Definition

Insurance is a legal contract (insurance policy) made between two parties, i.e. the insurance
company (known as insurer) and the individual or group (known as insured). Both these
parties enter into a contract under which the insured pays a predetermined sum of money to
the insurer (known as a premium) with the promise that the company will compensate the
insured in the event of a financial loss (risk) due to the causes that the insurer has agreed to
provide a cover for.
The basic principle behind any insurance contract is that the insured would prefer to spend
small amounts of money on a periodic basis against the possibility of incurring a huge
unexpected loss. This concept works because all the policyholders pool in their risks together,
and in case there are any losses arising due to the occurrence of the insured event, the person
suffering the loss will be compensated up to the extent agreed in the contract.

History of Insurance

The History of Insurance is as old as Human Existence. Some of the milestones related to
Insurance are listed below:

1. Over 5000 years ago, Chinese Traders used Insurance as a preventive measure against
Piracy by distributing the cargo to be transported among several ships so that if one
ship got lost or captured by pirates, the traders suffered only a partial loss.
2. The First Written Insurance Policy dates to 1750 B.C when Babylonian Traders
carved the Code of Hammurabi into a stone monument and clay tablets. The
Hammurabi Code was one of the first forms of written laws of Insurance where the
ship’s cargo could be pledged for a loan and the repayment of the loan was contingent
upon the ship reaching its destination safely. The understanding was that if the goods
reached safely, and the goods were sold, the merchant would return the loan to the
financier with interest. But if the ship sank or caught fire and the cargo was destroyed,
the merchant would not pay back the loan amount. So, in essence, the Interest being
charged was actually an Insurance Premium.
3. In 1666, the Great Fire of London destroyed more than 13000 houses. In response, the
First Fire Insurance Company was started in 1680.

History of Insurance in India

1. Insurance began formally in India in the 18th The year 1818 saw the start of life
insurance in India when Oriental Life Insurance Company was established in Kolkata.
2. The year 1850 saw the establishment of first non-life insurance company, Triton
Insurance Company Limited in Kolkata by the British.
3. The Year 1870 saw the enactment of British Insurance Act
4. Bombay Mutual and Oriental started in Mumbai in the year 1871 and 1874
respectively.
5. The Life Insurance Companies Act, 1912 was enacted as a first statutory measure to
regulate life insurance business.
6. Insurance Act 1938 was enacted to control the activities of the insurance companies.
 7. Life Insurance Corporation of India came into existence in the year 1956.
8. General Insurance Council was formed in the year 1957 which formed a code of
conduct for ensuring fair conduct and sound business practices.
9. The Insurance Act was amended in 1968 to regulate and set minimum solvency
margins. The Tarriff Advisory Committee was also set up.
10. The General Insurance Business was nationalised with effect from 1st Jan 1973, where
107 insurance companies were amalgamated and grouped into 4 companies, namely,
National Insurance Company Ltd., the New India Assurance Company Ltd., the
Oriental Insurance Company Ltd and the United India Insurance Company Ltd.
11. The General Insurance Corporation of India was incorporated as a company in 1971
and started operations on 1st Jan 1973
12. Insurance Regulatory and Development Authority of India (IRDA) was incorporated
as a statutory body in April 2000 to regulate and develop the insurance industry.
13. The IRDA opened up the Insurance Industry in August 2000 with the invitation for
application for registrations. Foreign companies were allowed ownership of up to
26%. The Authority has the power to frame regulations under Section 114A of the
Insurance Act, 1938.

Insurance Act, 1938

Insurance Act, 1938 was a law passed in the year 1938 in India to regulate the Insurance
Sector. Prior to the Insurance Act, 1938, only Marine Insurance Act of 1906 was applicable
to Marine Insurance in India while for other Insurance, the British Common Law applied.

The Insurance Act, 1938 provides power to IRDA to frame regulations for supervision of
entities operating in Insurance Sector in India. The Insurance Act 1938 lays down the
organisations which are allowed to operate Insurance Business in India.

The Insurance Act, 1938 also lists down the duties of Insurance Companies such as
maintaining a register of policies, claims and agents.

