CHAPTER-1

INTRODUCTION
Insurance Regulatory and Development Authority of India (IRDAI) is an autonomous
apex statutory body which regulates and develops the insurance industry in India. It
was constituted by a Parliament of India act called Insurance Regulatory and
Development Authority Act, 1999 [2][3] and duly passed by the Government of India.
The agency operates from its headquarters at Hyderabad, Telangana where it shifted
from Delhi in 2001. IRDA batted for a hike in the foreign direct investment (FDI)
limit to 49 per cent in the insurance sector from the erstwhile 26 per cent.[6] The FDI
limit in insurance sector was raised to 49% in July 2014.
A statutory authority as an autonomous body was established under the provision of
Insurance regulatory and development authority, by the Government of India with the
objective of regulating, directing and controlling the Insurance sector for ensuring
smooth functioning of the Insurance sector in India. This authority is called as
"Insurance Regulatory and development Authority" Which came into existence with
effect from 1st April 2000. The IRDA being a National agency of the Government of
India, there are numerous arrangements for taking corrective steps as to incorporate
the emerging requirement of the Insurance sector in India.
Insurance Regulatory and development Authority is an autonomous and statutory
authority established by the Government of India, which has been provided whole
authorities of the Controller of Insurance in order to regulate. Control and direct the
different activities of the Insurance sectors in India. IRDA is engaged is bringing
reforms in the different parts of the Insurance sector in India by way of regular
monitoring, directing and controlling over different activities of the Insurance sector
at the different places across the country, which can be directly observed by
comparing in the previous scenario of the Indian Insurance sector to the present
scenario. Insurance industry is an important and integral component of the macro
economy. It has emerged as a dominant institutional player in the financial market
impacting the health of economy. It has multi-dimensional role in savings and capital
market, while the primary role of an insurance company is to provide insurance
coverage for managing financial risks, it plays a very crucial role in promoting
savings by selling a wide range of products and also actively contributes in promoting
and sustaining the capital market of a country. Insurance sector has micro and macro

1
effects on the economy. The micro effects are on individual safety, investments,
savings perspective, and contribution to growth of economy. The macro effects are
financing infrastructure, promoting investments, contribution to capital formation,
financial leveraging and accessing resources.

1.1 HISTORY OF INSURANCE IN INDIA

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
( Manusmrithi ), Yagnavalkya (Dharmasastra ) and Kantilla ( Arthasastra ). The
writings talk in terms of pooling of resources that could be re-distributed in times of
calamities such as fire, floods, epidemics and famine. This was probably a precursor
to modern day insurance. Ancient Indian history has preserved the earliest traces of
insurance in the form of marine trade loans and carriers’ contracts. Insurance in India
has evolved over time heavily drawing from other countries, England in particular.
1818 saw the advent of life insurance business in India with the establishment of the
Oriental Life Insurance Company in Calcutta. This Company however failed in 1834.
In 1829, the Madras Equitable had begun transacting life insurance business in the
Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the
last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental
(1874) and Empire of India (1897) were started in the Bombay Residency. This era,
however, was dominated by foreign insurance offices which did good business in
India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe
Insurance and the Indian offices were up for hard competition from the foreign
companies.
In 1914, the Government of India started publishing returns of Insurance Companies
in India. The Indian Life Assurance Companies Act, 1912 was the first statutory
measure to regulate life business. In 1928, the Indian Insurance Companies Act was
enacted to enable the Government to collect statistical information about both life and
non-life business transacted in India by Indian and foreign insurers including
provident insurance societies. In 1938, with a view to protecting the interest of the
Insurance public, the earlier legislation was consolidated and amended by the
Insurance Act, 1938 with comprehensive provisions for effective control over the
activities of insurers.

