Introduction: History of insurance Law in India:

Transcription

1 Introduction: The concept of insurance has been prevalent in India since ancient times amongst Hindus. Overseas traders practiced a system of marine insurance. The joint family system, peculiar to India, was a method of social insurance of every member of the family on his life. The law relating to insurance has gradually developed, undergoing several phases from nationalisation of the insurance industry to the recent reforms permitting entry of private players and foreign investment in the insurance industry. The Constitution of India is federal in nature in as much there is division of powers between the Centre and the States. Insurance is included in the Union List, wherein the subjects included in this list are of the exclusive legislative competence of the Centre. The Central Legislature is empowered to regulate the insurance industry in India and hence the law in this regard is uniform throughout the territories of India. History of insurance Law in India: 1. Formation of the Insurance Industry in India: The development and growth of the insurance industry in India has gone through three distinct stages. Insurance law in India had its origins in the United Kingdom with the establishment of a British firm, the Oriental Life Insurance Company in 1818 in Calcutta, followed by the Bombay Life Assurance Company in 1823, the Madras Equitable Life Insurance Society in 1829 and the Oriental Life Assurance Company in However, till the establishment of the Bombay Mutual Life Assurance Society in 1871, Indians were charged an extra premium of up to 20% as compared to the British. The first statutory measure in India to regulate the life insurance business was in 1912 with the passing of the Indian Life Assurance Companies Act, 1912 ( Act of 1912 ) (which was based on the English Act of 1909). Other classes of insurance business were left out of the scope of the Act of 1912, as such kinds of insurance were still in rudimentary form and legislative controls were not considered necessary. General insurance on the other hand also has its origins in the United Kingdom. The first general insurance company Triton Insurance Company Ltd. was promoted in 1850 by British nationals in Calcutta. The first general insurance company established by an Indian was Indian Mercantile Insurance Company Ltd. in Bombay in Eventually, with the growth of fire, accident and marine insurance, the need was felt to bring such kinds of insurance within t he purview of the Act of 1912 While there were a number of attempts to introduce such legislation over the years, non-life insurance was finally regulated in 1938 through the passing of the Insurance Act, 1938 ( Act of 1938 ). The Act of 1938 along with various amendments over the years continues till date t o be the definitive piece of legislation on insurance and controls both life insurance 1 and general insurance. General insurance, in turn, has been defined to include fire insurance 1 Section 2(11), Insurance Act, 1938 defines Life Insurance Business 1 Electronic copy available at:

2 business 2, marine insurance business 3 and miscellaneous insurance business 4, whether singly or in combination with any of them. 2. Nationalization of the Insurance Business in India: On January 19, 1956, the management of life insurance business of two hundred and forty five Indian and foreign insurers and provident societies then operating in India was taken over by the Central Government. The Life Insurance Corporation ( LIC ) was formed in September 1956 by the Life Insurance Corporation Act, 1956 ( LIC Act ) which granted LIC the exclusive privilege to conduct life insurance business in India. However, an exception was made in the case of any company; firm or persons intending to carry on life insurance business in India in respect of the lives of persons ordinarily resident outside India provided the approval of the Central Government was obtained. The exception was however not absolute and a curious prohibition existed. Such company, firm or person would not be permitted to insure the life of any person ordinarily resident outside India, during any period of their temporary residence in India. However, the LIC Act, 1956 left outside its purview the Post Office Life Insurance Fund, any Family Pension Scheme framed under the Coal Mines Provident Fund, Family Pension and Bonus Schemes Act, 1948 or the Employees' Provident Funds and the Family Pension Fund Act, The general insurance business was also nationalised with effect from January 1, 1973, through the introduction of the General Insurance Business (Nationalisation) Act, 1972 ( GIC Act ). Under the provisions of the GIC Act, the shares of the existing Indian general insurance companies and undertakings of other existing insurers were transferred to the General Insurance Corporation ( GIC ) to secure the development of the general insurance business in India and for the regulation and control of such business. The GIC was established by the Central Government in accordance with the provisions of the Companies Act, 1956 ( Companies Act ) in November 1972 and it commenced business on January 1, Prior to 1973, there were a hundred and seven companies, including foreign companies, offering general insurance in India. These companies were amalgamated and grouped into four subsidiary companies of GIC viz. the National Insurance Company Ltd. ( National Co. ), the New India Assurance Company Ltd. ( New India Co. ), the Oriental Insurance Company Ltd. ( Oriental Co. ), and the United India Assurance Company Ltd. ( United Co. ). GIC undertakes mainly re-insurance business apart from aviation insurance. The bulk of the general insurance business of fire, marine, motor and miscellaneous insurance business is under taken by the four subsidiaries. 2 Section 2(6-A), Insurance Act, 1938 defines Fire Insurance business 3 Section 2(13-A), Insurance Act, 1938 defines Marine Insurance Business 4 Section 2(13-B), Insurance Act, 1938 defines Miscellaneous insurance business 2 Electronic copy available at:

