History of Regulations in India 9th Sept03

8/4/2019 History of Regulations in India 9th Sept03

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Philosophy and Genesis ofInsurance Regulations

H. ANSARI


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Regulations are for wise mento follow wisely and for fools to

follow blindly.

- B.G. James Turner


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Insurance Regulations are not carved instone. They evolve over a period of

time. They will undergo change withthe requirements and dynamism of themarket.

Indian market has large potential forinsurance business.


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The Insurance density per capita in India for2009 was US $ 54.3 (combined Life and Non-

Life). This compares poorly with theinsurance density of Asia which was US$243.1 The worlds density per capita wasUS $ 595.1.

Our Gross Domestic Product in Insurance in2009 was only 5.2 %.

This compares adversely with the GDP of the

world in 2009 which stood at 7.0% and thatof Asia which was 6.1%.


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In India, Government has sinceinception perhaps exercised more

control over the business of Insurancethan any other business activity. Evenwhen this business was in the hands of

Private Players prior to 1956 (in thecase of Life Insurance), and 1973(pertaining to General Insurance)regulatory control was exercisedexclusively.at the state level.


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The Insurance Act of 1938 is a

testimony to the conduct of InsuranceBusiness in the country and wasfollowed even after Nationalisation of

Insurance sector by the monopolyplayers.

Since Insurance is a Peoples Business

it requires extensive legislative,regulatory and ongoing politicalattention.


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There are Three basic reasons forframing Regulations in InsuranceSector:

1. Number effected :

2. Nature of Insurance : Security via apromise.

3. Imbalance of bargaining power.


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Insurance has also become a vital

element in the economic and socialfabric of the nation. It impacts not onlythe individual but also the functioning

of the business community. While theprime focus of Insurance regulations isprotection of policy holder, it also fulfillsan essential public function and hence

the need for regulatory control.


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Goals of Insurance

Regulations Insurance laws and regulations have

evolved on an ad-hoc basis with little

reference to sophisticated system ofInsurance regulatory goals.Nevertheless, over the period of time,

the goals of insurance can bediscussed. These are as under : -


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A. Internal Goals

Reliability I.e. sense of security andneed for security to the policy holderis a universal phenomena. HenceInsurance has to be reliable.

i) Solidity of the insurance enterpriseInsurer to be solvent so that theycan meet their liability.

ii) Guarantee against loss Need tohave a guarantee fund legislationfor all types of Insurance conducted.


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Reasonableness, Equity & fairness in theInsurance market

i) There should be reasonablenessbetween the Insurer and itspolicyholders

The policyholder should betreated reasonably and should

not be charged excessively.

ii) Equity among policyholder Thereshould be fair treatment as betweenpolicyholders. Premium should notbe discriminatory.


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B. External Goals

Insurance business should function inan acceptable manner. It shouldconform to public policy. It should also

cover various social sectors, includingfamily units as a means to obtainsecurity. Coverage should be availableto those who need and want it. Thecover should also be affordable.


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C. Goals from the customersperspective

i) Insurance cover be available on asconvenient basis as possible.

ii) The insurance cover should bereasonably priced.

iii) The cover should be good and meetwith requirements of policyholder.


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In other words Insurance should bereadily available, reasonably priced and

the insurance company should be solidand meet its liability.

All the three are interrelated andbalance each other.The story of

Insurance is probably as old as thestory of mankind. Collectivecooperation among persons exposed toa particular risk in order to share therisk, is as old as the dawn of humancivilization.


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The Aryans had evolved a system ofvillage and community life which wasproof against the ravages of time andgave sustenance to everyone.

Other civilized people of the world also

had independently conceived the ideaof collective protection.

The word Yogakshema (meaning wellbeing) is from the Rig Veda.

Manu Smriti also supports the system ofCollective co-operation.


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Even Kautilyas Arthashastra refers totaxes being paid to the ruler who can look

after the well-being and security of thesubjects.