2
The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there
were a large number of insurance companies and the level of competition was high.
There were also allegations of unfair trade practices. The Government of India,
therefore, decided to nationalize insurance business.
An Ordinance was issued on 19 January 1956 nationalising the Life Insurance sector
and Life Insurance Corporation came into existence in the same year. The LIC
absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245
Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the
Insurance sector was reopened to the private sector.
The history of general insurance dates back to the Industrial Revolution in the west
and the consequent growth of sea-faring trade and commerce in the 17th century. It
came to India as a legacy of British occupation. General Insurance in India has its
roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in
Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This
was the first company to transact all classes of general insurance business.
1957 saw the formation of the General Insurance Council, a wing of the Insurance
Associaton of India. The General Insurance Council framed a code of conduct for
ensuring fair conduct and sound business practices.
In 1968, the Insurance Act was amended to regulate investments and set minimum
solvency margins. The Tariff Advisory Committee was also set up then.
In 1972 with the passing of the General Insurance Business (Nationalization) Act,
general insurance business was nationalized with effect from 1 January 1973. 107
insurers were amalgamated and grouped into four companies, namely National
Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental
Insurance Company Ltd and the United India Insurance Company Ltd. The General
Insurance Corporation of India was incorporated as a company in 1971 and it
commence business on January 1sst 1973.
This millennium has seen insurance come a full circle in a journey extending to nearly
200 years. The process of re-opening of the sector had begun in the early 1990s and
the last decade and more has seen it been opened up substantially. In 1993, the
Government set up a committee under the chairmanship of RN Malhotra, former
Governor of RBI, to propose recommendations for reforms in the insurance sector.
The objective was to complement the reforms initiated in the financial sector. The
committee submitted its report in 1994 wherein, among other things, it recommended

3
that the private sector be permitted to enter the insurance industry. They stated that
foreign companies be allowed to enter by floating Indian companies, preferably a
joint venture with Indian partners.
Following the recommendations of the Malhotra Committee report, in 1999, the
Insurance Regulatory and Development Authority (IRDA) was constituted as an
autonomous body to regulate and develop the insurance industry. The IRDA was
incorporated as a statutory body in April, 2000. The key objectives of the IRDA
include promotion of competition so as to enhance customer satisfaction through
increased consumer choice and lower premiums, while ensuring the financial security
of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application
for registrations. Foreign companies were allowed ownership of up to 26%. The
Authority has the power to frame regulations under Section 114A of the Insurance
Act, 1938 and has from 2000 onwards framed various regulations ranging from
registration of companies for carrying on insurance business to protection of
policyholders’ interests.
In December, 2000, the subsidiaries of the General Insurance Corporation of India
were restructured as independent companies and at the same time GIC was converted
into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries
from GIC in July, 2002.
Today there are 28 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and 24 life insurance companies operating in the
country.
The insurance sector is a colossal one and is growing at a speedy rate of 15-20%.
Together with banking services, insurance services add about 7% to the country’s
GDP. A well-developed and evolved insurance sector is a boon for economic
development as it provides long- term funds for infrastructure development at the
same time strengthening the risk taking ability of the country.1

1.2 ORGANIZATIONAL STRUCTURE OR COMPOSITION OF

AUTHORITY

1
The Insurance Regulatory and Development Authority (Insurance Advertisements and Disclosure)
Regulations, 2000, the Principal Regulations were published in the Gazette of India on ……… vide F.
No…………

4
 As per the section 4 of IRDA Act' 1999, Insurance Regulatory and Development
Authority (IRDA, which was constituted by an act of parliament) specify the
composition of Authority.[8] IRDAI is a ten-member body consisting of:[8]
A Chairman,-(T.S. Vijayan)
Five whole-time members,-(R.K. Nair,M. Ram Prasad,S. Roy Chowdhary,D.D.
Singh)
Four part-time members,-(Anup Wadhawan,S.B. Mathur,Prof. V.K.Gupta,CA.
Subodh Kr. Agarwal)
All members are appointed by the Government of India.

1.3. LIST OF CURRENT MEMBERS OF IRDA1

F. No. IRDA/IAC/7/97/2015 - In exercise of the powers conferred by sub section (1)

of Section 25 of the Insurance Regulatory and Development Authority Act, 1999
(41 of 1999), and in terms of Regulation 3A of the Insurance Advisory Committee
(Meetings) Regulations, 2000, the Authority hereby makes the following
notification reconstituting the Insurance Advisory Committee with effect from the
date of notification viz. 25th May 2015.
The reconstituted Insurance Advisory Committee is as under:-
T.S. VIJAYAN, Chairman
1. Chairman, Life Insurance Corporation of India
2. Chairman-cum-Managing Director, United India Insurance Co. Ltd.
3. Chairman-cum-Managing Director, General Insurance Corporation of India
4. MD and CEO, ICICI Prudential LIC Ltd.
5. MD and CEO, Bajaj Allianz GIC Ltd.
6. Chairman-cum-Managing Director, Star Health & Allied Insurance Co. Ltd.
7. Chairman-cum-Managing Director, Agricultural Insurance Co. Ltd.
8. Director, National Insurance Academy
9. Managing Director, Institute of Insurance and Risk Management
10. President, Institute of Actuaries of India
11. President, Insurance Brokers’ Association of India
12. Chief Administrative Officer, United Healthcare Parekh TPA Pvt. Ltd.

