CONCEPT OF INSURANCE IN INDIA

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ASSIGNMENT

ON

CONCEPT OF INSURANCE

Submitted by: Submitted to:

Nancy Shamim Dr A!ad Ma"i#

$A% &&$% ' year%

Section $

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C(APTER )

)) AC*NO+&EDGEMENT

Firstly, I would like to express my profound sense of gratitude towards the Almighty ALLAHfor providing me with the authentic circumstances which were mandatory for the completion of

my research work

I am also thankful to DrA!ad Ma"i#, for his invalua!le support, encouragement, supervision and

useful suggestions throughout this research work His moral support and continuous guidance

ena!led me to complete my work successfully His intellectual thrust and !lessings motivated me

to work rigorously on this study In fact this study could not have seen the light of the day if his

contri!ution had not !een availa!le It would !e no exaggeration to say that it is his unflinchingfaith and un"uestioning support that has provided the sustenance necessary to see it through to its

present shape

I express my deep sincere gratitude towards my #other for her !lessing, patience, and moral

support in the successful completion of this pro$ect I express my gratitude to my all teachers and

friends who has supported and encouraged me during my study at Faculty of Law, %amia

#illiaIslamia, &ew 'elhi

&ancy (hamim

)ALL) *Hons+ th(emester

-th.ear

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), TA$&E OF CONTENT

C(APTER )

)) AC*NO+&EDGEMENT

), TA$&E OF CONTENT

)- &IST OF A$$RE'IATIONS

). STATEMENT OF PRO$&EM

)/ SCOPE OF T(E STUD0

)1 (0POT(ESIS

)2 O$3ECTI'E OF T(E STUD0

C(APTER ,

,) RESEARC( MET(ODO&OG0

,, C(APTERI4ATION SC(EME

C(APTER 5

5) INTRODUCTION

5, +(AT IS INSURANCE &A+6

55 NEED FOR INSURANCE

5- T0PES OF INSURANCE

5- GENERA& PRINCIP&ES AND CONCEPTS OF INSURANCE

5. DIFFERENTIATION INSURANCE AND GUARANTEE

51 INSURANCE AND +AGER

5/ MATERIA& FACTS

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52 DISC&OSURES

57 FACTS% +(IC( MUST $E DISC&OSED

5)8 REPRESENTATIONS

5)) EFFECT OF NON9DISC&OSURE

5)8 EAMP&ES OF MATERIA& FACTS

5), ACTI'E AND PASSI'E DUT0 OF DISC&OSURE

5)5 MORA& (A4ARDS

C(APTER -

-) NATURE OF INSURANCE CONTRACT

-, FEATURES OF INSURANCE CONTRACT

C(APTER . REGU&ATOR0 EN'IRONMENT ; SPECIFIC &EGIS&ATIONS

.) (ISTOR0 OF INSURANCE IN INDIA

., &IFE INSURANCE

.5 GENERA& INSURANCE

.- REGU&ATION OF INSURANCE $USINESS IN INDIA

.. ACTS


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1) CONSTITUTION OF INSURANCE REGU&ATOR0 AND DE'E&OPMENT

AUT(ORIT0

1, PO+ERS

REGU&ATIONS% ,888 =AS AMENDED FROM TIME TO TIME>

2- IRDA GUIDE&INES TO FINANCIA& INC&USION

C(APTER /

/) CONC&USION

/, $I$&IOGRAP(0

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)- &IST OF A$$RE'IATIONS

(/)I 0 (ecurities and /xchange )oard of India

I1'A0Insurance 1egulatory and 'evelopment Authority

/232 0 /xport 2redit 3uarantee 2orporation

AI2L 0 Agricultural Insurance 2ompany of India Ltd

3I2 0 3eneral Insurance 2orporation of India

LI2 0 Life Insurance 2orporation of India

3I&03eneral Insurance &ationali4ation Act

IA0Insurance Act

IAA0Insurance Amendment Act

F/#A0/xchange 2ontrol 1egulations

I(A0Indian (tamp Act

25A02onsumer 5rotection Act

I60Insurance 6m!udsman

##7A0#ulti0#odal 7ransportation Act

#8A0 8ehicles Act

I(8AA0Inland (team 8essels Amendment Act

#IA0#arine Insurance Act

23(A02arriage of 3oods !y (ea Act

#(A0#erchant (hipping Act

)LA0)ill of Lading Act

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I5A0Indian 5orts *#a$or 5orts+ Act

I1A0Indian 1ailways Act

2A02arriers Act

I56A0Indian 5ost 6ffice Act

2AA02arriage !y Air Act

92A09orkmens: 2ompensation Act

5LIA05u!lic Lia!ility Insurance Act ;;

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)1 TA$&E OF CASES

; La4arus /state Ltd 8s )easley ;-?@

@ 'uchess of ingstone, (mith:s Leading 2ases, ;Bth /dn, p of ;

0-? of

@??C

> #eghmala v 3 &arasimha 1eddy reported in *@?;?+ D (22 BDB

D )askar vs 7he &ational Insurance 2o Ltd 2ivil #iscellaneous Appeal &o@?


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). STATEMENT OF PRO$&EM

India, one of the fastest growing economies in the world, has a !urgeoning middle class, and has

witnessed a significant rise in the demand for insurance products 6ver the last ;? years, the

insurance industry has grown at a capital annual compounded growth rate *2A31+ of around

@?G However, with the exponential growth in the industry, there has also !een an increased

incidence of frauds in the country

Laws pertaining to Insurance are sufficient as they have !een time to time amended !y the

Legislature as per the changing demand of current scenario )ut the industry has progressed on a

slow pace Hence, companies need a more vigorous progressive management framework

)1 (0POT(ESIS

7he current research and study is !ased on the following hypotheses0

; 7here are sufficient safeguards for the insurance industry in India

@ 7he insurance industry has stringent regulations governing it

)2 O$3ECTI'E OF T(E STUD0

In this research work, the 1esearcher endeavours to impart the knowledge and give the insight to

the masses on the following !road o!$ectives0

; 7o appraise the existing law on the regulation regarding the Insurance Industry in India

@ 7o setup more vigorous fraud management framework in Insurance 2ompanies

B Last )ut not the least, to !ring awareness among the common mass a!out the concept of

Insurance and legislations dealing with it

)/ SCOPE OF T(E STUD0

Any perception of this work would perhaps seem minuscule considering the fact that this workhas produced from a mere student of law, particularly in the light of the knowledge that so many

legal luminaries have deli!erated on the matter since time immemorial

7he study due to incorporation of a num!er of restrictions like time and resources, deals keeping

in focus all the states and union territories in India

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7he study !y putting forward its recommendations, most hum!ly, hopes to make a small

contri!ution in the field of legal reforms in India 7he study also relates and incorporates

International Instruments2onventionsforeign legislations and policies of the Enited &ation

6rganisation and different foreign &ational laws

C(APTER ,

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,) RESEARC( MET(ODO&OG0

7he present work has !een undertaken with guided intellectual in"uisition !ased on organi4ed

and systematic investigation !y employing doctrinal research methodology

7he methodology followed !y the 1esearcher in the present work has !een undertaken with

guided intellectual in"uisition !ased and organi4ed and !y systematic investigation !y employing

purely doctrinalnon0empirical in nature For the purpose of preparing this research work, the

1esearcher has relied on various !ooks, statutes, articles, $ournals, newspaper articles and other

such literature 7he 1esearcher has also relied on various case laws to su!stantiate or refute his

points as and when they arise

,, C(APTERI4ATION SC(EME

2HA57/1 ;7his 2hapter deals with the list of A!!reviation used in this research work

2HA57/1 @ It includes the methodology used in the research work comprising

chapteri4ation scheme

2HA57/1 B 7he chapter includes the introduction part of the research work

comprising need of insurance, the general principles dealing with the

Insurance and differentiation of insurance from wager and guarantee

2HA57/1 C 7he Fourth 2hapter covers the nature of insurance contract

2HA57/1 - 7he Fifth 2hapter titled J1egulatory /nvironment K (pecific

Legislations explains in !rief the history of insurance in India and also

the legislation dealing with the Insurance in India

2HA57/1


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2HA57/1 D 7he last chapter concludes the research work along with suggestions

and !i!liography

C(APTER 5

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5) INTRODUCTION

Insurance may !e descri!ed as a social device to reduce or eliminate risk of life and property

Ender the plan of insurance, a large num!er of people associate themselves !y sharing risk,

attached to individual 7he risk, which can !e insured against include fire, the peril of sea, death,

incident, !urglary Any risk contingent upon these may !e insured against at a premium

commensurate with the risk involved@

Insurance is actually a contract !etween two parties where!y one party called insurer undertakes

in exchange for a fixed sum called premium to pay the other party on happening of a certain

event

Insurance is a contract where!y, in return for the payment of premium !y the insured, the

insurers pay the financial losses suffered !y the insured as a result of the occurrence of

unforeseen events 9ith the help of Insurance, large num!er of people exposed to similar risksmakes contri!utions to a common fund out of which the losses suffered !y the unfortunate few,

due to accidental events, are made good

An insurer is a company selling the insuranceM an insured or policyholder is the person or entity

