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REGULATIONS & LEGISLATIVE MATTERS

Introduction Insurance Legislation Norms Insurers---Financial Viability and Strengths Business Practices Professional Standards, Rules & Ethics

Further to regulate the activities of the Insurance companies (both Foreign and Indian) operating in India and force them to act on sound actuarial principles the Life Insurance Companies Act was passed in 1912 Subsequently to consolidate and amend the laws relating to both Life and Non-Life insurance business the Insurance Act 1938 was enacted The Insurance Act 1938 came into being with effect from 1.7.1939

Constitution of Insurance Associations, Insurance Councils and Tariff Advisory Committees Licensing of Agents and their remuneration Prohibition of rebates Protection of policyholders interests by prohibiting policies from being called into question after 2 years by Insurers Guaranteed Surrender Value

Insurance Legislation
Over a period of time, life becoming more and more complicated insurance has developed into a complex one. As such State intervention became necessary and so a legislation to govern the insurance contracts was enacted namely The Trust Law or Act Later to regulate the functions of insurance companies the Insurance Act 1870 was passed.

Important provisions of the Insurance Act 1938

Registration of insurance companies Maintenance and scrutiny of accounts and valuation Investment and utilisation of funds Placing limits on expenses of the Insurers Maintaining solvency levels Powers to take over the management of the Insurers and appoint Administrators

LIC Act 1956 The life insurance business was nationalised with effect from 19.01.1956 and LIC of India started functioning from 01.09.1956 General Insurance Business (Nationalisation) Act 1972 This Act came into force on 01.01.1973

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IRDA Act 1999

IRDA Act was passed by the Parliament in December 1999

IRDA
Functions of IRDA (i) To issue certificate of registration, renew, withdraw, suspend or cancel such registration (ii) To protect the interest of policyholders (iii) To undertake inspection, conduct enquiries etc of the insurers and insurance intermediaries (iv) To regulate investment of funds by the insurance companies

(x) To regulate maintenance of solvency margin (xi) To adjudicate disputes between insurers and insurance intermediaries (xii) To supervise the functioning of the Tariff Advisory Committee (xiii) To specify the percentage of Life insurance and General insurance to be undertaken in Rural or Social sectors

IRDA is a Corporate Body, set up by an Act of Parliament

IRDA
- IRDA consists of:(a) Chairperson (b) Not more than 5 whole time members (c) Not more than 4 part-time members - The members are appointed by the Central Government - Insurance Advisory Committee---25 Members

(v) To regulate and control the rates, terms etc offered by insurers in respect of general insurance business (vi) To specify requisite qualifications, code of conduct and practical training of insurance intermediaries or agents (vii) To specify code of conduct for Surveyors and Loss Assessors (viii) To promote efficiency in the conduct of insurance business (ix) To promote and regulate professional organisations connected with insurance and reinsurance business

Insurance Companies
Under Sec 3 of the Insurance Act 1938, a certificate of registration for that particular class of insurance business has to be obtained from the IRDA, to do insurance business in India. In this regard the conditions to be satisfied, have been prescribed in Section 2, 2c, 3 & 6 of the Insurance Act as well as various regulations framed by IRDA

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The Company must be a Public Company or a Co-op Society. An application for registration has to be submitted along with the relevant data / information. Foreign entrepreneurs participation cap as of now 26% of the equity capital.(49% shortly) The Indian promoters shall divest their shareholding in excess of 26% in a phased manner after 10 years.

Minimum Deposit with RBI

Life Insurance : 1% of the gross premium income in a year not exceeding Rs.10 crores. Non- Life Insurance: 3% of the gross premium income in a year not exceeding Rs.10 crores.

Insurance Business Practices

Distribution Channels Individual Agents Corporate Agents Brokers Insurance Consultants Remuneration First Commission First year Commission Renewal Commission Hereditary Commission

Minimum Paid up Capital Rs.100 crores for Life or Non life business.

An Actuarys certificate regarding the soundness and workability of terms of life insurance business Registration fee of Rs.50,000/- , to be renewed annually

INSURANCE AGENTS
Sec 42 of the Insurance Act 1938 defines the functions of Insurance Agent IRDA is the licence issuing authority and IRDA has laid down some conditions / prerequisites for an Insurance Agent. Renewal of Agency is also subject to the agent satisfying some conditions regarding training, submission of renewal application form along with fees as per guidelines.

Minimum Paid up Capital Rs. 200 crores for Reinsurance business.