1
Insurance Advisory Committee, Ref: IAC , Date: 27-05-2015

5
13. Secretary General, Federation of Indian Chambers of Commerce and Industry
(FICCI)
14. President, Indian Institute of Insurance Surveyors & Loss Assessors
15. Secretary General, National Federation of Insurance Field Workers of India
16. Chairman and Managing Director, Bank of Maharastra
17. Insurance Ombudsman, Guwahati
18. Secretary General, Insurance Institute of India
19. Smt. Rajyalakshmi Rao, Former Member, National Consumer Disputes Redressal
Commission
20. Shri G.N. Agarwal, Actuary
21. Shri Asadulla Pasha, Hyderabad
22. Shri Sesha Bhattar Sreenivasa Chary, Hyderabad
23. Shri M. Kalyanasundaram, Chief Executive, International Network of Alternative
Financial Institutions-India

1.4 FUNCTION OF IRDA

The Insurance Regulatory and Development Authority (IRDA) was constituted to
regulate and develop insurance business and re-insurance business in India. As a key
part of its role, the insurance regulator is responsible to protect the rights of
policyholders. Listed below is a comprehensive picture of duties, powers and
functions of the IRDA.
IRDA provides a certificate of registration to both life and general insurance
company.
IRDA is responsible for the renewal, modification, withdrawal, suspension or
cancellation of this certificate of registration.IRDA frames regulations on protection
of policyholders’ interests.It offers policyholders the right to voice their complaints
against insurance companies.

 The IRDA has set up the grievance redressal cell to take up the complaints of
the policyholder.

 It specifies the requisite qualifications, code of conduct and practical training

for insurance intermediaries and agents.

6
  The regulator promotes efficiency in the conduct of insurance businesses.

 It promotes and regulates activities of professional organisations connected

with life and general insurance.

 It levies fees and other charges to carry out the purposes of the IRDA Act.

 It can call for information from, undertake the inspection of, conduct enquiries
including the auditing of insurers, agents, brokers and other organisations
connected with the business of insurance.

 It specifies the form in which books of account should be maintained and

statements of accounts should be rendered by insurers and other insurance
intermediaries.

 It regulates the investment of funds by insurance companies.

 It regulates the maintenance of margins of solvency.

 It adjudicates disputes between insurers and intermediaries or insurance

intermediaries.

 The regulator specifies the percentage of premium income of the insurer to

finance schemes for the promotion and regulation of certain specified
professional organisations.

 It specifies the percentage of life insurance business to be undertaken by an

insurer in the rural or social sector; and it exercises any other powers as may
be prescribed.

1.5 DUTIES, & POWERS OF AUTHORITY (SECTION 14):

Duties: - The duty of the authority is to control, promote and safeguard orderly
growth of the insurance industry and reinsurance business subject to the provisions of
any other provisions of the act.

7
POWERS TO:-
(1) To protect the interest of the policy holders related to surrender value of policy,
settlement of insurance claims, insurable interest, nomination by policy holders, other
terms & conditions of insurance contract.
(2) In case of General Insurance, who assess the loss of policy holder should be stated
the code of conduct.
(3) Promoting proficiency in the conduct of insurance business;
(4) Promoting and regulating professional organizations connected with the insurance
and re-insurance business;
(5) Calling for information from, undertaking inspection of, conducting inquiries
including audit of the insurers, intermediaries, insurance intermediaries and other
organizations connected with the Insurance business;
(6) Stating the form and manner in which books of account shall be kept and
statement of accounts shall be rendered by insurers and other insurance
intermediaries;
(7) Regulating investment of funds by insurance companies;
(8) Regulating maintenance of margin of solvency i.e., having sufficient funds to pay
insurance claim amount;
(9) To settle the disputes between insurers and intermediaries or insurance
intermediaries
(10) Stating the percentage of life insurance business and general insurance business
to be accepted by the insurer in the rural or social sector; and
(11) Exercising such other powers as may be prescribed.

