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CHAPTER 1
INTRODUCTION TO INSURANCE
1.1 WHAT IS INSURANCE
INSURANCE is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium. Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate. We say "significant" because if the potential loss is small, then it doesn't make sense to pay a premium to protect against the loss. After all, you would not pay a monthly premium to protect against a $50 loss because this would not be considered a financial hardship for most.
Insurance is appropriate when you want to protect against a significant monetary loss. Take life insurance as an example. If you are the primary breadwinner in your home, the loss of income that your family would experience as a result of our premature death is considered a significant loss and hardship that you should protect them against. It would be very difficult for your family to replace your income, so the monthly premiums ensure that if you die, your income will be replaced by the insured amount. The same principle applies to many other forms of insurance. If the potential loss will have a detrimental effect on the person or entity,insurancemakes sense.
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Everyone that wants to protect themselves or someone else against financial hardship should consider insurance. This may include:
Protecting family after one's death from loss of income
Ensuring debt repayment after death
Covering contingent liabilities
Protecting against the death of a key employee or person in your business
Buying out a partner or co-shareholder after his or her death
Protecting your business from business interruption and loss of income
Protecting yourself against unforeseeable health expenses
Protecting your home against theft, fire, flood and other hazards
Protecting yourself against lawsuits
Protecting yourself in the event of disability
Protecting your car against theft or losses incurred because of accidents
And many more
1.2 BRIEF HISTORY OF INSURANCE
The first two decades of the twentieth century saw lot of growth in insurance business. From 44 companies with total business-in-force asRs.22.44 crore, it rose to 176 companies with total business-in-force as Rs.298 crore in 1938. During the mushrooming of insurance companies many financially unsound concerns were also floated which failed miserably. The Insurance Act 1938 was the first legislation governing not only life insurance but also non-life insurance to provide
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strict state control over insurance business. The demand for nationalization of life insurance industry was made repeatedly in the past but it gathered momentum in 1944 when a bill to amend the Life Insurance Act 1938 was introduced in the Legislative Assembly. However, it was much later on the 19th of January, 1956, that life insurance in India was nationalized. About 154 Indian insurance companies, 16 non-Indian companies and 75 provident were operating in India at the time of nationalization. Nationalization was accomplished in two stages; initially the management of the companies was taken over by means of an Ordinance, and later, the ownership too by means of a comprehensive bill.
The Parliament of India passed the Life Insurance Corporation Act on the 19th of June1956, and the Life Insurance Corporation of India was created on 1stSeptember, 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.
LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from its corporate office in the year 1956. Since life insurance contracts are long term contracts and during the currency of the policy it requires a variety of services need was felt in the later years to expand the operations and place a branch office at each district headquarter. re-organization of LIC took place and large numbers of new branch offices were opened. As a result of re-organisation servicing functions were transferred to the branches, and branches were made accounting units. It worked wonders with the performance of the corporation. It may be seen that from about 200.00 crores of New Business in 1957 the corporation crossed 1000.00 crores only in the year 1969-70, and it took another 10 years for LIC to cross2000.00 crore mark of new business. But with re-organization happening in
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the early eighties, by 1985-86 LIC had already crossed7000.00 crore Sum Assured on new policies.
Today LIC functions with 2048 fully computerized branch offices, 100divisional offices, 7 zonal offices and the Corporate office. LIC‟s Wide Area Network covers 100 divisional offices and connects all thebranches through a Metro Area Network. LIC has tied up with some Banks and Service providers to offer on-line premium collection facility in selected cities. LIC‟s ECS and ATM premium payment facility is an addition to customer convenience. Apart from on-line Kiosks and IVRS, Info Centres have been commissioned at Mumbai, Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, New Delhi, Pune and many other cities. With a vision of providing easy access to its policyholders, LIC has launched its SATELLITE SAMPARK offices. The satellite offices are smaller, leaner and closer to the customer. The digitalized records of the satellite offices will facilitate anywhere servicing and many other conveniences in the future. LIC continues to be the dominant life insurer even in the liberalized scenario of Indian insurance and is moving fast on a new growth trajectory surpassing its own past records. LIC has issued over one crore policies during the current year. It has crossed the milestone of issuing 1,01,32,955 new policies by 15th Oct, 2005, posting a healthy growth rate of 16.67% over the corresponding period of the previous year. From then to now, LIC has crossed many milestones and has set unprecedented performance records in various aspects of life insurance business. The same motives which inspired our forefathers to bring insurance into existence in this country inspire us at LIC to take this message of protection to light the lamps of security in as many homes as possible and to help the people in providing security to their families.
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1.3 PURPOSE AND NEED OF INSURANCE
The business of insurance is related to the protection of the economic value of assets. Every asset has value. The asset would have been created through the efforts of the owner, in the expectation that, either through the income generated there from or some other output, some of his needs would be met. In the case of a factory or a cow, the production is sold and income generated. In the case of a motorcar, it provides comfort and convenience in transportation. There is no direct income. There is normally expected life time for the asset during which time it is expected to perform. The owner, aware of this, can so manage his affairs that by the end of that life time, a substitute is made available to ensure that the value or income is not lost. However, if the assert gets lost earlier, being destroyed or made nonfunctional, through an accident or other unfortunate event, the owner and those helps to reduce such adverse consequences. Insurance is mechanism that h deriving benefits there from suffer.
Assets are insured, because they are likely to be destroyed or made non-functional through an accidental occurrence. Such possible occurrences are called perils. Fire, floods, breakdowns, lightning, earthquakes, etc., are perils. The damage that these perils may cause the asset, is the risk.
The risk only means that there is possibility of loss or damage. It may or may not happen. There has to be uncertainty about the risk. Insurance is done against the contingency that it may happen. Insurance is relevant only if there are uncertainties. If there is no uncertainty about the occurrence of an event, it cannot be insured against.
