or
references thereof, are no longer required and such provisions need to be deleted.

IL Some of the provisions of the Act,' are of transitional nature and should, therefore, be
deleted. Further, matters covered in the Regulations framed by the IRDA should be deleted
from the Act, in order to avoid duplication. Further, The IRDA Act, 1999 has inserted some
provisions in the Insurance Act, 1938, the effect of which was to nullify some existing
provisions. They have not been deleted, thus giving rise to anomalies, for example,
definitions of the term 'insurance company' [S.2 (8)]. Such provisions require to be deleted.

III. References in the Insurance Act, 1938 to older enactments have to be replaced by
references to the corresponding new legislations that have replaced such enactments. For e.g.,
references to the Indian Companies Act, 1913 have to be replaced by the Companies Act,
1956. .. •:-

IV. The insurance sector, which earlier covered only a few areas like life and marine
insurance, has now expanded to cover various kinds of risk activities. Hence reclassification
of insurance businesses is necessary. For instance, insurance business may broadly be
classified as 'life' and 'non-life' or 'short term' and 'long term' insurance business. For this
purpose, the definition of the term 'insurance' and 'insurer' would have to be amended.

V. The IRDA exercises its powers by and large under the provisions of the principal Act.
Therefore, it is appropriate as well as necessary that the relevant provisions ofIRDA Act be
merged in the Insurance Act, 1938.

VI. The IRDA while regulating the business activities of the insurers :exercises

quasi-judicial powers, in addition . to the administrative powe.r,.,s, e.g., issue, renewal and
cancellation of registration certificate to insurers, order in 'regard to

investigation of the affairs of the insurers, making application to the court for the winding up
of the insurance companies, grant of licenses to the insurance agents etc. It is felt necessary
that there must be a provision of appeal against the decisions of the IRDA to an independent
body constituted under the Act itself.

VIL The insurance business has increased several fold even while policy holders have not
been entirely satisfied with the manner of functioning of insurance companies, particularly in
the area of settlement of claims. Although at present, there is in place of the office of an
Ombudsman under the Redressal of Public Grievances Rules, 1998, complaints nevertheless
continue to be filed in the consumer fora constituted under the Consumer Protection Act,
1986. In order to provide a more effective grievance redressal missionary, while at the same
time, lessening the burden of the consumer fora, it is proposed that there should be a full-
fledged grievance redressal mechanism.

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VIII. The principle of uberrimae fide, i.e., of absolute good faith, governs both the parties
to a contract of insurance. Though standardized insurance policies prohibit certain misleading
contract prov1s 10ns, problems have ansen with misrepresentation or non-disclosure
whenever personal characteristics are collected by insurance agents for risk classification. In
this context, the issue is whether a failure to make a disclosure of the material information
would render the contract void or voidable. For this purpose, some specific statutory
enumerations are required for protecting the interest of policyholders so that unintended
minor mistakes in disclosure do not lead to a loss of coverage.

IX. Provisions regarding investments, loans and management need review and revision.
The IRDA has made detailed investment regulations, hence provisions are to be revised so as
to eliminate inconsistencies and duplication. The term "approved securities" is required to be
revised in the context of new economic policy and business practices.

X. At present, there is no prov1s1on in the principal Act for motivation or

encouragement for insurers to invest in "Research & development" or "Technology up
gradation" as regards valuation of assets for the purpose of solvency margin
calculations..There is a suggestion that it is appropriate if such provisions for taking a portion
of the investment/ expenditure in areas as directed by the IRDA are incorporated in the Act
for the purpose of "Solvency Margin" so as to encourage insurers to take up such
investments.

XI. The provisions regarding solvency margin of the principal Act have been amended by
the IRDA Act, 1999. But • these provisions still require• revision because they stipulate
minimum level of solvency margin without a control level, i.e., a position below which the
Authority can get warning signals in respect of a particular insurer. The Principal Act is
required to be amended so as to empower the Authority to intervene whenever the solvency
margin falls below the control level. IRDA has framed regulations for the determination of
the amount of liabilities, solvency margin and valuation of assets. But the provisions
regarding solvency margin are still to address th':'.extent of appropriate matching of assets
and liabilities.

XII. The Principal Act and IRDA Act empower the Central Government and the Authority
to frame rules and regulations. These ate to be revised and harmonized with the Act in the
context of new regulatory regime.

XIII. The Act provides for penalties in the miscellaneous part of the Act, for contravention
or non-compliance of the provisions of the Act or Regulation or rules under Sections. I 02 to
105C. These provisions of the Act are to be reviewed and revised as the amount of fine or
penalty provided therein is not adequate enough to be considered now as a fine or penalty. In
addition to these provisions, there are other provisions which provide for the punishment
along with the other provisions requiring mandatory compliance. It is appropriate that all
such specific clauses on penalty may be shifted to the chapter dealing with the pn,alties.

4.9.2 Imperative for a Revamp of Insurance Laws

65
Insurance laws are in for a complete overhaul. The initiative for the purpose has been taken
by the Law Commission of India to put all insurance laws•that are in force at present under
the microscope.

Following the Law Commission's decision to undertake what it has promised would be "a
comprehensive review" of all the insurance laws and to prepare a consultative paper for the
purpose, the Insurance Regulatory and Development Authority (IRDA) has sought feedback
from all quarters on the possible changes that could be incorporated in the present laws.

The Law Commission is a powerful body set up by the Government in the legislative arena
that reviews the existing statutes from time to time and in the process provides valuable
inputs to the official machinery in making amendment to the laws. Mr. Justice Jagannadha
Rao chaired the Sixteenth Law Commission.

Among the major insurance laws that are in force are the IRDA Act, 1999, the Insurance Act,
1938, the LIC Act, 1956 and the General Insurance Business (Nationalization) Act, 1972.
!While the IRDA Act has been one of the most important insurance legislations of recent
times since the enactment of the law provided the legislative backing for throwing open the
insurance industry to private competition, the Insurance Act, 1938, has been the core of the
insurance laws in India during the pre-nationalization days and later including the period of
nationalization and the subsequent opening up of the industry. The LIC Act and GIBNA
provided the basis for the earlier nationalization of the insurance industry.

4.9.3 Recommendations of the Law Commission of India

The review undei1:aken by the Law Commission focuses on the removal of contradictions
in the various laws and also the ways to refine it further..One of the likely aspects that the
Commission would look into is the possibility of further improvements in the IRDA Act in
order to provide it with further teeth to regulate the sector more effectively. The Law
Commission of India initially prepared an approach paper and held discussions with officials
of the IRDA as well as certain other key personnel in the Insurance sector. As a result of
these discussions, it is

decided that the work of revision of the Insurance Act, 1938 should be undertaken under the
following topics:4

(i) Merger of the provisions ofIRDA Act into the Insurance Act;

(ii) Changes in definitions, deletions and other amendments;

(iii) Power!' of the IRDA;

(iv) Obligations of the insurers under the Act;

(v) Interests of the policyholders;

(vi) Tariff Advisory Committee-composition and powers;

66
(vii) Redressal of grievances/ claims and the machinery for the sarhe;

(viii) Penal provisions; and

(ix) Miscellaneous provisions.

4.9.4 Proposals of Revision Given by the Law Commission

.T he following are some of the focused categories about which •the law commission has
given subtle 'recommendations. The recommendations broadly catered to the integration of
the various insurance laws in the country, especially the Insurance Act, 1938, the insurance
Act, 1956 and the IRDA Act, 1999, with the major reason for such integration being to
remove dualities in the law: and also to avoid possible conflicting opinions. Discussed below
are some of the major changes suggested in the legislative integration effort, especia11i'ith
regard to the role of the IRDA. A tabular representation of the existing provisions in the
legislations and also the changes suggested in these provisions is presented here.

4 http :I/lawcom missionofindia. nic. in

4.9.4.1 Merger of the provisions of IRDA Act into the Insurance Act The Authority by and
large exercises all those powers which hitherto used to be exercised by the Controller under
the principal Act, e. g., grant, suspension and cancellation of certificate of registration. It is to
be noted that the principal Act does not provide for establishment of Authority but provides
under s.2 B only for supersession of the Authority referring to the provisions of IRDA in this
respect. To avoid duplication in this regard, the provision of s.2 B (1) of the principal Act
may be omitted though retaining provisions of sub s. (2). In this backdrop, the best course
would be to merge the provisions relating to IRDA as provided in IRDA Act, into the
principal Act.

For this purpose, the definitions enumerated in s.2 may be merged in the definition part of the
Principal Act. Chapter II of the Act of 1999 dealing with the establishment and other
incidental matters regarding Authority (sections 3-12); Chapter IV dealing with the duties,
powers and functions of the Authority (section 14); Chapter V dealing with the grants by
Central Government, IRDA fund and Accounts and Audit (Ss. 15-17); Chapter VI dealing
with powers of the Central Government (Ss. 18-23 and 25) may be placed together and
merged in the Principal Act before part II of the Principal Act under the proposed part "Part
IA" to be entitled as 'Insurance Regulatory and Development Authority'. Section 24 providing
the Central government the power to make rules, s.26 providing the Authority power to make
regulations and section 27 providing for laying of rules and regulations before the Houses of
Parliament may be merged respectively in ss.114 and 114 A of the principal Act providing
for the same. Again section 28 may be shifted to the principal Act after s.114A.

The proposed merger would not only help facilitate the insurers and the insured, agents and
surveyors, actuaries and auditors, lawyers and litigants m understanding the role of IRDA but
locating all the provisions at one place.

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For ready reference, a table showing the scheme for merger of the provisions of the IRDA
Act with the Insurance Act is set out hereunder:

Provisions of the Insurance act, 1938 Change proposed Section 33(1) - Investigation by
IRDA into affairs f insurer :investigation

The provisions of S. 33 does not lay down standards or criteria (grounds) to guide the
Authority to cause judiciously. In absence of such criteria, the power may be misused for
ulterior motive. Hence the provisions of sub-section (1) may be amended by adding the
words "if it considers expedient to do so" in sub- section (1). It is to be noted that the section
uses the term "Authority" for both the Regulating Authority and investigating authority
though the latter is mentioned as investigating authority in the section. Yet such a usage may
give rise to some confusion. It is, therefore, appropriate to change the terminology from
investigating authority to investigating officer .Section 33(4) -Examination by Investigating
Authority of insurer's officer on oath The section does not provide for the qualification/
experience/ rank of the person to be appointed as the investigating authority who is obligated
to examine on oath the,. officers of the insurer under sub-section (4)..This may be rectified by
suitable amendments. A provision may also be incorporated so as to prevent appointment of
incompetent person. Section 34B (4) -Penalty for contravention of provisions regarding
removal by IRDA of managerial persons. The provisions of sub-section (4)of this section
prescribes punishment for contravention of s. 34B or of proviso under S. 34B (2) in the nature
of fine extendable to Rs. 250 per day. The amount of fine is not adequate enough to deter an
officer from contravening the orders of IRDA. Therefore, the same may be enhanced
appropriately.

Section 34C - Power ofIRDA to appoint additional directors This power should be
exercise by IRDA in consultation with the central government and particularly in case of
insurance co-operative societies.

Section 34E -Power to caution or advise insurers In S. 34(E), the word "Controller" should
be substituted by the word 'Authority' as the powers described in this section are now
exercised by the Authority by viliue of the IRDA Act.

Section 34G - Power of authority to order closure of foreign branches This provision is
no longer relevant since private players, now permitted, can• themselves decide on closure of
their branches without being directed by the IRDA. This provision may be deleted.

Section 34H - Search and seizure The rank of the officer conducting search and seizure
should be clarified. The words 'Code of Criminal Procedure, 1898' should be substituted by
'Code of Criminal Procedure, 1973'.

Section 35 (1) -Amalgamation and transfer of insurance business

At - present, the provision applies only to life insurance business. It is suggested that this be
made applicable to general insurance business as well.

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Further, a time •limit may be specified within which IRDAS has to approve the scheme of
transfer or amalgamation.

The title of the marginal note requires minor change in the context of the provisions of this
section. The word "and" be replaced by the word "or".