1.6 ROLE OF INSURANCE REGULATORY AND

DEVELOPMENT AUTHORITY
To safeguard the interest of and secure fair treatment to insurance policy holders
To bring quick and systematic growth of the insurance industry or sector in order to
provide benefits to the common man and also to provide long term funds for
accelerating growth of the economy.
To set, promote, monitor and apply high standards of integrity, fair dealing, financial
viability and capability of those it regulates.

8
To make sure that insurance policy holder receives precise, accurate, clear & correct
information about the products & services provided by insurance companies & also
make customers aware about their duties & responsibilities in this regard.
To ensure quick settlement of genuine claims, to prevent insurance frauds, scams &
other malpractices and put in place operative grievance redressal machinery.
To boost transparency, fairness, and orderly conduct in financial markets dealing with
insurance & build a trustworthy management information system in order to enforce
high standards of financial soundness amongst market players.
To take appropriate actions where such standards do not prevail or are inadequate &
ineffectively enforced.
To bring about optimal amount of self-regulation in day-to-day activities of the
industry reliable with the requirements of prudential regulation.

9
 CHAPTER -2
LIFE INSURANCE SECTOR IN INDIA AN OVERVIEW WITH
IRDA IMPACT
2.1 HISTORY OF LIFE INSURANCE 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 which
granted LIC the exclusive privilege to conduct life insurance business in India. The
concept of insurance laws has been prevalent in India since ancient times.
Subsequently, a comprehensive legislation on insurance was introduced by enactment
of the Insurance Act, 1938.
But the real breakthrough came in 1999 with the passing of the IRDA Act, 1999. This
not only opened the gates for the foreign investors and private players but it also was
the first concrete step taken with the view to protect the interests of the policy holders,
to regulate, promote and ensure orderly growth of the insurance industry. In addition
to the specific insurance laws, various decisions passed by the judiciary bodies have
also been setting the rules for the industry
Recently the Bombay High Court has ruled that life insurance policies can be
traded and assigned freely.1 This judgment is thought to give a boost to the growing
business of assigning insurance policies. However, there have been mixed opinions on
the same. Thus, further amendments to insurance laws would be required to help
bring clarity in many such issues which have arisen due to the complex nature of the
business in today’s world.
The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—
245 Indian and foreign insurers in all.4 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,

10
1952.
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. For example, currently, the LIC has a network of
7 zones, 100 divisions and over 2,000 branches. LIC has over 5,50,000 agents and
over 100 million lives are covered1
THE LIBERALISATION ERA
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 affected 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 1994. Two of the key recommendations of the Committee included the
privatization of the insurance sector by permitting the entry of private players to enter
the business of life and general insurance and also the establishment of an Insurance
Regulatory Authority. The insurance sector is a colossal one and is growing at a
speedy rate of 15-20% p.a.. Together with banking services, insurance services add
about 7% to the country’s GDP. A well-developed and evolved insurance sector is a
boon for economic development as it provides long-term funds for infrastructure
development, at the same time strengthening the risk taking ability of the country.2
1. Lalit Vermani, “The Changing Face of Insurance Law: Going with the Times”,
IRDA Journal, Volume V, No. 11, October, 2007, 26.
2. http://www.irda.gov.in/ADMINCMS/cms/LayoutPages_Print.aspx site visited on
21/03/2012.

