Issue XVI | January 2014

New Amendment Bill in Insurance Sector

Introduction
Indias insurance market is growing enormously but is yet to reach the majority of
population. Privatisation is a good mechanism to increase this reach. In most of the sectors,
private participation has weakened the incumbent players but in insurance segment, the
traditional players still dominate it. Insurance sector is also witnessing growth in other
segments like the health insurance, directors & officers liability insurance and re-insurance,
but they are not explicitly covered in the existing Insurance Act, 1938 (Act). There is a
need to strengthen the present regulatory as well as the system for adjudication of disputes
related to insurance. Though the Insurance (Amendment) Bill, 2008 (Bill) is being
proposed, it is yet to analyze whether it is bringing the much needed respite and the much
needed changes.
The present bulletin examines the important development of the comprehensive Bill
which includes changes in the Act, the General Insurance Business (Nationalisation) Act,
1972, the Insurance Development and Regulatory Authority Act, 1992.
The major highlights of the Bill are discussed below:
1.0

New Definitions Incorporated in the Bill

The new Bill incorporates two new definitions namely, health insurance and foreign
company. The health insurance is a type of general insurance, whose meaning is not defined
in the Act so far. However, the business in health insurance has increased over the period
and the area has great growth potential. Therefore, the new Bill has inserted the definition of
health insurance business1 separately. The highlight of the definition is that it provides
insurance cover for both domestic and international travel. The expanding economy is
increasing number of new classes to be introduced to the non-life insurance market and
developing demand for specialist products continue to create new insurance and reinsurance
opportunities.
The Bill defines foreign company as a company or body established under the
law of any country outside India. The definition is important for its reference to Lloyds. In
India, the Act currently does not define the foreign company but defines an insurer to
include persons in India who have contracts with Lloyds underwriters. Lloyds is regulated
by the Financial Services Authority, which regulates financial services in the UK. In China,
Lloyds has a licence only for reinsurance and operates through a wholly owned subsidiary,
incorporated as a company. In US, Lloyds is an accredited re-insurer in all states. Thus, the
present Bill has defined the foreign company keeping in view of the definition of the
Health insurance includes policies issued to cover medical, surgical, and hospitalisation costs related to inpatient and out-patient treatment. Such policies can include assured benefits, cover long term care, and provide
overseas travel or personal accident cover.
1

Disclaimer This bulletin is for information purposes and should not be construed as legal advice.

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Issue XVI | January 2014

insurer already in the Act and to give statutory recognition of Lloyds under the Act within
the meaning of foreign companies. This amendment also becomes important as the Bill
seeks to provide for entry of foreign companies in insurance market by amending the
definition of insurer.
2.0

New Criteria and Compliances in Insurance Business

The definition of the insurer is mentioned in section 2(9) of the Act. In this
definition, foreign insurer includes any individual or unincorporated body of individual in
the insurance excluding those who are covered under section 2(9)(c) of the Act 2. However,
the Bill now replaces the existing definition and provides four kinds of entities who can
enter into business of insurance namely, (i) public companies; (ii) cooperative societies; (iii)
foreign companies operating through a branch and (iv) statutory bodies established by the
Acts of the Parliament. These companies are required to maintain minimum equity capital to
register themselves as insurance companies under the Insurance Regulatory and
Development Authority Act, 1999 (IRDA Act). The Bill proposes that the health
insurance company is required to maintain an equity capital of Rs. 50 crores.
Since 1999, government intends to address the issue of capital flow in the sector.
The general modes of pooling in capital by initial public offering or foreign institutional
investors etc. have not been of much help to the insurance sector so far. Further, insurance
sector is also required to maintain the solvency margin3 as per law. The solvency margin is an
indicator of claim settlement capability of insurers. One of the principal objects for
amendment of the Act is to raise foreign equity participation in the insurance companies.
Now in a company a foreign investor can hold 49% of the shares whereas this limit is diluted
to 26% for cooperative societies. The branch of a foreign company can only be a re-insurer
but it does not require an Indian partner. The increase of FDI to 49% will also see increased
commitment by the foreign promoter to the Indian insurance company.
The Act provides4 that the promoter can hold up to 26% of the equity capital in an
Indian insurance company and anything beyond the prescribed limit was required to be
divested in a phased manner within a period of ten years from the date of commencement of
such business. The present Bill has done away with the requirement of divesting excess
shareholding.
The other relevant amendments proposed include that the agents, insurance brokers
or other insurance intermediaries cannot be directors of an insurance company. Regarding
the transfer of shares, IRDA must approve any transfer of shares which results in a single
investor owning more than 5% of the equity of an insurance company. The regulator must