Types of Insurance
Insurance policies provide protection against the various types of uncertainties that can occur
in the life of an individual. Having health insurance can help you cover up for the expenses
paid for any diseases, while an accident insurance can help you in getting cover for any kind
of accidents that may occur.
There are various types of insurance in the market due to the presence of a large number of
insurance companies. But, the purview of this article is restricted to dealing with the types of
Insurance as prescribed in the Business Studies syllabus for CBSE Class 11.
The types of Insurance that will be discussed are:
1. Life Insurance
2. General Insurance (which includes fire insurance, health insurance and marine insurance)
Let us discuss these types in detail.
1. Life Insurance:
Life insurance is a type of insurance policy in which the insurance company undertakes the
task of insuring the life of the policyholder for a premium that is paid on a
daily/monthly/quarterly/yearly basis.
Life Insurance policy is regarded as a protection against the uncertainties of life. It may be
defined as a contract between the insurer and insured in which the insurer agrees to pay the
insured a sum of money in the case of cessation of life of the individual (insured) or after the
end of the policy term.
For availing life insurance policy the person needs to provide some details like age, medical
history and any type of smoking or drinking habits.
As there are many requirements of persons for availing a life insurance, the requirements can
be needs of family, education, investment for old age, etc.
Some of the types of life insurance policies that are prevalent in the market are:
a. Whole life policy: As the name suggests, in this kind of policy the amount that is insured
will only be paid out to the person who is nominated and it is only payable on the death of the
insured.
Some insurance policies have the requirement that premium should be paid for the whole life
while others may be restricted to payment for 20 or 30 years.
b. Endowment life insurance policy: In this type of policy the insurer undertakes to pay a
fixed sum to the insured once the required number of years are completed or there is death of
the insured.
c. Joint life policy: It is that type of policy where the life insurance is availed by two persons,
the premium for such a policy is paid either jointly or by each individual in the form of
installments or a lump sum amount.
In the case of such a policy the assured sum is provided to both or any one of the survivors
upon the death of any policyholder. These types of policy are taken mostly by husband and
wife or between two partners in a business firm.
d. Annuity policy: Under this policy, the sum assured or the policy money is paid to the
insured on a monthly/quarterly/half-yearly or annual payments. The payments are made only
after the insured attains a particular age as dictated by the policy document.
e. Children’s Endowment policy: Children’s endowment policy is taken by any individual
who wants to make sure to meet the expenses necessary for children’s education or for their
marriage. Under this policy, the insurer will be paying a certain sum of money to the children
who have attained a certain age as mentioned in the policy agreement.
2. General Insurance:
General Insurance is related to all other aspects of human life apart from the life aspect and it
includes health insurance, motor insurance, fire insurance, marine insurance and other types
of insurance such as cattle insurance, sport insurance, crop insurance, etc.
We will be discussing the various types of general insurances in the following lines.
a. Fire Insurance: Fire insurance is a type of general insurance policy where the insurer
helps in paying off for any damage that is caused to the insured by an accidental fire till the
specified period of time, as mentioned in the insurance policy.
Generally, fire insurance policy is valid for a period of one year and it can be renewed each
year by paying a premium, which can be a lump sum or in installments.
The claim for a fire loss must satisfy the following conditions:
i. It should be an actual loss
ii. The fire must be accidental and not done intentionally
b. Marine Insurance: Marine insurance is a contract between the insured and the insurer. In
marine insurance, the protection is provided against the perils of the sea. The instances of
dangers in sea can be collision of ship with rocks present in sea, attacking of the ship by
pirates, fire in ship.
Marine insurance covers three different types of insurance which are ship hull, cargo and
freight insurance.
Ship or hull insurance: As the ship is exposed to many dangers at the sea, the insurance
covers for losses caused by damage to the ship.
Cargo Insurance: The ship carrying cargo is subjected to many risks which can be theft of
cargo, lost goods at port or during the voyage. Therefore, insuring the cargo is essential to
cover for such losses.
Freight Insurance: In the event of cargo not reaching the destination due to any kind of loss
or damage during transit, the shipping company does not get paid for the freight charges.
Freight insurance helps in reimbursing the loss of freight caused due to such events.
Marine insurance is a contract of indemnity where the insured can recover the cost of actual
loss from the insurer in event of any loss occurring to the insured item.
c. Health Insurance: Health insurance is an effective safeguard for protection against rising
healthcare costs. Health insurance is a contract that is made between an insurer and an
individual or a group where the insurer agrees to provide health insurance against certain
types of illnesses to the insured individual or individuals.
The premium can be paid in installments or as a lump sum amount and health insurance
policy is renewed every year by paying the premium.
The health insurance claims can be done either directly in cashless or reimbursement availed
after treatment is done. Health insurance is available in the form of Mediclaim policy in
India.
d. Motor vehicle insurance: Motor vehicle insurance is a popular option for the owners of
motor vehicles. Here the owners’ liability to compensate individuals killed by negligence of
motorists is borne by the insurance company.
e. Cattle Insurance: In case of cattle insurance, the owner of the cattle receives an amount in
the event of death of the cattle due to accident, disease or during pregnancy.
f. Crop Insurance: Crop insurance is a contract for providing financial support to the
farmers in the event of crop failure due to drought or flood.
g. Burglary Insurance: Burglary insurance comes under the insurance of property. Here the
insured is compensated in the event of a burglary for the loss of goods, damage occurred to
household goods and personal effects due to burglary, larceny or theft.