Section 35(3) -Requirement of preparation of actuarial reports The provisions of sub-

clause (c) of s. 35 (3) states that actuarial reports are to be prepared as per the requirements of
Part II of Fourth and Fifth Schedules. As the Fourth Schedule has been repealed by the
Insurance (Amendment) Act 2002, clause (c) of S. 35 (3) may be amended by deleting the
reference of Schedule IV and . to provide that actuarial reports be prepared m
conformity with the regulations made by the Authority.

Section 36 -Approval of amalgamation by IRDA The Authority is empowered under S.

36 of the Act to approve the arrangement of

amalgamation after giving adequate opportunity of hearing Section 37A (2) - Power
ofIRDA to prepare scheme of amalgamation 37A (4) - Central government is specify scheme
of amalgamation sanctioned by it to the directors and policy holders who desire so and to
pass consequential orders to give effect to the amalgamation including the disposal of
deposits made under sections 7 or 98. Section 98, which provides for mutual insurance
companies and co-operative life insurance societies, has become redundant. Therefore, the
word "or section 98" may be omitted. Similar omission is required in clause (c) of the
provision to this section.

The provisions of amalgamation may be made applicable to general insurance business, as

well. If this is done, then the words "life policy" in S. 36 (1) would have to be replaced by the
words 'of any kind of policy'.

The contents of sub-section (2) which enumerates the clauses which the scheme should
contain can be made part of the Regulations

The following may be added m s.37

(A) (4) after the words "in this behalf '. "in the Official Gazette with such constitution,
with such property, powers, rights, interests, authorities and privileges and
with such liabilities, duties and obligations as may be specified in the
order."

It is suggested that the Authority should exercise the power under sub-section

(3) to call for independent report from an approved surveyor upon receiving a complaint.
There is also a suggestion for appointment of a second surveyor or loss assessor, if any
complaint is received by the Authority. It would be appropriate if the power to settle the
claims under this section are exercised by an adjudicating officer to be appointed by the
Authority.

69
It has been suggested that appointment and payment to surveyors/loss assessors should be on
rotation and controlled by IRDA with the help of respective State. Chapter of Institute of
Surveyor/ Loss Assessor so that surveyors/loss assessors are independent of
general insurers and need not to appease the respective department/ staff/ officer/ manager for
getting appointment and payment. .

There is a suggestion that to set aside the written test for issuing licence to Crystal-ball
gazing the insurance sector In this section, we gaze into the future of the insurance industry in
India. A number of trends are already emerging.

Convergence

In many other regions around the world, one sure sign is emergmg in the insurance business.
Different parts of the financial sectors are converging. This happened first in European Union
(with the so-called Third Directive). It is now happening in the United States with the
effective repealing of the Glass-Steagall Act of 1933. In India, it will surely come. Not
everybody in India, however, believes so. For example, the Insurance Regulatory
Development Authority (IRDA) chairman N. Rangachari said that India is not yet ready for
the convergence of all financial sectors under one supervisory authority as suggested by the
banking division of the finance ministry. The RBI (Reserve Bank of India) has erected a
firewall between banks and insurance companies to protect investor interests. With the
insurance sector transforming from total regulation to being opened up after 35 years, fears
have been expressed on how it would move. However, the convergence is already happening
on the ground in a "curious way" as 10 out of 12 insurance proposals received for license by
the IRDA have come in from companies who are in the pure or applied finance sector. It may
appear curious, but clearly the companies who want to enter the insurance sector see some
kind of a synergy between their existing business and insurance.

Monitor Group Report

How would the insurance market be divided up between the incumbent Life Insurance
Corporation and the newcomers? The Monitor Group (from Boston) has published a study at
the end of 1999 (reported in Business Today, 2000). It estimates that the $5 billion market of
life insurance in India (figure for 1998) will become a $23 billion market by 2008. The report
estimates that the LIC will have some 70-80% of the market whereas the new companies will
share some 20-30%. The bright prognostics for the LIC come from several key observations.

(1) The LIC has a vast distribution network in the rural and semi-urban areas.

This would be hard to duplicate.

(2) The LIC has had a real annual growth rate of 8% over the last decade. This is much
larger than industrial growth. Therefore, the LIC has a head start.

(3) As life insurance benefits accrue over time, it becomes more expensive to switch -
because switching would mean a loss of accrued benefits.

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The general insurance business is expected to grow from USD 1.8 billion (1998) to 12 billion
in 2008. The Monitor Group Report predicts that the private companies would have an easier
access to the general insurance business. The market share of the newcomers will be 40-50%
of the total market. The cause for better market penetration for the new companies come from
the fact that it makes no difference for the insured to switch companies. Unlike life insurance,
it is not expensive to switch insurers. However, the lack of good data would hamper the
newcomers.

Reinsurance

The GIC has decided to spin o.ff its reinsurance business as a separate company to be called
Indian Reinsurer. The insurance• business in India is less than USD $1 billion at present
(2000). In the near term (three to five years), it is expected to double in size for two simple
reasons.

(1) Under the new regime, the reinsurance requirements are higher (as a percentage of
total insurance business).

(2) Privately run non-life insurance companies have a higher reinsurance requirement in
the early years.

Aftermath of the Gujarat Earthquake

On January 26, 2001, an earthquake measuring 6.9 on the Richter scale hit parts of Gujarat.
Many buildings toppled. An estimated 20,000 persons were killed - most of them in Bhuj
district of Gujarat (around 18,000). Estimated damage was in the order of magnitude of USD
5 billion - most of it uninsured.

The disaster was once in a lifetime event. In a curious way, it will help the new entrants in the
insurance industry in India. It is well known in the psychology literature that disasters make
people more aware of their insurance needs. Given what happened in Gujarat, most Indians
will now have a higher awareness about buying an insurance policy than they would have
otherwise. No amount of advertisement by the insurance companies (both life and general)
could have achieved this.

Ironically, India's national insurance companies began to exclude earthquake cover in the
new policy forms adopted from 1 April 2000 and began to offer the protection as a buy-back
on the recommendation of the Tariff Advisory Committee(TAC) report. Many policyholders
were unaware of the change and so the relatively few individuals and companies that have
been prudent enough to buy insurance may discover that, in the case of the Gujarat event,
they are uninsured.

Of late, there has been a general feeling that the insurance regulator could do with some more
powers to enforce its diktat. This has been felt ever since the IRDA could not force its wish
on the Life Insurance Corporation (LIC) to hike it capital base in line with other private
insurance companies. It has been reinforced more recently due to the defiance of the public
sector non-life insurance companies in following the regulator's directives on the motor

71
insurance front with repeated allegation by the transport industry of overcharging of
premium despite the imposition of a regulatory cap.

The Ministry of Finance is, however, not likely to be a party to the review exercise at present.
It may enter the picture once the Law Commission completes its study and finalizes it views.
When contacted few days prior to the issue of the present IRDA notice for review of the laws,
officials of the Finance Ministry had said that no major proposal for a review of the insurance
laws are at present pending with the Ministry. i.

Present Scenario

The Governmet of India liberalized the insurance sector in March 2000. with the

passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry
restrictions for private, players and allowing foreign players to enter the market with some
limits on direct foreign ownership. Under the current guidelines, there is a 26 percent equity
cap for foreign partners in an insurance company. There is a proposal to increase this limit to
49 percent.

The opening up of the sector is likely to lead to greater spread and deepening of insurance in
India and this may also include restructliring and revitalizing of the public sector companies.
In the private sector 12 life insurance and •s general insurance companies have been
registered. A host of private Insurance companies operating in both life and non-life segments
have started selling their :insurance policies since 2001.

Non-Life Insurance Market In December 2000, the GIC subsidiaries were restructured
as independent insurance companies. At the same time, GIC was converted ihtb"a n.ational
re- insurer. In July 2002, Parliament passed a bill, delinking the four subsidiaries from GIC.

Presently there are 12 general insurance companies with 4 public sector companies and 8
private insurers. Although the public sector companies still dominate the general insurance
business, the private players are slowly gaining a foothold. According to estimates, private
insurance companies have a 10 percent share of the market, up from 4 percent in 2001. In the
first half of 2002, the private companies booked premiums worth Rs 6.34 billion. Most of the
new entrants reported losses in the first year of their operation in 2001.

With a large capital outlay and long gestation periods, infrastructure projects are fraught with
a multitude of risks throughout the development, construction and operation stages. These
include risks associated with project implementation, including geological risks,
maintenance, commercial and political risks. Without covering these risks the financial
institutions are not willing to commit funds to the sector, especially because the financing of
most private projects is on a limited or non- recourse basis.

Insurance companies not only provide risk cover to infrastructure projects, they also
contribute long-term funds. In fact, insurance companies are an ideal source of long term debt
and equity for infrastructure projects. With long term liability, they get a good asset- liability
match by investing their funds in such projects. IRDA regulations require insurance

72
companies to invest not less than 15 percent of their funds in infrastructure and social sectors.
International Insurance companies also invest their funds in such projects.

Insurance costs constitute roughly around 1.2- 2 percent of the total project costs. Under the
existing norms, insurance premium payments are treated as part of the fixed costs.
Consequently they are treated as pass-through costs for tariff calculations.

Premium rates of most general insurance policies come under the purview of the government
appointed Tariff Advisory Committee. For Projects costing up to Rs 1 Billion, the Tariff
Advisory Cominittee sets the premium rates, for Projects between Rs 1 billion and Rs 15
billion, the rates are set in keeping with the committee's guidelines; and projects above Rs
15 billion are subjected to re-insurance pricing. It is the last segment that has a number of
additional products and competitive pricing.

Insurance, like project finance, is extended by a consortium. N01mally one insurer takes the
lead, shouldering about 4050' per cent of the risk and receiving a proportionate percentage of
the premium. The other companies share the remaining risk and premium. The policies are
renewed usually on an annual basis through the invitation of bids.

Of late, with IPP projects fizzling out, the insurance companies are turning once again to old
hands such as NTPC, NHPC and BSES for business.

FDI in insurance sector - the penetration of insurance business

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has projected
that foreign direct investment (FDis) will increase in insurance sector by $ 0.46 billion in next
2 years and likely to touch $ 0.96 billion as it is still regulated. A Paper on FDI's ;Prospects in
Insurance Sector brought out by the ASSOCHAM says that currently the total insurance
market in India is about $ 30. billion, in which the element of FDI's is $ 0.5 billion. This is
1.6 percent of total insurance business in India. Despite, insurance being a highly regulated
sector, however, in the first five months of current calendar, i.e. between January to May, it
could attract FDI's of $ 217.97 million which by any standard is not too insignificant. If the
insurance•sector is opened up to an extent of 49 percent for FDI's, in next 2 years, i.e. by
2010, the FDI's contribution to insurance business would touch nearly $ 2 billion ..Currently,
only 26 percent of FDI's are permitted

in insurance sector, the chamber expects. It is pointed out that the domestic insurance sector
has been growing at an average speed of nearly 200 percent and that is why the chamber is of
the view that by 2012, the total insurance business would touch $ 60 billion size.

In the life insurance sector pahicularly on FDI's front, the growth that has taken between
2006 and 2007 is estimated to be around 270 percent. This itself speaks the significance and
importance, investors are attaching to both life insurance and non-life insurance sector.

73
The liberalization of the msurance sector also had positive effect on the functioning of the
premium insurance business company in India, the LIC. Since end of 2000 when insurance
was privatized, life insurance company promoters pumped in Rs 21,000 crore so far. The
distribution network also expanded significantly. In the second quarter of fiscal 2008-09 1480
branches were added including 1293 branches set up by private sector life insurers. During
this period the life industry added 53332 employees to their payrolls. The number of pay-roll
employees now crossing over 300,000. Of the total 10,037 branches of life insurance
companies around 7,000 are in semi urban and rural areas. By the end of 1st quarter of
current fiscal (2008-09) the total assets of the life insurance companies stood at Rs 857,500
crore. Of this, Unit Linked Policies ( ULIP) accounts for Rs 140,000 crore.