!uying the insurance 7he insurance rate is a factor used to determine the amount to !e charged

for a certain amount of insurance coverage, called the premium

According to %) #acleanB

Insurance is a method of spreading over a large num!er of persons a possi!le financial loss too

serious to !e conveniently !orne !y an individual

5, +(AT IS INSURANCE &A+6

Insurance law is the name given to practices of law surrounding insurance, including insurance

policies and claims Insurance regulation that governs the !usiness of insurance is typically

aimed at assuring the solvency of insurance companies 7hus, this type of regulation governs

capitali4ation, reserve policies, rates and various other N!ack officeN processesC

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55 NEED FOR INSURANCE

All assets have some economic value attached to them 7here is also a possi!ility that these

assets may get damaged destroyed or !ecome non0operational due to risks like !reakdowns, fire,

floods, earth"uake etc 'ifferent assets are exposed to different types of risks like a car has a risk

of theft or meeting an accident, a house is exposed to risk of catching fire, a human is exposed to

risk of deathaccident- Hence insurance is re"uired for the following reasons

; Insurance acts as an important tool in providing a sense of security to the society on a whole

In case the !read earner of a family dies, the family suffers from direct financial loss as family:s

income ceases Life insurance is one alternate arrangement that offers some respite to the family

from financial distress

@ 7he !asic need of insurance arises as risks are uncertain and unpredicta!le in nature 3etting

insurance for an asset does not mean that the asset is protected against risks or its exposure to

risk is reduced, !ut it actually implies that in case the asset suffers any loss in value due to such

risk, the insurance company !ears the loss and compensates the insured !y making payment to

him

B Insurance acts as a useful instrument in promoting savings and investments, particularly

within the lower income and middle income families 7hese savings are used as investments to

fuel economic growth

5- T0PES OF INSURANCE1

Insurance !usiness is divided into following types of !usiness namely

)> &ie In!urance

,> Genera" In!urance

Marine in!urance

Fire in!urance

Motor Behic"e in!urance

Mi!ce""aneou! in!urance

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5> Rein!urance

5- GENERA& PRINCIP&ES AND CONCEPTS OF INSURANCE

7he !usiness of insurance aims to protect the economic value of assets or life of a person

7hrough a contract of insurance the insurer agrees to make good any loss on the insured property

or loss of life *as the case may !e+ that may occur in course of time in consideration for a small

premium to !e paid !y the insured>

Apart from the a!ove essentials of a valid contract, insurance contracts are su!$ect to additional

principles

7hese are

Princi"e o Utmo!t ?ood aith

Princi"e o In!urab"e intere!t

Princi"e o Indemnity

Princi"e o Subro?ation

Princi"e o Contribution

Princi"e o Proimate cau!e

Princi"e o &o!! o Minimiation

7hese distinctive features are !ased on the !asic principles of law and are applica!le to all types

of insurance contracts 7hese principles provide guidelines !ased upon which insurance

agreements are undertaken

A proper understanding of these principles is therefore necessary for a clear interpretation of

insurance contracts and helps in proper termination of contracts, settlement of claims,

enforcement of rules and smooth award of verdicts in case of disputesD

&ow I will !e discussing various principles of Insurance in detail

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) PRINCIP&E OF U$ERRIMAE FIDEI =UTMOST GOOD FAIT(7>

5rinciple of E!errimae fidei *a Latin phrase+, or in simple /nglish words, the 5rinciple ofEtmost 3ood Faith, is a very !asic and first primary principle of insurance According to this

principle, the insurance contract must !e signed !y !oth parties *ie insurer and insured+ in an

a!solute good faith or !elief or trust

7he person getting insured must willingly disclose and surrender to the insurer his complete true

information regarding the su!$ect matter of insurance 7he insurer:s lia!ility gets void *ie legally

revoked or cancelled+ if any facts, a!out the su!$ect matter of insurance are either omitted,

hidden, falsified or presented in a wrong manner !y the insured

7he principle of E!errimae fidei applies to all types of insurance contracts

, PRINCIP&E OF INSURA$&E INTEREST)8

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7he principle of insura!le interest states that the person getting insured must have insura!le

interest in the o!$ect of insurance A person has an insura!le interest when the physical existence

of the insured o!$ect gives him some gain !ut its non0existence will give him a loss In simple

words, the insured person must suffer some financial loss !y the damage of the insured o!$ect

For example 7he owner of a taxica! has insura!le interest in the taxica! !ecause he is getting

income from it )ut, if he sells it, he will not have an insura!le interest left in that taxica!

From a!ove example, we can conclude that, ownership plays a very crucial role in evaluating

insura!le interest /very person has an insura!le interest in his own life A merchant has

insura!le interest in his !usiness of trading (imilarly, a creditor has insura!le interest in his

de!tor

5 PRINCIP&E OF INDEMNIT0))

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Indem

nity means security, protection and compensation given against damage, loss or in$ury

According to the principle of indemnity, an insurance contract is signed only for getting

protection against unpredicted financial losses arising due to future uncertainties Insurance

contract is not made for making profit else its sole purpose is to give compensation in case of any

damage or loss

In an insurance contract, the amount of compensations paid is in proportion to the incurred

losses 7he amount of compensations is limited to the amount assured or the actual losses,

whichever is less 7he compensation must not !e less or more than the actual damage

2ompensation is not paid if the specified loss does not happen due to a particular reason during a

specific time period 7hus, insurance is only for giving protection against losses and not for

making profit;@

However, in case of life insurance, the principle of indemnity does not apply !ecause the value of

human life cannot !e measured in terms of money

- PRINCIP&E OF SU$ROGATION)5

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(u!rog

ation means su!stituting one creditor for another 5rinciple of (u!rogation is an extension and

another corollary of the principle of indemnity It also applies to all contracts of indemnity

According to the principle of su!rogation, when the insured is compensated for the losses due to

damage to his insured property, then the ownership right of such property shifts to the insurer

7his principle is applica!le only when the damaged property has any value after the event

causing the damage 7he insurer can !enefit out of su!rogation rights only to the extent of the

amount he has paid to the insured as compensation

For example #r Arvind insures his house for O ; million 7he house is totally destroyed !y the

negligence of his neigh!our #r #ohan 7he insurance company shall settle the claim of #r

Arvind for O ; million At the same time, it can file a law suit against #r #ohan for O ;@

million, the market value of the house If insurance company wins the case and collects O ;@

million from #r #ohan, then the insurance company will retain O ; million *which it has already

paid to #r Arvind+ plus other expenses such as court fees 7he !alance amount, if any will !e

given to #r Arvind, the insured;C

. PRINCIP&E OF CONTRI$UTION

5rinciple of 2ontri!ution is a corollary of the principle of indemnity It applies to all contracts ofindemnity, if the insured has taken out more than one policy on the same su!$ect matter

According to this principle, the insured can claim the compensation only to the extent of actual

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loss either from all insurers or from any one insurer If one insurer pays full compensation then

that insurer can claim proportionate claim from the other insurers

For example #r Arvind insures his property worth 1s ;??,??? with two insurers NAI3 LtdN

for O?,??? and N#etLife LtdN for O


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However, in case of life insurance, the principle of 2ausa 5roxima does not apply 9hatever may

!e the reason of death *whether a natural death or an unnatural death+ the insurer is lia!le to pay

the amount of insurance

2 PRINCIP&E OF &OSS MINIMI4ATION)1

According to the 5rinciple of Loss #inimi4ation, insured must always try his level !est to

minimi4e the loss of his insured property, in case of uncertain events like a fire out!reak or !last,

etc 7he insured must take all possi!le measures and necessary steps to control and reduce the

losses in such a scenario 7he insured must not neglect and !ehave irresponsi!ly during such

events $ust !ecause the property is insured Hence it is a responsi!ility of the insured to protect

his insured property and avoid further losses

For example Assume, #r Arvind:s house is set on fire due to an electric short0circuit In this

tragic scenario, #r Arvind must try his level !st to stop fire !y all possi!le means, like first

calling nearest fire department office, asking neigh!ours for emergency fire extinguishers, etc

He must not remain inactive and watch his house !urning hoping, N9hy should I worryP I:ve

insured my houseN

5. DIFFERENTIATION INSURANCE AND GUARANTEE)2

Insurance is a contract of indemnity where!y Insurer agrees to indemnify, or pay, the insured for

certain types of loss while in a contract of guarantee, one party agrees to act on !ehalf of another

should that second party default In plain terms, this means that if an individual fails to pay her

guaranteed de!t or to perform some other duty or o!ligation, the guarantor, the party who has

agreed to act on !ehalf of another, will step in to pay or perform the o!ligation