3 3. Entry of Private Players: Since 1956, with the nationalization of insurance industry, the LIC held the monopoly in India's life insurance sector. GIC, with its four subsidiaries, enjoyed the monopoly for general insurance business. Both LIC and GIC have played a significant role in the development of the insurance market in India and in providing insurance coverage in India through an extensive network From 1991 onwards, the Indian Government introduced various reforms in the financial sector paving the way for the liberalization of the Indian economy. It was a matter of time before this liberalization affects the insurance sector. A huge gap in the funds required for infrastructure was felt particularly since much of these funds could be filled by life insurance funds, being long tenure funds. Consequently, in 1993, the Government of India set up an eight-member committee chaired by Mr. R. N. Malhotra, a former Governor of India's apex bank, the Reserve Bank of India to review the prevailing structure of regulation and supervision of the insurance sector and to make recommendations for strengthening and modernizing the regulatory system. The Committee submitted its report to the Indian Government in January Two of the key recommendations of the Committee included the privatisation of the insurance sector by permitting the entry of private players to enter the business of life and general insurance and the establishment of an Insurance Regulatory Authority. It took a number of years for the Indian Government to implement the recommendations of the Malhotra Committee. The Indian Parliament passed the Insurance Regulator y and Development Act, 1999 ( IRD Act ) on December 2, 1999 with the aim to provide for the establishment of an Authority, to protect the interests of the policy holders, to regulate, promote and ensure orderly growth of the insurance industry and to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalization) Act, Legislative Developments after 1999: The Insurance (Amendment) Act, 2002 which came to force on August 9, 2002 permitted, by way of insertion of s.2 (8A) in the Insurance Act, 1938 insurance co-operative societies, registered under the Co-operative Societies Act, 1912 or Multi-State Co-operative Societies Act, 1984 or under any state law relating to co-operative society, to carry on any class of insurance business. However, the IRDA has been empowered to exempt an insurance co-operative society from the application of any of the provisions of the Insurance Act or application of its provisions with exceptions, modifications or adaptations [see proviso to S.94A(2)]. The Insurance (Amendment) Act, 2002 provided for insurance intermediaries, including insurance brokers and 3

4 consultants, and provisions for the payment of commission, brokerage or fee to them, thereby introducing in this country the business practice adopted the world over in this area. Further, s.49 of the Act has been modified to provide shareholders an entitlement of actuarial surplus. By virtue of amendment to s.64 VB of the Act, the IRDA has been authorized to prescribe the mode of payment of premium, i.e., through credit cards or through the internet which in turn might result in an increase in the insurance business. Moreover, the General Insurance Business (Nationalisation) Amendment Act, 2002 which came into force on August 7, 2002 made the General Insurance Corporation the only reinsurer to carry on exclusively reinsurance business in India. It ceased to carry on general insurance business as also to control the four subsidiaries. The Central Government was authorised to discharge its functions in respect of these subsidiaries in future. Amendment Bill 2008: The government introduced the Insurance Laws (Amendment) Bill, 2008, in the Rajya Sabha and the Life Insurance Corporation (Amendment) Bill, 2008, in the Lok Sabha. The insurance amendment Bill is an omnibus legislation to change parts of three Acts: Insurance Act, 1938; Insurance Regulatory and Development (IRDA) Act, 1999, and General Insurance Business Nationalisation Act. Objects of Amendment Bill: To amend the Insurance Act, 1938, the General Insurance Business (Nationalisation) Act, 1972 and the Insurance Regulatory and Development Authority Act, Amendment in Definition Clause: The words and figures The Indian Companies Act, 1913, wherever they occur, the words and figures The Companies Act, 1956 shall be substituted. Health insurance Health insurance includes policies issued to cover medical, surgical, and hospitalisation costs related to in-patient and out-patient treatment. Such policies can include assured benefits, cover long term care, and provide overseas travel or personal accident cover. The Bill also provides for a minimum paid-up equity capital of Rs. 50 crore in case of insurers carrying on exclusively the business of health insurance 4