Registration can be cancelled if any claim under a policy of Insurance is pending for more than 3 months after final judgment in a regular Court of Law

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BROKERS

Termination of Agency

In the event of not satisfying the conditions or acquiring any disqualification as stipulated by IRDA

Under IRDA (Insurance Brokers Regulations 2002) any Individual / Firm / Company / Bank NBFC / NGO etc can act as Insurance Broker after obtaining a licence from the IRDA Conditions regarding Capital as well as Deposit norms to be satisfied. Broker can be a Direct / Reinsurance / Composite Broker Licence Fee Rs25000 / 100000 / 125000

Solvency Margins
The IRDA (Assets, Liabilities & Solvency Margin of Insurers) Regulations 2000 has prescribed rules for valuation parameters, policy options, methods of determination of mathematical reserves, assets, liabilities and solvency margins. Separate statements in prescribed form for business in India and abroad to be submitted to the IRDA

Corporate Agents
Any Firm / Company / Bank / Co-operative Society / N G O / N B F C etc Corporate Insurance Executive to obtain licence ------------------Licence Fee Rs 250 Specified Persons (working for Corporate Agents) to obtain certificates--Fee Rs 500

Sec 40 A (1) of the Insurance Act 1938 stipulates the maximum rate of commission that can be paid to an Insurance Agent. Sec 44 of the Insurance Act 1938 guarantees payment of Renewal Commission even after the agency has been terminated for any reason other than fraud as well as payment of Hereditary Commission to the nominees or legal heirs of a deceased agent subject to some conditions

Valuation Parameters
The basis of computation and discounting Mortality rates Morbidity rates Policy maintenance expenses Rate of interest

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Valuation of Assets Valuation of Liabilities Life Insurance (Sch II A) Non Life Insurance (Sch II B & Form HG)

Life Insurance Business

Broadly speaking the guidelines are : 1. 25% in Government Securities 2. Not less than 50% in Government Securities or other approved securities including (1) above 3. Not less than 15% in Infrastructure & Social sector 4. Not exceeding 35% in other investments governed by Exposure Norms

Exposure & Prudential norms Limits fixed for the individual companies, for the entire group to which the investee company belongs and also for the industry sector to which the investee company belongs as well as in the Public Financial Institutions

Valuation of Liabilities (Life Insurance) Method of determination of mathematical reserves To be determined separately for each contract

Insurance Funds Investment Guidelines Sections 27, 27A, 27B, 27C & 27D of the Insurance Act 1938 regulate the investment of funds of an Insurance Company

Non Life Insurance Business

1. Not less than 25% : in Central Government Securities 2. Not less than 30% : In State Government Securities and other Guaranteed Securities including (1) above 3. 5% in Housing and loans to State Government for Housing etc 4. Not less than 10% in Infrastructure & Social sector 5. Not exceeding 55% in other investments governed by Exposure Norms

Moreover norms for investments in various instruments like Fully / Partly Convertible Debentures with specifications regarding Asset cover, Debt Equity Ratio and Interest cover etc. also applicable Every Insurer shall draw up annually an Investment Policy and get it approved by its Board of Directors

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Every Insurer shall constitute an Investment Committee with minimum of Two Non-executive Directors of the Insurer, CEO, Chiefs of Finance and Investment Divisions and also Appointed Actuary, if any The details of the Investment policy or its review as periodically decided by the Board shall be submitted to the Authority within 30 days of its decision.

Rural Sector
Any place where as per the latest census: 1. Population is less than 5000 persons 2. Density of population is less than 400 per square kilometre 3. More than 25% of the male working population is engaged in agricultural pursuits

Professional Standards, Rules and Ethics

Code of Conduct for Agents laid down by IRDA in Agents Regulations, specifying many Dos and Donts for Agents Code of Conduct for Brokers: IRDA---Licensing of Insurance Brokers Regulations2002 To regulate the advertisements as well as disclosures by the Insurance Companies, agents and other intermediaries Code of Conduct for them ,through IRDA-Insurance Advertisements and Disclosures Regulations--2000

Obligations of Insurers to Rural and Social Sectors

Sec 32 B and 32 C of the Insurance Act : Every Insurance Company is obliged to do a certain minimum business both in Rural and Social sector as specified by IRDA. In pursuance of the above provisions of the Act, the IRDA issued Insurance Regulatory and Development Authority (Obligations to Rural and Social sectors) Regulations 2000

Social Sector
1. Unorganised sector
e.g Bidi workers, Carpenters, Cobblers, Toddy tappers etc

Protection of Policy holders Interest

The IRDA (Protection of Policyholders Interests) Regulations 2002 apply to all insurers, agents, insurance intermediaries and policy holders.