7here are two ma$or differences !etween insurance and guarantees 6ne difference is that

insurance is a direct agreement !etween the insurance provider and the policyholder, while a

guarantee involves an indirect agreement !etween a !eneficiary and a third party, along with the

primary agreement !etween the principal and !eneficiary A second difference is that insurance

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policy calculations are !ased on underwriting and possi!le loss, while a guarantee is focused

strictly on performance or nonperformance In addition, insurance providers or policyholders can

cancel policies with notice, while guarantees often cannot !e canceled 7he difference !etween a

contract of Insurance and a contract of guarantee are as given !elow

INSURANCE GUARANTEE

In a contract of insurance, there are two parties

ie insurer and insured

In a contract of 3uarantee there are three

parties ie #ain 'e!tor, 2reditor (urety

Insurance contract is generally 2ancella!le 2ontract of 3uarantee is &on02ancella!le

Insurance premium is !ased on the pro!a!ility

and "uantum of losses

In contract of !usiness, loss cannot !e

estimated generally so fee is charged for the

guarantee service rendered

An insurance contract transfers the 1isk 7here is &o 7ransfer of 1isk in a contract of

guarantee

51 INSURANCE AND +AGER )/

A contract of Insurance, ie life, accident, fire, marine, etc is not a wager though it is

performa!le upon an uncertain event It is so !ecauseM the principle of insura!le interest

distinguishes insurance from a wagering contract Insura!le interest is the interest which one has

in the safety or preservation of the su!$ect matter of insurance 9here insura!le interest is not

present in insurance contracts, it !ecomes a wagering contract and is therefore void

7he following are the points of distinction !etween wagering agreements and insurance

contracts

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; 7he parties have no insura!le interest iii a wagering agreement )ut the holder of an insurance

policy must have an insura!le interest

@ In wagering agreement, neither party has any interest in happening or non0happening of an

event )ut in a contract of insurance, !oth parties are interested in the su!$ect0matter

B 2ontracts of insurance are contracts of indemnity except life insurance contract, which is a

contingent contract )ut a wagering agreement is a conditional contract

C 2ontract of insurance are !ased on scientific and actuarial calculation of risks, where as

wagering agreements are a gam!le without any scientific calculation of risk

- 2ontracts of insurance are regarded as !eneficial to the pu!lic and hence encouraged !y the

(tate !ut wagering agreements serve no useful purpose


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alteration in the policy In the latter case, he must inform the insurer of any facts material to the

alteration

5/ MATERIA& FACTS

,8

#aterial fact is every circumstance or information, which would influence the $udgment of a

prudent insurer in assessing the risk 7hose circumstances which influence the insurers decision

to accept or refuse the risk or which affect the fixing of the premium or the terms and conditions

of the contract, must !e disclosed

A material fact is one which would have influenced the $udgment of a prudent insurer in deciding

whether he would accept the risk in whole or in part and, if so, at what amount of premium 7he

materiality of a fact depends upon the application of this test to the particular circumstances of

the case as at the date that the fact should have !een communicated

#aterial facts may have a !earing on the physical ha4ard or on the moral ha4ard, or they may

show that if a loss occurs the insurer:s lia!ility is likely to !e greater than would normally !e

expected

57 FACTS% +(IC( MUST $E DISC&OSED

*i+ Facts, which show that a risk represents a greater exposure than would !e expected from its

nature eg, the fact that a part of the !uilding is !eing used for storage of inflamma!le materials

*ii+ /xternal factors that make the risk greater than normal eg the !uilding is located next to a

warehouse storing explosive material

*iii+ Facts, which would make the amount of loss greater than that normally expected eg there is

no segregation of ha4ardous goods from non0ha4ardous goods in the storage facility

*iv+ History of Insurance *a+ 'etails of previous losses and claims *!+ if any other Insurance

2ompany has earlier declined to insure the property and the special condition imposed !y the

other insurersM if any

*v+ 7he existence of other insurances

*vi+ Full facts relating to the description of the su!$ect matter of Insurance

5)8 EAMP&ES OF MATERIA& FACTS,)

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*a+ In Fire Insurance 7he construction of the !uilding, the nature of its use ie whether it is of

concrete or ucha 0 having thatched roofing and whether it is !eing used for residential purposes

or as a godown, whether fire fighting e"uipment is availa!le or not

*!+ In #otor Insurance 7he type of vehicle, the purpose of its use, its age *#odel+, 2u!ic

capacity and the fact that the driver has a consistently !ad driving record

*c+ In #arine Insurance 7ype of packing, mode of carriage, name of carrier, nature of goods, the

route

*d+ In 5ersonal Accident Insurance Age, height, weight, occupation, previous medical history

and occupation especially if it is likely to increase the chance of an accident 5roclivity of

su!stance a!use has to !e disclosed as well0 eg alcohol or drug addiction

*e+ )urglary Insurance &ature of stock, value of stock, type of security precautions taken

7he a!ove are $ust indicatory of the type of material facts that must !e disclosed

'etails of previous losses is a material fact that has to !e disclosed in all cases

5)) EFFECT OF NON9DISC&OSURE ,,

9here there has !een non0disclosure, whether innocent or fraudulent, sometimes called

concealment the contract is voida!le at the option of the insurer 7his is the position where the

matter is not dealt with !y a policy condition 7he ground is usually covered !y a policy

condition which may do no more than state the common law rule

5), REPRESENTATIONS,5

1epresentations are statements made during the negotiations with the o!$ect of inducing the

other party to enter into the contract they must !e distinguished from statements which are

introduced into the contract, and upon the truth of which the validity of the contract is made to

depend 1epresentations may !e as to a matter of fact, and, if material must !e su!stantially

correct

9here there has !een misrepresentation it is necessary to decide whether it was fraudulent or

innocent A fraudulent misrepresentation is one which was known to !e false M or which was

made without !elief in its truth, or recklessly, careless whether it was true or false Fraudulent

misrepresentation of a material fact entitles the insurer to avoid the policy

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23 https://www.po!icho!derperspective.com

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/very material fact which the insured ought to know in the ordinary course of !usiness must !e

statedM an innocent misrepresentation of such a fact would entitle the insurer to avoid the policy

7his must !e so, otherwise the duty to disclose material facts and to state them accurately would

not !e correlative

5), ACTI'E AND PASSI'E DUT0 OF DISC&OSURE,-

7he "uestion here is what method is used to ac"uire the material information

7wo different approaches are used in this respect 7he first 0 an active duty of disclosure, and

the second approach is characteri4ed as a passive duty of disclosure 7he former argues that the

duty to assess what information is material for the insurer rests with the person effecting the

insurance 6n the other hand, a passive duty of disclosure implies that the insurer will have to

define what information is material through a "uestionnaire A passive duty of disclosure implies

that information not asked for is not material

7he common law systems seem mainly to apply an active duty of disclosure, !ut elements of a

passive duty of disclosure is found in some countries in the form of proposals

5)5 MORA& (A4ARDS,.

#oral ha4ard is a situation in which one agent decides on how much risk to take, while another

agent !ears *parts of+ the negative conse"uences of risky choices

7he person who !uys insurance is protected against monetary damages 7herefore, he may

engage in more risky !ehavior than if he has to !ear the risk himself

#oral ha4ard can arise in the insurance industry when insured parties !ehave differently as aresult of having insurance 7here are two types of moral ha4ard in insurance ex ante and ex post

/x0Ante #oral Ha4ard 0 /d the Aggressive 'river /d, a driver with no auto insurance, drives

very cautiously !ecause he would !e fully responsi!le for any damages to his vehicle /d decides

to get auto insurance and, once his policy goes into effect, he !egins speeding and making unsafe

lane changes /d:s case is an example of ex0ante moral ha4ard As an insured motorist, /d has

taken on more risk than he did without insurance /d:s choice reflects his new, reduced lia!ility

/x05ost #oral Ha4ard 0 #arie and Her Allergies #arie has had no health insurance for a few

years and develops allergy symptoms each spring 7his winter she starts a new $o! that offers

insurance and decides to consult a physician for her pro!lems Had #arie continued withoutinsurance, she may never have gone to a doctor )ut, with insurance, she makes an appointment

and is given a prescription for her allergies 7his is an example of ex0post moral ha4ard, !ecause

24 https://www.ssrn.com

25 https://www.economictimes.indiatimes.com

26


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#arie is now using insurance to cover costs she would not have incurred prior to getting

insurance

Insurers try to decrease their exposure !y shifting a portion of lia!ility to policyholders in the

form of deducti!les and co0payments )oth represent the amount of money a policyholder must

pay !efore the insurance company:s coverage !egins 5olicyholders can often opt for lowerdeducti!les and co0payments, !ut this will raise their insurance premiums

C(APTER -

-) NATURE OF INSURANCE CONTRACT,1

A contract of insurance is an agreement where!y one party, called the insurer, undertakes, in

return for an agreed consideration, called the premium, to pay the other party, namely the

insured, a sum of money or its e"uivalent in kind, upon the occurrence of a specified event

resulting in a loss to him 7he policy is a document which is an evidence of the contract of

insurance

As per Anson, a contract is an agreement enforcea!le at law made !etween two or more persons