FUNCTIONS OF INSURANCE
It is important to understand that an insurance policy has both a financial and an emotional
aspect for the policyholder. There are certain functions that an insurance company must
promise to take care of while they are finalising the contract with the insured party. We will
attempt to explain those functions below:
 To provide safety and security to the insured – One of the prime reasons for
entering into an insurance contract is to seek financial security in the event of a loss
from an unexpected occurrence. Insurance offers support to the policyholder and
helps to reduce the uncertainties in the business or in human lives. With the help of a
policy, the insured party is protected against future hazards, vulnerabilities and
accidents. Although no insurer in the world can prevent the dangerous event from
occurring, they can certainly help by providing some sort of financial protection to
compensate the insured party.
 Protection for your loved ones – Medical insurance can help you and your family
get the right sort of treatment and cover hospitalisation expenses. It helps to take care
of their health in case of an accident, illness or any other unfortunate event. The well
being of your family comes before anything, and insurance helps take care of that in
the best possible manner.
  Collective Risks – Another function of an insurance contract is that it helps a number
of individuals get an insurance policy to safeguard themselves from the losses that
may occur due to an unfortunate event. This strategy works on the principle that not
all of the policyholders for a particular risk will face it at the same time. For example,
if a total of fifty thousand people are insured against damage to their cars due to
accidents, the most likely scenario is that only a few of them would have accidents in
a single year. So the amount that they can claim from the insurance company for the
financial losses due to the accidents would be adequately covered by the insurance
premiums from all fifty thousand policyholders.
 Risk Assessment – Insurance organisations play an important role in determining the
actual amount of risk from the occurrence of a particular event by assessing the
situation. They analyse all the aspects of a risk carefully to make an informed
decision. It helps them to arrive at the final insurance amount as well as fix the
premium to be paid by the insured.
 Certainty – One of the main benefits of taking a policy for the insured is that they
can feel secure about meeting the future losses after taking coverage for a particular
risk. It can be very reassuring for the insured party and can also help them to proceed
with their daily activities in a much more assured manner without fear or hesitation.
 It helps to forestall losses – An insurance contract can help the insured to mitigate
their losses by providing some sort of security in case of an unforeseen event. It helps
businesses have a contingency plan in case things do not go as planned. Insurance is a
very important tool for organisations as it allows them to cover their bases while
operating in a very risky environment where the losses can be huge if they do not play
their cards right. It also allows them to be able to cover these huge risks in their
businesses by paying a relatively small amount as the premium.
 Fulfil the legal requirements – In some countries, any business is required to have
certain insurance covers in order to engage in any economic activity. So the insurance
company can help organisations fulfil these requirements.
 It allows the development of big businesses – Any large-sized organisation is
exposed to a greater amount of risk. If the chances of loss are relatively higher, it may
prevent the management in those organisations from taking calculated risks, which
has the potential of bringing more profits. Insurance helps to mitigate that risk in a
way and encourage businesses to take bold decisions. Insurance takes away some of
the financial pressures and allows businesses to flourish in the long run.
 It can help in boosting the economy – When the businesses have sufficient
insurance cover, they can increase their scope of economic activity that will bring
commensurate rewards. This can provide an impetus to the overall economy of a
country in the long run.