We have the classic example of our Jointfamily system which ensured co-operation, tolerance, thrift andselflessness. The basic concept of LifeInsurance viz. taking care of the financial

needs of a family in case of untimelydeath of the bread winner and provisionfor his old age, was fully taken care of byour joint family system.


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Life Insurance in its modern form came

to India from England as far back as1818. The first Insurance Company -on Indian Soil - namely the OrientalLife Insurance Society was started in

Calcutta by Europeans to help thewidows of their community.

Raja Ram Mohan Roy, Prince

Dwarakanath Tagore, Remtanu Lahiriand Rustomji Cowasji were the earlyIndian pioneers.


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Other Companies :

Bombay Life Assurance Company wasfounded in Bombay in 1823. - MadrasEquitable founded in 1829- Madras

Widows started in 1834. Universal Life Assurance Company

started operation in 1840 and merged

with North British in 1901.


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The period of fifty years commencingwith 1818 was one in which sincereefforts were made to find ways andmeans to write life businessscientifically.

The British Parliament enacted theInsurance Act of 1870 which was notapplicable to India. Indian Insurance

Companies were only governed byIndian Companies Act of 1866.


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First Indian Insurance Company was

formed in 1870 the Bombay MutualLife Assurance Society to cover Indianlives at normal rates. Earlier, theIndian lives invited a loading of 15-20%.


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The Swadeshi Movement of 1905, theNon-Cooperation Movement of 1919and the civil disobedience movement

of 1929 were milestones in the historyof Indian Insurance as thesemovements were primarily responsiblefor generating the spirit of Indianess.


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Life Insurance Companies Act was passedin 1912 requiring that the rate tables and

periodic valuations should be certified byan Actuary. The law also required IndianInsurers to make deposits with the

Government, but foreign Companies wereexempted from this provision. The Actthus introduced discrimination betweenforeign and Indian Companies and gavefurther impetus to growth of IndianInsurers


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It is the duty of every Indian to

support only Indian Insurance. The keynote of our Swaraj is in

placing all our insurance with our

Indian Companies Mahatma Gandhi A stop gap legislation was passed in

1928 to amend the Insurance

Companies Act 1912


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The main features of the new Act werethat it provided for collection ofstatistics, including those from ForeignCompanies. It also provided fordisposal of surplus assets in the eventof liquidation of an Insurance Companyin the same proportion amongst

policyholders and shareholders asprofits were distributed


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All Indian Life Offices Association wasestablished in 1928 (AILOA)

If performed a yeoman service to thecause of Indian Insurance. The

Association made material contributionto the enactments of 1938 and 1950

and put forward useful suggestions 44 companies business in force in

1914 Rs. 22.44 crores.

176 companies business in force1938 Rs. 298 crore.


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In 1934Mr. S.C. Sen the well knownsolicitor was appointed as officer onspecial duty in the Department ofcommerce to study and report on thesubject of amendments to insurancelaw. The AILOA also formed acommittee for this purpose in 1936.

The committee in their draft billrecommended the following


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A separate Deptt. Of Insurance be setup to supervise the working of all

Companies operating in India so as toprotect the interest of policy holders

Every Insurance Company be required

to obtain a licence from the Governmentto enable it to commence and carry oninsurance business in India

Substantial deposits should be obtainedfrom Indian and foreign companies inrespect of each class of business


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There should be provisions for registrationof Agents and prevention of re bating

There should be provision for annualreturns, submission of Actuarial reports,investigation, amalgamation and transferof business and winding up

To protect the interest of IndianPolicyholders, the companies should keepsufficient assets by way of reserves to

enable them to meet their outstandingrisks and should invest their surplus fundsin securities authorized by Section 20 &20-A of Indian Trust Act.