!y which rights are ac"uired !y one more persons to certain acts or for!earance on the part of

other or others

7he Indian 2ontract Act, ;D>@, sets forth the !asic re"uirements of a 2ontract As per (ection ;?of the Act

All agreements are contracts if they are made !y the free consent of parties competent to

contract, for a lawful consideration and with a lawful o!$ect, and are not here!y expressly

declared to !e voidQ

An Insurance policy is also a contract entered into !etween two parties, vi4, the Insurance

2ompany and the 5olicyholder and fulfills the re"uirements enshrined in the Indian 2ontract Act

-, FEATURES OF INSURANCE CONTRACT ,2

26https://www.on!ine!irar.wi!e.com

27https://www.actuaries.or

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7hough all contracts share fundamental concepts and !asic elements, insurance contracts

typically possess a num!er of characteristics not widely found in other types of contractual

agreements 7he most common of these features are listed here

*a+ A"eatory,/

If one party to a contract might receive considera!ly more in value than he or she gives up under

the terms of the agreement, the contract is said to !e aleatory Insurance contracts are of this type

!ecause, depending upon chance or any num!er of uncertain outcomes, the insured *or his or her

!eneficiaries+ may receive su!stantially more in claim proceeds than was paid to the insurance

company in premium dollars 6n the other hand, the insurer could ultimately receive

significantly more money than the insured party if a claim is never filed

*!+ Adhe!ion,7

In a contract of adhesion, one party draws up the contract in its entirety and presents it to the

other party on a :take it or leave it: !asisM the receiving party does not have the option of

negotiating, revising, or deleting any part or provision of the document Insurance contracts are

of this type, !ecause the insurer writes the contract and the insured either :adheres: to it or is

denied coverage In a court of law, when legal determinations must !e made !ecause of

am!iguity in a contract of adhesion, the court will render its interpretation against the party that

wrote the contract 7ypically, the court will grant any reasona!le expectation on the part of the

insured *or his or her !eneficiaries+ arising from an insurer0prepared contract

*c+ Utmo!t Good Faith58

Although all contracts ideally should !e executed in good faith, insurance contracts are held to an

even higher standard, re"uiring the utmost of this "uality !etween the parties 'ue to the nature

of an insurance agreement, each party needs 0 and is legally entitled 0 to rely upon the

representations and declarations of the other /ach party must have a reasona!le expectation that

the other party is not attempting to defraud, mislead, or conceal information and is indeed

conducting themselves in good faith In a contract of utmost good faith, each party has a duty to

reveal all material information *that is, information that would likely influence a party:s decision

2+ =ripathe pa!# Ca!ini 'arava# H-nsurance =heor and practiceI# Cew ?e!hi#

'rentice a!! o* -ndia private !imited# 2$$5# pp %3$31)

2, -n*ra note

3$ -n*ra note

2+


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to either enter into or decline the contract+, and if any such data is not disclosed, the other party

will usually have the right to void the agreement

*d+ Eecutory5)

An executory contract is one in which the covenants of one or more parties to the contractremain partially or completely unfulfilled Insurance contracts necessarily fall under this strict

definitionM of course, it:s stated in the insurance and agreement that the insurer will only perform

its o!ligation after certain events take place *in other words, losses occur+

*e+ Uni"atera"5,

A contract may either !e !ilateral or unilateral In a !ilateral contract, each party exchanges a

promise for a promise However, in a unilateral contract, the promise of one party is exchanged

for a specific act of the other party Insurance contracts are unilateralM the insured performs the

act of paying the policy premium, and the insurer promises to reim!urse the insured for any

covered losses that may occur It must !e noted that once the insured has paid the policy

premium, nothing else is re"uired on his or her partM no other promises of performance were

made 6nly the insurer has covenanted any further action, and only the insurer can !e held lia!le

for !reach of contract

*f+ Conditiona"55

A condition is a provision of a contract which limits the rights provided !y the contract In

addition to !eing executory, aleatory, adhesive, and of the utmost good faith, insurance contracts

are also conditional /ven when a loss is suffered, certain conditions must !e met !efore the

contract can !e legally enforced For example, the insured individual or !eneficiary must satisfythe condition of su!mitting to the insurance company sufficient proof of loss, or prove that he or

she has an insura!le interest in the person insured

7here are two !asic types of conditions conditions precedent and conditions su!se"uent A

condition precedent is any event or act that must take place or !e performed !efore the

contractual right will !e granted For instance, !efore an insured individual can collect medical

!enefits, he or she must !ecome sick or in$ured Further, !efore a !eneficiary will !e paid a death

!enefit, the insured must actually !ecome deceased A condition su!se"uent is an event or act

that serves to cancel a contractual right A suicide clause is an example of such a condition

31 -n*ra note

32 =ripathe pa!# Ca!ini 'arava# H-nsurance =heor and practiceI# Cew ?e!hi#

'rentice a!! o* -ndia private !imited# 2$$5# pp %3334)

33 -n*ra note

2,


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7ypical suicide clauses cancel the right of payment of the death !enefit if the insured individual

takes his or her own life within two years of a life insurance policy:s effective date

*g+ Per!ona" contract5-

Insurance contracts are usually personal agreements !etween the insurance company and theinsured individual, and are not transfera!le to another person without the insurer:s consent *Life

insurance and some maritime insurance policies are nota!le exceptions to this standard+ As an

illustration, if the owner of a car sells the vehicle and no provision is made for the !uyer to

continue the existing car insurance *which, in actuality, would simply !e the writing of the new

policy+, then coverage will cease with the transfer of title to the new owner

*h+ +arrantie! and Rere!entation!5.

A warranty is a statement that is considered guaranteed to !e true and, once declared, !ecomes anactual part of the contract 7ypically, a !reach of warranty provides sufficient grounds for the

contract to !e voided 2onversely, a representation is a statement that is !elieved to !e true to the

!est of the other party:s knowledge In order to void a contract !ased on a misrepresentation, a

party must prove that the information misrepresented is indeed material to the agreement

According to the laws of most states and in most circumstances, the responses that a person gives

on an insurance application are considered to !e a representations, and not warranties

As an example, consider an individual seeking life insurance coverage He or she would

routinely !e re"uired to complete an application, on which the applicant:s sex and age would !e

re"uested 7he accuracy of this information is necessary for the insurer to correctly ascertain itsrisk and determine the policy premium If the applicant gives these responses incorrectly, they

would likely !e deemed *in the a!sence of outright fraud+ as misrepresentations, and could

possi!ly !e used !y the insurance company as grounds for voiding the policy

7here is, however, a difference !etween the representation *or misrepresentation+ of a fact and

the expression of an opinion 7ake, for instance, a common insurance application "uestion such

as, N7o the !est of your knowledge, do you now !elieve yourself to !e in good healthPN An

applicant answering :yes: while knowing that he or she suffers from a particular condition would

!e guilty of misrepresenting an actual fact However, if the applicant had no symptoms of any

kind that would !e recogni4a!le to an average person and no doctor:s opinion to the contrary, heor she would simply !e stating an opinion and not making a misrepresentation

34 -n*ra note

35 =ripathe pa!# Ca!ini 'arava# H-nsurance =heor and practiceI# Cew ?e!hi#


3$


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*i+ Mi!rere!entation! and Concea"ment!51

A misrepresentation is a statement, whether written or oral, that is false 3enerally speaking, in

order for an insurance company to void a contract !ecause of misrepresented information, the

information in "uestion must !e material to the decision to extend coverage

2oncealment, on the other hand, is the failure to disclose information that one clearly knows

a!out 7o void a contract on the grounds of concealment, the insurer typically must prove that the

applicant willfully and intentionally concealed information that was of a material nature

*$+ Fraud52

Fraud is the intentional attempt to persuade, deceive, or trick someone in an effort to gain

something of value Although misrepresentations or concealments may !e used to perpetrate

fraud, !y no means are all misrepresentations and concealments acts of fraud For instance, if an

insurance applicant intentionally lies in order to o!tain coverage or make a false claim, it could

very well !e grounds for the charge of fraud However, if an applicant misrepresents some piece

of information with no intent for gain *such as, for example, failing to disclose a medical

treatment that the applicant is personally em!arrassed to discuss+, then no fraud has occurred

*k+ Imer!onation =Fa"!e reten!e!>5/

9hen one person assumes the identity of another for the purpose of committing a fraud, that

person is guilty of the offense of impersonation *also known as false pretenses+ For instance, an

individual that would likely !e turned down for insurance coverage due to "uestiona!le health

might re"uest a friend to stand in for him *or her+ in order to complete a physical examination