IMPORTANCE OF INSURANCE
Insurance plays a major role in the insured’s life. Here are a few pointers that will show how:

1. The insured’s family is protected with the help of insurance at the time something
unexpected happens. Their family doesn't have to worry about the monetary aspects
of the finances in this case.
2. We all know that unexpected events can occur at any time and are a part of life. In
case of any injury, illness, or death, finances are the last thing that they need to worry
about. This way, their emotional stress is also reduced to an extent.
3. Insurance is a great financial security to an individual's family. An insurance policy
gives the family the coverage needed as well as the courage to move on.
 4. Insurance is peace of mind for the insured in case of theft or medical emergency. This
way they would not have to go and arrange money or go into a panic mode.
5. The funds which are provided by the insurance company are well enough for
managing the school fees of the insured children. It also takes care of their standard of
living.

Principles of Insurance

As we discussed before, insurance is actually a form of contract. Hence there are certain
principles that are important to ensure the validity of the contract. Both parties must abide by
these principles.

1] Utmost Good Faith

A contract of insurance must be made based on utmost good faith ( a contract of
uberrimate fidei). It is important that the insured disclose all relevant facts to the insurance
company. Any facts that would increase his premium amount, or would cause any prudent
insurer to reconsider the policy must be disclosed.

If it is later discovered that some such fact was hidden by the insured, the insurer will be within
his rights to void the insurance policy.

2] Insurable Interest
This means that the insurer must have some pecuniary interest in the subject matter of the
insurance. This means that the insurer need not necessarily be the owner of the insured property
but he must have some vested interest in it. If the property is damaged the insurer must suffer
from some financial losses.

3] Indemnity
Insurances like fire and marine insurance are contracts of indemnity. Here the insurer undertakes
the responsibility of compensating the insured against any possible damage or loss that he may
or may not suffer. Life insurance is not a contract of indemnity.

4] Subrogation
This principle says that once the compensation has been paid, the right of ownership of the
property will shift from the insured to the insurer. So the insured will not be able to make a
profit from the damaged property or sell it.

5] Contribution
This principle applies if there are more than one insurers. In such a case, the insurer can ask the
other insurers to contribute their share of the compensation. If the insured claims full insurance
from one insurer he losses his right to claim any amount from the other insurers.
6] Proximate Cause
This principle states that the property is insured only against the incidents that are mentioned in
the policy. In case the loss is due to more than one such peril, the one that is most effective in
causing the damage is the cause to be considered.

REINSURANCE

What Is Reinsurance?
A reinsurance, in its most basic sense, is insurance for insurers. It is the process through
which insurers minimise the possibility of paying high amounts of money, in case of an
insurance claim, by transferring a part of their risk portfolio to other parties.

Types of Reinsurances
The two primary forms of reinsurance contracts are — Treaty reinsurance and Facultative
reinsurance. Each of these reinsurances caters to different levels of risk subletting.
 Treaty reinsurance
A reinsurance contract that involves an insurance business acquiring insurance from another
insurer is known as treaty reinsurance. The cedent is the firm that issues the insurance and
transfers all of the risks associated with a specific class of policies to the purchasing
company, the reinsurer.
Treaty reinsurances are contracts based on an understanding of premium sharing. It provides
better security for the ceding insurer’s equity and more stability in the case of exceptional or
major events. Treaty reinsurance is less transactional, and risks are less likely to be reduced.
 Facultative
A primary insurer purchases facultative reinsurance to cover a specific risk (or a group of
risks) in the business. This form of contract offers a beneficial edge to the reinsurance
business, as it helps in reviewing individual risks. On the other hand, reinsurance provides the
insurer with additional protection for its equity and solvency in case of extreme events,
Facultative reinsurance agreements are considered to be long-term coverage between two
parties as compared to treaty reinsurance.
Depending on the form of agreement between the two parties, the reinsurance — treaty
or facultative — can be further divided into two categories.
 Proportional reinsurance
The reinsurer receives a prorated share of all policy premiums sold by the insurer
under proportional reinsurance. In the event of a claim, based on a pre-determined proportion,
the reinsurer is responsible for a share of the losses. The ceding company is also reimbursed
for processing, business acquisition, and writing costs by the reinsurer.
 Non-proportional reinsurance
In a non-proportional form of agreement, the reinsurer is liable to pay if the insurer’s losses
reach a certain amount, known as the priority or retention limit. As a result, the reinsurer
receives no proportional part of the insurer’s premiums or losses. One type of risk or an entire
risk category determines the priority or retention limit.