New trends in insurance industry post-liberaliza:tion - health insurance

Yet another highly prospective business segment is health insurance. According to a CII-
E&Y study report, the health insurance premium income is likely to touch Rs 30,000 crore in
2015 from the existing Rs 4,000 crore. The premium was Rs 670 crore in fiscal 2001-02. It is
expected that the hike in FDI for the msurance sector from 26 percent to 49 percent will boost
the healthcare business.

The immense business potential in health sector is reflected in the fact that only about 1
percent of the country's population is presently covered under health insurance policies. The
fillip to the health insurance segment will also come when the Insurance Regulatory and
Development Authority's (IRDA) recommendation to bring down capital requirements for
stand-alone health insurance companies from Rs 100 crore to Rs 50 ctore. In fact, the
Insurance Laws (Amendment) Bill 2008 makes provision to allow companies, exclusively
into the business of health insurance, to operate with minimum paid Up capital of Rs 50 crore
against the current minimum paid up capital of Rs• 100 crore for any insurance business- Life
or General. This is expected to prompt entry of more health insurance companies into the
country. . The health expenditureacross the country was Rs 180,000 crore in 2007. With
healthcare costs escalation,' rising demand for healthcare services and limited access of the
low-income group to quality healthcare, health insurance is emerging as an alternative
mechanism for financing healthcare. And with merely 12 percent of the population being
covered, companies are looking at the health insurance space as a lucrative segment.

The state-owned companies constitute ne;:i.rly 70 percent of the health i.nsurance market and
private companies account for the remaining 30 percent As the out-of- pocket expenditure on
healthcare is pegged at more than 70%, private insurers are treating this as an important target
market.

Micro-insurance

Micro insurance is yet another which is yet to be explored optimally. The

Confederation of Indian Industry - Ernst & Young (CII-E&Y) report says that micro health
insurance schemes in India have achieved good enrolment levels among their target
populations including poor. Out of the total insuranc premium of Rs 100,000 crore collected
in fiscal 2007-08, micro-insurance accounted for a meager Rs 125 crore. The CII-E&Y

74
recommendations include introduction of risk-based capital in the life insurance segment,
institutionalization of underwriting and marketing skills in the general insurance segment,
articulation of proper reform-: and industry compliance for health insurance and regulatory
and industry endeavor to promote deepening of markets for micro insurance. General
insuranceCommenting on the prospect of the general insurance industry in India a
Moody's-ICRA report on Industry Indian General Insurance Outlook said:

The outlook for the general insurance industry in India is stable based on Moody's
expectations for steady fundamental credit conditions in the sector over the next 12-18
months. With the Indian economy forecast to grow at 7.5% in 2008 and given rising income
levels and higher risk awareness among insured, the country's insurers are optimistic about
demand for their products. However, intense competition from new entrants, deregulation and
a moderation in returns from the equities market will pressure pricing and ultimately short-
term profitability.•"

"At the same time, despite a severe con-ection in the stock market (the key Sensex index fell
26% in Ql-:2008), the prevailing view in Asia is that while China and India are not insulated
from the credit crisis afflicting the US and EU, domestic demand is strong enough to support
GDP growth. Being less export dependent, India is also less vulnerable than some of its
neighbors", the Report pointed out.

According to Moody's-ICRA report published in April 2008, "Rising income levels, low
penetration for most consumer products, availability of financing and changes in lifestyles/
aspirations are likely to sustain consumer demand over the next few years. In the short term,
the focus on infrastructure development will keep the economy going, even if the tightening
in credit leads to a slowdown in consumer spending."

"Furthermore, over the medium and long term, India's insurance market will continue to
experience major changes as its operating environment increasingly deregulates. On the one
hand, a mix of new products, new delivery systems and a greater awareness of risk will
generate growth. On the other hand, competition will remain intense as private sector insurers
and those about to enter India seek to win market share from the inore established public
sector entities," the report indicated.

Role of Insurance in India's future

Insurance would assist businesses to operate with less volatility and risk of failure and
provide for greater •financial and societal stability from the growth pangs of an estimated
grO\yth rate over 8 % in GDP

Government has arranged for disaster management and for funds. NGOs and public
institutions assist with fund raising and relief assistance. Besides government provides for
social security programs. There is considerable impact upon government in these respects.
fosurance substantially steps in to provide these services. The effect would be to reduce the
strain on the tax payer and assist in efficient allocation of societal resources

75
• Facilitates trade, business and commerce by flexible adaptation to changing risk needs
particularly of the burgeoning Services sector.

• Like any other financial institution insurance companies generate savings from the
insurance sector within the economy and make available the same in well directed, areas of
the economy deserving investments ; a sector with potential for business as is the case with
Indian insurance provides incentive to develop it all the more faster

• It enables risk to be managed more efficiently through risk pricing and risk transfers
and this is an area which provides unlimited opportunities in the Indian context for
consulting, broking and education in the post- privatization phase with newer employment
opportunities

• The insurance industry of its own accord is interested m loss minimization. Its
expertise in understanding losses assists it to share the experience across the economy thus
enabling better loss control and preservation of national assets

• In its risk pricing and investment decisions the insurance industry sets the tone for
investment by others in the economy. Informed assessment by the insurance companies thus
signals allocation of resources by others contributing to efficiency in allocation.

• India has reasonably well developed accounting, legal and supervisory institutions.
These support the requirements of the insurance market very well.

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 CHAPTER - FIVE

TRENDS OF JUDICIAL OPINION IN THE LIBERALIZED

INSURANCE SECTOR
Judicial opinion on the necessity of regularity mechanism of insurance business.
policyholder is a consumer under the CP Act 1986. This protection mechanism for the
policyholders.

Insurance is a people-centric business where the policyholder is the focal point. The
main objective of insurance business regulation is to protect the interests of the
policyholders. In this process, the Insurance Regulatory and Development Authority
(IRDA) has made rules . and provided guidelines to the insurance companies. The
IRDA was established to protect the interests of the policyholder and for the orderly
growth of the insurance business in India. In spite of having a number of provisions in
insurance law and regulation, the insurance policyholders suffer from delays and
repudiation of claims. The insurance regulations impose the duty on insurers to establish
an effective and efficient grievance settlement mechanism. IRDA also established an
insurance ombudsman to settle disputes of insurance policyholders. The. paper looks at
the provisions laid down in the Consumer Protection Act and deals with the applicability
of the consumer law and the role played by consumer councils in the settlement of
disputes between parties.

Introduction
Insurance business is complicated and difficult. This holds true especially for insurance
organizations and the problem is more complicated• iµ life insurance products where the
contract is for a very long - term, sometimes even extending to a few decades. Therefore, it
is indeed essential for insurance companies to maintain quality of service. The Insurance
business is people-centric and insurance services are provided on solicitation. The Insurance
Regulatory and Development Authority (IRDA), the apex regulatory body of the insurance
industry, endeavors to protect the people who consume the service and products
offered by the insurance companies registered with it. The insurance contracts, being a
standard form of contracts, designed and drafted by the insurers have supremacy over the
purchase of insurance products and services. The consumers of insurance service have less
bargaining and negotiating opportunities and are to opt •either for purchasing or avoiding. As
there is no alternative to insurance services (the service provider may differ but the attitude
of the insurer will be the same), the consumer is required to purchase the service. In the
process, they suffer due to the conflicting nature of interests. The real picture suffering will
only be known at the time of claims. Though the IRDA framed rules and regulations to the

77
insured and provided outer framework to design their products and services, the insurance
companies adopt intelligent means in support of their rights. The insurance companies
always have a tendency to avoid claims on small and pretty technical parameters which are
incorporated in the policies not understood by the policyholders. When a risk takes place, the
consumers want the claims to be paid. A number of other reasons such as interpretation of
term and clauses of the policy
document, improper accounting of payment and receipt of premium at both ends
I
particularly, in the case of salary saving schemes of life insurance policies and
group insurance policies, delays in processing of claims, misrepresentation and
nondisclosure of information or disclosure of wrong interpretation of disclosed information
and noncompliance of term of insurance contracts are reasons for avoiding claims. There
may also be other reasons; thus, the conflicting interest may develop and land them in
disputes that may extend to litigations. In reality, many problems of claim settlement are
faced by policyholder's in spite of having various provisions in law and regulations to protect
their interests.
"Though globally the profile of the insured is changing, delivering a consistent high quality
customer experience is the only way to the future success for the insurer." Customer service
involves all facts, which are associated with the
basic product or service before, during an:d after delivering it.1
Insurance Dispute and Settlements

• Dispute block development hamper peace and dispute without resolution leads to a
conflict beyond control under normal circumstance. The need for resolving disputes and
insufficiency of transitional litigation mechanism to adjudicate disputes is obvious. The
study and analysis of reasons of delay, in dispensation of justice, will continue till the
problem is solved.
Like any other service industry, the insurance industry too has disputes. The policy holders
are sometimes forced to approach the mechanism provided by law for redresssal of their
grievances.
The following are the dispute reqlution mechanisms for msurance related disputes at present:

• Insurers' own grievance redressal cells and grievance redressal cell of IRDA:As
claims /policy contracts in dispute require adjudication and IRDA does not carry out any
adjudication , the insured are advised to approach the available quasi judicial, channels,
i.e. the insurance
ombudsmen, Consumer fora or the Civil Courts for such complaints.2

• Directorate of Public Grievances;

• Consumer Forums;
• Ombudsmen;
• Arbitration on quantum;
• Civil Courts; and

78
• Lok Adalats and Motor Accident Claims Tribunal (MACTs). Each one them is
clogged with numerous insurance related disputes to a disproportionate extent.
It is relevant to point out that the insurers neither publish information nor are they
Aware of how many cases they have won and how many cases they have lost in each of the
various forums in a financial year.3
Rule 5 of IRDA (Protection of policy holders interests) Regulations 2002 imposes upon
insurers the responsibility to have in place, proper procedure and effective mechanism to
address complaints and grievances of policy holders efficiently and with speed. Insurers
must establish a 'grievance cell' at their office in order to address the grievances and
problems of their policy holders. Above these, the IRDA has established its own grievance
cell at its head quarters for discontented insurance customers. The IRDA transfers the
complaints it receives to the concerned insurance companies with proper direction. The
Annual Reports of the IRDA contain information about the number of grievance settlements
made by the insurance companies. Dissatisfied policy holders could further knock the doors
of justice by way of litigation which is complex, time consuming and cumbersome; at the
end of it even if the court of law gives a favorable verdict, the consumer has little positive
impact because of the delay. In order to improve grievance settlements mechanism in the
industry, the IRDA appointed a committee to look into grievance redressal system of
insurers and suggest modifications to the regulations for the protection of policy holders.
The report is yet to be submitted.
Most of the insurance polices include an arbitration clause which prohibits parties from
approaching courts for settlements before exhausting other alternative methods of dispute
settlements. The assistance of agents may be taken to solve disputes through arbitration.
Some times the arbitration proceedings may also extends for long period of time due to
various reasons. Also, as arbitration is appointed by the companies, during settlements, they
may have an inclination towards the companies; if the arbitration is appointed with the
consent of the consumer, the copany may not abide by the word of the arbitrator. Finally,
there is a possibility for the dispute to end in litigations.
Some of the insurance company have followed the above mentioned regulations to
establish grievance mechanisms such a:s Jald Rahat yojna, in addition to their own
existing schemes. though there is little substantial evidence this is actually helping
policyholders. The second part of the regulation insists that insurance companies should
provide the addresses of the 'Insurance Ombudsman' which has the territorial jurisdiction.
This provision help the insurance consumers reinforce their right to approach other
grievance settlement mechanisms in addition to those established by insurance companies.
Insurance Disputes and Consumer Law
The consumer forums like the traditional courts are plagued with problems like expenditure,
delay on account of workload, possibility of appeals, procedural delays, etc. Further,
insurance being a typical kind of service industry and being different from a routine contract
sometimes requires insurance expertise to dispose the complaints. Therefore, there is a need
to have an Alternative Dispute Mechanism to deal specifically with insurance disputes. This
need : has led to passing of Redressal Public Grievance Rules 1998 under which the
insurance Ombudsman was created and is functioning. In insurance business there has come