*l+ Paro" =or Ora"> eBidence ru"e57

7his principle limits the effects that oral statements made !efore a contract:s execution can have

on the contract 7he assumption here is that any oral agreements made !efore the contract was

written were automatically incorporated into the drafting of the contract 6nce the contract is

executed, any prior oral statements will therefore not !e allowed in a court of law to alter or

counter the contract

36 -n*ra note

37 -n*ra note

3+ =ripathe pa!# Ca!ini 'arava# H-nsurance =heor and practiceI# Cew ?e!hi#


3, -n*ra note

31


32/87

C(APTER . REGU&ATOR0 EN'IRONMENT ; SPECIFIC

&EGIS&ATIONS

.) (ISTOR0 OF INSURANCE IN INDIA

In India, insurance has a deep0rooted history It finds mention in the writings of

#anu* #anusmrithi+, .agnavalkya * 'harmasastra + and autilya * Arthasastra + 7he writings

talk in terms of pooling of resources that could !e re0distri!uted in times of calamities such as

fire, floods, epidemics and famine 7his was pro!a!ly a pre0cursor to modern day insurance

Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade

loans and carriers contracts Insurance in India has evolved over time heavily drawing from

other countries, /ngland in particular &ow, we will !e discussing !rief a!out the history of Life

Insurance and 3eneral Insurance in India

32


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., &IFE INSURANCE-8

.ear ;D;D saw the advent of life insurance !usiness in India with the esta!lishment of the

6riental Life Insurance 2ompany in 2alcutta 7his 2ompany however failed in ;DBC In ;D@,

the #adras /"uita!le had !egun transacting life insurance !usiness in the #adras 5residency

;D>? saw the enactment of the )ritish Insurance Act and in the last three decades of thenineteenth century, the )om!ay #utual *;D>;+, 6riental *;D>C+ and /mpire of India *;D>+ were

started in the )om!ay 1esidency 7his era, however, was dominated !y foreign insurance offices

which did good !usiness in India, namely Al!ert Life Assurance, 1oyal Insurance, Liverpool and

London 3lo!e Insurance and the Indian offices were up for hard competition from the foreign

companies

In ;;C, the 3overnment of India started pu!lishing returns of Insurance 2ompanies in India

7he Indian Life Assurance 2ompanies Act, ;;@ was the first statutory measure to regulate life

!usiness In ;@D, the Indian Insurance 2ompanies Act was enacted to ena!le the 3overnment to

collect statistical information a!out !oth life and non0life !usiness transacted in India !y Indianand foreign insurers including provident insurance societies In ;BD, with a view to protecting

the interest of the Insurance pu!lic, the earlier legislation was consolidated and amended !y the

Insurance Act, ;BD with comprehensive provisions for effective control over the activities of

insurers

7he Insurance Amendment Act of ;-? a!olished 5rincipal Agencies However, there were a

large num!er of insurance companies and the level of competition was high 7here were also

allegations of unfair trade practices 7he 3overnment of India, therefore, decided to nationali4e

insurance !usiness

An 6rdinance was issued on ;th %anuary, ;-< nationalising the Life Insurance sector and Life

Insurance 2orporation came into existence in the same year 7he LI2 a!sor!ed ;-C Indian, ;- provident societiesR@C- Indian and foreign insurers in all 7he

LI2 had monopoly till the late ?s when the Insurance sector was reopened to the private sector

.5 GENERA& INSURANCE-)

7he history of general insurance dates !ack to the Industrial 1evolution in the west and the

conse"uent growth of sea0faring trade and commerce in the ;>th century It came to India as a

legacy of )ritish occupation 3eneral Insurance in India has its roots in the esta!lishment of

7riton Insurance 2ompany Ltd, in the year ;D-? in 2alcutta !y the )ritish In ;?>, the Indian

#ercantile Insurance Ltd, was set up 7his was the first company to transact all classes of

general insurance !usiness

4$ -R?A Journa!# a 2$$4# p 1$11.

41 -R?A Journa!# a 2$$4# p 1$11.

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;-> saw the formation of the 3eneral Insurance 2ouncil, a wing of the Insurance Associaton of

India 7he 3eneral Insurance 2ouncil framed a code of conduct for ensuring fair conduct and

sound !usiness practices In ;@ with the passing of the 3eneral Insurance )usiness *&ationalisation+ Act, generalinsurance !usiness was nationali4ed with effect from ;st %anuary, ;>B ;?> insurers were

amalgamated and grouped into four companies, namely &ational Insurance 2ompany Ltd, the

&ew India Assurance 2ompany Ltd, the 6riental Insurance 2ompany Ltd and the Enited India

Insurance 2ompany Ltd 7he 3eneral Insurance 2orporation of India was incorporated as a

company in ;>; and it commence !usiness on %anuary ;sst ;>B

-5 +(0 REGU&ATION OF INSURANCE $USINESSES IS REUIRED6-,

Any industry wherein the stakes of the pu!lic are high would come within the purview of a

1egulation K reason !eing that failure of such companies could result in serious implications onthe economy of the country at large

Insurance !usiness involves collection of money from various 5olicyholders, investing them

properly, honouring the o!ligations of the 5olicyholders and providing an efficient service It is

important to ensure that the entities providing these services stick to their commitments Failure

to honour commitments !y such entities could have ma$or repercussions on the financial services

industry

After li!erlisation and entrance of 5rivate players in Insurance !usiness and (eeing the large

num!ers of customers and high risk potential, 3overnment of India constituted the Insurance

1egulatory and 'evelopment Authority in .ear ;

.- REGU&ATION OF INSURANCE $USINESS IN INDIA

7his millennium has seen insurance come a full circle in a $ourney extending to nearly @?? years

7he process of re0opening of the sector had !egun in the early ;?s and the last decade and

more has seen it !een opened up su!stantially In ;B, the 3overnment set up a committee

under the chairmanship of 1& #alhotra, former 3overnor of 1)I, to propose recommendations

for reforms in the insurance sector 7he o!$ective was to complement the reforms initiated in the

financial sector 7he committee su!mitted its report in ;C wherein, among other things, it

recommended that the private sector !e permitted to enter the insurance industry 7hey stated thatforeign companies !e allowed to enter !y floating Indian companies, prefera!ly a $oint venture

with Indian partners

Following the recommendations of the 2ommittee reportCB, the Insurance 1egulatory and

'evelopment Authority *I1'A+ was constituted as an autonomous !ody to regulate and develop

42 -(RA Report# H=he -ndian insurance industrI# a 2$$3

34


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the insurance industry 7he I1'A was incorporated as a statutory !ody in April, @??? 7he key

o!$ectives of the I1'A include promotion of competition so as to enhance customer satisfaction

through increased consumer choice and lower premiums, while ensuring the financial security of

the insurance market

7he I1'A opened up the market in August @??? with the invitation for application forregistrations Foreign companies were allowed ownership of up to @


36/87

Insurance Co$o% &ociet'

Indian &tam% Act, 1899

Consumer (rotection Act, 198)

Insurance *m+udsman

.1 REGU&ATIONS GO'ERNING< AFFECTING &IFE INSURANCE $USINESS IN

INDIA T(E FO&&O+ING ACTS GO'ERN


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Carriage +' Air Act, 192

or:mens; Com%ensation Act, 1923E&I Act, 19


38/87

persons of a!ility, integrity and standing who have knowledge or experience in life insurance,

general insurance, actuarial science, finance, economics, law, accountancy, administration etc

7he Authority consists of a chairperson, not more than five whole0time mem!ers and not more

than four part0time mem!ers

/very 2hairperson and mem!er of I1'A appointed shall hold office for a term of five yearsHowever, 2hairperson shall not hold office once he or she attains


39/87

i# Control and regulation o5 rates, ad=antages, terms and conditions that ma' +e o55ered +'

general insurance com%anies

7# &%eci5'ing the 5orm and manner in hich +oo:s o5 account shall +e maintained +' insurance

com%anies and intermediaries

:# Regulation o5 in=estments o5 5unds +' insurance com%anies l# Regulation o5 maintenance o5

margin o5 sol=enc'

m# Ad7udication o5 dis%utes +eteen insurers and insurance intermediaries

n# &u%er=ising the 5unctioning o5 ari55 Ad=isor' Committee

o# &%eci5'ing the %ercentage o5 %remium income o5 the insurer to 5inance schemes 5or %romoting

and regulating %ro5essional organiations

%# &%eci5'ing the %ercentage o5 insurance +usiness to +e underta:en +' insurers in rural or

social sectors

@# &uch other %oers as ma' +e %rescri+ed4

15 FRAME+OR* UNDER T(E INSURANCE ACT% )75/

7he Insurance Act, ;BD, !roadly provides the ground rules for the operating insurance

companies in India 7he Act provides for the following

7he Insurance Act is the parent legislation which aimed at consolidating and amending the law

relating to the !usiness of insurance in Fe!ruary ;BD, when, during the )ritish 1ule in India,

there were many insurance companies which were operating 7he Insurance Act, ;BD, !roadly

provides the ground rules for the operating insurance companies in IndiaC>

7he Insurance Act, ;BD CDhas !een segregated into five parts

;(art I &ection 1 to &ection 26#

5art I of Insurance Act, ;BD deals with 'efinitions, interpretation of 2ertain 9ords and

expressions and Appointment of Authority in India

@(art II &ection 2C to &ection )