5 Regulations- Means the regulations framed by the Insurance Regulatory and Development Authority of India established under the Insurance Regulatory and Development Authority Act, 1999; Re- Insurance- Means the insurance of all or part of one insurer s risk by another insurer who accepts the risk for a mutually acceptable premium; The Bill also permits foreign re-insurers to open branches only for re-insurance business in India. Securities Appellate Tribunal Means the Securities Appellate Tribunal established under section 15K of the Securities and Exchange Board of India Act, 1992; ; More Features: It is also proposed that an Indian insurance company is also a company whose sole purpose is to carrying out business of health insurance. The foreign Direct Investment limit in an Indian insurance company by any foreign company is proposed to increase up to 49% from the existing 26%. A foreign company has been defined as a company or body established or incorporated under the law of any country outside India. Lloyd s, established under the Lloyd s Act, 1871 in the UK, and is specifically covered by this definition. It is proposed that Insurance Co- operative Society a minimum paid-up capital of rupees one hundred crore in case of life insurance or general insurance business and rupees fifty crores in case of health insurance business. Definition of insurer is proposed to meant to be an Indian Insurance Company, or a statutory body established by an Act of Parliament to carry on insurance business, or an insurance co-operative society, or a foreign company engaged in re-insurance business through a branch established in India. Registration is made compulsory for the insurer under this proposed bill. Special Economic Zones are made open to the Insurers. 5

6 If a foreign insurer is registered in any foreign country then it may require notification from the authority to carry on its business of re- insurance in India. Prior permission of Authority is made compulsory for new insurance policy or renew of the policy of any property situated in SEZ or any ship or other vessel or aircraft registered in India contravention of which provides a penalty which may extend up to five crore rupees. Capital Requirement: Life insurance or general insurance Health insurance Re-insurance Foreign company engaged in re-insurance business through a branch established in India A paid-up equity capital of rupees one hundred crore A paid-up equity capital of rupees fifty crore, A paid-up equity capital of rupees two hundred crore Owned funds of not less than rupees five thousand crore Capital structure and voting rights of shareholders: A public company limited by shares having its registered office in India, shall carry on insurance business if the capital of the company shall consist of equity shares each having a single face value and such other form of capital. The voting rights of shareholders are restricted to equity shares and been strictly proportionate to the equity shares held by him. These provisions are subject to condition that if a public company issued any share other than a ordinary shares, before the commencement of the Insurance (Amendment) Act, each of which has a single face value or any shares the paid-up amount whereof is not the same for all of the them for a period of three years from such commencement. Under section 21(2), it is proposed that in case of any inaccuracy or defect in the return filed by the insurer he may apply to the Securities Appellate Tribunal instead of the Court as envisaged in the Act. 6

7 The investment of the assets by the insurer will be governed by this Act and the regulations passed by IRDA for this purpose, hence increasing the power of IRDA in this regard. In this section, the term assets means all the assets of insurer at their carrying value but does not include any assets specifically held against any fund or portion thereof in respect of which the Authority is satisfied that such fund or portion thereof, as the case may be, is regulated by the law of any country outside India or miscellaneous expenditure or in respect of which the Authority is satisfied that it would not be in the interest of the insurer to apply the provisions of this section. Life Insurance: Every insurer carrying on the business of life insurance is required to invest and at all times keep invested his controlled fund (other than funds relating to pensions and general annuity business and unit linked life insurance business) in the following manner, free of any encumbrance, charge, hypothecation or lien: Investment Percentage Government Securities: 25% Government securities or other approved not less than 25 per cent securities: Approved investments: Not less than 50% Other than in Approved Investments to be governed by Exposure/Prudential Norms: Not exceeding 15% General Insurance: An insurer carrying on general insurance business is required to invest and keep invested at all times his total assets in approved securities in the following manner: Investment Percentage Government Securities: 2o% 7