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The above finally led to theappointment of an informal Committeeunder the Chairmanship of the thenLaw Member Mr. N.N. Sarcar toexamine the report of Mr. S.C.Sen with

regard to amendment in Insurance Lawand pilot the same in the legislatureassembly in January 1937, which

resulted in the Insurance Act 1938


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The Insurance Act 1938

The Insurance Act 1938 acomprehensive legislation governing not

only Life but also Non-Life branches ofInsurance to provide State Control overInsurance business.


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Salient Features OfInsurance Act 1938

A.Constitution of a Department ofInsurance under a superintendent vested

with wide powers of supervision andcontrol over all kinds of Insurancecompanies.


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B. Regulations introduced for the

compulsory registration of InsuranceCompanies and for filing of Returns ofInvestment and Financial conditions.

C.Provisions for Deposits to preventInsurance Inadequate financial

resources or speculative concerns fromcommencing business


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D.Provision that 55% of the net life fund ofan Indian or Non-Indian Insurance shouldbe vested in Government and approvedsecurities with at least 25% in Indian

Government rupee securities. All othercompanies i.e. Foreign Companies mustinvest 100% of their Indian Liabilities in

Indian Government and approvedsecurities, with at least 33.3% in IndianGovernment Securities


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E. Provision of rebating, restriction of

commission were fixed at 40% of thefirst years premium and 5% of therenewal premium in respect of Life

Insurance business. The agent must belicensed, to improve the status of theprofession.


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F. Periodical valuation for Indian

Business of foreign companies and thebusiness of Indian Companies.

G. G. Provision for Policyholders

Directors, making it possible for therepresentatives of Policyholders to beon the Board


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H. Standardization of Policy Conditionsrequired all companies to file standard

forms and tables of Premium approved byan Actuary under this requirement, theinitial deposit for Life Insurance businesswas raised from Rs. 25,000/- in governmentSecurities to Rs. 50,000 in cash or approvedsecurities, which was subsequently to beraised by installments to Rs. 2 lac within a

specified time limit.


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Thus for the first time in the history ofInsurance in India, the whole business

was brought under a unified system ofcontrol and its structure strengthened bystatutory regulations. Weaker elements

were weeded out, indiscriminatepromotion was checked and speculativeInsurance was eliminated. The best

proof of the soundness of law was theeffective check on large scaleliquidations which had marred the nameof Insurance in the thirties.


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Various amending Acts to 1938 Actwere passed in 1939, 1940, 1941,

1944, 1945 and 1946 on issues likecontrol on deposits, creation of anoffice of Superintendent of Insurance

with wide powers of Supervision ofControl, Investments, rebating,Policyholders Directors, Returns andManaging Agencies Further

amendments were brought about in1950, 1956 and 1968 to make the actmore comprehensive and meaningful.


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INSURANCE REGULATORY ANDDEVELOPMENT ACT 1999

Insurance in India is not new.

It has a history of 0ver 192 years.

Insurance Companies enjoyed ratingfreedom.

Life prior to 1956

Non life prior to 1973


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Nationalisation enabled mobilisation anddeployment of massive financialresources

Committee on Reforms in InsuranceSector Malhotra Committee

IRDA Act 1999


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Recommendations of CRIS

Insurance Sector should be graduallyopened for private participation both life

and non-life separately. No compositeinsurers allowed.

Foreign Companies be allowed through

Joint Ventures established in India withIndian partners.


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The minimum paid up capital of the

new Insurance Companies should notbe less than Rs. 100 Crores I.e.approximately US $25 Million

Capital adequacy should be backed byvery defined solvency standards

Brokers may be allowed to operate for

direct business subject to adequatecontrols and safeguards


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Promoters shareholding should not

exceed 40 percent of the paid upcapital. This was subsequentlymodified to 26% by the Parliamentary

Committee which was appointedsubsequently and was later onincorporated in the IRDA Bill which waspassed by both Houses of Parliament inDecember 1999.