11
LIFE INSURANCE IN INDIA: Pre and Post Privatization
When life insurance companies started operating in the middle of 20th century in the
country, the evil play natural to all business had its sway. There was a lot of cut throat
competition as well as profiteering. As a result Life Insurance Corporation of India
(LIC) came into existence on 1st September, 1956 after nationalization of all the 245
companies engaged in life insurance business. However, Government made a
paradigm shift in the economic policy by adopting the process of liberalization,
privatization and globalization at the end of previous decade. From its very inception,
the LIC has made impressive growth LIC has always been striving for further
improvement in the quality of service. Later a committee was set up under the
chairmanship of Mr. Malholtra, Ex-governor of RBI for undertaking various reforms
in the insurance sector in the light of new economic policy. The Committee which
submitted his report in 1993 recommended the establishment of a special regulatory
agency along the lines of SEBI and opening of insurance industry for private sector.
This move was aggressively opposed by the various trade unions then operating in the
insurance industry which led to some delay in implementation of Malhotra
Committee’s recommendations. However, the Government passed Insurance
Regulatory and Development Authority (IRDA) Act in 1999 and established IRDA to
regulate the insurance business in the country. As a result, private sector was allowed
entry both in general and life insurance sector in India. shareholding of private
insurance companies. As a result many foreign companies (both in general and life
insurance) got themselves registered with IRDA to operate in India. Presently, twenty
three life insurance companies are operating in private sector in addition to LIC from
public sector making the total to twenty four.1

GROWTH IN NUMBER OF OFFICES OF INDIAN LIFE

INSURERS
LIC is operating through its five tier organizational structure, namely central office,
zonal offices, divisional offices, branch offices and satellite offices while private life
insurers are operating through two tier organizational structure, namely head office
and branch offices. Increase in number of offices shows expansion of life insurance
industry.

12
The total number of offices of life insurers operating in India increased from 2,199 in
2000-01 to 11,167 in 2011-12, registering a growth rate of 34 percent during the period
under study, while the number of offices of LIC increased from 2,186 in 2000-01 to
3455 in 2011-12, registering a growth rate of 4.58 percent, the number of offices of
private life insurers increased from 13 in 2000-01 to 7,712 in 2011-12. It shows that
private life insurers expanded their business very fast as they had 69.06 percent share
in total number of offices operating in India as on 31.3.2012, while LIC expanded at
slow speed due to its already

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 2.2. REGULATIONS FORMED UNDER IRDA
Insurance Regulatory and Development Authority (Registration of Indian Insurance
Companies) Regulations, 2000 F.No.IRDA/Reg./7/2000.--
In exercise of the powers conferred by section 114A of the Insurance Act, 1938 ( 4 of
1938) read with section 26 of the Insurance Regulatory and Development Authority
Act, 1999 (41 of 1999), the Authority, in consultation with the Insurance Advisory
Committee, hereby makes the following regulations, namely:-
1. Short title and commencement.--(1) These regulations may be called Insurance
Regulatory and Development Authority (Registration of Indian Insurance Companies)
Regulations, 2000.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. Definitions.-In these regulations, unless the context otherwise requires, -
(a) “Act” means the Insurance Act, 1938 (4 of 1938);
(b “Authority” means the Insurance Regulatory and Development Authority
established under sub-section (1) of section 3 of the Insurance Regulatory and
Development Authority Act, 1999 ( 41 of 1999);
(c) “Certificate” means a certificate of registration granted or renewed by the Authority
under these regulations;
(d) “Enquiry officer” means an officer of the Authority or any person specifically
appointed by it to conduct an enquiry for purposes of these regulations;
(e) “General annuity business” means the business of effecting contracts to pay
annuities on human life but does not include contracts under pension business;
(f)“Health insurance business” or “health cover means the effecting of contracts
which provide sickness benefits or medical, surgical or hospital expense
benefits, whether in-patient or out patient, on an indemnity, reimbursement,
service, prepaid, hospital or other plans basis, including assured benefits and
long term care
(g) “Indian promoter “means and includes---
(i) A company formed under the Companies Act, 1956 (1 of 1956), which is not a
subsidiary as defined in section 4 of that Act;
(ii) A banking company as defined in subsection (4A) of section 2 of the Act but does
not include a foreign bank or branch thereof functioning in India;