Functions of Reinsurance
While the main function of any reinsurance company is to reduce the risk associated with the
insurance claims. There are a few other functions that a reinsurance company performs.
Income Smoothing
By absorbing big losses, reinsurance may make an insurance company’s results more
predictable. This will very certainly lower the amount of cash required to offer coverage. The
risks are spread out, with the reinsurer or reinsurers covering a portion of the insurance
company’s losses. Because the cedent’s losses are restricted, income smoothing occurs. This
ensures that claim payouts are consistent and that indemnification expenses are kept to a
minimum.
Risk Transfer
The risk is transferred from the main insurance company to the reinsurer, which helps the
insurance company manage portfolios better.
Offering Expertise
In the case of a specific risk, the insurance company may desire to use the experience of a
reinsurer, or the reinsurer’s ability to determine a suitable premium. In order to safeguard
their own interests, the reinsurer will want to apply this knowledge to underwriting. This is
particularly true in the field of facultative reinsurance.
Expanding Portfolio
The reinsurer helps insurance companies expanding their portfolio by taking over some part
of the risk. This helps both the insurer and the reinsurer.
Assurance Of Claim Settlement
The involvement of a reinsurer also offers an assurance of claim settlement to the
policyholders in case of a catastrophic event.

Objective of Reinsurance
The objective of the reinsurer is very similar to that of any insurance provider. It gives the
insurer the surety that no matter what happens, you are insured.
Following are the objectives of reinsurance
 Risk is distributed to guarantee that a claim is covered.
 It gives a high level of underwriting stability during the claim period.
 Financial obligations that exceed the insurance firm’s capability are outsourced to
another company with the necessary resources. As a result, the ceding business is only
left with the financial responsibility that it can meet.
 Profiting from a premium on the net amount.
 To settle their claims, the real insured individual must work with just one insurance
provider.
 Enhance the risk exposure capacity.

Reinsurance Advantages
Apart from the main risk-bearing advantage. Following are the main advantages of
reinsurance.
1. Insurance funds protected: In the case of reinsurance, the insurance funds are
protected and kept safe in case of any unforeseen claim. It also helps the insurance
company manage their funds better.
 Encourages new underwriters: Having reinsurance encourages insurance companies
to have new underwriters. Which further leads to an increase and expansion in
business.
 It provides a limit on the quantum of liabilities: By sharing the risk, the
reinsurance also helps in reducing the size and number of liabilities that any insurance
company has to bear. Which also helps in bettering the operations of the said insurer.
  It further increases the goodwill of the main insurer: A reinsurer helps in building
goodwill for the insurance company. The better the claim settlement, the better the
business in the future as a rule.
 Stability to profits: With the addition of a reinsurer, profit is stable for insurance
companies.

MICRO INSURANCE:
Micro insurance is specifically intended for the protection of low -income people, with
affordable insurance products to help them cope with and recover from financial losses. The
need of insurance for underprivileged section cannot be avoided as this section of society is
more prone to many risks which ultimately leads to incapacity to face such uncertain
situations. Hence, the role that micro insurance plays thus becomes inevitable