8 Government securities or other approved securities: not less than 10 per cent Approved investments: Not less than 70% Other than in Approved Investments to be governed by Exposure/Prudential Norms: Not exceeding 15% Penalties and Adjudication Mechanism : The Bill provides for the Securities Appellate Tribunal, established under the SEBI Act, 1992, to be the appellate authority for decisions made by IRDA. Insurers, who violate norms on investment and the underwriting of third party motor insurance, or obligations towards rural and social sectors or vulnerable sections, face a fine of Rs 25 crore. Now for the loan/ advances made by the Insurer to Banking Company or to a Subsidiary Company or to any other of which the company is a subsidiary company, previous approval of the Authority is made necessary. (S. 29) Remuneration shall be governed by the Regulations.( S. 31B) All general insurers must underwrite a minimum amount of insurance business in third party motor insurance but this will not apply to health insurance or re- insurance business.( S. 32D) Power of investigation and inspection by Authority: The person directed to investigate by the Authority will termed as Investigating Officer. He has made empowered to investigate the books of account of any insurer or intermediary or insurance intermediary. Other officer of the insurer includes a service provider, contractor of an insurer where services are outsourced by the insurer. On contravention of the order of removal of the Director or Chief Executive Officer, by the Authority, he shall be liable to a penalty of one lakh rupees for each day during which such contravention continues or one crore rupees, whichever is less.(s.34b) 8

9 The Authority appoint Additional Director with the consultation of the Central Government.(34C) Application, against the order of Chairperson of the Authority, for the retention of seized books of accounts for more than the specified 180 days, is now made to the Securities Appellate Tribunal.(S.34H) Amalgamation and Transfer: All the amalgamation and transfer of any insurance business will be in accordance with a scheme prepared under this section and approved by the Authority. Notice of the application for this scheme is made mandatory to be given to the holders of any kind of policy of insurer concerned along with statement of the nature and terms of the amalgamation or transfer. Central Government may notify in this behalf in the Official Gazette. After amalgamation or transfer the rights and interest of the every policy-holder or shareholder or member of each of the insurers shall remain same as as he had in the company of which he was originally a policy-holder or shareholder or member The interests or rights of any shareholder or member are less than his interest in, or rights against, the original insurer, he shall be entitled to compensation which shall be paid by the insurance company resulting from such amalgamation. If a person is aggrieved by the assessment of compensation made by the Authority, he may within thirty days from the publication of such assessment prefer an appeal to the Securities Appellate Tribunal. Assignment and Transfers: The Bill provides for policyholders to assign or transfer the rights under a policy either completely or only partly, to a third party. Conditional transfers allow for only certain rights to be transferred till the policy matures. Absolute transfers provide for the transfer of all rights of the policy unconditionally. Unless specifically allowed otherwise, all transfers are to be treated as absolute. Insurers can decline the assignment of a policy if they feel it is against the interests of the policyholder, that it is not bona fide, or that it is against the public interest. Policyholders can appeal to IRDA against such a refusal. 9

10 Nomination: In view of the decision of Supreme Court in Sarbati Devi case 5 and the Law Commission s earlier recommendation made in its 137 th Report (1991), the Commission has now recommended that section 39 be amended to make a distinction between a beneficial nominee and a collector nominee. The Bill distinguishes collector nominees from beneficiary nominees. Beneficiary nominees are entitled to benefits payable under a policy. A collector nominee must pay benefits of the policy to legal heirs or the beneficiary nominee. Unless a policyholder makes such a distinction, all nominees are to be treated as beneficiary nominees. Insurance Agents: The Bill does away with the requirement that insurance agents be licensed by IRDA. It allows insurers to appoint persons with specified qualifications and training, as insurance agents. No person can act as an agent for more than one life insurer or general insurer. Norms for commission and brokerage are to be specified in regulations. Section 45- The Insurance Act allows an insurer to cancel a life insurance policy within two years on the grounds that material facts, on the basis of which the policy was issued, were inaccurate or false. After two years, a policy can still be cancelled on grounds of fraud. The Bill expands the window within which policies can be cancelled to five years. However, a policy cannot be challenged on any grounds after a period of five years. If an insurer cancels a policy on grounds of misstatement or suppression of facts, premiums collected must be returned within 90 days. Section 48A- No insurance agent or intermediary or insurance intermediary shall be eligible to be or remain a director in insurance company. Solvency: All insurers and re-insurers must maintain an excess of assets over liabilities (solvency margin) of 50% of the minimum amount of capital prescribed. A further control level of solvency shall also be prescribed in the rules. An insurer or re-insurer, as the case may be, who does not comply the solvency margin shall be deemed to be insolvent and may be wound-up by the court on an application made by the Authority.(S.64VA) The Part III Provident Societies, Part IIIA- Insurance Co- operative Societies, and Part IV- Mutual Insurance Companies and Co- operative Life Insurance Societies are deleted. 5 AIR 1984 SC