14
(iii) A Public financial institution as defined in section 4A of the Companies Act,
1956 (1 of 1956);
(iv) A co-operative society registered under any relevant law for the time being in
force;
(v) A person, who is an Indian citizen or a combination of persons who are Indian
citizens;
(h) “Infrastructure facility” means ---
(i) A road, highway, bridge, airport, port, Railways including BOLT, road transport
system, a water supply project, irrigation project, industrial parks, water treatment
system, solid waste management system, sanitation and sewerage system;
(ii) Generation or distribution or transmission of power;
(iii) Telecommunication;
(iv) Project for housing;
(v) Any other public facility of a similar nature as may be notified by the Authority in
this behalf in the Official Gazette;
(i) “Linked business’ means life insurance contracts or health insurance contracts
under which benefits are wholly or partly to be determined by reference to the value
of underlying assets or any approved index;
(j) “Non-linked business” means life insurance contracts or health insurance contracts
which are not linked business;
(k)“Pension business’ includes business of effecting contracts to manage investments
of pension funds or superannuation schemes or contracts to pay annuities that may be
approved by the Authority in this behalf;
(l) “Principal officer” means any person connected with the management of the
applicant or any other person upon whom the Authority has served notice of its
intention of treating him as the principal officer thereof;
(m) All words and expressions used herein and not defined in but defined in the
Insurance Act, 1938(4 of 1938), or in the Insurance Regulatory and Development
Authority Act, 1999 (41 of 1999), shall have the meanings respectively assigned to
them in the those Acts.

Procedure for registration.---(1) An applicant desiring to carry on insurance business

in India shall make a requisition for registration application in Form IRDA/R1.

15
(2)An applicant, whose requisition for registration application has been accepted by
the Authority, shall make an application in Form IRDA/R2 for grant of a certificate of
registration.1
4. Classes of insurance business for which requisition for registration application may
be made.—(1) An applicant shall make a separate requisition for registration
application under regulation 3 for each class of business of insurance.
(2) The classes of business of insurance for which requisition for registration
application may be made are :
(a) Life insurance business consisting of linked business, non-linked business or
both;
or,
(b) General insurance business including health insurance business (or health cover).
5. Requisition for Registration Application.—(1) An applicant shall be eligible to
apply for requisition referred to in sub-regulation (1) of regulation 3, if such applicant
upon registration will be an Indian insurance company as defined in section 2(7A) of
the Act:
Provided that the applicant whose,-
(i) Requisition for registration application has been rejected by the Authority at any
time during the preceding five financial years on the date of requisition for
registration application; or
(ii)Aapplication for registration has been rejected by the Authority at any time during
the preceding five financial years on the date of requisition for registration
application; or
(iii) Certificate of registration has been cancelled or withdrawn by the Authority; or
(iv) Name does not contain the words ‘insurance company’ or ‘assurance company’;
Shall not be eligible to make a requisition for registration application under this
regulation.
(2) Every requisition for registration application shall be accompanied by
(a) A certified copy of the memorandum of association and articles of association,
where the applicant is a company and incorporated under Companies Act, 1956 (1 of
1956);

1
Impact Analysis of IRDA Guidelines . -Gautam Vaidya

16
(b) The name, address and the occupation of the directors and principal officer;
(c) A statement of the class of insurance business proposed to be carried on
(d) A statement indicating the sources that will contribute the share capital required
under section 6 of the Act;
6.Furnishing of further information and clarification, etc.---(1) The Authority may
require the applicant, which makes a requisition under regulation 3, to furnish further
information or clarification regarding the matters relevant to consider the requisition
for registration application.
(2) The applicant referred to in sub-regulation (1) of Regulation 5, if so required, may
appear before the Authority through its principal officer
7. Consideration of requisition for registration application.--- The Authority on being
satisfied that---
(a) The requisition in Form IRDA/R1 is complete in all respects and is
accompanied by all documents required therein;
(b) All information given in the Form IRDA/R1 is correct;
(c) The applicant will carry on all functions in respect of the insurance business
including management of investments within its own organisation;
(d) The applicant submitting requisition for registration application—
(i) Is a bona fide applicant for registration under section 3 of the Act;
(ii) Will be in a position to comply with all the requirements for grant of certificate;
may accept the requisition and direct supply of the application for registration to the
applicant.
8. Rejection of requisition for registration application.—(1) Where the requirements
under regulation 7 are not complied with, the Authority may, after giving the
applicant a reasonable opportunity of being heard, reject the application.
(2) The order rejecting the application under sub-regulation (1) shall be
communicated by the Authority within thirty days of such rejection to the applicant in
writing stating therein the ground on which the application has been rejected.
(3) An applicant aggrieved by the decision of the Authority under sub-regulation (2)
may, within a period of thirty days from the date of such communication, apply to the
Authority for reconsideration of its decision.
(4) The Authority shall consider the application made under sub-regulation (3) and
communicate its decision, as soon as possible, in writing to the applicant.