There are other meanings of the term „risk‟. To the ordinary man in the street risk means exposure to danger. In insurance practice risk is also used to refer to the
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peril or loss producing event. For example, it is said that fire insurance covers the risks of fire, explosion, cyclone, flood etc. again, it is used to refer to the property covered by insurance. For example, a timber construction is considered to be a bad risk for fire insurance purpose. Here the term risk refers to the subject matter of insurance.
Conceptually the mechanism of insurance is very simple. People who are exposed to the same risks come together and agree that, if any one of the members suffers a loss, the others will share the loss and make good to the person who lost. All people who send goods by ship are exposed to the same risk related to water damage, ship sinking, piracy, etc. those owning factories are not exposed to these risks, but they are exposed to different kinds of risks like, fire, hailstorms, earthquakes, lightening, burglary, etc. like this, different kinds of risks can be identified and separate groups, made including those exposed to such risks. By this method, the risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all.
The manner in which the loss is to be shared can be determined beforehand. It may be proportional to the likely loss that each person is likely to suffer, which is indicative of the benefit he would receive if the peril befell him. The share could be collected from the members after the loss has occurred or the likely shares may be collected in advance, at the time of admission to the group. Insurance companies collect in advance and create a fund from which the losses are paid.
A human life is also an income generating asset. This asset also can be lost through unexpectedly early death or made non-functional through sickness and disabilities caused by accidents. Accidents may or may not happen. Death will happen, but the timing is uncertain. If it happens around the time of one‟s retirement, when it could
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be expected that the income will normally cease, the person concerned could have made some other arrangements to meet the continuing needs. But if it happens much earlier when the alternate arrangements are not in place, insurance is necessary to help those dependent on the income.
In the case of a human being, he may have made arrangements for his needs after his retirement. Those would have been made on the basis of some expectations like he may live for another 15 years, or that his children will look after him. If any, of these expectations do not become true, the original arrangement would become inadequate and there could be difficulties. Living too long can be as much a problem as dying too young. These are risks which need to be safeguarded against. Insurance takes care.
Insurance does not protect the asset. It does not prevent it loss due to the peril. The peril cannot be avoided through insurance. The peril can sometimes be avoided through better safety and damage control management. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset. It compensates, may not be fully, the losses. Only economic or financial losses can be compensated.
The concept of insurance has been extended beyond the coverage of tangible assets. Exporters run the risk of the importers in the other country defaulting as well as losses due to sudden changes in currency exchange rates, economic policies or political disturbances. These risks are now insured. Doctors run the risk of being charged with negligence and subsequent liability for damages. The amounts in question can be fairly large, beyond the capacity of individuals to bear. These are insured. Thus, insurance is extended to intangibles. In some countries, the voice of
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a singer or the legs of a dancer may be insured; even through the advantages of spread may not be available in these cases.
Satisfaction of economic needs requires generation of income from some source. If the property, which is the source of such income, is lost fully or partially, permanently or temporarily, the income too would stop. The purpose of insurance is to safeguard against such misfortunes by making good the losses of the unfortunate few, through the help of the fortunate many, who were exposed to the same risk but saved from the misfortune. Thus the essence of insurance is to share losses and substitute certainty by uncertainty.
There are certain basic principles which make it possible for insurance to remain popular and a fair arrangement. The first is the fact that people are exposed to risks and that the consequences of such risks are difficult for anyone individuals to bear. It becomes bearable when the community shares the burden. The second is that no one person should be in a position to make the risk happen. In other words, none in the group should set fire to his assets and ask others to share the costs of damage. This would be taking unfair advantage of as arrangement put into place to protect people from the risks they are exposed to. The occurrence has to be random, accidental and not the deliberate creation of the insured person.
1.4 EXPECTATIONS FROM IRDA
The law of India has following expectations from IRDA
1. To protect the interest of and secure fair treatment to policyholders.
2. To bring about speedy and orderly growth of the insurance industry (including annuity and superannuation payments), for the benefit of the common man, and to provide long term funds for accelerating growth of the economy.
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3. To set, promote, monitor and enforce high standards of integrity, financial soundness, air dealing and competence of those it regulates.
4. To ensure that insurance customers receive precise, clear and correct information about products and services and make them aware of their responsibilities and duties in this regard.
5. To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery.
6. To promote fairness, transparency and orderly conduct in financial markets dealing with insurance and build a reliable management information system to enforce high standards of financial soundness amongst market players.
7. To take action where such standards are inadequate or ineffectively enforced. 8. To bring about optimum amount of self-regulation in day to day working of the industry consistent with the requirements of prudential regulation.
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CHAPTER 2
IRDA RULES AND REGULATIONS
2.1 INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999
An Act
To provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business(Nationalisation) Act, 1972.
BE it enacted by Parliament in Fiftieth Year of Republic of India as follows:-
PRELIMINARY
1. SHORT TITLE, EXTENT AND COMMENCEMENT.
(1) This Act may be called the Insurance Regulatory and Development Authority Act, 1999.
(2) It extends to the whole of India.
(3) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint:
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Provided that different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision.
2. DEFINITIONS.
(1) In this Act, unless the context otherwise requires, -
(a) "appointed day" means the date on which the Authority is established under sub-section (1) of section 3;
(b) "Authority" means the Insurance Regulatory and Development Authority established under sub-section (1) of section 3;
(c) "Chairperson" means the Chairperson of the Authority;
(d) "Fund" means the Insurance Regulatory and Development Authority Fund constituted under sub-section (1) of section 16;
(e) "Interim Insurance Regulatory Authority" means the Insurance Regulatory Authority set up by the Central Government through Resolution No.17(2)/94-Ins-V, dated the 23rd January, 1996;
(f) "intermediary or insurance intermediary" includes insurance brokers, reinsurance brokers, insurance consultants, surveyors and loss assessors;
(g) "member" means a whole time or a part time member of the Authority and includes the Chairperson;
(h) "notification" means a notification published in the Official Gazette; (i) "prescribed" means prescribed by rules made under this Act;
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(2) Words and expressions used and not defined in this Act but defined in the Insurance Act, 1938 (4 of 1938) or the Life Insurance Corporation Act, 1956 (31 of 1956) or the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) shall have the meanings respectively assigned to them in those Acts.