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*a+ Insurers *(ection @ 2 to (ection @ to (ection B@2+

*c+ Investigation *(ection BB+ *d+ Appointment of (taff *(ection BBA to (ection BC+

*e+ 2ontrol over #anagement*(ection BCA to (ection BCH+

*f+ Amalgamation and 7ransfer of Insurance )usiness*(ection B- to (ection B>A+

*g+ Assignment or 7ransfer of 5olicies and &ominations *(ection BD to (ection B+

*h+ 2ommission and 1e!ates and Licensing of Agents*(ection C? to (ection CCA+

*i+ (pecial 5rovisions of Law*(ection C- to (ection -@+

*$+ #anagement !y Administrator*(ection -@ A to (ection -@3+

*k+ Ac"uisition of the Endertakings of Insurers in certain cases*(ection -@H to (ection -@&+

*l+ 9inding up*(ection -B to (ection


41/87

5art I8 contains provisions relating to #utual insurance 2ompanies and cooperative life

insurance societies

(AR IA &ection 101A to &ection 101C#

5art I8 A contains provisions relating 7o 1e0Insurance

-(AR &ection 102 to &ection 120#

5art 8 contains provisions relating to miscellaneous matters

1- T(E DETAI&S OF FE+ OF T(E IMPORTANT PRO'ISIONS OF INSURANCE

ACT% )75/

The detai"! o e o the imortant roBi!ion! o In!urance Act% )75/ are de!cribed be"o:

*a+Incor%oration o5 insurance com%anies, issue o5 licence and reneal o5 licenceC

6nly Comanie! ormed and re?i!tered under the Comanie! Act% )7.1%whereunder the

foreign e"uity is not more than @


42/87

Applicants for insurance licence will have to su!mit, among other things, certified true copy of

memorandum and articles of association, list of directors, certain affidavits and undertakings

from 5romoters and the fees re"uired for registration I1'A conducts due diligence on the

5romoters, their !ackground !efore they issue a licence 1eference is made to the 1egulatory of

the country in which the foreign promoter operates, as most foreign promoters of insurance

companies are esta!lished players in other $urisdictions outside India

IRDA i! Be!ted ith oer! under the Act to cance" the re?i!tration o in!urer! on certain

?round! !uch a! deau"t in com"yin? ith the roBi!ion! o the Act or 1egulations passed

thereunder, carrying on !usiness other than insurance !usiness etc

&icence i! i!!ued or a inancia" year and i! reneab"e on an year"y ba!i! on ayment o the

reHuired ee! 7he fee for renewal is ?@-G of the premium income generated !y the insurance

company in the preceding financial year, su!$ect to an overall cap of I&1 - 2rores

*!+Re@uirements as to Ca%ital, rans5er o5 shares, oting Rights etc

-0

/very insurer carrying on insurance !usiness shall have a minimum aid u eHuity caita" o

INR )88 Crore! or "ie in!urance and ?enera" in!urance bu!ine!! and INR ,88 crore! or

an in!urer carryin? on rein!urance bu!ine!! 7his capital shall !e maintained after preliminary

expenses incurred upon formation of the insurance company and registration of insurance

!usiness 7he intention of prescri!ing a minimum capital is to ensure that only serious players

who look at a longer term for return of investment enter insurance !usiness

Further the caita" o an in!urance comany !ha"" con!i!t o on"y EHuity Share caita" and

no other orm! o caita" are a""oed

All the e"uity shares shall have a single face value Further, notwithstanding the provisions

contained in the 2ompanies Act, ;-


43/87

5ersons holding !eneficial interest in the e"uity shares of an insurance company held in another

persons name, are re"uired to su!mit a declaration of their interest to the insurance company,

failing which such person shall have no right or title in such shares and the insurance companies

are expected to record the !eneficial ownership in a separate 1egister maintained for this

purpose

9hile the maximum foreign in an insurance company is @


44/87

separate !ooks of account Further a separate fund called Life insurance fund shall !e formed,

the assets of which shall !e separate and distinct from all other assets of the insurer )y virtue of

the powers given under (ection ;;, I1'A have framed 1egulations for Financial (tatements

which provides for forms of 1evenue Account, 5rofit and Loss Account and )alance (heet

alongwith the form of #anagement 1eport and some of the documents annexed to the financial

statements Further, every insurer shall keep separate accounts relating to funds of shareholders

and policyholders 7he forms provided in (chedule 8I to the 2ompanies Act, ;-< is not

applica!le to Insurance companies as they are re"uired to follow the forms prescri!ed under the

I1'A 1egulations

7he accounts and the statements referred to in (ection ;; shall !e signed !y the 2hairman of the

)oard of the Insurance company and two other 'irectors, the 5rincipal 6fficer of the 2ompany

*2/6 or #anaging 'irector+ and shall !e accompanied !y a statement containing the names,

descriptions and occupations of, and the directorships held !y the persons in charge of the

management of the !usiness during the period to which the accounts and statements relate to

(ection ;@ provides for audit of the financial statements shall !e audited !y an auditor 'etailed

guidelines have !een framed !y I1'A on the "ualifications of persons who can !e appointed as

(tatutory Auditors of the 2ompany

(ection ;B re"uires investigation of financial condition of the life insurance !usiness carried on

!y an actuary 9hile the section mandates actuarial valuation not more than once in two years,

I1'A have mandated an yearly actuarial valuation I1'A have issued detailed regulations on

preparation of Actuarial 1eport and A!stract

*e+(ro=isions Relating to In=estments

- re"uires insurance companies to invest in the manner specified in the section an

amount e"uivalent to the amount of lia!ilities of the insurance companies on account of matured

claims and on account of lia!ility on policies maturing for payment after deducting the premiums

due !ut grace period not expired and the amount of loans outstanding against the policies issued

!y the insurer 7he manner in which the investment is re"uired to !e made is K not less than -?G

in 3overnment and Approved securities *out of which @-G only in 3overnment securities+ and

the !alance in Approved investments as specified in (ection @>A 7he deposits made with

1eserve )ank of India under (ection > are deemed to !e 3overnment (ecurities for this purpose

(ection @>A prescri!es the approved investments for the purpose of (ection @> It lists down

various investments which have !een recognised for this purpose 7he following are some of the

approved investments recogni4ed under the section

*i+ Approved securities as defined under (ection @*B+ of the Insurance Act, ;BD

54 %0ections 27# 27A# 27# 27D)

44


45/87

*ii+ 'e!entures of companies having a interest paying track record of - years immediately

preceding or five out of the < of > years immediately preceding, secured !y a first charge on any

immova!le property, plant or e"uipment of sssthe 2ompany

*iii+ 'e!entures of companies secured !y a first charge on the immova!le property, plant of

machinery of a 2ompany where the !ook value or the market value whichever is less of the assetis atleast three times the value of de!entures *in such cases, interest track record is not

mandatory+

*iv+ First de!entures secured !y a floating charge on all assets of a 2ompany which has paid

dividends on /"uity shares for five years or atleast five out of six or seven years preceding

*v+ First mortgage on immova!le property situated in India *other than leasehold property with

an outstanding term of less than B? years and the value of property exceeds one0third of the

mortgage money *if it is !uilding, one0half+

*vi+ 5reference shares of any company on which dividends on e"uity shares have !een paid for

the immediately preceding five years or for atleast five out of the six or seven years immediately

preceding

*vii+ 5reference shares of a company which has paid dividends on such preference shares for five

years immediately preceding or for atleast five out of six or seven years immediately preceding

and such 5reference shares have priority over e"uity shares in the event of winding up

*viii+ /"uity shares of a 2ompany which has paid dividends of not less than four percent for the

seven years immediately preceding or for atleast seven out of the eight or nine years immediately

preceding

*viii+ Fixed deposits with )anks

*ix+ (uch other investments notified !y I1'A as Approved Investments through 1egulations

5 #In=estment in >*ther in=estments?

Any investment in other than Approved Investments as a!ove is allowed upto ;-G of the sum

specified in (ection @>, provided such investments are made with the consent of all the directors

present at a )oard meeting and eligi!le to vote, in respect of which a special notice has !een

given to all the 'irectors in India

g# Ceilings *n In=estments

=a> in one $an#in? Comany or InBe!tment Comany..

55 O0ection 27A%3)P

45


46/87

An insurance company cannot out of the 2ontrolled fund invest or keep invested in the shares of

any one !anking company or investment company, an amount exceeding ;;CG of the amount

specified in (ection @> *or+ @G of the su!scri!ed share capital and de!entures of the )anking

company or investment company concerned, whichever is less

=b> in any Comany other than $an#in? Comany or InBe!tment Comany .1

An insurance company cannot out of the controlled fund invest or keep invested in the shares of

any one company other than !anking or investment company, an maount exceeding @;CG of the

amount specified in (ection @> *or+ ;?G of the su!scri!ed share capital and de!entures of the

2ompany

=c> in Fied Deo!it! or Current deo!it! o $an#! or Co9oeratiBe Societie!