17
 9.Action upon rejection of application for requisition.—An applicant, whose
requisition for registration application has been rejected, may approach the Authority
with a fresh request for registration application after a period of two years from the
date of rejection, with a new set of promoters and or for a class of insurance business
other than the originally proposed one.
10.Application for registration.—(1) An applicant, whose requisition has been
accepted, may make an application in Form IRDA/R2 for grant of certificate of
registration.
(2) Every application shall be accompanied by--
(a) Documentary proof evidencing the making of deposit required under section 7 of
the Act.
(b) Evidence of having rupees one hundred crore or more paid up equity share capital,
in case the application for grant of certificate is for life insurance business or general
insurance business;
(c) Evidence of having rupees two hundred crore or more paid up equity share capital,
in case the application for grant of certificate is for re-insurance business;
(d) An affidavit by the principal officer and the promoters of the applicant certifying
that the requirements of the first proviso to section 6 of the Act to the effect that paid-
up share capital is adequate after excluding any preliminary expenses incurred in the
formation and registration of the company and the deposit required to be made under
section 7 of the Act have been satisfied;
(e) A statement indicating the distinctive numbers of shares issued to each promoter
and shareholder in respect of share capital of the applicant;
(f) An affidavit by the principal officer and the promoters of the applicant certifying
that the paid up equity capital referred to in sub-clause (b) of clause (7A) of section 2
of the Act, calculated is in accordance with regulation 11 does not exceed twenty six
percent;
(g) A certified copy of the published prospectus, if any;
(h) A certified copy of the standard forms of the insurer and statements of the assured
rates, advantages, terms and conditions to be offered in connection with insurance
policies together with a certificate by an actuary in case of life insurance business that
such rates, advantages, terms and conditions are workable and sound;

18
 (i) A certified copy of the memorandum of understanding entered into between the
Indian promoter and the foreign promoter, if any, or amongst the promoters as a
whole including details of the support comfort letters exchanged between the parties;
(j) The original receipt showing payment of the fee of rupees fifty thousand for a class
of business;

(k) A certificate from a practising chartered accountant or a practising company secretary

certifying that all the requirements relating to registration fees, share capital, deposits,
and other requirements of the Act have been complied with by the applicant;
(l) Any other information required by the Authority during the processing of the
application for registration.
11. Manner of calculation of twenty six per cent. equity capital held by a foreign
company.—
(1) For the purposes of the Act and these Regulations, the calculation of the holding of
equity shares by a foreign company either by itself or through its subsidiary
companies or its nominees (hereafter referred to as foreign investor) in the applicant
company, shall be made as under and shall be aggregate of:-
(i) The quantum of paid up equity share capital held by the foreign company either by
itself or through its subsidiary companies or nominees in the applicant company;
(ii) The quantum of paid up equity share capital held by other foreign investors, non-
resident Indians, overseas corporate bodies and multinational agencies in the applicant
company; and
(iii) the quantum represented by that proportion of the paid up equity share capital to
the total issued equity capital of an Indian promoter company mentioned in sub-clause
(i) of clause (g) of regulation 2 held or controlled by the category of persons
mentioned in sub-clauses (i) and (ii) of this sub regulation.
Explanation: For purposes of calculation referred to above, account need not be taken of
the holdings of equity in an Indian promoter company held by foreign institutional
investors, other than the foreign promoters of the applicant and their subsidiaries and
nominees, and Indian mutual funds to the extent the investment of foreign
institutional investors and Indian mutual funds are within the approved limits laid
down by the Securities and Exchange Board of India under its rules, regulations or
guidelines issued from time to time.

19
(2) Every insurer who has been granted registration under the Act shall, within 15 days of
the end of every quarter, furnish to the Authority a statement indicating changes
exceeding 1% of the issued capital in the holding of the shares in his company and
those of the promoter.
(3) Interpretation: The interpretation of this regulation will be that of the Authority, whose
decision on all issues will be binding on all applicants/insurers and will be final.