2.2ESTABLISHMENT
AND
INCORPORATION
OF
AUTHORITY
(1) With effect from such date as the Central Government may, by notification, appoint, there shall be established, for the purposes of this Act, an Authority to be called "the Insurance Regulatory and Development Authority".
(2) The Authority shall be a body corporate by the name aforesaid having perpetual succession and a common seal with power, subject to the provisions of this Act, to acquire, hold and dispose of property, both movable and immovable, and to contract and shall, by the said name, sue or be sued.
(3) The head office of the Authority shall be at such place as the Central Government may decide from time to time.
(4) The Authority may establish offices at other places in India.
1. COMPOSITION OF AUTHORITY.
The Authority shall consist of the following members, namely:- (a) a Chairperson;
(b) not more than five whole-time members; (c) not more than four part-time members,
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to be appointed by the Central Government from amongst persons of ability, integrity and standing who have knowledge or experience in life insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration or any other discipline which would, in the opinion of the Central Government, be useful to the Authority:
Provided that the Central Government shall, while appointing the Chairperson and the whole-time members, ensure that at least one person each is a person having knowledge or experience in life insurance, general insurance or actuarial science, respectively.
2. TENURE OF OFFICE OF CHAIRPERSON AND OTHER MEMBERS.
(1) The Chairperson and every other whole-time member shall hold office for a term of five years from the date on which he enters upon his office and shall be eligible for reappointment:
Provided that no person shall hold office as a Chairperson after he has attained the age of sixty-five years:
Provided further that no person shall hold office as a whole-time member after he has attained the age of sixty-two years.
(2) A part-time member shall hold office for a term not exceeding five years from the date on which he enters upon his office.
(3) Notwithstanding anything contained in sub-section (1) or sub-section (2), a member may -
(a) relinquish his office by giving in writing to the Central Government notice of not less than three months; or
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(b) be removed from his office in accordance with the provisions of section 3. REMOVAL FROM OFFICE.
(1) The Central Government may remove from office any member who-
(a) is, or at any time has been, adjudged as an insolvent; or
(b) has become physically or mentally incapable of acting as a member; or
(c) has been convicted of any offence which, in the opinion of the Central Government, involves moral turpitude; or
(d) has acquired such financial or other interest as is likely to affect prejudicially his functions as a member; or
(e) has so abused his position as to render his continuation in office detrimental to the public interest.
(2) No such member shall be removed under clause (d) or clause (e) of sub-section (1) unless he has been given a reasonable opportunity of being heard in the matter.
4. SALARY AND ALLOWANCES OF CHAIRPERSON AND MEMBERS.
(1) The salary and allowances payable to, and other terms and conditions of service of, the members other than part-time members shall be such as may be prescribed.
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(3) The salary, allowances and other conditions of service of a member shall not be varied to his disadvantage after appointment.
5. BAR ON FUTURE EMPLOYMENT OF MEMBERS.
The Chairperson and the whole-time members shall not, for a period of two years from the date on which they cease to hold office as such, except with the previous approval of the Central Government, accept-
(a) any employment either under the Central Government or under any State Government; or
(b) any appointment in any company in the insurance sector.
6. ADMINISTRATIVE POWERS OF CHAIRPERSON.
The Chairperson shall have the powers of general superintendence and direction in respect of all administrative matters of the Authority.
7. MEETINGS OF AUTHORITY.
(1) The Authority shall meet at such times and places and shall observe such rules and procedures in regard to transaction of business at its meetings (including quorum at such meetings) as may be determined by the regulations.
(2) The Chairperson, or if for any reason he is unable to attend a meeting of the Authority, any other member chosen by the members present from amongst themselves at the meeting shall preside at the meeting.
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(3) All questions which come up before any meeting of the Authority shall be decided by a majority of votes by the members present and voting, and in the event of an equality of votes, the Chairperson, or in his absence, the person presiding shall have a second or casting vote.
(4) The Authority may make regulations for the transaction of business at its meetings.
8. VACANCIES, ETC., NOT TO INVALIDATE PROCEEDINGS OF AUTHORITY.
No act or proceeding of the Authority shall be invalid merely by reason of - (a) any vacancy in, or any defect in the constitution of, the Authority; or (b) any defect in the appointment of a person acting as a member of the Authority; or
(c) any irregularity in the procedure of the Authority not affecting the merits of the case.
9. OFFICERS AND EMPLOYEES OF AUTHORITY.
(1) The Authority may appoint officers and such other employees as it considered necessary for the efficient discharge of its function under this Act.
(2) The terms and other conditions of service of officers and other employees of the Authority appointed under sub-section (1) shall be governed by regulations made under this Act.
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2.3DUTIES, POWERS AND FUNCTIONS OF AUTHORITY
1. DUTIES, POWERS AND FUNCTIONS OF AUTHORITY.
(1) Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business.
(2) Without prejudice to the generality of the provisions contained in sub-section (1), the powers and functions of the Authority shall include, -
(a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration;
(b) protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance;
(c) specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents;
(d) specifying the code of conduct for surveyors and loss assessors; (e) promoting efficiency in the conduct of insurance business;
(f) promoting and regulating professional organisations connected with the insurance and re-insurance business;
(g) levying fees and other charges for carrying out the purposes of this Act; (h) calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries,
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insurance intermediaries and other organisations connected with the insurance business;
(i) control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938);
(j) specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries;
(k) regulating investment of funds by insurance companies; (l) regulating maintenance of margin of solvency;
(m) adjudication of disputes between insurers and intermediaries or insurance intermediaries;
(n) supervising the functioning of the Tariff Advisory Committee;
(o) specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organisations referred to in clause (f);
(p) specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and
(q) exercising such other powers as may be prescribed.
2.4 MISSION STATEMENT OF IRDA
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2.To bring about speedy and orderly growth of the insurance industry (includingannuity and superannuation payments) for the benefit of the common man, and to provide long-term funds for accelerating growth of the economy.
