insurance laws

In this article, Harshal Joshi who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses recent Insurance laws reforms in India.

Introduction

  • Insurance sector is one among those sectors which have seen great growth since independence. Regulation of insurance business dates back to 1818 with establishment of Oriental Insurance Company.[1] At that time, the subject matters with which insurance sector dealt with were really restricted. Now the spectrum has expanded and various kinds of insurance like fidelity insurance, crop insurance, etc have added to the list.
  • This industry has developed gradually from being a nationalized industry to allowing involvement of private players and foreign direct investment. In order to regulate the insurance business, Insurance Regulatory and Development Authority (hereinafter to be referred as “IRDA”) was established.
  • In this article, the researcher has dealt with the reforms which the Insurance Laws (Amendment) Act has introduced. In March 2015, Insurance Laws (Amendment Act) was passed. This amendment act amended the Insurance Act, 1938, the General Insurance Business (Nationalisation) Act, 1972 and the Insurance Regulatory and Development Authority Act, 1999.
  • The first part of the article briefly deals with the journey which the amendment bill has traversed in order to get passed by both the houses of the parliament, get the assent of the president and become an act.
  • The latter parts deal with the various provisions it has amended like raising the cap on foreign direct investment, substantial increase in the penalties, making SAT the appellate tribunal, etc. The researcher has tried to provide a holistic view of these reforms.

Journey of passing the Amendment Act

This amendment act has brought out the reforms which had been almost waiting for a decade. While discussing the 2004-05 Union Budget, Mr. P. Chidambram, finance minister in UPA government, announced the plan to increase the foreign direct investment cap in insurance to 49% from 26%.[2] In 2005, a committee headed by Mr. KP Narasimhan was formed in order to suggest amendments to existing insurance laws. Finally, in December, 2008, the Insurance Laws (Amendment) Bill, 2008 was introduced in the upper house by the UPA government. The Bill was referred to the Standing Committee on Finance. Post general elections in September, 2009, the bill was once again referred to a newly constituted Standing Committee. This committee took almost two long years to submit its report on the matter concerned. This committee led by Yashwant Sinha (former finance minister) recommended that raising FDI limit in insurance sector was not a feasible idea.[3]

In July, 2014 with the new government at the center, the entire process of bringing in reforms in insurance sector started again. In July, 2014, NDA government after making certain amendments in the 2008 Bill circulated it in the Parliament, with raising FDI to 49% as a crucial part of the Bill. In August, the Bill was referred to the Select Committee of Rajya Sabha. Due to certain reasons, the report which was to be submitted in first week of the winter season got delayed. As the Bill was taking considerable amount of time to pass due to strong opposition in Rajya Sabha, the Union Cabinet approved the ordinance to pass the insurance law reforms. With the President’s sign, the cap of foreign direct investment in the insurance sector was raised to 49%. On March 4, 2015, the Lok Sabha passed the Insurance Laws (Amendment) Bill, 2015[4] and around a week later on March, 2015, the Rajya Sabha also passed the bill, with which the parliament passed the bill and became an act by getting president’s assent on March 20, 2015.

Foreign investment in Insurance sector

  • The act increases the cap on foreign investment in insurance companies from 26% to 49%.[5] This foreign investment can include both foreign direct investment and portfolio investment.[6] The justification which is provided for increasing the allowed foreign investment is that “Insurance is a capital-intensive industry.
  • The insurance companies need to provide for future claims. If we provided legislative assurance and stability, foreign capital will come in which will help in expanding the insurance coverage in the country,” as per Jayant Sinha (then Ministry of Finance, State).[7]
  • It has been pointed out by various analysts that this 49% composite cap (FDI and portfolio) will have threefold benefit, firstly, in case of joint ventures, it will allow the foreign partners to increase their stake.
  • Secondly, it will open the insurance sector to new insurance companies.
  • Thirdly, will help the domestic promoters who have been restricted by cash consideration to trade-off their stake to private equity or in favor of other investors.[8] The amendment has been brought in a manner that the company still needs to be owned and controlled by Indian.
  • The control here denotes what is meant by control in general parlance in corporate field that is control over appointment of majority of directors, policy or management decisions, etc.[9] On October 19, 2015, IRDA issued guidelines to clarify the meaning of the phrase “Indian owned and controlled”.[10]

Health Insurance

  • Health insurance is one of the crucial sub-set of the insurance sector in India but it was not defined uptil now.[11]
  • The amendment act has carved it out as a special category and has provided it a separate definition which is “the effecting of contracts which provide for sickness benefits or medical, surgical or hospital expense benefits, whether in-patient or out-patient travel cover and personal accident cover”.[12]
  • The amendment act also specifies that as in case of life insurance or general insurance, the requirement of minimum paid up equity share capital for the purpose of running health insurance business is also INR 1 billion. Earlier, when 2008 Bill was introduced, the minimum paid-up equity share capital was supposed to be INR 50 crores.[13]
  • But in order to bring the health insurance business at par with life and general insurance, it has been increased to INR 100 crores.