Types Of Microinsurance
Let us discuss the different types of microinsurance through the points below:
 Health Microinsurance: This insurance covers health-related expenses such as
medical treatment and hospitalization. It is especially beneficial for the low-income
section of society as they might not be able to afford the costs of unexpected medical
expenses.
 Life Microinsurance: This type of microinsurance protects in the event of disability
or death. It is designed to provide financial protection for dependents and may also
cover the costs of funerals.
 Natural Disasters: These micro insurances protect from damages caused by floods,
storms, earthquakes, or other natural disasters.
 Non-Natural Disasters: Non-natural disasters include fire, theft, and liability.
Microinsurance for non-natural disasters covers damage caused due to these factors.
 Crop Microinsurance: This insurance is curated especially for small farmers and
provides coverage for them in the event of crop damage due to natural calamities or
other factors.
Importance
Let us discuss the importance of microinsurance briefly through the points below:
 Inclusiveness: Microinsurance includes a section of society that is often looked down
upon or ignored regarding protection and financial stability. However, protecting
them during turbulent times is a step in the right direction.
 Sense Of Security: Low-income individuals or families find it challenging to
accommodate the excess expenditure of a medical emergency, illness, injury, or
disruption in their source of income. Microinsurance reassures them and provides a
sense of security that otherwise would have been inaccessible.
 Economic Growth: Most microinsurance policies are issued through community-
based programs where advice and consultation are provided along with insurance.
This helps low-income persons to attain financial stability or even growth and
contribute to the economy.
  Affordability: The cost of premiums is not a hindrance to protecting oneself from a
probable event in the future. On the contrary, this allows individuals and families to
avail protection through low premiums and small upfront deposits.
 Fast Claims: Microinsurance policies or schemes have a typical window of 2-3 days
within which the settlement process is completed. This helps the low-income section
of society to avail claims promptly and not after the event or circumstance has already
burnt a hole in their pockets.
Difference Between Microinsurance And Microfinance
Microinsurance is a subset of microfinance. However, some factors show stark differences in
their fundamentals, application, and processes. Let us understand their differences through
the table below:
Basis Microinsurance Microfinance
Function Microinsurance is the protection Microfinance is a service provided to
provided to low-income individuals unemployed or low-income individuals or
or families to protect against families who do not have access to
unforeseen circumstances in the savings schemes or financial services.
future.
Institution It is usually provided through Commercial banks, Cooperative banks,
community-based programs or credit unions, and NGOs provide
NGOs to ensure the scheme or microfinance.
policy is tailor-made for the need of
the local community.
Guidance Since it is provided through The guidance and advice factor depends
community-based programs, persons on the place of acquiring microfinance.
seeking insurance are advised or For example, commercial bank
counseled on their options regarding employees might need more time to
savings and investments. counsel, while NGO volunteers might
take the time to guide.
Costs Microinsurance is affordable as the A few microfinance loans can levy
premium rates are minimal, and the interest rates upwards of 30%, and it has
claiming process is quick. also been noticed that microfinance does
not increase the net income of individuals
despite the influx of funds.

IRDA
IRDA Overview
India saw the advent of the insurance business with the establishment of Oriental Life
Insurance Company in Calcutta. Ever since various insurance companies came into being,
however, after India’s independence, the Government of India nationalized all the insurance
companies to curb unfair trade practices.
After Liberalization was introduced in India in 1990, the “Malhotra Committee” was formed
to examine the structure of the Insurance Industry and recommend changes to make it more
efficient and competitive. Based on the recommendations of the “Malhotra Committee”,
IRDA (Insurance Regulatory and Development Authority) was formed in 1999 after going
through various transformations. The IRDA was incorporated as a statutory body in April
2000.
What is IRDA?
The IRDA (Insurance Regulatory and Development Authority) is a statutory body meant to
regulate, promote and ensure the orderly growth of insurance and reinsurance business in
India. The IRDA Act, of 1999 also paves the way for opening up of the insurance sector to
private Indian Companies, LIC and GIC will no longer have monopolies and they will have
to work under the directions of the IRDA and compete with other companies that may be set
up in private sector.

Objective of IRDA
The basic objective and the aim of IRDA, 2000 is “Insurance for All by 2047” which means
that every citizen shall have required life, health and property insurance coverage and every
organisation is supported by appropriate insurance solutions.