IRDA AIMS


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IRDAs AIMS :

The IRDAs aims are :-

To protect customers of Insurancecompanies

IRDA will :-

set, promote, monitor and enforce highstandards of integrity, financialsoundness, fair dealing and competenceof those it regulates, in order to protectand to secure fair treatment forinsurance policyholders;


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IRDAs AIMS :

aim to ensure that insurance customersreceive precise, clear and correctinformation about the services,

products and risks; recognise insurance customers

responsibility for their own decisions,while aiming to ensure that they are notexposed to risks that they should notreasonably by expected to assume.


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IRDAs AIMS :

(ii) To promote clean and orderlymarkets. IRDA will :-

promote fairness, transparency and

orderly conduct in financial marketsdealing with insurance and enforce highstandards in this area;

take action where such standards areinadequate or ineffectively enforced


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IRDAs AIMS :

(iii) IRDA will pursue these aims in an

efficient way and will aim to ensure thatthe costs of regulation areproportionate to the benefits.


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DUTIES, POWERS ANDFUNCTIONS OF IRDA

(1) Subject to the provisions of this Act andany other law for the time being in force,the Authority shall have the duty to

regulate, promote and ensure orderlygrowth of the insurance business andreinsurance business.


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(2) Without prejudice to the generality of

the provisions contained in sub-section(1), the powers and functions of theAuthority shall include : -

(a) to issue to the applicant a certificateof registration, to renew, modify,withdraw, or cancel such registration

DUTIES, POWERS AND


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(b) protection of the interests of the policyholders in matters concerning assigning of

policy, nomination by policy holders,insurable interest, settlement of insuranceclaim, surrender value of policy, and other

terms and conditions of contracts ofinsurance

DUTIES, POWERS AND


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(c) specifying requisite qualifications andpractical training for intermediary orinsurance intermediaries and agents

(d)specifying the code of conduct for surveyorsand loss assessors

(e) promoting efficiency in the conduct ofinsurance business

DUTIES POWERS AND


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(f)promoting and regulating professionalorganisations connected with the insuranceand reinsurance business

(g) levying fees and other charges forcarrying out the purposes of the Act

(h)calling for information from, undertakinginspection of, conducting enquiries andinvestigations including audit of the insurers,intermediaries, insurance intermediaries andother organisations connected with the

insurance business


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(i) control and regulation of the rates,advantages, terms and conditions that maybe offered by insurers in respect of general

insurance business not so controlled andregulated by the TAC under section 64U ofthe Insurance Act, 1938.

(J)prescribing the form and manner in which

books of account shall be maintained andstatement of accounts will be rendered byinsurers and other insurance intermediaries


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(k) regulating investment of funds by insurancecompanies; regulating maintenance of

margin of solvency; adjudication of disputesbetween insurers and intermediaries orinsurance intermediaries along with

supervising the functioning of TariffAdvisory Committee

DUTIES, POWERS AND


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(n)to specify the percentage of premiumincome of the insurer to finance schemes forpromoting and regulating professionalorganisations

(o) specify percentage of life insurancebusiness and general insurance business tobe undertaken by the insurer in the rural

sector or social sector.(p) exercising such other powers as may be

prescribed.

EXPECTATIONS FROM


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EXPECTATIONS FROMLIBERALISATION

Market expansion

Focused penetration

Up-dation and internationalization oftechnology and skills

Improved customer focus

Operational efficiency

Information transparency


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MAJOR FEARS

Financial soundness

Insolvency of insurer

Market indiscipline

Agents misinforming customers

Discrimination in underwriting and

payment of claimsNon payment of claims

ROLE OF REGULATIONS


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ROLE OF REGULATIONS Promoting operational efficiency

strengthening investment function rationalizing insurance premium rates

enlarging scope of insurance business

Maintaining market order safe and stable insurance market

ensuring solvency & exploring criteria forcapital adequacy

Professional Conduct Standards/ Goodinsurance practice

development of legislation/ public policy

O O O


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ROLE OF REGULATIONS

Protecting rights and benefits of insured

enforcing public disclosure of

Information secure the rights of insured

Healthy development of insurance business

and to secure sound competition

ROLE OF REGULATOR


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Securing benefits covered by insuranceand policyholdersinterests