3.To set, promote, monitor, and enforce high standards of integrity, financialsoundness, fair dealing, and competence of those it regulates
.4.To ensure that insurance customers receive precise, clear and correct information about products and services and make them aware of their responsibilities and duties in this regard.
5.To ensure speedy settlement of genuine claims, to prevent insurance frauds, and other malpractices and put in place effective grievance redressal machinery.
6.To promote fairness, transparency, and orderly conduct in financial markets dealing with insurance and to build a reliable management information system to enforce high standards of financial soundness amongst market players.
7. To take action where such standards are inadequate or ineffectively enforced. 8. To bring about optimum amount of self-regulation in day-to-day working of the industry, consistent with the requirements of prudential regulation.
2.5 FINANCE, ACCOUNTS AND AUDIT
1.GRANTS BY CENTRAL GOVERNMENT.
The Central Government may, after due appropriation made by Parliament by law in this behalf, make to the Authority grants of such sums of money as the Government may think fit for being utilised for the purposes of this Act.
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2. CONSTITUTION OF FUNDS.
(1) There shall be constituted a fund to be called "the Insurance Regulatory and Development Authority Fund" and there shall be credited thereto-
(a) all Government grants, fees and charges received by the Authority;
(b) all sums received by the Authority from such other source as may be decided upon by the Central Government;
(c) the percentage of prescribed premium income received from the insurer.
(2) The Fund shall be applied for meeting -
(a) the salaries, allowances and other remuneration of the members, officers and other employees of the Authority;
(b) the other expenses of the Authority in connection with the discharge of its functions and for the purposes of this Act.
3. ACCOUNTS AND AUDIT.
(1) The Authority shall maintain proper accounts and other relevant records and prepare an annual statement of accounts in such form as may be prescribed by the Central Government in consultation with the Comptroller and Auditor-General of India.
(2) The accounts of the Authority shall be audited by the Comptroller and Auditor-General of India at such intervals as may be specified by him and any
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expenditure incurred in connection with such audit shall be payable by the Authority to the Comptroller and Auditor-General.
(3) The Comptroller and Auditor-General of India and any other person appointed by him in connection with the audit of the accounts of the Authority shall have the same rights, privileges and authority in connection with such audit as the Comptroller and Auditor-General generally has in connection with the audit of the Government accounts and, in particular, shall have the right to demand the production of books of account, connected vouchers and other documents and papers and to inspect any of the offices of the Authority.
(4) The accounts of the Authority as certified by the Comptroller and Auditor-General of India or any other person appointed by him in this behalf together with the audit-report thereon shall be forwarded annually to the Central Government and that Government shall cause the same to be laid before each House of Parliament.
2.6 MISCELLANEOUS
1. POWER OF CENTRAL GOVERNMENT TO ISSUE DIRECTIONS.
(1) Without prejudice to the foregoing provisions of this Act, the Authority shall, in exercise of its powers or the performance of its functions under this Act, be bound by such directions on questions of policy, other than those relating to technical and administrative matters, as the Central Government may give in writing to it from time to time.
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PROVIDED that the Authority shall, as far as practicable, be given an opportunity to express its views before any direction is given under this sub-section.
(2) The decision of the Central Government, whether a question is one of policy or not, shall be final.
1. POWER OF CENTRAL GOVERNMENT TO SUPERSEDE AUTHORITY.
(1) If at any time the Central Government is of the opinion-
(a) that, on account of circumstances beyond the control of the Authority, it is unable to discharge the functions or perform the duties imposed on it by or under the provisions of this Act, or
(b) that the Authority has persistently defaulted in complying with any direction given by the Central Government under this Act or in the discharge of the functions or performance of the duties imposed on it by or under the provisions of this Act and as a result of such default the financial position of the Authority or the administration of the Authority has suffered; or
(c) that circumstances exist which render it necessary in the public interest so to do,
the Central Government may, be notification and for reasons to be specified therein, supersede the Authority for such period, not exceeding six months, as may be specified in the notification and appoint a person to be the Controller of Insurance under section 2B of the Insurance Act, 1938 (4 of 1938), if not already done :
Provided that before issuing any such notification, the Central Government shall give a reasonable opportunity to the Authority to make representations, if any, of the Authority.
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(2) Upon the publication of a notification under sub-section(1) superseding the Authority, -
(a) the Chairperson and other members shall, as from the date of supersession, vacate their offices as such;
(b) all the powers, functions and duties which may, by or under the provisions of this Act, be exercised or discharged by or on behalf of the Authority shall, until the Authority is reconstituted under sub-section(3), be exercised and discharged by the Controller of Insurance; and
(c) all properties owned or controlled by the Authority shall, until the Authority is reconstituted under sub-section(3), vest in the Central Government.
(3) On or before the expiration of the period of supersession specified in the notification issued under sub-section(1), the Central Government shall reconstitute the Authority by a fresh appointment of its Chairperson and other members and in such case any person who had vacated his office under clause(a) of sub-section(2) shall not be deemed to be disqualified for reappointment.
(4) The Central Government shall cause a copy of the notification issued under sub-section(1) and a full report to any action to be laid before each House of Parliament at the earliest.
3. FURNISHING OF RETURNS, ETC., TO CENTRAL GOVERNMENT.
(1) The Authority shall furnish to the Central Government at such time and in such form and manner as may be prescribed, or as the Central Government may direct to furnish such returns, statements and other particulars in regard to any proposed or
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existing programme for the promotion and development of the insurance industry as the Central Government may, from time to time, require.
(2) Without prejudice to the provisions of sub-section(1), the Authority shall, within nine months after the close of each financial year, submit to the Central Government a report giving a true and full account of its activities including the activities for promotion and development of the insurance business during the previous financial year.
(3) Copies of the reports received under sub-section(2) shall be laid , as soon as may be after they are received, before each House of Parliament.