Features of IRDA
The salient features of the IRDA Act (1999) are as follows;
 The IRDA Act (1999) marks the opening of India’s insurance sector to private entities.
The Act’s second and third schedules outline the removal of existing corporations or
companies that engage in life and non-life insurance business in India.
 An Indian insurance company is defined as a company registered under the
Companies Act, of 1956, where foreign equity does not exceed 26% of the total equity
shareholding, including that of NRIs, FIls, and OCBs.
 After the ten-year period, excess equity above the 26% limit will be divested
according to a phased program outlined by IRDA. The Central Government has the
authority to extend the ten-year period on a case-by-case basis and set higher ceilings
for Indian promoter shareholding.
 Foreign promoters are subject to a maximum operational limit of 26% equity and
cannot hold equity beyond this threshold at any stage.
 The Act grants statutory status to the Interim Insurance Regulatory Authority (IRA),
which was established by the Central Government through a Resolution in January
1996.
 All the powers currently exercised by the Controller of Insurance (Col) under the
Insurance Act, 1938, will be transferred to IRDA.
 The IRDA Act also allows for the appointment of a Controller of Insurance by the
Central Government when the Regulatory Authority is superseded.
 The minimum required paid-up equity capital is Rs. 100 crore for both life and
general insurance and Rs. 200 crore for reinsurance.
  The solvency margin, which represents the surplus of assets over liabilities, is
mandated to be at least Rs. 50 crore for life and general insurance and Rs. 100 crore
for reinsurance in each case.
 Insurance companies are required to deposit Rs. 10 crore as a security deposit before
commencing operations.
 In the non-life insurance sector, preference is given to companies that offer health
insurance.
 Safeguards for policyholders’ funds include a prohibition on investing these funds
outside India and adherence to IRDA policy guidelines for investments, including
those in social and infrastructure projects.
 Every insurer must offer life insurance or general insurance policies, including crop
insurance, to individuals in rural areas, workers in the unorganized or informal sector,
economically vulnerable or disadvantaged groups, and other categories specified by
IRDA regulations.
 Failure to meet these social obligations may result in a Rs. 25 lakh fine, and persistent
non-compliance could lead to license cancellation.
Functions of IRA
The Principal Functions of IRDA are suggested as follows:
 One of its key roles is to establish capital adequacy and solvency margin
requirements, as well as other prudent standards for entities engaged in insurance
activities.
 Examine, in the light of the prescribed criteria, applications for grant of registration
for transacting insurance business and to grant such registration where appropriate.
 In the interest of consumer protection, set standards for insurance products. There
should be a system of “file and use’ for insurance products subject to the power of the
IRA to modify the rates, terms and conditions thereof within a prescribed time limit.
 Ensure compliance with the prescribed ceiling for management expenses of insurance
and agency commissions.
 Monitor the performance and quality of reinsurance ceded and accepted.
 Ensuring the proper maintenance of adequate technical reserves by the insurers.
 Review the insurer’s asset distribution and management and particularly monitor
compliance with prescribed prudential norms and patterns of investment.
 Ensure high standards of accounting and transparency of the balance sheet of
insurance companies and scrutinize and accept annual accounts, valuation reports and
solvency margin statements.
 Detect badly managed unhealthy or failing insurers and take suitable corrective
action, including the appointment of administrators to temporarily manage such
companies and where warranted, cancellation of registration.
 Where necessary to act as a ‘dispute resolution forum for consumer grievances.
 Create and release an annual report detailing the condition of the insurance sector.
Powers of IRDA
The IRDA has been given wide-ranging powers in the matter of promoting and regulating the
orderly growth of business and exercising control over agents and other intermediaries. The
following are some of the powers of IRDA.
 Granting permission for the establishment of new Insurance Companies.
  Protecting the interests of policyholders in all matters.
 IRDA specifies the qualifications, code of conduct and training required for insurance
agents and other intermediaries.
 Promoting efficiency in the conduct of the insurance business.
 Encouraging and overseeing professional associations which are connected with the
insurance and reinsurance industries.
 Inspection, investigation and audit of the insurers and intermediaries.
 Prescribing principles of maintenance of accounts.
 Regulating and directing the investment of funds by the Insurance Companies.
Adjudicating the disputes between insurers and intermediaries. Specifying the minimum
quantum of rural business to be procured by Life and General Insurance Companies and
imposing penalties for non-compliance with provision....