&ot more than BG of the 2ontrolled funds is allowed to !e deposited in the Fixed or 2urrent

deposits with any one )anking company or any one 2o0operative (ociety registered under the

2o0operative (ocieties Act, ;;@

h# !ormation *5 &u+sidiar' Com%anies !or Doing Insurance 6usiness-

7he restriction given as a!ove will not !e applica!le if an insurance company invests in the share

capital of a su?!sidiary company for carrying on insurance !usiness after getting previous

approval of the Authority 7his is more relevant in the context of recent notification of I1'A

permitting formation of foreign su!sidiaries engaged in insurance !usiness

i# (rohi+ited In=estments./

InBe!tment! in the !hare! or debenture! o a PriBate &imited Comany and inBe!tment! out

o Po"icyho"der! und! out!ide India are rohibited

Encum+rance, charge or h'%othecation o5 Assets 5orming %art o5 Controlled 5und

All assets forming part of 2ontrolled fund to !e kept of free of any encum!rance or charge

except to the extent not exceeding ;;?th of the controlled fund, su!$ect to such conditions as

may !e prescri!ed !y I1'A (uch charge or encum!rance can !e created only for the purpose of

56 O0ection 27A%4)P

57 %'roviso to 0ection 27A%4)

5+(0D(=-QC 27A%5) AC? 27()

46


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a loan taken !y an insurance company for the purpose of any investment However, 3overnment

(ecurities and Approved (ecurities forming part of the 2ontrolled fund cannot !e su!$ect to any

charge or encum!rances

&ote 2ontrolled Fund is defined as all funds pertaining to life insurance !usiness, except for any

part of the fund in respect of which I1'A is satisfied that it would not !e in the interests of theinsurer to apply the provisions of (ection @>A

(rohi+ition o5 oans

Section ,7 rohibit! ?rant o any "oan! or temorary adBance! to any Director , Actuary or

Auditor of the insurance company or to any company or firm in which any such 'irector,

Actuary or Audi tor holds the position of a 'irector, Actuary or partner 7his prohi!ition is not

applica!le to

*i+ loans made !y an insurer to a !anking company in which such 'irector, Actuary or Auditor is

interested

*ii+ loans or advances made !y an insurance company to its su!sidiary or to the loans or advances

made !y an insurance company to its holding company

*iii+ 5olicy loans granted !y the insurance company within the surrender value of the policy

"inimum insurance +usiness under Rural and &ocial &ectors-9

(ection B@) and B@2 re"uires every insurer to undertake such minimum percentage of theinsurance !usiness for covering risks associated with persons forming part of rural or social

sector, workers in the unorgani4ed or informal sector or economically vulnera!le or !ackward

classes of society or such classes as prescri!ed !y I1'A

7# Assignments and /ominations under Insurance (olicies)0

Assignments are transfer of insurance policies from policyholder to another with or without a

valid consideration Any assignment to !e valid must satisfy the following conditions

*i+ /ndorsement for assignment upon the policy document or !y a separate instrument signed in

either case !y the transferor or his duly authori4ed agent and attested !y one witness

5, 0ection 32 and 32( o* -nsurance Act#1,3+

6$ 0ection 3+ and 3, o* -nsurance Act# 1,3+

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*ii+ &otice of assignment to !e given to the insurer and the endorsement or instrument itself or a

copy thereof certified to !e correct !oth !y transferor and transferee or their duly authori4ed

agents have !een delivered to the insurer

*iii+ 1egistration of assignment !y the insurer in their records after receiving the a!ove document

and effecting an endorsement upon the policy document

6n and from the date of receipt of notice of assignment alongwith documents, the insurer shall

recogni4e transferee or assignee as the only person entitled to any !enefits under the policy after

the date of assignment

&omination is effected !y the person taking the policy on his own life, to decide the person who

will receive the !enefits upon the death of the policyholder *since the policyholder will not !e

alive at that time+ For minor nominees, a 3uardian *called appointee+, other than the

policyholder himself, needs to !e appointed In order to effective, the name of the nominee must

!e incorporated in the policy document itself, !ased on the name of the nominee mentioned inthe 5roposal form *application for life insurance+ However, a nomination, if not made at the

proposal stage, can !e made !y way of an endorsement in the policy !y the Insurer su!se"uently,

for which a notice has to !e given !y the 5olicyholder to the insurer Epon receipt of such notice,

the insurer shall register the nomination and make an endorsement on the 5olicy document

(imilar process is adopted for change of nominations as well An assignment under a policy shall

automatically Lesson C 1egulatory /nvironment K (pecific Legislations cancel a nomination

su!sisting on the date of assignment 7his is !ecause nomination is valid only for policies taken

on ones own life Epon assignment, the policyholder !ecomes a person different from life

assured and assignee is the only person entitled to receive any !enefit upon death of the life

assured *assignor+

:# Indis%uta+ilit' o5 %olicies)1

Insurance contracts are contracts of utmost good faith, !ased on the principles of Ju!!erima

fidae 7he person taking the insurance policy is expected to disclose the information re"uired in

the application form concerning his health, occupation, family history, ha!its and all other

material "uestions truthfully without withholding any information re"uired 7his is to ena!le

accurate assessment of the risk and fixing of the premium !y the insurer accordingly (ince only

the person taking the insurance is privy to the personal information, o!ligation to truthfully

disclose lies with the person taking the insurance If there is any misstatement or concealment ofa material fact *any information which would have impacted the decision to accept the risk+, the

insurance company has the right to cancel the contract *repudiation+ and deny the policy !enefits

(ection C- however, places !urden on the insurers right to repudiate !eyond @ years from the

61 0ection 45 o* -nsurance Act# 1,3+

4+


49/87

date the policy was affected In such cases, the insurer has to prove the following B points in

order to repudiate any policy !enefit

*i+ (tatement*s+ made in the proposal for insurance or in any medical report or any other

document leading to issue of policy was inaccurate or false on a material matter *ie on a matter

which could have affected $udgment of underwriter+

*ii+ 7he statements were made with fraudulent intention

*iii+ 7he policyholder knew at the time of making the statement that it was false or knew that

material facts were suppressed

However, the insurers right of calling for proof of age even after @ years su!se"uent to issuance

of policy and ad$usting the terms of the policy accordingly would not !e affected !y the

provisions of the a!ove section

:# (oers o5 IRDA ith re5erence to control o5 management o5 insurance com%anies, ta:eo=ero5 management, mergers, ac@uisitions and inding u%)2

(ection -@A empowers I1'A to make a report to 2entral 3overnment if the affairs of a Life

insurance 2ompany are carried on in any manner pre$udicial to the interests of policyholders

)ased on the 1eport, the 2entral 3overnment is empowered to appoint an Administrator to

manage the affairs of the life insurance company A report shall !e filed !y such Administrator to

the 2entral 3overnment giving his recommendations on the way forward, including the options

of transfer of !usiness to an existing insurer or winding up, as he deems fit 2entral 3overnment

is empowered to take such action as it deems fit !ased on the 1eport of the Administrator

7he Act


50/87

whole !ody of shareholders and holding not less than one0tenth of the whole share capital or !y

not less than fifty policyholders holding life insurance policies in force for not less than three

years of total value of not less than I&1 -?,???, the 7ri!unal is satisfied to do so

In addition, I1'A may also apply to the 7ri!unal for winding up on the following grounds

*i+ 7hat the insurance company failed to deposit or keep deposited with 1eserve )ank of India,

the amount re"uired to !e deposited under (ection > or (ection D

*ii+ 7hat the insurance company has failed to comply with any re"uirement of the Insurance Act

or has continued contravention for a period of three months after notice of such failure or

contravention has !een conveyed to the 2ompany !y I1'A

*iii+ 7hat it appears from returns or statements filed !y the 2ompany or from the results of the

2ompany that the company is deemed to !e insolvent

*iv+ 7hat the continuance of the company is pre$udicial to the interests of the policyholders or tothe pu!lic interest generally

It may !e noted that the Act


51/87

*i+ 7wo officials nominated !y I1'A K one as 2hairman and the other as #em!er

*ii+ /ight representatives of mem!ers of Insurance Association of India elected !y the respective

mem!ers of the 2ouncils

*iii+ 6ne non0official not connected with any insurance !usiness, nominated !y I1'A

*iv+ Five persons connected with life insurance !usiness *general insurance !usiness for 3eneral

Insurance 2ouncil+, nominated !y I1'A

7he Act empowers Life insurance council, with the approval of I1'A, to authori4e its

/xecutive 2ommittee to hold examinations for individuals who wish to "ualify themselves as

insurance agents and that only such individuals who have passed such examinations shall !e

eligi!le for issue of a licence under (ection C@

7he /xecutive 2ommittees of the Insurance 2ouncils act as an advisory !ody for the Life

insurance and 3eneral insurance companies for setting up standard of conduct and soundpractice and in matters relating to efficient service to policyholders Further they are also

empowered to render advice to I1'A in matters relating to controlling of expenses of the

insurance companies

In this regard it is pertinent to note that (ection the Insurance 1ules ;B


52/87

cancellation of a policy shall !e paid !y the insurance company directly to Lesson C 1egulatory