79
a dynamic change. Due to this change there are so many complications also have come in
this insurance industry.
The CP Act, 1986 was enacted with an objective to provide simple; ' speedy and inexpensive
redressal to the grievances of consumers. It is ,pplicable to all States in the Country, except
Jammu and Kashmir, where a sep.arate legislation, the Jammu and Kashmir Consumer Act
is applicable. It covers both the public and private sectors,5 and caters to grievances relating
to all type of goods and services, unless specifically exempted by the Central Government.
The primary condition for application of the law is the consideration in terms of money
(Price), to buy the goods and services. These provisions are applicable to goods which have
been bought on agreements, either fully or partly paid. Thus all services and goods supplied
either on payment or agreements to pay the consideration in future in installments are
covered.
Insurance being a prime component of financial service, any beneficiary under such contract
is considered to be an insurance consumer. The consumer law provides protection to all
affected consumers whose insurance services suffer from deficiencies and defects. Further,
they are also protected against marketing of goods and services which are hazardous to life
and property against unfair trade practice or restrict trade practice or unscrupulous
exploitation of consumers. The consTu1. 1ers law grants to the consumer the right to know
about the quality, quantity, potency, purity, standards of services, costs and provides
mechanism to deal and settle with the grievances. The Act establishes quasi-judicial
authorities at the district, state and national levels to deal with consumer grievances. The
procedure is simple, cost-effective, speedy and efficient, and the interference of courts is
minimal. Only the Supreme Court of India has the appellate jurisdiction upon the awards
granted by the National Consumer Redressal Council on matters of legal interpretation.
In this case 6the dispute whether section is restricted to insurer carrying on life insurance
business.
The provisions in the Act making a distinction between life insurance business and general
insurance business, the keeping of separate accounts and balance
sheets have been enacted for the safeguard of the holders of life insurance policies and they
provide an over-all picture of the business done by the insurer showing the exact state of
affairs concerning the life insurance business of the insurer. These provisions cannot and do
not affect the provisions of S. 52A of the Act.
Section 52A (1) speaks of "an insurer can-ying on life insurance business". It does not speak
of "only life insurance business". Where an insurer is carrying on insurance business of
various kinds which includes life insurance business, he becomes amenable to the provisions
of S. 52A if he is acting
In a manner prejudicial to the interests of the holders of life policies and he would have to
suffer the consequences following the report made by the Controller and the appointment of
an Administrator by the Government.
The winding up of the company would be concerned with its entire insurance business
including life and general insurance business, because there could be no partial winding up
of a company. It was not difficult to imagine that the affairs of the company with reference
to its general insurance business may be in such a hopeless state that winding up may be the

80
only course to be taken to protect the interests of the life policy holders. When the provisions
of the Act are closely ex.amined, it will be noticed that its main policy has been to safeguard
the interests of life policy holdersj who were deeply affected by the manner in which the
insurance business of an insurer was carried on.

We have no difficulty in interpreting S. 52-A (1) to mean that where an insurer was carrying
on insurance business of various kinds which includes life insurance business, he becomes
amenable to the provisions of section 52-A, if he was acting in a manner prejudicial to the
interests of the holders of life policies arid he would have to suffer the consequences,
following the report made by the Controller and the appointment of an Administrator by the
Government.
The provisions in the Act making a distinction between life insurance business and general
insurance business, the keeping of separate accounts and balance- sheets have been enacted
for the safeguard of the holders of life insurance policies and they provide an over-all picture
of the business done by the insurer showing the exact state of affairs concerning the life
insurance business of the insurer. These provisions cannot and do not affect the provisions of
S. 52-A of the Act.
In this case7 the question arise before the Court whether the definition clause are
repugnance to the context and Section 2D of the Act Includes person who has closed his
business.
It was well settled that all statutory definitions or abbreviations must be read subject to the
qualification variously expressed in the definition clauses which created them and it may be
that even where the definition was exhaustive in as much as the word defined is said to mean
a certain thing, it was possible for the word to have a somewhat different meaning in
different sections of the Act depending upon the subject or the context. That is why all
definitions in statutes generally begin with the qualifying words namely, unless there was
anything repugnant in the subject or context. In view of this qualification, the Court has not
only to look at the words but also to look at the context, the collocation and the object of
such words relating to such matter and interpret the meaning intended to be conveyed by the
use of the words under the circumstances.
Therefore, though the ordinary meaning to be given to the word "insurer" is as given in the
definition clause (i.e., S.2 (9)) and refers to a person or body corporate etc., carrying on the
business of insurance, the word may also refer in the context of certain provisions of the Act,
to any intending insurer or quondam insurer. The contention, therefore, that because the
word "insurer" has been used in S. 33 or S. 2D those sections can only apply to insurers who
were actually carrying on business cannot • necessarily succeed and the Courts have to see
whether in the context of these provisions an insurer will also include a person who was an
insurer but has closed his business.
Obviously, S. 2D applies to those insurers who have closed their business. It was not
necessary to enact that section if the word "insurer" here also meant a person actually
carrying on the business of insurance, for the provisions of the Act apply top such a person
proprio vigore. Therefore, when the word "insurer" was used in
S. 2D it must mean a person who was carrying on the business of insurance but has closed it.

81
Ifthat was so, S. 3, which provides for investigation, would apply to such an insurer who has
closed his business, by virtue of S. 2D.
'Any class' of insurance business in S. 2D - Includes all classes. Sections apply to case of
closure of all classes of business.

82
 CHAPTER- SIX

APPRAISALS, SUGGESTIONS AND CONCLUSION

In insurance business in India there are so many complications which have come in the
knowledge of the policy-holders after the maturity of the policy. Insurance business is
complicated and difficult. This holds true especially for insurance organizations and
the problem is more complicated in life insurance products where the contract is for a
very long term, sometimes even extending to a few decades. Therefore, it is indeed
essential for insurance companies to maintain quality of service. The Insurance business
is people-centric and insurance services are provided on solicitation. The Insurance
Regulatory and Development Authority (IRDA), the apex regulatory body of the
insurance industry, endeavors to protect the people who cnsume the service and products
offeed by the insurance companies registered with it. The insurance contracts, being a
standard form of contracts, designed and drafted by the insurers have supremacy over the
purchase of insurance products and services. The consumers of insurance service have
less bargaining and negotiating opportunities and are to opt either for purchasing or
avoiding. The contract of insurance totally depends upon the principle of Utmost Good
Faith. This is the duty of both the partie's that they present there self accordingly the
terms and conditions of the contract of insurance.

In insurance business in India whether it may be public sector or private sector there
are so many complications which are related to the insurance policies. According to the
contract of insurance in every insurance policy there must be at least two parties, one
party will be insurance company which will be called insurer and the other party who
will take the insurance policy to the insurance policy will be called assured or insured.
In the contract of insurance it is implied that both the parties one is insurance company
and other is insured will follow the salient features of the Indian Contract Act, 1872. In
the contract of insurance the most important element is Utmost Good Faith. So this is the
duty of the insurer or

insured to tell the real fact to each other about the contract of insurance. Any party of the
contract of insurance who misled the other party of the contact of insurance this contract
will be invalid and the parties who want to mislead the other party that party have no
right to file a case for the performance of the contract of msurance.

83
The Parliament has enacted so many Acts which are related to the insurance
business. The enactment of Life Insurance Corporation Act, 1956 was a mile stone in
the business of insurance. Another mile stone was in the business of insurance when
the nationalization of insurance business was passed in the Parliament in 1972. Before
the nationalization of insurance business the people were scared about their money and
investment but after the nationalization of insurance business there was a security of
the money or policies in insurance business. Most of the people who did not believe in
the insurance business they invested millions rupees in the insurance business because
this sector of business was very safe in comparison of other businesses. After passing
the General Insurance Business (Nationalization) Act, 1972 there was a guarantee of the
invested money that it will be definitely returned by the insurance company after the
maturity of the insurance policy. Parliament passed this Act that people's faith
was in the government policies.
I

In Insurance Act, 1938 there are so many provisions for the rights of the policy holders.
The rights of the policy holders are given as under:-

· Right to change the name f nominee at_ any time before the maturity of the insurance
policy but after the maturity of the policy he cannot change the name of the nominee.

· Right to mortgage the insurance policy.

· Right to surrender the insurance policy.

These rights of the policy holders have been protected by the post legislations of
insurance business even though these Acts provide so many other facilities to the

policy holders. The Consumer Protection Act, 1986 was enacted with an objective to
provide simple, speedy and inexpensive redressal to the grievances of consumers. It
covers both the public and private sectors, and caters to grievances relating to all type of
goods .and services, unless specifically exempted by the Central Government. The
primary ·condition for application of the law is the consideration in terms of money to
buy the goods and services. These provisions are applicable to goods which have been
bought on agreements, either fully or partly paid. Thus all services and goods supplied
either on payment or agreements to pay the consideration in future in installments are

84
covered.

Before passing the Amendment Bill 2008 the share of the foreigner companies in the
insurance companies of India was 26% which wa:s very reasonable for
'..··-,

participating in insurance business arid any other business. In the year of 2008 the
Parliament had passed an Amendment Bill in which the percentage of participation in
insurance business was enhanced 26% to 49%. After passing this Amendment Bill 2008
if any foreign company who .wants to run insurance business in India, now they can
purchase 49% share of the insurance company; The present scenario of insurance
industry is that the foreigner companies will tun the insurance business according to their
rule and regulations whibh will be contrary our rule and regulations. Now the question
will arise what should be the role of IRDA in future? Because the rights of the Foreign
Insurance Company who have purchased 49% share o any insurance company which
have already
running insurance business in India, the decision taking power automatically
i
increased and the regulation ofIRDA will absolutely decreased.

The insurance consumers have the option to select the appr,opriate authority and forum,
be it the.insurance Ombudsman or the Consumer Councils, to .settle their disputes. Both
the institutions have their own set of strengths and weaknesses as discussed earlier. In
order to get benefits they may opt for Consumer Councils, as they are widely spread and
located. The process of settlement of disputes is easy
and inexpensive like that of Ombudsman. The other advantage of !Consumer
:

Councils is the legal binding upon the parties, which is lacking in the case of
Ombudsman. The limitations of Ombudsman, such as the pecuniary jurisdiction,
geographical spread, and appeal against the awards, are the strengths of the Consumer
Councils. Though the Consumer Councils do suffer from the lack of expertise in the
field, this shortcoming may be addressed by providing a specialized bench with
experienced members, to deal with insurance cases; this will certainly help the
consumers to mitigate their sufferings and have access to immediate justice. The
institution of Ombudsman has to be further strengthened by removing its limitations
and also establishing its offices at urban places,
especially where there is an insurance company, this will give the consumers on easy
access to justice. 1

85
The capital of the Life Insurance Company before passing the Amendment Bill 2008 it
was five crores but after passing the Amendment Bill 2008 it becomes hundred crores.
So any persorn who want to run insurance business in India first of all he will deposit
hundred crors in the Reserve Bank of India as a security. So every insured have
ce1iainty that their money rriust be returned by the.-...i.,,nsurance
company after the maturity of the insurance policy. At present in every business
there may be venture but insurance business is that kind of business in all circumstances
a policy holder who pays the installments within time; he will receive certain amount
after the maturity of the policy. So there is no venture in insurance business in India.

The main function of the IRDA is to regulate the insurance business in India, whether
it may be public sector or private sector. Before the year 2000 there was monopoly of
Life Insurance Corporation this was the sole company who run the life insurance
business in India. After the year 2000 there are so many private players has come in the
field of life or non- life insurance business. After the entry of the private insurance
companies, the insurance business has come very irregularities. So the role of IRDA to
see the regulatory mechanism over insurance business in India, become very complicated
and critical.