4. CHAIRPERSON, MEMBERS, OFFICERS AND OTHER EMPLOYEES OF AUTHORITY TO BE PUBLIC SERVANTS.
The Chairperson, members, officers and other employees of Authority shall be deemed, when acting or purporting to act in pursuance of any of the provisions of this Act, to be public servants within the meaning of section 21 of the Indian Penal Code (45 of 1860).
5. PROTECTION OF ACTION TAKEN IN GOOD FAITH.
No suit, prosecution or other legal proceedings shall lie against the Central Government or any officer of the Central Government or any member, officer or other employee of the Authority for anything which is in good faith done or intended to be done under this Act or the rules or regulations made thereunder:
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Provided that nothing in this Act shall exempt any person from any suit or other proceedings which might, apart from this Act, be brought against him.
6. DELEGATION OF POWERS.
(1) The Authority may, by general or special order in writing, delegate to the Chairperson or any other member or office of the Authority subject to such conditions, if any, as may be specified in the order such of its powers and functions under this Act as it may deem necessary.
(2) The Authority may, by a general or special order in writing, also form committees of the members and delegate to them the powers and functions of the Authority as may be specified by the regulations.
7. POWER TO MAKE RULES.
(1) The Central Government may, by notification, make rules for carrying out the provisions of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely :
(a) the salary and allowances payable to, and other terms and conditions of service of, the members other than part-time members under sub-section(1) of section 7;
(b) the allowances to be paid to the part-time members under sub-section(2) of section 7;
(c) such other powers that may be exercised by the Authority under clause (q) of sub-section(2) of section 14;
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(d) the form of annual statement of accounts to be maintained by the Authority under sub-section(1) of section 17;
(e) the form and the manner in which and the time within which returns and statements and particulars are to be furnished to the Central Government under sub-section(1) of section 20;
(f) the matters under sub-section(5) of section 25 on which the Insurance Advisory Committee shall advise the Authority;
(g) any other matter which is required to be, or may be, prescribed, or in respect of which provision is to be or may be made by rules.
8. ESTABLISHMENT OF INSURANCE ADVISORY COMMITTEE.
(1)The Authority may, by notification, establish with effect from such date as it may specify in such notification, a Committee to be known as the Insurance Advisory Committee.
(2)The Insurance Advisory Committee shall consist of not more than twenty-five members excluding ex-officio members to represent the interests of commerce, industry, transport, agriculture, consumer fora, surveyors, agents, intermediaries, organisations engaged in safety and loss prevention, research bodies and employees' association in the insurance sector.
(3)The Chairperson and the members of the Authority shall be the ex officio Chairperson and ex officio members of the Insurance Advisory Committee.
(4)The objects of the Insurance Advisory Committee shall be to advise the Authority on matters relating to the making of the regulations under section 26.
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(5)Without prejudice to the provisions of sub-section(4), the Insurance Advisory Committee may advise the Authority on such other matters as may be prescribed.
9. POWER TO MAKE REGULATIONS.
(1) The Authority may, in consultation with the Insurance Advisory Committee, by notification, make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely :-
(a) the time and places of meetings of the Authority and the procedure to be followed at such meetings including the quorum necessary for the transaction of business under sub-section(1) of section 10;
(b) the transactions of business at its meetings under sub-section(4) of section 10;
(c) the terms and other conditions of service of officers and other employees of the Authority under sub-section(2) of section 12;
(d) the powers and functions which may be delegated to Committees of the members under sub-section(2) of section 23; and
(e) any other matter which is required to be, or may be, specified by regulations or in respect of which provision is to be or may be made by regulations.
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Every rule and every regulation made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive session aforesaid, both Houses agree in making any, modification in the rule or regulation or both Houses agree that the rule or regulation should not be made, the rule or regulation shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule or regulation.
11. APPLICATION OF OTHER LAWS NOT BARRED.
The provisions of this Act shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force.
12. POWER TO REMOVE DIFFICULTIES.
(1) If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act as may appear to be necessary for removing the difficulty:
Provided that no order shall be made under this section after the expiry of two years from the appointed day.
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(2) Every order made under this section shall be laid, as soon as may be, after it is made, before each House of Parliament.
NEW LAWS AND GUIDELINES:
The Insurance Regulatory and Development Authority (IRDA) have issued disclosure norms for insurance companies, mandating them to publish accounts on a half-yearly basis. The disclosure norms are seen as a precursor to allowing insurance companies to hit the primary market.
According to the new norms, insurers will have to publish their balance sheet on half-yearly basis starting from the period ending March 31, 2010, i.e. beginning with the October-March period. Such disclosures will be necessary for all insurers even if they are not listed on any stock exchange, the IRDA said.
IRDA said several insurance companies will be completing 10 years shortly, after which they may be allowed to go for an initial public offer (IPO).
It is also essential that investors are made fully aware of the financial performance, company profile, financial position, the risk exposure, elements of corporate governance in place and the management of the insurance companies. Such data shall preferably be made available for at least a 5-year period prior to the IPO. The regulator has directed all firms to come up with a public disclosure framework to ensure a fair and stable insurance market.
IRDA has also said that key analytical ratios of insurance companies have to be published in at least one English daily circulating substantially in the whole of India and in one regional language newspaper.
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Insurers have also been asked to host all the forms including revenue account, profit &loss account, balance sheet, segmental reporting, schedules to accounts and other forms, on their websites, on a quarterly/half-yearly/ yearly basis.
According to the IRDA, the International Association of Insurance Supervisors (IAIS) has recognized that insurers have an equal if not greater responsibility towards policyholders than their duty towards the investors. This is because if insurers become insolvent, loss to policyholders is much more than that to investors.
Public disclosures, on the risks faced by the insurers, provide information to policyholders that help them make informed decisions before entering into an insurance contract.
At present, in India, it may not be possible for an individual policyholder to have necessary ability and resources to undertake the task of assessing the insurers. However, various expert stakeholders in the market can provide necessary inputs based on the disclosures, which will help them in assessing the risk exposure of an insurer while entering into a contract with an insurer.