Shareholding pattern

The bill brings in a huge change by vesting power with IRDA to allow the insurance companies to raise capital through other forms (in addition to equity share capital) as per the approval of the authority. Prior to the amendment, only equity share capital were allowed to be issued by the insurance companies. Keeping in consonance with the basic fundamentals of companies law, the voting right (even after the amendment) will be only given to the equity shareholders.[14]

The amendment act has omitted section 6AA of the Insurance Act, 1938. Section 6AA(1) stated that,

“No promoter shall at any time hold more than twenty-six percent or such other percentage as may be prescribed, of the paid-up equity capital in an Indian insurance company.”.

Beyond ten years from the date of commencement of business, no promoter was allowed to keep a shareholding of more than 26%. The amendment act has omitted this section which means that even after ten years of commencement of business; a promoter can hold more than 26% (even upto 100%) of shares in the business. When this amendment was proposed in 2008 Bill, the standing committee had recommended against the omission of this section as according to the standing committee, this section allows (rather mandates) diversification of ownership of business.[15]

Restrictions on sanction of loans and advances by insurers

Prior to the amendment, Section 29 of the Insurance Act, 1938 prohibited loans or any kinds of advances to the insurance agents (other than a highly restricted list) which did not exceed  previous year’s renewal commission, “with the overall ceiling of loans or advances restricted to a very nominal sum of One hundred rupees”. In addition to this, any other kind of loans was also generally prohibited. This section came as an obstruction in general process of doing business as it prohibited even general loans to vendors or agents who were required as part of the functioning of business.

The 2015 amendment act has substituted Section 29 with a new section which provides for approval of loans and advances but as per the norms which can be or are to be specified by the Insurance Regulatory and Development Authority and on the basis of the scheme which needs to be duly approved by the board of directors of the insurer.[16] This amendment provides for liberalization of the highly restricted section and provision.

Enables partial assignment of policy

The Insurance Laws (Amendment) Act, 1938 has amended the Section 38 of the Insurance Act, 1938. Prior to amendment this section only allowed the transfer of policy in toto. The amended section allows partial assignment which means “assigning a part of interest in a life insurance policy”. This partial assignment comes with the restriction that the holder of this partial assignment “won’t be entitled to further assign or transfer the residual amount payable under the same policy”.[17]

Foreign re-insurer

Section 2(9) of the Insurance Act, 1938 has been amended and the definition of insurer includes “(d) a foreign company engaged in re-insurance business through a branch established in India. Explanation.—For the purposes of this sub-clause, the expression “foreign company” shall mean a company or body established or incorporated under a law of any country outside India and includes Lloyd’s established under the Lloyd’s Act, 1871 (United Kingdom) or any of its Members”. The amendment act allows the foreign re-insurance companies to directly operate their re-insurance business in India through branch offices registered with Insurance Regulatory and Development Authority. Qualification, as provided in the explanation, will be applicable.[18]

Insurance agents and commission

The amended Section 40 of the Insurance Act, 1938 provides that,

“Insurers are prohibited from paying any remuneration to any person other than an insurance agent or an intermediary for soliciting or procuring insurance business in India and outside of the prescribed manner”.

In addition, the intermediaries or the insurance agents and intermediaries are mandated to ensure that the commission they receive and the contracts pursuant to the policies should be as per the regulations promulgated.[19]

The amendment act has omitted Section 44 which provided that “an insurance company cannot deny payment of renewal commission after termination, if an insurance agent has served for five years with an insurer. If the agent has completed 10 years, such entitlement to renewal commission after termination vests only if the agent, after termination, does not work directly or indirectly with any insurer. Such renewal commission is payable to the legal heirs of deceased insurance agent after his death”. When this omission was suggested by the 2008 amendment bill, the standing committee proposed for retention of this section as according to it, it works for the interest of a large number of agents. But the section was finally omitted, because “while compensation is paid after termination, the policyholders are not serviced resulting in lapsation”.[20]

Section 45, policy not to be called in question on ground of misstatement after three years

Globally, insurance contracts are considered to be the contracts made in utmost good faith i.e. “uberimma fides”. What we mean by utmost good faith is that you won’t conceal anything and as a customer are obligated to disclose all the required details to the best of your knowledge, e.g., health condition, income sources, etc. The disclosure helps the insurance company in effectively assessing the risk involved under the policy cover and in consequently fixing the premium. Prior to the amendment, Section 45 of the Insurance Act, 1938 do not allow the insurance company to deny the claim made after two years from the date when the policy came into effect.