11 Penalties: For default in complying with or act in contravention of, this Act For carrying on the business of insurance without obtaining a certificate of registration under section 3 For fails to comply with the provisions of section 27, section 27A, section 27B, section 27D and section 27E regarding Investment of assets For wrongfully obtaining or withholding the property For fails to comply with the provisions of section 32B, section 32C and section 32 i.e. insurance business in rural or social sector Liable for penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less Liable to a fine not exceeding rupees twentyfive crores and with imprisonment which may extend to ten years Liable to a penalty not exceeding twenty-five crore rupees. Liable for penalty rupees not exceeding one crore Liable to a penalty not exceeding twenty-five crore rupees. Appeal: Securities Appellate Tribunal now made competent to hear the appeal against the order of the Authority and should be filed within a period of forty five days from the date on which a copy of the order made by the Authority is received by him. Schedules: The Fifth Schedule, the Sixth Schedule and the Eighth Schedule shall be omitted. Amendment to the General Insurance Business (Nationalisation) Act, 1972: Now The General Insurance Corporation and the Government insurance may, raise their capital for increasing their business in rural and social sectors, to meet solvency margin and such other purposes, as the Central Government may empower in this behalf. 11

12 Amendment to Insurance Regulatory and Development Authority Act, 1999: Intermediary or insurance intermediary" now includes insurance brokers, reinsurance brokers, insurance consultants, "Insurance agents, third party administrator surveyors and loss assessor Important Features of the Bill: (i) Define "health insurance business" and provides for a minimum paid-up equity capital of Rs. 50 crore in case of insurers carrying on exclusively the business of health insurance; (ii) Raise the foreign equity in Indian insurance company from 26% to 49% and maintain foreign direct investment cap at 26% for the Insurance Co-operative Societies; (iii) Permit foreign re-insurers to open branches only for re-insurance business in India; (iv) Facilitate entry of Lloyd's of London in insurance business in India as a foreign company in joint venture with Indian partners and also as branch of foreign re-insurer; (v) Provide for permanent registration of the insurers with annual renewal fee and right to cancel the registration on breach of conditions specified by the IRDA; (vi) Remove restriction on divestment by Indian promoters of insurance companies, which were required earlier to divest to 26% or such other, prescribed percentage in the manner and period prescribed by the Central Government; (vii) Remove requirements of deposits by insurers for registration in view of these being regulated by the IRDA on the basis of solvency margin; (viii) Provide obligatory underwriting of third party risks of motor vehicles on the pattern of insurance in rural areas and social sectors; (ix) Make provision for absolute and conditional assignments of life insurance policies; (x) Make provision for distinction between a beneficiary nominee and a collector nominee in life insurance policies; (xi) Entrust responsibility of appointing insurance agents to insurers and IRDA to regulate their eligibility, qualifications and other aspects; (xii) Make life insurance policy unchallengeable on whatsoever ground after five years of issue of the policy and limiting the grounds for challenge during the period within five years; 12