Realization of sound development in

insurance business through competition Setting limits for risk taking

Striking right balance between

governmental regulation and selfregulation

ROLE OF REGULATOR

TASKS OF A REGULATOR


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1. Insurance companies must be kept solvent

so that they can pay claims developing and encouraging self regulation

interactions with players and

intermediaries solvency regulations

Capital Adequacy; Pricing and products;Return on Investments; Reserving;

Asset liability matching; Reinsurance

Publishing Watch-list and monitoringof Intermediaries



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2. No discrimination in price or availability

between policy holders who present thesame general degree of risk

fair and realistic price

non discrimination in claims settlement checking unfair selling/market practices

product based regulations

market conduct examinations responding to consumer complaints


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3. Insurance relationship must befair, balanced and non deceptive

contracts must be fair and balancedpolicies be approved/ scrutinized by

regulator

standardized and popular policiesmay be written in simple language


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4. Process of marketing insuranceand of settling claims should behonest, fair and prompt

monitor conduct of surveyors, lossassessors, investigators, and lawyers

evolving codes of conduct

check unfair claims management

ensure timely claim settlements


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5. Insurance should be available tothose who need and want it

encourage widespread availability ofinsurance, especially individuals

ensure private participation in sellinginsurance to unprotected

develop spread and growth ofinsurance


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6. Establishment of professionalconduct standards and acceptableindustry practices

publicize acceptable practices

identifying insurers deviating from setstandards

Licensing of intermediaries andsetting up of professionalcompetency/ conduct standards


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STRATEGIC OBJECTIVES

Public Confidence

Safeguards from undue loss Cost effectiveness

Competition Quality

STRATEGIES


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STRATEGIES

Refining regulatory and supervisory

framework to focus more clearly onmajor risk areas

Continuously testing new and existing

initiatives Encouraging rule setting and adoption

of sound business and financialpractices

Development of legislation, regulation,and guidelines in tune with industry andprofessional practices


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CHALLENGES

Realistic understanding of roleof regulation and supervision

mandatory supervision of keyfinancial variables

regulations on norms for disclosure

co-operation with internationalregulators

role of Appointed Actuary


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CHALLENGES

Information Technology electronic data base systems

streamlining information gatheringrequirements

examination of key financial

information feedback on competitive impact ofregulation

CHALLENGES


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CHALLENGES

Voluntary compliance by insurancecompanies sharing of highly confidential

information by senior executiveswould not lead to damaging publicevaluations

Confidentiality of Information

where information is not otherwisepublicly available


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Important sub-sections of theIRDA Act, 1999

The provision of this Act shall be in

addition to, and not in derogation of,the provision of any other law for thetime being in force.


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After Sub-section (2A), insert

(2AA) The Authority shall givepreference to register the applicant andgrant him a certificate of registration ifsuch applicant agrees, in the form andmanners as may be specified by theregulations made by the Authority, tocarry on the life insurance business or

general insurance business for providinghealth cover to individuals or group ofindividuals


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6 Requirement as to capital No

insurer carrying on the basis of lifeinsurance, general insurance or re-insurance in India on or after thecommencement of the InsuranceRegulatory and Development Authority

Act 1999, shall be registered unless hehas


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i) A paid-up equity capital of rupees

one hundred crores in, case of aperson carrying on the business oflife insurance or general insurance or;

ii) A paid-up equity capital of rupeestwo hundred crores, in case of aperson carrying on exclusively thebusiness as a reinsurer


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6AA Manner of divesting excess

shareholding by promoter in certaincases

1. No promoter shall at any time holdmore than twenty-six per cent orsuch other percentage as may beprescribed, of the paid-up equitycapital in an Indian insurance

company.