/nvironment K (pecific Legislations >; the life insured !y a crossed account payee che"ue or !y

postal money order and a proper receipt shall !e o!tained from the insured In any case, refund to

the account of the Agent is strictly prohi!ited Further, where an insurance agent collects a

premium on !ehalf of an insurer, the Agent is re"uired to deposit the premium collected without

deduction of his commission, within @C hours of collection excluding !ank and postal holidays

n# *%ening o5 %laces o5 +usiness re@uires %rior a%%ro=al o5 IRDA

7he Act>?re"uires every insurance company to take a approval in advance in I1'A for opening

any place of !usiness or for relocation of an existing place of !usiness outside the same city,

town or village 7he approval is re"uired to !e sought for opening of any offices, whether called

as )ranch office, Head 6ffice, Administrative office, (atellite office or any other similar names

o# (oers o5 IRDA 5or im%osition o5 %enalties 5or de5ault in com%l'ing ith the Act1

(ection ;?@ empowers I1'A to impose a penalty not exceeding 1upees five lakhs for each of

the following failures !y an insurance company

*i+ Failure to furnish any document, statement, account, return or report to I1'A

*ii+ Failure to comply with the directions *(ection BC empowers I1'A to issue directions if it is

satisfied to do so in the interests of pu!lic or for prevention of affairs !eing conducted

detrimental to policyholders or to secure proper management of any insurer+

*iii+ Failure to maintain the re"uired solvency margin

*iv+ Failure to comply with the directions on the insurance treaties

Further the Act>@ empowers I1'A to impose a penalty not exceeding 1upees Five lakhs for

failure to comply with (ection B@), while (ection ;?-2 empowers I1'A to impose a penalty

not exceeding 1upees 7wenty five lakhs for failure to comply with (ection B@2, with

cancellation of certificate of registration for continuing failure

7$ 0ection 64( o* the -nsurance Act# 1,3+

71 0ection 1$2 o* the -nsurance Act# 1,3+

72 0ection 1$5 o* -nsurance Act# 1,3+

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54/87

a# Bnit reser=es o5 unit lin:ed +usinessK 7hese constitute the reserves against the units of a unit

linked insurance !usiness which are dependent upon the investment pattern chosen !y the

5olicyholders Hence these investments are classified separately

+# (ension Annuit' +usinessK 5ension Annuity !usiness are relatively long term in nature

and guarantee annuity over a fairly long period of time and hence re"uires to !e treateddifferently 3roup !usiness other than unit linked and 6ne year 1enewal 3roup 7erm insurance

also fall under this category

c# i5e insurance +usinessK this is the residual category which comprises of

; (hareholders funds representing solvency margin

@ 5articipating and &on0participating 5olicyholders funds

B 6ne year 1enewa!le 3roup 7erm Insurance

C &on0unit reserves of unit linked insurance !usiness

*d+ For a /on$li5e insurer including ealth +usiness#, there is only one category of investi!le

funds K which includes !oth shareholders funds and policyholders funds

=iii> Pre!crition o "oor and cei"in? or inBe!tment cate?orie! =ba!ed on tye o bu!ine!!>

*a+!or unit reser=es o5 unit lin:ed +usinessK the investments are re"uired to !e made in such

forms of instruments in such proportion as per the pattern of investment for the fund selected !y

the 5olicyholders However, atleast >-G of the investments made as per the pattern shall !e in

such instruments which !elong to Approved investment category

*!+!or (ension Annuit' +usinessK a minimum of C?G of the funds in this category will have

to !e invested in 2entral government, (tate government or other Approved (ecurities *out of

which @?G shall !e 2entral 3overnment (ecurities+ At the same time not more than


55/87

*i+ upto -?G allowed in Approved investments

*ii+ upto ;-G allowed in 6ther Investments

&ote 7he pattern of investments is not applica!le for (hareholders funds held in excess of the

solvency margin, provided they are kept separately and !ased on an Actuarial certification filedwith the Authority and provided the (hareholders funds held to support solvency margin are

invested as per the investment pattern as a!ove

=iB> (ou!in? J Inra!tructure InBe!tment!

)onds or de!entures issued !y HE'26 or &ational Housing )ank or Housing Finance

2ompanies accredited !y the )ank for housing finance activities or carrying 3overnment

guarantee of a rating of not less than AA only would "ualify If an Asset !acked (ecurity is

!acked !y an underlying housing loan which satisfies the a!ove condition, such a (ecurity would

also "ualify under this category

If a 2entral or (tate 3overnment (ecurity is issued to specifically meet the needs of a sector

falling under infrastructure facility, such a security shall "ualify for the purpose of investments in

Housing and Infrastructure investment category

All investments in Approved investments and 6ther Investments shall !e su!$ect to /xposure

and 5rudential norms, including housing and infrastructure investments

*B> InBe!tment Contro"! $a!ed on Ratin? o In!trument!

A credit rating evaluates the credit worthiness of a de!tor, especially a !usiness *company+ or a

government It is an evaluation made !y a credit rating agency of the de!tor:s a!ility to pay !ackthe de!t and the likelihood of default

As a general rule, no investment can !e in an instrument which is capa!le of !eing rated, !ut is

not rated for some reason Also, the rating must !e done !y an authorised 2redit 1ating agency

under the (/)I 1egulations

2lassification as Approved Investments )ased on 1ating

7he following investments shall !e classified as Approved investments !ased on 2redit rating

as follows

(r

&o

&ature of (ecurity 2redit rating 7ype of

investment

2ategory

recognised

1emarks

55


56/87

; 2orporate !onds or

de!entures

#inimum JAA or

e"uivalent

Approved

investments

&il

@ (hort term !onds,

de!entures,

2ertificate of

deposits,

2ommercial papers

#inimum J5; or

e"uivalent

Approved

investments

&il

B 'e!t instruments

issued !y All India

financial institutions

#inimum JAA or

e"uivalent rating

Approved

investments

If investments in

JAA not allowed,

JAS allowed with

Investment

2ommittee approval

#inimum and maximum investments !ased on 2redit rating

*a+ #inimum investments in JAAA, (overeign or J5; rating for 'e!t instruments A minimum

of >-G *-G shall !e invested in securities rated

J5;S and a!ove while short term corporate !onds and de!entures rated J5; and a!ove shall !e

56


57/87

rated as JApproved investments 7his would mean that short term de!t securities rated less than

J5; cannot exceed ;-G *limit for J6ther investments+

=Bi>InBe!tment contro"! ba!ed on Eo!ure norm!

7hese norms aim to control the investment risk !y limiting the exposure to the 2ompany wherethe funds are invested, limiting the exposure to a 3roup of companies to which the Investee

company !elongs to and also limits the exposure to one industry 7his follows the golden

principle do not put all your eggs in one !asket

/xposure norms are applica!le to all the three investment categories !ased on the types of

!usiness given a!ove and shall !e calculated for the following types of investments

a# A%%ro=ed in=estments

+# *ther in=estmentsF

c# ousing in5rastructure in=estments

=Bii>InBe!tee Comany "imit!

7here are @ limits for calculation of exposure norms to an Investee company

a# *=erall ex%osure limit o5 all the 5unds o5 the insurer in all t'%es o5 &ecurities in a &ingle

Com%an'

+# &ecurit'$ise ex%osure limit 5or each In=estee com%an' 5or each t'%e o5 in=estment categor'

he loer o5 a# or +# a+o=e determines the ex%osure limit 5or an In=estee Com%an'

*a+ *=erall ex%osure limit 7he overall exposure limit is calculated as follows

Aggregate all types of investments, vi4, e"uity, de!t etc in a (ingle investee company

Aggregate investment assets of the insurer *ie addition of unit reserves, pension and

annuity including 3roup and Life insurance funds+

*i+ divided !y *ii+ shall not exceed ;?G

In the case of non0life insurers the limit is ;?G of their total funds

*!+Ex%osure limit +ased on nature o5 securit' 5or each t'%e o5 5und

For investment in e"uity, preference shares and converti!le de!entures

7he limit is calculated as ;?G of the outstanding face value of e"uity shares of the Investee

company or ;?G of assets !elonging to each investment category !ased on type of !usiness *unit

reserves, 5ension and Annuity including 3roup and Life insurance !usiness+ For non0life, total

investment assets *policyholders funds and shareholders funds+ are considered

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58/87

7he lower of *a+*iii+ and *!+*i+ is the Investee company limit

For investments in 'e!entures, loans and other permitted investments *other than

mentioned in *i+ a!ove+

7he limit is calculated as ;?G of the 2apital, Free reserves, 'e!entures and )onds of theinvestee company or ;?G of each investment ca

Documents

CONCEPT OF INSURANCE IN INDIA