For better understanding of Unit-linked life insurance products (ULIP) by intending investors/policyholders, the Insurance Regulatory and Development Authority (IRDA) have put forth detailed guidelines for companies selling these. There has to now be a minimum lock-in period of three years and all insurance companies selling ULIP need to provide for reasonable insurance cover, with a linkage to the premium payment during the term of the contract, along with availability of the greater part of the targeted sum at the longer end.
For better understanding of the complexities of ULIP, the insurance companies should provide separate training to all agents/intermediaries before they are
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authorized to sell ULIP. Also, periodical in-house refresher training to those involved in soliciting business. Insurance companies are being asked to follow a uniform practice for rounding off the unit prices.
Further, any advertisement by insurance companies should clearly distinguish ULIP from traditional life insurance products and also make clear that the premiums and funds are subject to certain charges related to the fund or to the premium paid. IRDA has also asked all life insurers to furnish data on switching options exercised by policyholders,
IRDA New Guidelines for Life Insurance Agents
In a first of its kind measure, Insurance Regulatory & Development Authority has decided to penalize agents if the insurance policies are not renewed. The move, aimed at curtailing wrong selling, will entail commissions being retracted from agents and credited to the policyholders account. And such not renewed policy to be treated as Single Premium Policy".
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CHAPTER 3
PRINCIPLES OF LIFE ASSURANCE
3.1 LIFE INSURANCE CONTRACTS
Almost all of us have insurance. When your insurer gives you the policy document, generally, all you do is glance over the decorated words in the policy and pile it up with the other bunch of financial papers on your desk, right? If you spend thousands of dollars each year on insurance, don't you think that you should know all about it? Your insurance advisor is always there for you to help you understand the tricky terms in the insurance forms, but you should also know for yourself what your contract says. In this article, we'll make reading your insurance contract easy. Read on to take a look at the basic principles of insurance contracts and how they are put to use in daily life.
3.2 ESSENTIALS OF A VALID INSURANCE CONTRACT
Offer and Acceptance: When applying for insurance, the first thing you do is get the proposal form of a particular insurance company. After filling in the requested details, you send the form to the company (sometimes with a premium check). This is your offer. If the insurance company accepts your offer and agrees to insure you, this is called an acceptance. In some cases, your insurer may agree to accept your offer after making some changes to your proposed terms (for example, charging you a double premium for your chain-smoking habit). Consideration: This is the premium or the future premiums that you have pay to your insurance company. For insurers, consideration also refers to the
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money paid out to you should you file an insurance claim. This means that each party to the contract must provide some value to the relationship.
Legal Capacity:You need to be legally competent to enter into an agreement with your insurer. If you are a minor or are mentally ill, for example, then you may not be qualified to make contracts. Similarly, insurers are considered to be competent if they are licensed under the prevailing regulations that govern them.
Legal Purpose: If the purpose of your contract is to encourage illegal activities, it is invalid.Find the Value in Indemnity contracts
Most insurance contracts are indemnity contracts. Indemnity contracts apply to insurances where the loss suffered can be measured in terms of money.
Principle of Indemnity
This states that insurers pay no more than the actual loss suffered. The purpose of an insurance contract is to leave you in the same financial position you were in immediately prior to the incident leading to an insurance claim. When your old Chevy Cavalier is stolen, you can't expect your insurer to replace it with a brand new Mercedes-Benz. In other words, you will be remunerated according to the total sum you have assured for the car. (To read more on indemnity contracts, see shopping For Car Insurance and How does the 80% rule for home insurance work?)
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3.3ADDITIONALFACTORS
There are some additional factors of your insurance contract that also need to be considered, including under-insurance and excess clauses that create situations in which the full value of an insured asset is not remunerated.
Under-Insurance
Often, in order to save on premiums, you may insure your house at $80,000 when the total value of the house actually comes to $100,000. At the time of partial loss, your insurer will pay only a proportion of $80,000 while you have to dig into your savings to cover the remaining portion of the loss. This is called under-insurance, and you should try to avoid it as much as possible.
Excess
To avoid trivial claims, the insurers have introduced provisions like excess. For example, you have auto insurance with the applicable excess of $5,000. Unfortunately, your car had an accident with the loss amounting to $7,000. Your insurer will pay you the $7,000 because the loss has exceeded the specified limit of $5,000. But, if the loss comes to $3,000 then the insurance company will not pay a single penny and you have to bear the loss expenses yourself. In short, the insurers will not entertain claims unless and until your losses exceed a minimum amount set by the insurer.
Not all insurance contracts are indemnity contracts. Life insurance contracts and most personal accident insurance contracts are non-indemnity contracts. You may purchase a life insurance policy of $1 million, but that does not imply that your life's value is equal to this dollar amount. Because you can't calculate your life's net
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worth and fix a price on it, an indemnity contract does not apply. (For more information on non-indemnity contracts, read Buying Life Insurance: Term Versus Permanent,Long-Term Care Insurance: Who Needs It? and Shifting Life Insurance Ownership.)
1) Insurable Interest:
It is your legal right to insure any type of property or any event that may cause financial loss or create a legal liability to you. This is called insurable interest.
Suppose you are living in your uncle's house, and you apply for homeowners' insurance because you believe that you may inherit the house later. Insurers will decline your offer because you are not the owner of the house and, therefore, you do not stand to suffer financially in the event of a loss.
This example demonstrates that when it comes to insurance, it is not the house, car or machinery that is insured. Rather, it is the monetary interest in that house, car or machinery to which your policy applies.
It is also the principle of insurable interest that allows married couples to take out insurance policies on the lives of their spouses - they may suffer financially if the spouse dies. Insurable interest also exists in some business arrangements, as seen between a creditor and debtor, between business partners or between employers and employees.
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2) Principle of Subrogation:
Subrogation allows an insurer to sue a third party that has caused a loss to the insured and pursue all methods of getting back some of the money that it has paid to the insured as a result of the loss.
For example, if you are injured in a road accident that is caused by the reckless
driving of another party, you will be compensated by your insurer. However, your insurance company may also sue the reckless driver in an attempt to recover that money.