Parliament had passed IRDA Act, in 1999. After passing this Act there were so many
Amendment Bill has come through Parliament. In this present scenario the monopoly of
the life insurance company has been finished because so many life insurance companies
have come in the field of insurance business. The facilities provide by the private
insurance companies is far better than public life insurance company. The private
insurance companies providing better facilities in so many other insurance businesses. In
all life insurance policies which is issued by the public life insurance company, every
insured secure that after the matl.lrity of the policy a stipulated amount will be come in
the hand of insured but in case of private life insurance companies nobody knows
what will be come in the hand after the maturity of the insurance policy. This was only
due to the recession of Indian market and foreign market.

Life Insurance Company is a government company so the belief of tJie people in this
company is very much rather than the other private insurance companies. At the time of
the recession every private insurance company was going on loss but the public life
insurance company was going on profit, this was only due to the faith of the people in

86
public life insurance company. There are so many examples
which show the public faith in public life insurance company. In th month of
I

January 2009 an insurance plan was announced by the public insurance company,
i.e. Jeevan Varsha; in this plan there was a guarantee of the refund 'of invested money.
At that time the public invest 8000 Crores rupees in the public life insurance
company. This was happened at the time of the recession when all
companies of any business was going on loss. The Indian people. believe in
'
government sector and the Life Insurance Corporation of India is a government
company so the.faith of the public is going to increase day by day. In :the year of 2007
there was so many unit linked plan announced by the public insurance company,
thousand crores rupees invested by the public in the life insurance company. So these
facts show that the faith of the people in governmcint sector is very much rather than the
private sector.

There are so many magazines which are playing very important role to protect the
rights of the insurance policyholders because the focal point of the insurance business is
a consumer. In these magazines Insurance Regulatory and Development Authority
declares the benefit in the insurance policy ·which are very beneficial for the
policyholders. These magazines also announces the annual reports of the insurance
companies which are very essential for the investors or policyholders. These magazines
also tells about the advantages and disadvantages of the insurance companies. In these
magazines Central Government also announce the directions for the insurance
companies to protect the rights of the policyholders about his insurance policies. These
magazines also provide the informations about the concept of Insurance Ombudsman
because this concept is very beneficial for the insurance policyholders. The main
function of the Insurance Ombudsman to hear the grievances of the insurance
policyholders and to resolved that grievances of the policyholders as soon as possible.
The concept of Insurance Ombudsman should be printed in the insurance policy and it
should
be told by the insurance agents to the policyholders. These magazines also helps
I

the policyholders about rise and fall of the insurance companies which is very
important for the insurancr policyholder because if he want to invest his money in the
insurance business he will definitely invest his money in the reliable and profitable
company. So we can say that these magazines are very important for the policyholders.

87
 Some magazines providing most of the informations which are very essential for the
policyholders and researcher also putting some informations through these magazines.

Insurance laws in for a revamp

Insurance laws are in for a complete overhaul. The initiative for the purpose has been
taken by the Law Commission of India to put all insurance laws that are in force at
present under the microscope.

Following the Law Commission's decision to undertake what it has promised would
be "a comprehensive review" of all the insurance laws and to prepare a consultative
paper for the purpose, the Insurance Regulatory and Development
Authority (IRDA) has sought feedback from all quarters on the possible changes that could
be incorporated in the present laws.
The Law Commission is a powerful body set up by the Goverrurtent in the
legislative arena that reviews the existing statutes from time to time 'and in the
process provides valuable inputs to the official machinery in making amendment to the
laws. Mr Justice Jagannadha Rao chairs the present Sixteenth Law Commission.

Among the major insurance laws that are in force today are the IRDA Act, 1999, the
Insurance Act, 1938, the LIC Act, 1956 and the General Insurance Business
(Nationalization) Act, 1972. While the IRDA Act has been one of the most
important insurance legislations of:r,cent times since the enactment of the law
provided the legislative backing for throwing open the insurance industry to private
competition, the Insurance Act, 1938, has been the core of the insurance laws in India
during the pre-nationalization days and later including the period of nationalization and
the subsequent opening up of the industry. The LIC Act and GIBNA provided the basis
for the earlier nationalization of the insurance industry.

The review undertaken by the Law Commission is expected to focus on the removal
of contradictions in the various laws and also the ways to refine it further. One of
the likely aspects that the Commission would look into is the possibility of further
improvements in the IRDA Act in order to provide it with further teeth to regulate the
sector more effectively. Of late, there has been a general feeling that the insurance
regulator cduld do with some more powers to enforce its diktat. This has been felt
ever since the IRDA could not fore its wish on the Life Insurance Corporati °(Lie) to

88
 hike it capital base in line with other privat insurance companies. It has been
reinforced more· recently due to the defiance of the public sector non-life insurance
companies in following the regulator's directives on the motor insurance front with
repeated allegation by the transport industry of overcharging of premium despite
the imposition of a regulatory cap.

The Ministry of Finance is, however, not likely to be a party to the review exercise at
present. It may enter the picture once the Law Commission completes its study and
finalizes it views. When contacted few days prior to the issue of the present IRDA notice
for review of the laws, officials of the Finance Ministry had
said that no major proposal for a review of the insurance laws are at present pending
with the Ministry.2

IRDA wants private companies to speak publicly about their policies

Private insurers will have to put in place a "whistle-blower" policy, allowing

employees to raise concerns internally on possible irregularities in financial reporting and
governance weaknesses. In a draft of its first comprehensive norms on corporate
governance, insurance regulator IRDA has proposed prompt action against insurance
companies that do not follow these norms aimed at protecting policyholders' interest.

The whistle-blower policy will allow employees who spot irregularities to report in
confidence to the chairman of the board, or a panel of the board, or to external auditors.
The appointed actu1;1ry and statutory internal auditors also are under obligation to
report any irregularity to IRDA if any insurer fails to take corrective action.
The recent scam at IT sectors has turned the spotlight on the role of statutory auditors
and the role of independent directors. The guidelines provide for joint audit of each
insurer by two statutory auditors. The eligibility criteria for auditors include being in
continuous practice for 15 years and a two-year cooling-off period on completion of a
tenure of 4-5 years as a statutory auditor in an insurance firm.

IRDA member said insurers need to familiarize themselves with corporate governance
structures ahead of a listing on stock exchanges. The regulator is also
!.-:·' . .• .
working on extra financial disclosures to be made by companies that go·public. The
draft guidelines make it. mandatory for insurers to set up panels on audit, investment,

89
 risk management, asset liability management and policy holder protection.
It has also laid norms for significant owners and controlling shareholders. Any
conflict of interest of significant owners- shareholders who singly or together with their
associates own over 10 per cent. of the capital of the insurer.-should be disclosed to
the regulator, according to the guidelines.

Meanwhile, private life insurers, who ate yet to generate a surplus in their life fund,
can declare a bonus out of l).areholders funds for up to 10 years of
.: ·,:··
operations. The regulator has extended the special dispensation that was available for
only seven years earlier. :With the seven years coming to an end for most
companies, many of them had represented to IRDA to continue'. with this
'
dispensation as they are yet to generate a surplus. The regulator has 'acceded to
this request through a circular issued on Friday.3

ICAI mulls separate standards for insurance accounting

The Institute of Chartered Accountants of India (ICAI) is planning tb come out with
insurance-sector-specific accounting standards whieh will provide more information to
stakeholders, a top official said.

Accounting body ICAI has set-up a group of experts for this purpose which has
already started working on it. The recommendations once apprdved would become
mandatory. The new accounting norms to be recommend d by ICAI
' ,··'· '
:

would be additional to the 32 notified accounting standards.

The focus of these new recommendations would be on the overall sector and not on
some specific areas, he said. The experts in the group would come out with a white
paper which would be forwarded to the ICAI president who would then recommend it
to the Accounting Standards Board.

"The Accounting Standards Board will then keep the white paper in public for
comments. After seeking comments from the public and other stakeholders, the Board
will again send the papers to ICAI council. Once approved, ICAI would consult the
insurance regulator, IRDA, and recommend the standards for the insurance sector", the
ICAI President said.4

IRDA plans to cap salaries of insurance firm's CEOs

90
Insurance regulator- IRDA said it is considering to cap the salaries of chief executives
of the insurance companies so as to maintain expenses in a reasonable range.

"We are also mulling to cap the managerial remuneration of msurance companies," the
IRDA Chairman told reporters here.

There should be limit on what the policy holders could be charged for paying
compensation to the managerial staff, he said. Around 40 life and non-life insurance
companies are there in the country. At present, the remuneration of CEOs are
determined by IRDA.
'
On allocation charges for Unit Linked Investment Plans (Unit Linked Insurance
Policies), he said that IRDA is also keen to see that some kind of cap is imposed. Further,
he said that Unit Linked Insurance Policies had become the exclusive domain of the
private insurance companies so far. He, however, expressed satisfaction that the private
players were now laying stress on the traditional products. "This is good news for the
industry," he said.

While on non-life insurance sector, he expressed concern that the companies were
underwriting to an extent which was not sustainable. This had resulted in

increasing losses and financial health of the sector was threatened. Post detariffing,
profits of non-life companies had come down, he said.

The IRDA chairman said that the insurance market in India is too crowded and even
then there is enough room for more companies to set up shbps in the country. 5

IRDA to introduce uniform valuation norms among insurers

Insurance Regulatory and Development Authority (IRDA) has decided to make the
valuation exercise of insurance companies simpler and homogeneous. It will shortly
introduce a uniform and standard valuation methodology based on the companies'
embedded value from this fiscal.

Embedded value is computed. on the basis of present value of future profit plus adjusted
net asset value (NAV). "The insurance watchdog has engaged the Institute of Actuaries
to fom up the methodology for simplifying the valuation of insurance companies," the
IRDA chairman said.

91
He believes this new practice would dispense with the confusion in current disclosure
mechanism, which is based on European and American practices. As most local insurers
are structured as joint ventures with either European or American companies, disclosures
are made as per the practices prevalent in these countries.

Due to the absence of any standard valuation formula, there are instances of an
msurance company rece1vmg widely varied valuations from three different valuers-all
reputed ones.

The new practice would help the insurers access the capital ·market which is allowed
after 10 years of their operations under the existing guidelines. IRDA is
also working on the merger and acquisition guidelines for insurance players. 6
IRDA lists disclosure norms for companies going public

Insurance companies that are planning to launch initial public offerings (IPO) to raise
capital will have to disclose their valuation, investment portfolio, product offerings and
their distribution channels, so as to help investors gauge the financial strength of
msurance firms that are planning to list.

"In fact, all insurance companies will have to comply with these additional disclosures as
the goal is to bring in more transparency in their operations. For instance, it will be
mandatory for all insurance firms to disclose their embedded or intrinsic value every year",
Insurance Regulatory Development Authority (IRDA) chairman told.

But SEBI rules allow loss-making firms to launch IPOs. The only caveat is these firms
have to go through the compulsory book-building process for price discovery. "We
reckon that loss-making insurance firms can go for an IPO provided they complete I 0
years of operations", he said.

Foreign promoters of insurance joint ventures are expected to bring in more capital
after the Government amends the insurance law to hike the FDI cap from 26 per cent. to
49 per cent. The I 0 year stipulation on IPOs is set to go once the law is amended.

One of the life insurers has reportedly announced its plans to launch an IPO. Analysts
reckon this would set the trend for valuations of life insurance companies that are
linked in a big way to the performance of the equity markets.

92
The recommendations, to be vetted by the Institute of Actuaries of India, are set to form the
basis for various disclosures under IPOs, inclusive of market consistent

• [Source : www.economictimes.com dated June 11, 2009]

embedded value. Insurance companies have to disclose their investment portfolios at
regular intervals.

"The current solvency regime is simple and does not distinguish a risky portfolio from a
not-so-risky one. The economic capital for a company must take into account various
risks faced by the insurers and accordingly charge the capital. The economic capital
will form the basis for moving towards risk-based capital in future", said the IRDA
member (actuary).7

Insurance regulator seeks remedy for "pre-existing illness"

Disputes over medical insurance claims are on the rise in consumer courts across Mumbai
and Thane, an increase attributed primarily to the fact that insurance companies are
rejecting claims citing "pre-existing illnesses".

According to the Insurance Regulatory Development Authority (IRDA), applicants have

to submit their medical records, details of ailments,. diseases, diagnosis and
hospitalization of the previous four years when taking medical insurance policies.