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Provided that in a case where a Indian

insurance company begins the businessof life insurance, general insurance orre-insurance in which the promoters

hold more than twenty-six per cent ofthe paid-up equity capital or such otherexcess percentage as may beprescribed, the promoters shall divest in


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a phased manner the share capital inexcess of the twenty-six per cent of thepaid up equity capital or such excesspaid-up equity capital as may beprescribed, after a period of ten years

from the date of the commencement ofthe said business by such Indianinsurance company or within such

period as may be prescribed by theCentral Government.

27C. Prohibition for investment of funds


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27C. Prohibition for investment of fundsoutside India No insurer shall directly orindirectly invest outside India the funds ofpolicy-holders.

27D. Manner and conditions of investment 1) Without prejudice to anything

contained in sections 27, 27A and 27B,the Authority may, in the interests of thepolicy-holders, specify by the regulationsmade by it, the time, manner and other

conditions of investment of assets to beheld by an insurer for the purposes of this

Act.


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2) the Authority may give specific

directions for the time, manner andother conditions subject to which thefunds of policy holders shall be investedin the infrastructure and social sector as

may be specified by regulations madeby the Authority and such regulationsshall apply uniformly to all the insurers

carrying on the business of lifeinsurance,

general insurance or re insurance in


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general insurance, or re-insurance inIndia on or after the commencement of

the Insurance Regulatory andDevelopment Authority Act, 1999.

3)The Authority may, after taking into

account the nature of business and toprotect the interests of the policy-holders,issue to an insurer the directions relatingto the time, manner and other conditionsof investment of assets to be held byhim.


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32B Insurance business in rural orsocial sector Every insurer shall, afterthe commencement of the InsuranceRegulatory and Development Authority,

Act, 1999, undertake such percentages

of life insurance business and generalinsurance business in rural or socialsector, as may be specified, in the

Official Gazette by the Authority, in thisbehalf.


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32 C. Obligations of insurer in respect

of rural or unorganised sector andbackward classes Every insurer shall,after the commencement of theInsurance Regulatory and Development

Authority Act, 1999 discharge theobligations specified under section 32Bto provided life insurance or general

insurance policies to the personsresiding in the rural sector,


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workers in the unorganized or informalsector or for economically vulnerable orbackward classes of the society and othercategories of persons as may be specified byregulations made by the Authority and such

insurance policies shall include insurance forcrops.

The Sections 32-B & 32-C narrated abovehave to be read with Sections 105-B & 105-C

which are penalty provisions.


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42 D. Issue of licence to intermediary

or insurance intermediary1) The Authority or an officer

authorised by it in this behalf shall in

the manner determined by theregulations made by the Authorityand on payment of the feesdetermined by the regulations madeby the Authority, issue to any person


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making an applications in themanner determined by the

regulations, and not suffering fromany of the disqualifications hereinmentioned, a licence to act as anintermediary or an insuranceintermediary under this Act :


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114A . Power of Authority to makeregulations

1) The Authority may, by notification in

the Official Gazette, makeregulations consistent with this Actand the rules made there under, tocarry out the purposes of this Act.


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Every regulation made under this Act,shall be laid, as soon as it is made,

before each House of Parliament for atotal period of 30 days.

Conclusion


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Conclusion

Insurance in India was liberalized nearly 10

years back. So far, 48 licences to DirectInsurers have been issued by the IRDA

23 for Life,

25 for Non-Life GIC has been designated as the Indian Re-

Insurer under the Act.

By the end of 2011, it is expected that a fewmore licences will be granted by theAuthority.

In the Liberalized set-up, the Insurers can


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p,help in growth and deepening of theInsurance market including Niche marketing

and together with innovative covers, cansubstantially increase Insurance penetrationin the country which is the need of the hour.

The Nationalized Insurance Companies given

their size and reach can be the trend settersin this Liberalized scenario and should gettheir act together so as to ensure long termsurvival in the market with growth and

profitability.

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Documents

History of Regulations in India 9th Sept03