Any person who in India has a standing contract with underwriters who are members of Society of Lloyds
whereby any such person is authorised within the terms of contract to issue protection notes, cover notes or
other documents granting insurance cover to others on behalf of underwriters.
3 The amount by which an insurance company's capital exceeds its projected liabilities is effectively a measure
of its financial health. Insurance companies are sometimes required by law to maintain a minimum solvency
margin, which is sometimes referred to as resilience test.
4 Section 6AAb of the Act.
2

Disclaimer This bulletin is for information purposes and should not be construed as legal advice.

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Issue XVI | January 2014

also approve a transfer of more than 1% of the equity of an insurance company by an
individual or firm or group under the same management.
3.0

The Rights of a Policy Holder

The Bill provides for rights of transfer or assignment of an insurance policy, wholly
or in part, whether with or without consideration to third parties by the policy holders. The
validity of such transfer would be always open to challenge. Many foreign countries allow
such practices including US and Canada.
The issue whether the life insurance policy can be traded or not came for
adjudication before the Mumbai High Court5. In 2007, the division bench of the Bombay
High Court held that an insurance policy is also regarded as policy under the law. Even the
credit institutions lend money against these policies up to certain percentage of their cash
value. The creditors have right to attach this property. The right to assign is also a right
attached to the property. The Bombay High Court gave a ruling that the life insurance is a
tradable commodity wherein third party with no insurable interest in life of the policy holder
will get the benefits of the policy. The matter is currently pending for adjudication before
Supreme Court.
The Act provides that an insurer can cancel a life insurance policy within two years
on the ground that the policy was issued on the basis that the material facts which were
provided for issue of policy were inaccurate or false. Beyond the period of two years, the
policy can be cancelled only on grounds of fraud. But by way of the new Bill, it has been
provided that the policy can be cancelled up to a period of five years and the policy can be
challenged on any ground after a period of five years. If the insurer cancels the policy on
ground of misstatement or suppression of facts, premium collected must be refunded by
them within the period of 90 days. The amendment, therefore, seeks to better protect the
interest of the policy holders.
4.0

The Securities Appellate Tribunal

The existing machinery for addressing the grievance of the policy holders is not
satisfactory. A policy holder has remedy of approaching the consumer courts or Insurance
Ombudsman. The remedy provided by way of approaching an Insurance Ombudsman
under the Redressal of Public Grievance Rules, 1998 and under the Consumer Protection
Act was found to be dissatisfactory. This creates the possibility of conflict of interest as
often consumer approach multiple forums for relief. The committee examining the capacity
of these bodies to handle dispute resolution found that Ombudsman is not a satisfactory
mechanism for dispute resolution and consumer fora has huge backlog of cases. The
suggestion for independent grievance redressal authority was ruled out but it was suggested
to strengthen the existing mechanism. The Bill provides that appeals against decisions by
IRDA would lay to the Securities Appellate Tribunal (SAT), set up under the SEBI Act,
1992. Thus, SAT has been made competent to hear an appeal against the order of the IRDA

Writ petition no. 2159 of 2004, Insurance Policy Plus Service and Others vs. LIC and Others.

Disclaimer This bulletin is for information purposes and should not be construed as legal advice.

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Issue XVI | January 2014

and such an appeal should be filed within a period of forty five days from the date on which
a copy of the order made by the Authority is received by the aggrieved person.

Conclusion
The passage of the Bill is important for it talks about certain key aspects necessary to
provide momentum to growth of the insurance sector. The important development includes
FDI and health insurance. The banking sector allows FDI to the extent of 74%, therefore,
there is no point depriving the insurance sector with parallel increment of FDI limit. The
amendments suggested in FDI are meant to increase the cash flow in the sector. The other
important aspect of the Bill is the health insurance business which is in growing phase in
India. As the 70% of the medical expenses are still borne by individuals, health insurance
business has huge potential. The new Bill seeks to put in place the compliances for the
companies willing to venture into this growing sector. The Bill is yet to be approved by the
Rajya Sabha. Until the Bill is enacted and brought into effect, any significant change in the
insurance sector is further delayed.
Authored by:
Jyoti Srivastava

Disclaimer This bulletin is for information purposes and should not be construed as legal advice.

PSA 2014