Insurance companies agree that there needs to be more clarity on the term, but add that they
have enough evidence to back their findings when they reject a claim. But consumer
activists say that many private sector insurance firms provide medical insurance
without even a simple check-up for people below the age of 45.

A consumer activist pointed out that the insurance companies' claim that the policy
holders have been suffering from a disease for a long time :is "proved wrong when
the case comes up for hearing at the consumer court as they do not have any solid
evidence to back up their claims. They come with medical reasons not even remotely
connected with the policy holder".

93
To deal with the situation, the IRDA has now decided to introduce a uniform
definition of pre-existing illnesses that will be binding on all companies. 8

IRDA weighs cut in ULIP charges by 500 bps

Unit-linked insurance plans (Unit Linked Insurance Policies), one of the hottest products
in a bull run, could become more attractive for retail investors.

Insurance Regulatory and Development Authority (IRDA) is looking at a 500 basis

point cut . on the charges levied by insurance companies on ULIP investments. This
will make the product more attractive by increasing returns.

The regulator is likely to fix' a ceiling on charges in such a way that average charges
come down by 500 basis points. A ceiling on overall charges will give insurers the
leeway to distribute the charges across various expenses and at the same time protect
policyholders. "A panel is working on the cap and we will make an announcement
soon", said the IRDA chairman.

Besides commission, investors pay a host of charges to the insurer in the beginning of
the year, including premium allocation charge, policy administration charge, mortality
charge and rider charge. The difference, between the premium payable each year and
total charges is the money that is available for investment.

"Any reduction in charge should be made effective in the first three years as this will
enhance the return for the policyholder", said the chief executive of a life insurance
company, on condition of anonymity. He added that there was also a need to legalize
rebating commission on life insurance as this would allow the buyer to bargain for the
best deal with his agent.

Total charges on Unit Linked Insurance Policies with an average term of 17 to 20 years
ranges from 28 to 30 per cent. of the total premium. The charges could now be capped at
25 per cent., with a 500 basis point cut.

The insurance regulator's move needs· to be viewed against the backdrop of a spate of
complaints from the mutual fund industry on hefty commissions being paid to
insurance agents selling Unit Linked Insurance Policies and other traditional products.

94
The Securities and Exchange Board of India, on the other hand, has capped the
expenses of the mutual fund industry.

It has also scrapped the entry load on m_utual funds and the commission payable to
distributors will now be mutually agreed upon by the distributor and the investor.

The commission structure for insurance agents. is front-loaded as a large chunk of the
money is paid in the first year. IRDA will, however, not get into micro-
management of various charges.

"As Unit Linked Insurance Policies are positioned as long-term investments, we need to
make the product attractive to retail investors. At the same time, we want to ensure that
insurers have the freedom to take a decision on the distribution of charges across
different heads, including the commission payable to agents", said a senior IRDA official.
A part of the premium in Unit Linked Insurance Policies is invested in equities or
government bonds, depending on the choice made by the policyholder. The returns are
reflected in the increase in the value of the unit, min-oted by the net
asset value (NAV) declared by the company. Private insurers gamer over three quarters
of their new business premium from Unit Linked Insurance Policies.9 Consumers to get
more perception in mediclaim settlements
Consumer representatives may get a say in claims settlement for mediclaim
policies if the recon1mendations of the Third Party Administrator Committee are
I
accepted by the insurance regulator.
The committee headed by Mr. S. B. Mathur, Secretary-General of the Life Insurance
Council, has recommended the formation of a common body comprising members
from the TPAs, life and non-life insurance companies and hospitals and representatives
from consumer groups.

The proposed body is expected to simplify and speed up cashless claims settlement of
insurance policies. Its operation is expected to be independent of the insurance
ombudsmen services. The Ministry of Health, through its Directorate- General, might
facilitate m the functioning of the new body. Currently, the policyholders have
to rely solely on the TPAs which are intermediaries between msurance companies and
hospitals for settlements of claims.

95
"Hospitals now are not under .the IRDA and their representation in the proposed body
therefore could at least make them more accountable", the Secretary- General of the
Life Insurance Council said, adding that the objective of the
proposed body would be to help standardize the settlement procedures and bring
transparency to the system.10

Mergers and acquisitions norms for insurance sector soon: IRDA chief

Speaking at an Assocham summit on the Indian Insurance Industry 2009, the Minister
urged private insurance companies to find ways and means to explore the rural sector.

He pointed out that the growth of the insurance sector would crucially depend on the
extent to which the vast potential in the rural sector is tapped by the compames.
The Insurance Regulatory and Development Authority (IRDA) Chairman, told
presspersons that the mergers and acquisitions guidelines for the sector are likely to be
finalized in the next two months.
Currently, there are no specific M & A guidelines in the insurance sector in the country.
The Government seems to be in no hurry to hike the foreign direct investment (FDI)
cap in the insurance sector.

When asked if the Insurance Law Amendment Bill would come up in the Lok Sabha
this session, the Minister of State for Finance, remained non-coD:nnittal.

He also parried questions from presspersoils as to whether the Bill to facilitate LIC to
hike its capital will be taken up by the Lok Sabha in the current session. Currently, FDI
in insurance companies is capped at 26 per cent. The new norms would
encourage cpnsolidation in the insurance sector.

According to the provisions of the Insurance Act, if a company is not in existence for 10
years and wishes to launch an IPO, then the only authority which has powers to do
so is the Government and subsequently the company should
approach the Government in the matter, he said.11

IRDA to speed up grievance redressal, virtually

Complaint redressal by insurance companies is set to get a lot speedier. A new web-

96
based complaint tracking system by the insurance regulator will let both, the
complainants, and the regulator, check the status of their grievances.

In a bid to strengthen the consumer gnevance mechanism, the . Insurance Regulatory

and Development Authority (IRDA) is setting up an automated complaint tracking
system with insurance companies-life and non-life. Through this facility, customers
can check the status of their complaints on-line.

"The plan is to create a portal wherein insurance companies can upload data of their
complaints. Customers can log on to this portal and track their complaints.

II
[Source : www.hindubusinesslitie.com dated July 24, 2009]
While the insurers will have access to only their own data, IRDA will be able to access
the information submitted by all companies," the IRDA chairman said.

If, due to dissatisfactory complaint resolution, the policyholder approaches the

regulator again, they have limited means of ascertaining the history of the complaint, as
the system is not automated. Therefore, during a meeting with insurers in February
this year, IRDA had mooted this proposal, which was accepted by the companies. 12

Supreme Court Bench to decide on insurers' liability to pay claims under

MV Act

A larger bench of the Supreme Court will decide the issue of whether insurance
companies can be compelled to pay the claim even if they are under no. liability to pay such
amount. A bench comprising Justice Markandey Katju and Justice A. K. Ganguly said :
"No doubt, there are some decisions of the apex court which have taken the view that even
if the insurance company has no liability, yet it must pay and later on recover it from the
owner of the vehicle, the court said. The bench said, we have some reservations about
the correctness of such decisions of this court (SC)".

The court framed two issues to be decided by a larger bench of the apex court. One, if
an insurance company can prove that it does not have any liability to pay any amount in
law to the claimants under the Motor Vehicles Act or any other enactment, can the
court yet compel it to pay the amount in question giving it liberty to later on

97
recover the same from the owner of the vehicle?

Two, can such a direction be given under article 142 of the Constitution (discretionary
power of the apex court) and what is the scope of article 142? Does article 142 pe1mit
the comt to create a liability where there is none?

12
[Source : www.economictimes.com dated July 28, 2009]
The court passed the order on the plea of National Insurance Company. It said there
was no valid insurance coverage on the date of the accident, i.e., November 30, 2003.
The cheque towards premium for renewal of the policy was issued oh November 29,
2003, but it was dishonored. Hence, the contention of th insurance company was that it
has no liability to pay any compensation amount to the claimants since there was
no insurance coverage on the date of the accident.

Despite this, the Andhra Pradesh High Court had directed the insurance company to pay
the compensation amount to the claimants with liberty to recover the same from the
owner of the vehicle. 13

IRDA's stand toughens as agents switch companies

In a bid to ensure that there are fewer lapsed policies, the insurance regulator has made it
tougher for agents to shift loyalties. The new guidelines enslilre that all agents-
individuals, corporate as well as banks-continue to. sell policies of the same insurance
company for at least three years.

Life insurance companies have been taken aback by the onerous respbnsibilities placed
on them for granting a "no objection certificate (NOC)", which enables their agent to
move to another company. In the life insurance industry, those policies where the
insurance agent has quit the organization are termed as "orphan" policies, as there is no
intermediary to service them. Historically, lapse ratio has been higher among orphan
policies when compared with policies that are serviced by an agent.

Insurance Regulatory and Development Authority (IRDA) has p in a number of

preconditions that the agent has to fulfill before he can obtain an NOC from his
principal. Companies have also been asked to withhold renewal commissions of
'

98
Insurance firms say that many of the guidelines are extremely demanding and
insurance companies would simply refuse to grant NOCs to agents, who want to JOin

another company rather than follow the difficult procedure. Insurance companies
have been asked to intimate to each policyholder that their agent has quit and there are
alternate arrangements being made to service them.
He added that individual agents might try to work around the new norms by
appearing for the qualifying examination once again to get a duplicate license. 14

India committed to clear insurance bill: Minister

India is committed to clear the Insurance Amendment Bill that seeks to bring in more
foreign investments in the sector, Junior Finance Minister said.

"They are under preparation and being given final shape for discussion in Parliament,"
he said on the sidelines of a banking conference, referring to the details of the bill.

Indian laws currently allow 26 per cent. Foreign holding in insurance companies, which
the bill seeks to raise . to 49 per cent. and opening the insurance sector would build
tremendous confidence among both domestic and foreign investment community.
India has 22 life insurance compames, 21 non-life firms and one remsurer, according to
data from the website of the regulator, Insurance Regulatory and Development
Authority. 15

Ambiguous insurance claims under new tax code purview

The insurance claims paid to policy holders in the event of death or disability will be
subject to payment of income-tax if the new Direct Taxes Code proposals are
implemented.
The Code· proposes that contributions by the insured are subject to the EET method
of taxation of savings. This means that the sum received under a life

14
Source : www.economictimes.com dated September 8, 2009]
15
[Source : www.economictimes.com dated September 8, 2009]
321 • •

insurance policy, including any bonus, is taxed. Only a pure life insurance policy is
exempted from tax. In a pure life insurance policy, the policy holder receives money

99
only when death occurs.

Life insurance companies are perturbed that the tax proposal could hit their business.
Life insurers are taking up the issue with the Government tprough the Life Insurance
Council.

According to an insurance company official, the council is sending its suggestions to the
Government and the regulator.

"Even if you are in the lower tax bracket, when you get the sum assured, it will be a lump
sum amount. This would catap_ult you to a higher tax bracket and you will pay higher
taxes," said a CEO .of a private insurance company.

Only term insurance policies would be exempted. Both Unit Linked Insurance Policies
and traditional products would be taxed. The return would be taxed even in case of
disability or death, said a Chief Financial Officer of a private insurance company.
The Direct Taxes Code has a section which says that maturity proceeds of an
insurance policy shall be exempt only if the premium does not exceed 5 per cent. of the
capital sum assured.

This means that for a premium of Rs. 10,000, the sum assured will be exempted only if
it is greater than Rs. 2 lakhs. However, most of the products sold by companies do
not match this criteria, he said.
There is also ambiguity on whether only the returns will be taxed and not the
principal.

It is not clear whether the tax would be applied on the basis of the real value of money
invested or on the nominal value, the Secretary-General, Life Insurance Council, said.

Government nod a must for insurance companies eager to go public

The insurance regulator has said that no company in the insurance sector can go public
until the Government amends insurance laws.

Before companies go public, the regulator wants them to strengthen their disclosure
norms-the most imp01iant one pe1iaining to valuations. IRDA wants a uniform valuation
method for companies based on the principles of Market Consistent Embedded Value

100
(MCEV).