There are three exceptions to this policy which are

  • such mis-statement or concealment was made on a material fact,
  • that it was fraudulently made by the policyholder and that
  • the policyholder knew at the time of making it that the statement was false or was material to disclose”.

The 2008 Bill recommended that the insurer should not be allowed to deny the claim if the claim was made after five years from the date of policy coming into effect, irrespective of the conditions involved. This means even if the fraudulent statement (or the other two conditions as mentioned above) was made by the policy holder, it won’t affect the claim, if the claim was made after five years from the date when the policy came into effect. The Standing Committee had recommended three years term instead of five years term. The 2015 amendment act has reduced it to three years. Therefore, now if a claim is made under an insurance policy after three years from the taking of policy, the insurance company won’t have the right to repudiate it under any condition whatsoever.[21]

Penalties for violations

The amendment act has considerably increased the penalties for violation of the provision of the Act. A few examples are, as per Section 102, if a company doesn’t comply with directions of IRDA, the penalty has been substantially increased from Rupees Five Lakhs to Rupees One Lakh for each day or Rupees One Crore, whichever is less.

A new section, section 2CB has been introduced which states that

  1. No person shall take out or renew any policy of insurance in respect of any property in India or any ship or other vessel or aircraft registered in India with an insurer whose principal place of business is outside India save with the prior permission of the Authority.
  2. If any person contravenes the provision of sub-section (1), he shall be liable to a penalty which may extend to five crore rupees.” The amount of penalty is substantially high.

For a lot of other provisions, the penalty for violation or non-compliance has been substantially increased. The Standing Committee had recommended to reduce the penalty but this suggestion has not been incorporated as higher penalties are considered to have more deterrent effect.

Appellate authority: Securities Appellate Tribunal

The amendment act has made Securities Appellate Tribunal (SAT) as the appellate authority to the Insurance Regulatory and Development Authority.[22] The issue which is required to be kept in mind is that the experts sitting at SAT should have sufficient knowledge about insurance sector so that they can deal with the issues in an effective fashion.

Insurance Regulatory And Development Authority

Earlier, Section 3A of the Insurance Act, 1938 required for annual renewal of registration of insurance company.[23] The amended section mandates just for annual fee and no annual renewal is required. Therefore, it provides for permanent registration of the companies. IRDA has the power to suspend or cancel such registration under certain stipulated conditions.

Section 3(2) of the Insurance Registration Act, 1938 has been amended and the requirement of depositing a certain amount with Reserve Bank of India for the purpose of the registration of the company has been removed. Now, they will just have to fulfill whatever will be prescribed by the regulations. Though this requirement has been removed, the company will have to maintain a solvency margin as provided by the IRDA.

The amendment act has added Section 32D which states that “Every insurer carrying on general insurance business shall, after the commencement of the Insurance Laws (Amendment) Act, 2015, underwrite such minimum percentage of insurance business in third party risks of motor vehicles as may be specified by the regulations”.  The act has given the power to IRDA to exempt any insurer who is primarily engaged in the “business of health, re-insurance, agriculture, export credit guarantee”.

The amendment act has substituted Section 40B and 40C of the Insurance Act, 1938 and the new sections provide that management expenses of any insurance company should not exceed the limits which would be prescribed by IRDA and the details of the management expenses will be provided to IRDA as per the regulations promulgated.

Conclusion

The process of amending the insurance laws started way back in 2008 with the introduction of Insurance Laws (Amendment) Bill, 2008. The process finally culminated with the passing of Insurance Law (Amendment) Act, 2015. This amendment act has raised the cap on foreign direct investment in insurance sector from 26% to 49% allowing for more capital flow in insurance sector which is a capital intensive industry. In order to make the sector more effective, a lot of procedure from the Insurance Act have been omitted and IRDA is given the authority to formulate regulations for the same. Provision for providing loans and advances to agents has been diluted a little and made less restrictive. By amending Section 45, it is mandated for the insurer to provide for the claim if it is made after three years from the date when the policy became effective. It has also allowed foreign re-insurers with their branches registered with IRDA to do business in Indian territory. It has substantially increased the penalties as higher penalty has more deterrent effect. In order to provide a better grievance redressal system, Securities Appellate Tribunal has been made the appellate authority to IRDA’s order. According to the researcher, these reforms will boost the insurance sector in India, will lead to effective regulation of the sector and hence, will be beneficial for both insurance companies as well as the customers taking insurance policies.