13 (xiii) Delete provisions relating to Tariff Advisory Committee (TAC) in view of the detariffing of rates and premiums w.e.f. 1st January, 2007; (xiv) Provide for making Life Insurance Council and General Insurance Council as selfregulating bodies by empowering them to frame bye-laws for elections, meetings, levy and collection of fees from its members; (xv) Provide for fine up to Rs. 25 crore and imprisonment up to 10 years for carrying on insurance business without registration; (xvi) Provide for penalty of "not exceeding twenty-five crore rupees" in case an insurer fails to comply with the obligations for rural or social sector or third party insurance of motor vehicles; (xvii) Provide for powers of adjudication to the Authority and appeal to Securities Appellate Tribunal against the decisions of the Authority; (xviii) Provide for crediting sums realised by way of penalty to the Consolidated Fund of India; (xix) Bar courts from taking cognizance of any offence punishable under the Insurance Act, save on a complaint made by an officer of the IRDA; (xx) Delete redundant provisions and make consequential amendments to various provisions in the Insurance Act; (xxi) Allow insurance companies to raise newer capital through newer instruments on the pattern of banks; (xxii) Formulate regulations for payment of commission and control of management expenses; (xxiii) Formulate regulations for opening and closing of foreign branches and the closing of domestic branches of Indian insurers and norms for opening domestic branches; (xxiv) Address matters relating to the functions, code of conduct, etc., of surveyors and loss assessors in the existing regulations; (xxv) Allow nationalised general insurance companies to raise money from the market with the permission of the Central Government for increasing their business in rural and social sector, to meet solvency margin and such other purposes, as the Central Government may empower in this behalf; and (xxvi) Include "insurance agent" in the definition of "insurance intermediaries" in the IRDA Act 13

14 Analysis of Crucial Issues: Lloyd s of London The Bill provides for Lloyd s, covered by the Lloyd s Act, 1871 of the UK, to be treated as a foreign company. The Statement of Objects and Reasons specifies one of the aims of the Bill as being to facilitate entry of Lloyd s of London in insurance business in India Lloyd s is not a company but an insurance market, established as a society and comprised of members, who are distinct legal entities in their own right. It is the members, rather than Lloyd s itself, who bear the risks of any policies written. While the Bill allows for the entry of Lloyd s, it is unclear as to whether the individual members will also be allowed to practice in the country. In India, the Insurance Act, 1938 currently defines an insurer to include persons in India who have contracts with Lloyd s underwriters. Lloyd s is regulated by the Financial Services Authority, which regulates financial services in the UK. In China, Lloyd s has a license only for reinsurance and operates through a wholly owned subsidiary, incorporated as a company. 6 In the US, Lloyd s is an accredited reinsurer in all states. Capital Requirements: The Bill requires life and general insurers to have a minimum capital of Rs 100 crore. Health insurers are required to have a minimum capital of Rs 50 crore. The Bill does not give any flexibility to the regulator to revise capital requirements upward over time. This regulatory structure for insurers differs from that for banks. The Banking Regulation Act, 1949 allows the RBI to license banks who fulfill conditions imposed on them by the central bank.6 The Act gives broad guidelines as to what those conditions should be but leaves it to the central bank to impose specific conditions, including minimum capital norms, without needing to seek parliamentary approval. The Insurance Act and Life Insurance Corporation(LIC): The state-owned LIC is incorporated under the LIC Act, 1956 and is the country s largest life insurer. The IRDA Act, 1999 did away with LICs exclusive privilege to carry on life insurance in the country and applied all the provisions of the Insurance Act, 1938 to LIC. 7 However, unlike other life insurers in the country, all policies issued by LIC are guaranteed by the government. LIC currently does not meet the minimum capital requirement of Rs 100 crore specified in the Insurance Act as its paid up equity capital is Rs 5 crore. The Life Insurance Corporation (Amendment) Bill, 2008, introduced in December last year in the Lok Sabha provided for an increase in LICs capital to Rs 100 crore. It also allowed for the government to specify the extent 6 Lloyd s Annual Report, 2008, p. 27: 7 Section 30 A of Insurance Act,

15 to which it guarantees policies issued by LIC. However the Bill will lapse with the dissolution of the 14 th Lok Sabha. Divestment by Indian Promoters : The IRDA Act, 1999 amended the Insurance Act, requiring Indian promoters to reduce their stake to 26% within ten years. The Bill does away with this requirement. The Reserve Bank of India requires promoters of private sector banks to reduce their stake to 40% within one year.8 The RBI, at its discretion, can allow promoters to dilute their stake over a longer period. Assignment and Transfer of Policies : The Bill provides for a policyholder to assign or transfer their rights under a policy, either completely or only partly, to a third party. A basic requirement for any policy of life insurance to be issued is that of insurable interest i.e. whether the person who enjoys all rights under the policy also has an interest in the insured person remaining alive. If a policyholder sells the policy, it is unclear whether the new buyer is also required to have insurable interest. The Mumbai High Court has ruled that while insurable interest must exist when the policy is first taken, it is not necessary for such interest to exist when rights in the policy are subsequently transferred to a third party. It ruled that such assignments are legal in India. The case is currently facing appeal in the Supreme Court. 8 Internationally, the ability to completely assign all rights under a policy to a third party has led to a secondary market for life insurance policies. Policies can be sold for a price which is lower than the face value of the policy but higher than the surrender value. The buyer pays the remaining premiums on the policy and is entitled to the sum paid by the insurer when the insured person dies or the policy matures. India does not have laws which specifically regulate the secondary market in insurance policies. The Bill allows an insurer to decline to recognise the transfer of rights of a life policy to a third party. While this is in line with recommendations made by the Law Commission, it could deter the growth of a secondary market in such policies. The K.P. Narasimhan Committee had suggested that IRDA be given the power to regulate such transfers of rights. 8 LIC of India vs. Insure Policy Plus Services and others. Special Leave Petition (Civil) No of