The universal practice has been the use of "embedded value" for valuing insurance
businesses during M & A deals and for management compensation. Unlike other
businesses, the w01ih of an insurance company also depends on the future stream of
earnings through the present business. MCEV takes the model further by
incorporating a mark-to-market requirement. While a higher level of unit-linked
insurance and term insurance pushed up valuations under MCEV, annuity business
turned out to be drag on valuations in the initial years.

The IRDA Chairn1an said, "If you want to reach out in a country which is as vast and as
widespread with difficult terrain, with varying degrees of communication capability and
efficiency I do not see how you can have a more efficient system as this" while referring to
the agency system.

The regulator expressed concern over the surging management costs of life
. .
msurance companies.

He added that commissions in life insurance were not as high as were being made out to
be. "If you take the gross written premium (GWP) and work out what the commissions
are as a percentage of GWP, it ranges between 7 per cent. and 12 per cent. If you
calculate it on the first-year premium, it varies from 12 to 15 per cent., that's about it." he
said.
.-: ..

ccording to the chairman, IRDA, competition following de-tariffing two years ago has
put pressure on underwriting margins of non-life companies. He added that non-life
companies should share ·data among themselves to ensure that they have better
underwriting experience. 17

Third-party policy, a statutory cover for auto insurers

Insurance companies may soon have to mandatorily sell a minimum number of motor
third-pru.iy liability policies. This follows proposed amendments to the Insurance Act,
1938 which aims to ensure that insurers do not shun proposals for the mandatory yet
unprofitable third-party cover.

This amendment is a part of the omnibus insurance legislation that seeks to amend

101
 ·r· .
existing laws. The most-publicized portion of this amendment is the part which seeks to
increase foreign direct investment in insurance from 26 per cent. to 49 per cent. The
insurance bill wants to make motor third party insurance more
accessible to buyers as this is a statutory cover.

The third-party insurance portfolio, which provides compensation to victims of road

accidents, generally does not make profit as total compensations awarded by the motor
accident claims tribunal are more than the premium collected. The losses are largely
because of claims by commercial vehicle accident Victims. To ensure that no single
company becomes the victim of adverse selection, insurru.1ce companies have agreed to
pool together their premium and claims from third party insurance and share the losses.

However, there is no quota on the basis of products. It is expected that the

regulator will fix . an obligation based on the level of business done by ru.1
insurance company in the immediate preceding year after the amendments take place.

The amendment to the Act will replace the motor pool an·angement, which is

17
[Source : www.economictimes.com dated September 18, 2009]
limited to only commercial vehicles and replace it with a quota system for all
vehicles. Some insurers fear that such a system would perpetuate cherry picking as all
companies would try to fulfill their targets by writing profitable third-party insurance for
private cars. Insurers are reluctant to comment on the impact of the legislation until they
discuss the proposals at an industry level. 18

IRDA show deep concern over FINWEB proposal

The insurance regulator IRDA has shot-down a proposal to register all financial advisors
with the Financial Well-Being Board of India (FINWEB), an agency to write rules on
the common minimum standards for over 3 million sellers of insurance, pension and
mutual fund products.

The proposal is being interpreted as a back-door entry for FINWEB to take over the
powers to license insurance agents and brokers. Going by the consultation paper on
"minimum common standards for financial intermediaries and financial education,"
FINWEB will also have a self regulatory arm to bring all financial

102
advisors under one common standard and a Financial Literary Cell that would arm
I
to make Indians financially literate.

But the IRDA has opposed any new arrangement to create a new architecture for financial
sector advisors. "The mandate of the insurance regulator is tci find the fine balance
between the duty to regulate, promote and ensure the orderly growth
of the insurance business, re-insurance business and protect the interests of policy-
holders. The insurance regulations have achieved this balance," the IRDA chainnan said.

While pension products in the New Pension Scheme have no load, mutual funds have
become load free from August this year. The paper has suggested slashing the up-front
commission embedded in the premium no more than 15 per cent. (of the premium). This
should fall to 7 per cent. in 2010 and nil· by 2011.

18
[Source : www.economictimes.com dated September 28, 2009]
325

"The consultation paper presumes that every product has got a loading up to 40 per cent.
during the premium paying period of 10-15 years and even extending up to 50 years, which
is a fallacy. Similarly, the data high lapsation rate in the insurance sector is mis-leading as
the consultation paper picked up data on just one private life insurer with a market share
of less than 1 per cent.," said the IRDA chairman. A policy lapses when policy-holders
stop paying the premium ahead of the maturity period.

The IRDA has also countered the allegation that the growth in Unit Linked Insurance
Policies was fuelled by mis-selling, saying it was not borne out by any analytical
research. The recent cap on ULIP charges is meant to ensure greater transparency, he said.

"There is need, for a higher risk cover to be provided in a cost effective manner. But a
consultation paper does not give any approach to achieve this financial objective", the
IRDA has said.19

Regulator unveils disclosure norms for insurers going public

As insurance companies get closer to entering the capital market, the Insurance
Regulatory and Development Authority (IRDA) has come out with public disclosures

103
guidelines, making it mandatory for these companies to provide data for a minimum four
to five years.

The guidelines will come into force from November 1.

The regulator said the disclosures on a quarterly and annual basis were in line with
the guidelines of the International Association of Insurance Supervisors. Under the
new regime, insurers will have to give information about the management and
company philosophy as well as the investment profile throwing light on the balance
sheet. In addition, the regulator wants insurers to provide
information on risk concentration, solvency . and business statistics, including
I

claims ratio, persistence ratio, number of policies expiring and solvency ratio.

19
[Source : www.econoniictimes.com dated October 5, 2009]
326

Under investment risk and performance parameters, the regulator wants insurers to
disclose investment objectives, policies and management, asset class
segregati•on, per1.s:'o. rmance measurement and n.sk exposure. 20

Insurance companies push for uniform hospital rates

In a move to control health cover costs, insurance companies are bargaining hard with
hospitals for a standard rate card. One of the assurance companies has told corporate
customers that cashless reimbursement will be only to the extent of the negotiated price
and if any policyholder goes to a hospital, which charges more, the difference will have
to be borne by the policyholder.

The third-party administrator (TPA) MediAssist, has circulated to all group mediclaim
policyholders a list. of hospitals and the "reasonable charges" levied by them for various
procedures. The TPA has asked corporate to ensure that their employees avail of
cashless facility in these very hospitals.

"Should they avail the treatment for these procedures in any other hospital? We shall
restrict the settlement of the claim only to . the limits indicated in the attachment and the
employees shall be ·liable to meet the difference in the amount," the TPA has said.

104
The rate card circulated provides a matrix of standard charges for secondary and tertiary
providers in the premium and non-premium categories across various
. procedures. The tariff rates vary for metros where provision is made for higher costs.
However, some corporate are not happy with the change in terms.

The president of the Association of TPAs, said all TPAs are trying to introduce a
standardized pricing. "There are three benefits in standardizing prices for planned

20
Source : www.businessstandard.com dated October 9, 2009]
327 . ·

surgeries. First, it is an administrative convenience since, it is more transparent and it

also reduces claims.1121

Use of technology to reduce cost of insurance products

Simplification and standardization of life insurance products and development of

alternative distribution channels based on technology to achieve reduced cost are vital to
give a fillip to the key sector, a top industry body has said.

According to a paper to be presented at the FICCI Conference on Insurance here,

simplification and standardization of life insurance product structure is required to ensure
customers comprehend the product better.

On the distribution front, FICCI emphasized on the need to develop alternative

channels based on the technology available to achieve reduced cost and increased reach.
"The industry needs to look at new and innovative ways of cost reduction.
The industry could possibly leverage on the electronic channels such as mobile
!
phone and e-mail marketing for reducing the cost."

"Efforts need to be initiated to augment reach in a cost effective manner. Direct

insurance is one such example of cost effective means of reaching customer." To
overcome the challenge of distribution there is a need to develop low-cost innovative

105
distribution strategies. The industry needs to explore effective Bancassurance tie-ups
to utilize entire banking infrastructure for the Q.istribution of insurance products, the
industry body said.
I

The industry could also look at extensive tie-ups with micro finance institutions, SHGs,
NBFCs, co-operative institutions and other rural institutions to leverage their network
to enhance reach, FICCI noted.

The sector needs to leverage on the technology available and on the e-govemance projects
of the Central and State Governments to expand reach in the rural areas, it said;

21
[Source : www.economictimes.com-dated October 7, 2009]
328

The industry needs to move away from complex to simple and less legalistic,
reasonably priced and hassle-free policy issuance and claim process. There is a need to
create a composite product that serves all the insurance needs of the customer, the
FICCI paper said.22

IRDA to take up issue of show cause on Unit Linked Insurance Policies as it

leaves door open to backfire

The life insurance industry has decided to respond to SEBI's show-cause notice on unit-
linked insurance plans stating that these are products approved by the insurance
regulator and are being sold for several years as insurance plans. Life insurers met
with the Insurance Regulatory and Development Authority (IRDA) to discuss the
show-cause notice served on them by SEBI. The companies had received notices
from SEBI at different points of time. While some companies had received the notice
more than a week ago, some had received a letter only three days ago. SEBI has not
attacked Unit Linked Insurance Policies as a category but has picked up individual
plans which have been named in its letters to insurance companies. Some companies have
received queries in respect of one product while others have been questioned about several
of their products.

Some companies have sought a legal op1mon on this matter and have been advised
that the product is well within the definition of the Insurance Act, 1938.

106
 Sources close to the market regulator said SEBI did not see this as an issue between
two regulators. Companies regulated by SEBI, for instance, also sometimes receive
queries from other regulators or agencies such as the Company Law Board.

But the insurance industry sees this as a fallout of the traditional rivalry between life
insurers and mutual funds. Mutual funds have for long complained against

22
[Source : www.economictimes.com dated January 10, 2010]
Unit Linked Insurance Policies stating that insurers sell a similar product but are
allowed to pay much higher commission, resulting in banks and other distributors pushing
mutual funds.

Last week, the market regulator sent notices to life insurance companies, asking them
why they have not sought SEBI permission before selling Unit Linked Insurance
Policies. The SEBI pointed out that the structure was similar to mutual funds and were in
the nature of collective investment schemes.23

Consumer court insist policy holders to make insurance claims in writing

An insurance company is not liable for any deficiency of service if a policy holder fails to
submit the information about the accident, damage and claim in writing, a consumer court
has held.

The District Consumer Disputes Redressal Forum (Central) dismissed the complaint on
the ground that no surveyor could be appointed by the company to assess the insurance
claim in the absence of claim form and without having any information of the accident.

"Without the infortnation of the accident and damage to the vehicle and in the absence
of claim form, the c9mpany could not have appointed any surveyor to assess the
damages, II the Forum said. The Forum noted that the complainant failed to produce any
medical evidence relating to the accident.

The complainant met with an accident in 2004 and claimed to have received
treatment in hospital. The insurance claim for damaged vehicle was repudiated by the
company on the .ground that they were not informed about it.24

IRDA hits back at SEBI on fund regulation

The Insurance Regulatory and Development Authority (IRDA) has said the
. '

Securities and Exchange Board of India's (SEBI) notice to insurance companies

107
on unit-linked insurance plans (Unit Linked Insurance Policies) sold by them was
"misconceived on conceptual, legal and structural grounds".

In its letter, the insurance regulator said the road map for regulation of Unit Linked
Insurance Policies by IRDA was "well laid down, and settled," and there was "no merit"
in the contention that insurers must obtain a certificate of registration from the SEBI for
selling these products.

Following the SEBI show-cause notice on January 15, life insurers had approached
IRDA. "While there is an element of market exposure, the insurance component is much
higher. The rules are fairly clear and investor interest is clearly protected," said the
CEO of one of the largest life insurance companies. For some private players, Unit
Linked Insurance Policies account for close to 90 per cent. of new business.

Sources close to the development said IRDA's letter has pointed out the legal
provisions that limited SEBI's jurisdiction to securities and securities related transaction.
"What constitutes a security has been defined in the Securities Contract (Regulations)
Act, 1956 and insurance contracts are not regulated under these securities laws," it said. .