3) Doctrine of Utmost Good Faith:
All insurance contracts are based on the concept of "uberrima fidei", or the doctrine of utmost good faith. This doctrine emphasizes the presence of mutual faith between the insured and the insurer. In simple terms, while applying for life insurance, it becomes your duty to disclose your past illnesses to the insurer. Likewise, the insurer cannot hide information about the insurance coverage that is being sold.
4) Doctrine of Adhesion:
The doctrine of adhesion states that you must accept the entire insurance contract and all of its terms and conditions without bargaining. Because the insured has no opportunity to change the terms, any ambiguities in the contract will be interpreted in favor of the insured.
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CHAPTER 4
PREMIUMS AND BONUSES
4.1 WHAT IS PREMIUM
The sum paid by a policyholder to keep an insurance policy in force. It is amount paid to secure an insurance policy. Rate that an insured is charged, reflecting his or her expectation of loss or risk. The insurance company will assume the risks of the insured (length of life, state of health, property damage or destruction, or liability exposure) in exchange for a premium payment. Premiums are calculated by combining expectation of loss and expense and profit loading.
Usually, the periodic cost of insurance is computed by multiplying the premium rate per unit of insurance by the number of units purchased. The rate class in which the insured is placed includes large numbers of individuals with like characteristics who pose the same risk. Every individual in a given class will not incur the same loss; rather each has approximately the same expectation of loss (known as the Principle of Equity).
An insurance premium is the amount of money charged by a company for active coverage. The sum a person pays in premiums, also referred to as the rate, is determined by several factors, including age, health, and the area a person lives in. People pay these rates annually or in smaller payments over the course of the year, and the amount can change over time. When insurance premiums are not paid, the policy is typically considered void and companies will not honor claims against it.
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What Premiums Cover
Generally, premiums cover whatever is detailed in the insurance policy, and the services provided or paid for depend entirely on the specific policy and type of protection. The following are the most common varieties and the basic services they often cover. Consumers should keep in mind that not all of these types of insurance are available or common in all countries, and there are many other kinds.
Life insurance typically pays a lump sum in the event of the policyholder's death
to those detailed in the person‟s will or the plan itself. It may pay for funeral arrangements, outstanding debt, living expenses for those left behind, or other expenses related to the deceased's estate.
4.2 PURE PREMIUM
Analysis of uncertainty of financial loss. This classification can be done according to whether a risk is fundamental, particular, pure, speculative, dynamic, or static. In life insurance the process by which a company determines how much to charge for a policy based upon an applicant‟s age, occupation, sex, and health is not or pure Premium.
The cost to meet the risk of death for one year at a particular age is called the risk premium.
Eg. 1000 persons→ the cost of covering the risk of death of person age 50 for one
year. This cost is for insurance of Rs. 20,000 which can be expressed also as Rs. 10 per 1000. The risk premium is based on the probability of death at various ages, mortality tables prepared for the use of insurance offices; contain data relating to such probabilities.
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The balance premium remaining with the insurer will be invested and will earn some interest. To the extent of the expected interest earnings, the premium charged can be reduced. The premium worked out after taking into account the interest, is called the net premium or pure premium.
LOADING
Addition to the pure cost of insurance that reflects agent‟s commissions, premium taxes, and administrative costs associated with putting business on an insurance company‟s book.
The additions to the pure premium are called loadings. One of the loading is due to administrative expenses. One of them would be for unexpected contingencies and fluctuations.
LIFE FUND
The principles of prudent life insurance management require that all the income form the life insurance business (including the earnings from the investments) be kept aside in a life fund, earmarked exclusively to meet the liabilities under the life insurance policies. The laws in India also stipulate this requirement. The life fund can be utilized only to pay the claims and the expenses of running the business. The life fund represents the Reserve for life insurer policies.
It is a long term contract. The income from the life insurance business (Including the earnings from the investments) is kept aside in a Life Fund, earmarked exclusively to meet the liabilities under the life insurance policies. Life fund can be utilized mainly to pay claims and expenses. It represents the reserve for life insurance policies.
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A premium is calculated in respect of mortality, Interest and expenses. The practice followed by all prudent insurers is that periodically, they check the validity of these assumptions to make sure that the business is on sound lines. The process of doing so is called an Actuarial Valuation.
The insurance act in India requires that actuarial valuations be done every year. The method of estimating the liability of the business and of the future premiums is very technical and complex, involving actuarial principles. It has to be done by an actuary with recognized professional qualifications. This is one of the reasons why every life insurer has an actuary, either as a full time employee or as a consultant.
The insurer is required to maintain separate funds in respect of non-participating policies and in respect of participating policies. Separate valuations will be made in respect of these 2 funds. The surplus in the fund for participating policies, not more than 10% of the surplus can be distributed to the shareholders. The rest will have to be distributed to the policyholders as bonus.
BONUS
The distribution of the valuation surplus to policyholders is done through the declaration of „Bonus‟ only policy holders who opt for participating or with profit policies would be entitled to bonus. It is declared out of the surpluses determined after actuarial valuations. Surpluses, in a way reflect the profitability of the business or the quality of management of the business.
Non-participating or without profit policies would be paying a slightly lesser amount of premium for the same kind of insurance cover, because of the factor of bonus loading. The most common bonus „Simple Reversionary Bonus‟ and
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„Compound Reversionary System‟ added to the existing SA.A one-time bonus called Terminal Bonus or Final Additional Bonus was declared for policies which had been in force for 15 yrs.
CHAPTER 5
UNDERWRITING
5.1 WHAT IS UNDERWRITING
Not all life insurance policies are underwritten, but because some are it is important to understand what it means.
Underwriting is a term used by life insurers to describe the process of assessing risk, ensuring that the cost of the cover is proportionate to the risks faced by the individual concerned. People with the same or similar risk pay the same or similar premium rates.