16 Law Commission and the K.P. Narasimhan Committee Report: Grievance Redressal System: Policyholders with complaints can approach the consumer courts or insurance ombudsmen. Such ombudsmen are appointed based on recommendations made by a committee consisting of the chairpersons of IRDA, LIC, General Insurance Corporation and a representative of the central government. This creates the possibility of a conflict of interest. In comparison, ombudsmen in the banking sector are appointed by a committee comprising the deputy governors of the Reserve Bank of India and a representative of the finance ministry. The Law Commission found the ombudsmen system in insurance unsatisfactory and said that alternative fora such as the Consumer Courts were also ineffective given the large backlog of cases still pending. It proposed that amendments be made to the Insurance Act to put in place an independent Grievance Redressal Authority (GRA) with all powers and functions of a civil court and composed of judicial and technical members. It proposed that existing cases in consumer courts be transferred to the GRA. The K.P. Narasimhan Committee disagreed, saying that consumer courts were more easily accessible than a GRA would be. Further, it was not clear whether consumer courts were so overburdened as to be unable to handle complaints by policyholders. It suggested instead that the existing system be continued with some changes. The Bill does not provide for an independent GRA. Appeals Procedure: The Bill provides for appeals against decisions by IRDA to lie with the Securities Appellate Tribunal (SAT), set up under the SEBI Act, This is in line with recommendations made by the K.P. Narasimhan Committee. Since SAT currently deals with issues related to the capital markets only, its expertise in dealing with matters of insurance law may be limited. The committee had suggested that amendments be made to the SEBI Act to provide for the appointment of a member with a background in insurance. This recommendation has not been implemented. The Law Commission had suggested a separate appellate authority for the insurance industry, which would hear appeals against decisions by IRDA or the GRA. Appeals against decisions by the proposed Insurance Appellate Authority (IAT) would lie directly with the Supreme Court. 16

17 Status of Other Recommendations made by Law Commission: Topic Recommendation Status Simplification of laws Suggested the merger of a number of key provisions of IRDA Act with Insurance Act Not implemented. Cancellation of Policy Insurer should be allowed to challenge a policy on grounds of misstatements/suppression of facts or fraud within 5 years. No challenge to be allowed on any grounds after 5 years. Nomination of policies Allow policyholders to distinguish between beneficiary and collector nominees As recommended. As recommended. Penalties Increase penalties for violation of investment norms, or obligations towards rural /social sectors or vulnerable sections. As recommended. Sources: Insurance Laws (Amendment) Bill, 2008; PRS; Law Commission Report. Status of Other Recommendations made by K.P. Narasimhan Committee : Topic Recommendation Investments Minimum of 25% of investible funds in government securities and a further 25% in government/approved securities. Types of approved investments to be specified in regulations. Specify limits on non-approved As recommended. Types of approved investments to be specified in regulations. Act 17

18 investments in regulations specifies a maximum limit of 15% on nonapproved investments. Capital Requirements Minimum capital of Rs 100 crore prescribed for life and general insurers and Rs 200 crore for general insurers. Minimum capital for health/agricultural insurance to be specified in regulations As recommended. Act prescribes minimum capital of Rs 50 crore for health insurers Solvency Specify valuation norms for assets/ liabilities in regulations. Every insurer to maintain an excess of assets over liabilities of 50% of minimum capital Actuaries Insert provision in the Insurance Act which makes it mandatory for every insurer to appoint an actuary. As recommended. Not implemented. Currently required by IRDA regulations Powers of Statutory Councils Shift power to set rates and terms from Tariff Advisory Council to General Insurance Council. Bring TAC under the General Insurance Council. TAC done away with. Powers of General Insurance Council left unchanged Insurance Agents Do away with licensing of insurance agents while allowing IRDA to specify minimum qualifications. Entrust insurers with the power to appoint agents. As recommended. Cancellation of Policy No change to Act Window within which policy can be cancelled on grounds of Misstatement/suppress ion of facts or fraud expanded to five years from two. However, 18