2. Informal sector 3. Economically vulnerable or Backward classes 4. Other categories of persons (Both in Rural & Urban areas)

Some of the important guidelines are:

The Prospectus/Brochures etc issued by an Insurer under each plan of Insurance should explicitly state the scope of benefits, conditions, warranties, entitlements, exceptions, Rights & Duties of the Policyholder.

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Proposal for Insurance

An Insurer shall communicate the decisions in writing within 15 days from the date of receipt of proposals by the Insurer. An Insurer has to supply a copy of the proposal form to the policy holder within 30 days of acceptance of the proposal.

Matters to be stated in Life Insurance policy

A Life insurance policy shall clearly state: Name of the Plan; terms and conditions; participating or non-participating; benefits payable and the contingencies upon which these are payable; contingencies excluded; rider benefits included; to whom payable and how payable etc - Sec 45 of the Insurance Act 1938 - Guaranteed Surrender Value provisions under Sec 113 of the Insurance Act 1938

Delay in claim settlement requires the Insurer to pay interest:@ 2% above the bank interest rate @ Savings bank interest rate if the insurer is ready to pay but the claimant is not ready to collect

Rider Benefits
The total premium on all health related riders shall not exceed 100% of Basic premium of the main policy. The total premium on all other riders put together shall not exceed 30% of the basic premium of the main policy.

Policy holders Servicing

An insurer has to respond within 10 days of receipt of any communication from its policy holders in matters pertaining to: Change of address Registration of nomination or assignment Policy status Settlement of policy loan etc

Claims (Non-Life insurance)

An Insurer has to respond immediately on receipt of the intimation from the insured or the claimant If a surveyor has to be appointed then it shall be done within 72 hours of the receipt of intimation The Surveyor is governed by the Code of Conduct laid down by the IRDA and has to submit his report / findings within 30 days of his appointment

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In case the Insurer requires any clarification or additional report then the same should be called for within 15 days of the receipt of the original survey report The Surveyor has to furnish the requirements / reports within three weeks from the date of receipt of communication from the Insurer The Insurer shall within 30 days, offer a settlement of the claim to the Insured

Under Sec 15 of the Act, IRDA is eligible to receive grant from the Central Government Under Sec 16 of the Act, IRDA is eligible to receive funds from the insurers:----a percentage of their premium income and proper books of accounts have to be maintained in respect of funds received as well as expenses incurred The accounts shall be audited by the Comptroller and Auditor General of India. IRDA is bound by Government directions and its reports to be submitted to the Government regularly

Ombudsman is authorised to deal with a. Disputes with regard to premiums paid or payable b. Disputes with regard to legal construction of the policy relating to claims c. Non-issue of any documents after receipt of premiums d. Partial or Total repudiation or Delay in settlement of claims Ombudsman is not a judicial authority; has no right to summon witnesses Ombudsman acts as a Counsellor and Mediator in matters within its terms of reference

If the Insurer decides to reject the claim the same should be done within 30 days from the date of receipt of the Surveyors report The payment has to be made within 7 days of acceptance of the insurers offer by the insured For delay in payment, the insurer is liable to pay interest @ 2% above the bank interest rate

Ombudsman Scheme
Central Government framed rules known as Redressal of Public Grievance Rules 1998 in exercise of the powers vested in it under section 114(1) of Insurance Act 1938 The Scheme was notified in the Gazette of India on 11.11.1998 The Governing body of the Insurance Council is authorised by law to appoint Ombudsman for the Insurance industry and the appointment is for 3 years with reappointment provisions

Complaint Procedure
The Ombudsman has to pass the Award within 3 months of receipt of complaint. If the Award is acceptable to the complainant then the Insurer has to comply with it. Time limit to file a complaintwithin 1 year after the Insurer had rejected the representation. Ombudsmans limit: upto Rs.20 lakhs only. Expenses of the Ombudsman to be shared by insurance companies in proportion to their gross premium income.

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Consumer Protection Act 1986 (COPA)

This Act applies to all the goods and services It covers Private, Public & Co-op sectors Rights of the Consumers - Right to safety ; Right to be informed - Right to be heard ; Right to choose and - Right to Consumer Education

3 Tier Quasi-judicial machinery: District Forum : Limit up to Rs.20 lakhs State Commission : More than Rs.20 lakhs but up to Rs.1 Crore and appeals against orders of the District Forum National Commission: More than Rs.1 Crore and appeals against Orders of the State Commission Time Limit: Complaint to be filed within 2 years from the date on which the cause of action has arisen