The process of underwriting takes place when you submit your application. To assess a person‟s risk, life insurers rely on information from a range of sources. If you are applying for a policy that is underwritten, as a minimum you will be asked to complete an application form and a medical questionnaire.
Approximately 93% of applicants that go through the underwriting process will not experience any difficulty and will end up paying the standard premium rates for their life insurance.
People who have a higher risk of developing chronic illness or who work in high risk occupations are usually required to complete additional forms and may be asked to pay an extra premium to cover this risk. This only happens to a low
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proportion of applicants. And an even smaller number may not be eligible for cover at all.
Remember, if you have access to insurance through your super or through your employer, the insurance company may decide not to assess the risks for every individual in the policy. Instead they may spread the risk across everyone in the group. This is called a „Group Policy‟.
5.2 FINANCIAL UNDERWRITING
Concept Of Financial Underwriting
The term financial underwriting does not carry too much meaning to many people. The purpose is to determine if the amount of insurance can be justified by the insurance need.
Financial Underwriting
During a typical underwriting training process we usually begin with the theory of mortality tables, premium rates, and the concept of homogenous groupings of insured. Most times it is only after this, almost as an afterthought, that we look at the financial aspect. It would seem that we have put the cart before the horse. The first thing we should think about is the basic idea that, above all, an application for insurance is a contract between one or two other parties and the company, and it must make economic sense.
It is within the concerns of the underwriter to also therefore understand the apparent reasons for the client‟s proposal, and if he stands to benefit from the happening of the event insured, and whether the sum assured applied for is vastly in excess of the human life value of the individual. For example, if a car‟s market value is Rs 5 lakhs, and it is insured for 8 lakhs, there will be added incentive for
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the car‟s owner to dispose off the car and seek insurance indemnity for the amount of 8 lakhs (sum assured). That is not just unfair but also illogical. The car owner will make a fool of the insurance company, and all insurance companies shall have to shut shop, if that were to be the case. However, the car is never insured for a greater value than its present market value, and that explains the reason why the owner cannot make a profit of his car‟s destruction. Quite rightly, this rule also applies to life and disability risks. The proposer should be proposing for a sum assured that does not exceed the present human life value of the proposed life assured, and should not be in a position to benefit from the event happening, nor benefit the family members. Life insurance, we have already seen is an instrument to compensate for the financial loss to the dependents in the unfortunate event of the death or disability of the insured, and put the family back to the same standards of living as earlier, but not to a better one.
NEED FOR FINANCIAL UNDERWRITING
The purpose of Life Insurance is to protect against economic loss resulting from the death of the insured. If the amount applied for is in excess of the amount of the potential economic loss, then poor persistency or adverse selection may occur. The role of the Underwriter is to insure that the amount applied for is justified based on the potential economic loss. This process is called Financial Underwriting. Financial underwriting is an essential part of risk analysis in personal life insurance. It helps the insurer monitor and control risks, protect the portfolio and optimise the results of the insurance activity.The term „financial underwriting‟ prima facie; appears to convey some vast wealth assessment of highly paid executives, wealthy businessmen, lengthy balance sheets and financial statements, etc. It is true that one or many of these may come into play while determining acceptable levels of insurance. However, it should be understood that financial
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underwriting does not always necessarily involve huge sums of money. We know that “moral hazard” refers to the intention of the proposer. If the proposal is made with an intention to seek undue advantage from the policy, then there is some moral hazard. The intention may be to get a lower premium, or make some quick money
Financial Underwriting to judge the existence of moral hazard through secondary factors such as lifestyles, income as compared to premium payable, reputation for integrity, present financial condition, etc. If moral hazard is suspected, the proposal is declined. One of the indicators of moral hazard is the size of the insurance proposed compared to the income. The extent of insurable interest of a person in his own life is unlimited. It is not limited to his current levels of income, since it is assumed that these levels of income can go up in the near future. Dreams may become reality at the turn of a day. A bankrupt may go on to win a million dollar lottery, and a struggling actor may become an overnight sensation. However, this theory or projection may not be valid while proposing for life insurance policy, because insurance premiums are to be paid out of the present income, and a person‟s worth is calculated by his present income; and not by what he thinks he may become a decade later. The source of income needs to be checked. If he is not paying the premium, and someone else pays on his behalf, then there could be issues of insurable interest and wager (betting).
The need for insurance has to be related to current situations and not to a desirable situation of the future. If the premium paid is large compared to the income, the possibility of lapse is very high. Other possibilities include higher claims, money laundering and fraud. The underwriter has to keep an eye on these risk factors. Making a judgment on these factors is called financial underwriting. Thumb rules are just guidelines, and may not do justice in all cases. The need for the
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underwriter to be aware of financial considerations starts at the lowest level, the criterion being whether the proposor can afford to pay the premiums. This can be assessed through a financial check on his income, source of income, and the total insurance sum assured already in his name. If he cannot afford the premium, which is a matter of judgment at the time of underwriting the proposal, then there will be a case of over insurance involved and every underwriter is aware of the dangers inherent in such a situation. It is a well known fact that what is considered reasonable assessment of sum assured, premium and financial background in one case could well be a disastrous situation in another.
Over the years, insurers have combined income and potential worth with insurable interest giving rise to some “rule of thumb”, methods for determining acceptable limits. The underwriting of “financial risks” is a matter of experience, and involves a greater use of common sense and the ability to reach a logical and sensible conclusion. In the final analysis, the question that insurers need to ask is: “Does it make sense?”Financial Underwriting may be therefore defined as that area of underwriting which aims at ensuring that there is no question of over-insurance, or speculation or possibility of fraud arising out of pure monetary considerations. If there is evidence of over-insurance or fraud, there exists moral hazard, and there is only one decision in such cases, and that is to decline the proposal.
There is no question of charging extra premiums for the risks involved in case of moral hazard, as these risks are different from the special risks that exist in medical extramortality; which can be compensated by charging extra premiums on standard rates. It is important to understand that the proposal does not come into scrutiny only when the sum assured is very large, but that it can come into scrutiny even if the proposal is for a smaller CIFP Knowledge series