19 policy cannot be challenged on any grounds after five years. Sources: Insurance Laws (Amendment) Bill, 2008; K.P. Narasimhan Committee; Conclusion & Suggestions: Law is dynamic in nature. It should change with the need of time. Amendment is a mode to modify the existing law in consonance with the changing scenario. As now we are in the era of globalisation, where every step of modification in the existing law not only affects the countrymen but also have a deep impact in the foreign markets. After the beginning of liberalisation, a step to open the domestic market to the foreign players and a way ahead towards industrilisation, the policies and the laws made by the government have somewhere motive to boost up the process of liberalisation but the ultimate lies in the very content of these laws and policies which is to promote social security, upgrade the living standard and to strengthen the economy of the country. Even a cursory reading of the above amendment makes it clear the purpose of this amendment is to privatize the General Insurance Corporation and the four companies. The General Insurance Corporation and the four public sector companies have been performing admirably well. While doing business, they have never neglected the social objectives of the public sector. They have a number of schemes catering to the needs of the rural and social sectors. The General Insurance Corporation is very sound financially. It has a large asset base and reserves. It is capable of meeting the capital needs through internal resources. Similarly, the four companies are also financially very sound. They have been regularly generating profits and making huge dividend pay outs to the government. Therefore, these national institutions do not require approaching the capital markets to raise funds for their expansion. Privatising these successful institutions does not serve any national interest. Rather than this measure to privatize, the government must seriously consider the merger of the four companies into a single monolithic corporation on the lines of LIC as suggested by the Parliamentary Committee on Public Undertakings. This would help them to serve the social and rural sector and fulfill the objectives of a public sector with greater amount of success. The major amendment that is being proposed is to increase the foreign equity participation to 49 percent from the present 26 percent. It is being argued that insurance business being capital intensive, the Indian partners lack resources to expand the business. 9 The other arguments are that hike in FDI would bring technology, enable product innovation and generate resources for

20 infrastructure development. 10 These arguments are in total variance with the actual experiences since the opening up of the insurance sector and therefore do not stand test of reasoning. The argument that Indian partners are short of resources is simply unacceptable. It is known that many of the private insurance companies are subsidiaries of flagship corporate houses such as Tatas, Birlas and Reliance which have extremely strong balance sheets, ready access to financial markets and healthy capital reserves. In the recent period, we have seen that the Indian Corporate houses have invested heavily abroad to acquire foreign companies. Acquisition of Corus by Tatas is just an example. Therefore the argument that Indian partners in the insurance companies lack resources to meet the needs of their business just cannot be true. The Indian insurance industry is highly developed and technology adopted sector. In fact LIC has the highest technology spend in the entire country and is in possession of the best possible technology. Therefore, hike in FDI is not required for technology import. The Indian insurance industry has a large number of products designed to suit the needs of every section of population and there are continuous innovation of products to benefit the customers. Even on this count, there is absolutely no need for FDI.. The hike in FDI would allow foreign capital to gain greater access and control over our domestic savings. This surely cannot be in national interests. Insurance industry plays the important role of providing security to the policyholders and converting the small savings into capital for investment in critical infrastructure sector. At a time when the government has to make heavy investments in infrastructure to create domestic demand, the savings mobilized through insurance play a very important role. Therefore, the government must gain total control over the domestic savings rather than allowing the foreign capital to use them for their speculative endeavors. Though every amendment made in the law is to curb the follies lies in it. The actual test of the effectiveness of any amendment lies in the implementation of the law as it shows that how far it is competent to check the previous flaws and to boost up the economy of the country. Since the present bill is still to lie on the floor of the Lok Sabha and also the report of Parliament Standing Committee is awaited, we just hope for the best from the present analysis that the Bill will serve its purpose and achieve its object (29/10/2011) 20