References

[1] Avinash Singh, History of Insurance Legislation in India, available at http://www.manupatra.com/roundup/338/Articles/HISTORY%20OF%20INSURANCE%20LEGISLATION.pdf (Last visited on March 28, 2017).

[2] Purabi Bora, Insurance Bill: Then and Now, the financial express (March 13, 2015), available at http://www.financialexpress.com/money/insurance/insurance-bill-then-and-now/53159/ (Last visited on March 28, 2017).

[3] Purabi Bora, Insurance Bill: Then and Now, the financial express (March 13, 2015), available at http://www.financialexpress.com/money/insurance/insurance-bill-then-and-now/53159/ (Last visited on March 28, 2017).

[4] Insurance Laws (Amendment) Bill, 2015 passed by Lok Sabha, the economic times (March 4, 2015),  available at http://economictimes.indiatimes.com/news/politics-and-nation/insurance-laws-amendment-bill-2015-passed-by-lok-sabha/articleshow/46457317.cms (Last visited on March 28, 2017).

[5] Vineet Ahuja and Uday Opal, India: Insurance Reforms Regulatory Update, (September 14, 2015), available at http://www.mondaq.com/india/x/426758/Reinsurance/Insurance+Regulatory+Reforms+Update (Last visited on March 28, 2017).

[6] Section 3(iv) of Insurances Law (Amendment) Act, 2015.

[7]  Remya Nair, Parliament passes insurance bill in a major boost to Modi’s reform agenda, livemint (March 13, 2015), available at http://www.livemint.com/Politics/p78kNkYr1XPA92LXLUwoBP/Insurance-Bill-passed-in-Rajya-Sabha.html (Last visited on March 28, 2017).

[8] Remya Nair, Parliament passes insurance bill in a major boost to Modi’s reform agenda, livemint (March 13, 2015), available at http://www.livemint.com/Politics/p78kNkYr1XPA92LXLUwoBP/Insurance-Bill-passed-in-Rajya-Sabha.html (Last visited on March 28, 2017).

[9] Haigreve Khaitana and Anuj Shah, Insurance Reforms Notified (January 20, 2015), available at http://www.mondaq.com/india/x/367122/Insurance/Insurance+Reforms+Notified (Last visited on March 28, 2017).

[10] Phoenix Legal, Insurance Newsletter-October, 2015, (July 6, 2016), available at http://www.mondaq.com/india/x/505580/Insurance/INSURANCE+NEWSLETTER+OCTOBER+2015 (Last visited on March 28, 2017).

[11] Jyoti Srivastav, New Amendment Bill in Insurance Sector, XVI PSALEGAL 1, 1 (January 2014).

[12] Section 6, Insurance Act, 1938.

[13] The Insurance Laws (Amendment) Bill, 2008, available at http://www.prsindia.org/billtrack/the-insurance-laws-amendment-bill-2008-78/ (Last visited on March 28, 2017).

[14] Section 6A, Insurance Act, 1938.

[15] CL Baradhwaj, Key Changes Proposed by the Insurance Laws (Amendment) Bill, 2008, available at http://www.indiainfoline.com/article/news-top-story/key-changes-proposed-by-the-insurance-amendment-bill-2008-113110106176_1.html  (Last visited on March 28, 2017).

[16] Section 29, Insurance Act, 1938 (post amendment).

[17] Section 38(11), Insurance Act, 1938 (post amendment).

[18] Phoenix Legal, Insurance Newsletter- April, 2015, (June 30, 2016), available at http://www.mondaq.com/india/x/504704/Insurance/insurance+newsletter+april+2015 (Last visited on March 28, 2017).

[19] Section 40, Insurance Act, 1938 (post amendment).

[20] CL Baradhwaj, Key Changes Proposed by the Insurance Laws (Amendment) Bill, 2008, available at http://www.indiainfoline.com/article/news-top-story/key-changes-proposed-by-the-insurance-amendment-bill-2008-113110106176_1.html  (Last visited on March 28, 2017).

[21] Diwya Baweja, Insurance in 2016, india today money (December 17, 2015), available at http://indiatoday.intoday.in/money/story/insurance-in-2016/1/549520.html (Last visited on March 28, 2017).

[22] Press Information Bureau, Major Highlights of the Insurance Laws (Amendment) Bill, 2015 Passed by Parliament, (March 13, 2015), available at http://pib.nic.in/newsite/PrintRelease.aspx?relid=117043 (Last visited on March 28, 2017).

[23] Section 3A, Insurance Act, 1938.

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