"Certain similarities in the features of various products issued in the financial world
would not necessarily imply regulatory overlap," IRDA added.

Asked to comment, a senior SEBI official said : "Unit Linked Insurance Policies are
hybrid investment products with insurance cover and since it involves management of
funds, SEBI has a role in protecting the interests of investors . . . Unit Linked Insurance
Policies are fit for regulation under SEBI's mutual fund regulations."
He, however, added that the SEBI was waiting for replies from msurance companies
before deciding on how to regulate them.

In its letter to SEBI, sources said IRDA also attached a copy of its mandate, which
states that the regulator has to "protect the interest of the holders of insurance policies".

A former SEBI legal advisor said, "Unit Linked Insurance Policies, which are mutual
fund products with a fig leaf of insurance, ought to be regulated by SEBI. This is
notwithstanding the fact that the insurance regulator already regulates it. There is
nothing unusual with more than one regulator regulating a product," he

108
added and pointed to the joint regulation of currency futures by the Reserve Bank oflndia
and SEBI.25

Super regulator to harbinger peace to SEBI-IRDA ULIP issue

The issue of governing a popular financial instrument that has long been a bone of
contention between the insurance and capital market regulators could top the to- do list
of the Financial Stability and Development Council (FSDC), the government's latest
experiment at a super regulator proposed by the Union Budget.

FSDC, which will monitor companies and improve co-ordination among financial
regulators to prevent another crisis, will first resolve the standoff between Insurance
Regulatory and Development Authority and Securities and Exchange Board of India,
over unit linked insurance plans (Unit Linked Insurance Policies), a Finance Ministry
official said.

FSDC, which could subsume the Highlevel Co-ordination Committee (HLCC) on

financial markets, the Government's previous attempt at co-ordinating the working of
regulators, is likely to be given enough powers to settle the issue. HLCC was looking
into the regulation of UNIT LINKED INSURANCE POLICIES, a popular, but
complex investment product that is akin to a mutual fund but also offers insurance
benefits and is sold by insurers, but failed to end the deadlock.

SEBI slapped a show-cause notice on. life insurers, including top player Life
Insurance Corporation (LIC), asking them to explain why they did not take its

approval before selling Unit Linked Insurance Policies. This, however, did not go down
well with IRDA, which came to the defence of insurers.

The Finance Ministry will issue a draft concept paper on FSDC's creation within a month,
the official said, and requesting anonymity. That may bring down the curtains on
HLCC, created in 1999 for regulatory synchronization after the
Harshad Mehta stock scam came to light.

"The HLCC was not statutory and there was no defined mechanism through which

109
decisions would be obtained." FSDC, which will have the Finance Minister at the helm, is
likely to be created on the lines of oversight bodies suggested by the Raghuram Rajan
Committee on financial sector reforms and the High Powered Expe1i Committee on
making Mumbai an international financial centre.

Establishing FSDC with the FM in charge assumes importance in the wake of HLCC's
abject failure and in the aftermath of the global financial meltdown when taxpayers'
money was used to save private financial institutions, a point that the Finance Minister
referred to in his budget speech.

The draft note may suggest the setting up of a separate regulatory co-ordination
committee body, chaired by the RBI Govemor.26

IRDA guidelines on corporate agents appointment

Insurance companies cannot appoint a person from any group having a broking license as
corporate agents/agency, the Insurance Regulatory and Development Authority said.

In the, guidelines issued on licensing of corporate agents the IRDA said, applications for
corporate agency from those who are already engaged in the insurance business should be
referred to it. Applicants, regulated by Reserve Bank of India could obtain a license
provided they had "substantial" client base of their
own or access to data which would facilitate identification of prospects.

They should also have a turnover, assets or income of at least Rs. 15 crores, the
guidelines stipulate.

The guidelines would come into force with immediate effect, an Executive Director,
IRDA, said.27

Corporate to bear bigger share of insured loss

From April 1, Indian corporate will have to bear a bigger slice of an insured loss from
their own pockets. Till now, a company paid just Rs. 10,000 out of its own resources if
there was a fire or flood-insured events for which it had bought covers from non-life
firms. Now, it will have to fork out as much as 5 per cent. of the claim, which could run
into several crores.

110
Bitten by underwriting losses resulting from intense price war in the past three years,
non-life insurers have taken a collective decision to fix a floor level for deductibles-the
portion of risk required to be borne by the policyholder.

Although the industry association, General Insurance Council, denies that there is any
agreement at the council level, brokers said at least two companies have issued
identical circulars, which indicated a · concerted effort by players.

"The only discussion that took place in the council was that insurers should adopt prudent
underwriting practices," said a senior council official. Deductibles are considered a
prudent underwriting practice to ensure that the policyholder has an interest in taking all
loss prevention measures. Secondly, deductibles spare insurance companies of the
administrative hassles involved in low-value high- frequency claims.

Deductibles not only reduce the claim payouts, but also substantially bring down the
administrative expenses for general insurance companies. This would be a relief for
non-life insurers who have been recording balance-sheet losses amid a rate war that has
left them bleeding.

The industry is also facing pressure from reinsurers. All reinsurance treaties are renewed
with effect from April 1 and reinsurance companies are pressurizing insurers to be
more prudent in their rates. "Another way of looking at this situation is that insurers are
finding it difficult internally to enforce pricing discipline and are trying to curtail claims
instead. From these steps and the di,fficulty that insurers are having with their treaty
renewals makes us feel that we may see higher prices in the near future as well," said a
chairman of an insurance
company.28

IRDA to insist on "economic capital" based on solvency margin

Economic capital is calculated by determining the amount of capital that insurers need to
ensure, depending on the nature of business they write. This is a step towards risk-
based capital. The regulator will review it at the end of October. Insurers said the
calculation would be only theoretical at the moment. They would have to also give the
actuarial calculation of solvency, based on the current norms.

111
For a life insurer, the impact would vary depending on the composition of the product.
For instance, for products with a guaranteed return, the capital requirement would be
higher, whereas for products where there was no guarantee, the capital requirement
would be lower. With the industries present product
composition of 80 per cent. l[nit-linked insurance plans (Unit Linked Insurance
'
Policies), the overall capital requirement towards economic capital will be lower.
I

At present, insurance companies follow a formula-based method of calculating capital.

It includes solvency margin, which varies with different products. It is

28
[Source : www.economictimes.com dated March 12, 2010 ]
higher for traditional products or products with guarantees while lower for Unit Linked
Insurance Policies.

"We will have to keep aside either economic capital or statutory capital, whichever is
higher. According to the present product composition, most of the insurance
companies will have to keep aside capital based on the solvency
margin," said the actuary of a life insurance company.29

General insurers spend more, as commission rose above cost of premium

In its quest to shore up premium mcome in a market marked by economic depression,

cut-throat competition, and massive undercutting, the general insurance segment ended
up spending more on commissions and incurred higher management expenses than its
proportionate rise in premium income during 2008- 09.

According to latest data released by sector regulatot IRDA for 2008-09, the non- life
cover segment saw a 16 per cent. rise in premium income while its outgo under
commissions and management expenses rose by 24 per cent. The entire
segment spent Rs. 19,700 crores under the head. This was around 35 per cent. of the
total premmm income which stood at Rs. 24,4 i1 crores. Total expenses
incurred by public sector insurers were about 35 per cent. of the total premium income
during 200809. The sector spent Rs. 5,527 crores which was a large 20 per cent. rise
against the previous year. This is for the first time in

112
 five years that the segment witnessed a 20 per cent. growth in expenditure. "Cut-throat
competition propelled a large number of insurers to· offer huge discounts as well as large
commissions to agents. This in effect reduced premium income growth but increased
spends on commissions," said an insurance official. Underwriting losses represent, the
deficit arising out of pure insurance business. The PSUs together saw underwriting
losses touch Rs. 4,227 crores, while the

figure was Rs. 1,099 crores for the private compames. The public sector companies
managed a net profit because of a Rs. 4,800 crores income from investments. This
figure for the private companies was Rs. 1,091 crores.30

The new ULIP launches fully backed by IRDA

Life insurance companies need not worry and can go ahead with their plans for unit-
linked insurance plans (ULIPs), going by the stand of the Insurance Regulatory and
Development Authority (IRDA).

When asked about the Securities and Exchange Board of India order of Tuesday to 14
insurance companies asking them to register new ULIP products with it, a top IRDA
official told Business Line : "We have already clarified on the issue on April 10, and there
is no need for fresh clarification."

On April 10, the IRDA Chairman, had asked the 14 insurance companies to
effectively ignore SEBI's directive and conduct business as usual as the latter had 'no
jurisdiction' on the insurance companies.

The two regulators had locked horns following SEBI imposing a ban on sale of ULIPs
by the 14 insurers. The IRDA had contended that SEBI had no jurisdiction. The issue went
to the Finance Ministry, which asked them to maintain status quo on Monday pending
legal resolution of the issue.

Defying the status quo agreement, SEBI came up with the fresh order on Tuesday raising
further doubts among the insurance companies and policy holders.31

Investors need not worry over ULIP issue, says the Corporate Affairs Minister

The conflict between market regulator SEBI and insurance regulator IRDA widened
when the former banned 14 life insurers from raising money from market-linked
insurance schemes (ULIPs), following which the latter asked the companies to ignore the
order. Subsequently, the Finance Ministry intervened and the two regulators agreed to
jointly seek a legally binding mandate from the court

113
 as to who has jurisdiction over ULIPs. Till then, status quo ante was restored by the
Finance Ministry.

After the agreement, SEBI amended its order and banned only new ULIPs launched
after April 9, when the first order of SEBI was issued. IRDA, however, asked the
companies to ignore this directive as well.

The Corporate Affairs Minister downplayed fears that investors would lose confidence
due to the row between SEBI and IRDA over market-linked insurance policies, as the
issue will be resolved in favour of either one regulator or the other by the courts. He said
regulators are new institutions and there are bound to be overlaps in their functioning.

Engagement rules refer to practices followed in situations of opposing interests. ULIPs

are products which combine insurance features with market investment. In this case, the
Finance Ministry seems to have suggested that the courts decide the overlap rules.

The Minister said conflict may arise between the Competition Commission of India
and SEB1 or the Central Electricity Regulatory Com:n;tission, but engagement rules
are supposed to resolve these issues.32

IRDA focuses on growth of policyholder protection

After trying to reform unit-linked insurance plans (ULIPs), the Insurance Regulatory
and Development Authority (IRDA) is now turning its attention to the protection of
policyholders.

The regulator has identified 22 major and 150 minor complaints for which it
proposes to strengthen the redtessal inechanism, an IRDA official said.

Policyholders often complain about the lack of clarity in the features of a life
insurance cover and the fees and commission, which in case of some ULIPs ·is
estimated at over 35 per cent. in the first year.

Besides, there are complaints that agents· de> not explain the difference between single
premium and regular premium plans, which results iri high . lapse rates;

A large section of policyholders have also complained about poor service from agents
as well as insurers, which IRDA is now seeking to address.

The Securities and Exchange Board of India (SEBI), which last month sought to bar 14
life insurance companies from selling and renewing ULIPs, had also cited investor
protection as the primary reason for regulating the risk-cum-investment plans.

114
Those related to the stock market, however, see IRDA's moves on improving
policyholder protection as another step to strengthen its position in the turf war with
SEBI.

Following widespread complaints about lack of transparency, last week, IRDA asked
life insurers to disclose the commission and fees that policyholders paid.

Yesterday, the insurance regulator issued norms that mandate a higher element of risk
cover in ULIPs and unit-linked pension plans. Besides, it introduced a five- year lock-
in for ULIPs and barred withdrawals from pension plans.

Also, the top-up premium for ULIPs has to be used for providing a risk cover instead
of the earlier system where it could be used to increase the investment element.

These moves would, however, result in lower returns from ULIPs

115
Conclusion

The researcher suggested so many things in his research but at present the policy
holders are scared about their investment in insurance business because they are facing
so many problems after taking the insurance policies.

116
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