12. Consideration of Application.-(1) The Authority shall take into account for considering
the grant of certificate, all matters relating to carrying on the business of insurance by
the applicant.
(2) In particular and without prejudice to the generality of the foregoing without in any
manner affecting its freedom, the Authority shall consider the following matters for
grant of certificate to the applicant, namely:-
(a)The record of performance of each of the promoters in the fields of
business/profession they are engaged in;
(b) The record of performance of the directors and persons in management of the
promoters and the applicant;
(c) The capital structure of the applicant company;
(d) the extent of obligation to provide life insurance or general insurance policies to
the persons residing in the rural sector, workers in the unorganised sector or informal
sector or for economically vulnerable or backward classes of the society and other
categories of persons specified by the Authority;
(e) The nature of insurance products;
(f) The planned infrastructure of the applicant company, including branches in rural
areas, to effectively carry out the insurance business;
(g) The level of actuarial and other professional expertise within the management of
the applicant company;
(h) The organization structure of the applicant to meet the requirements of regulation
7(c).
(i) Other relevant matters for carrying out the provisions of the Act.
(3) The Authority shall give preference in grant of certificate of registration to those
applicants who propose to carry on the business of providing health covers to
individuals or groups of individuals.

20
13. Rejection of application for registration.—(1) Where an application for
registration is not complete in all respects and does not conform to the regulations or
instructions specified in Form IRDA/R2, and after considering matters referred to in
regulations 12 and 16 and on being satisfied that it is not desirable to grant a
certificate by the Authority, by an order, may reject the application.
(2) The order rejecting the application under sub-regulation (1) shall be
communicated by the Authority within thirty days of such rejection to the applicant in
writing stating therein the ground on which the application has been rejected.

(2) An applicant aggrieved by the decision of the Authority under sub-regulation (2)
may, within a period of thirty days from the date of such communication, appeal to
the Central Government in accordance with sub-section (2C) of section 3 of the Act,
for reconsideration of such decision.
(3) The decision of the Central Government on such appeal shall be final and shall not
be questioned before any Court.
(4) The fees, referred to in clause (j) of sub-regulation (2) of regulation 10, shall not
be refunded.
14.Effect of rejection of application for registration.—An applicant, whose
application for registration has been rejected shall not be entitled to a certificate:
An applicant may approach the Authority with a fresh request for registration after a
period of two years from the date of rejection, with a new set of promoters and or for
a class of insurance business other than the originally proposed one.
15. Manner of payment of fee for registration.- The fee of rupees fifty thousand for
each class of business for registration shall be remitted by a bank draft issued by any
scheduled bank in favor of the Insurance Regulatory and Development Authority
payable at New Delhi.
16. Grant of certificate of registration.— The Authority, after making such inquiry as
it deems fit and on being satisfied that –
(a) The applicant is eligible, and in its opinion, is likely to meet effectively its
obligations imposed under the Act;
(b) The financial condition and the general character of management of the applicant
are sound;
(c) The volume of business likely to be available to, and the capital structure and
earning prospects of, the applicant will be adequate;

21
 (d) The interests of the general public will be served if the certificate is granted to the
applicant in respect of the class of insurance business specified in the application; and
(e) The applicant has complied with the provisions of sections 2C, 5, 31A 32 and 32A
has fulfilled all the requirements of these sections applicable to him,
may register the applicant as an insurer for the class of business for which the
applicant is found suitable and grant him a certificate in Form IRDA/R3.
17. An applicant granted a certificate of registration under the Regulations shall
commence insurance business for which he has been authorized within 12 months of
the date of registration.
Provided, however, that if the company feels that it will not be able to commence the
insurance business within the specified period of 12 months, it can before the time
limit expires, seek an extension, by a proper written application, to the Authority.

18. The Authority on receipt of the request referred to in Regulation 17 will examine
it and communicate its decision in writing either rejecting the request or granting it.
19. No extension of time shall be granted by the Authority beyond 24 months from
the date of grant of registration under Regulation 16.
20. Manner of renewal of certificate. – (1) An insurer, who has been granted a
certificate under section 3 of the Act, shall make an application in Form IRDA/R5 for
the renewal of the certificate to the Authority before the 31st day of December each
year, and such an application shall be accompanied by evidence of the payment of the
fee which shall be the higher of,---
(a) Fifty thousand rupees for each class of insurance business, and
(b)One-fifth of one per cent. of total gross premium written direct by an insurer in
India during the financial year preceding the year in which the application for renewal
of certificate is required to be made, or rupees five crores, whichever is less; (and in
the case of an insurer carrying on solely re-insurance business, instead of the total
gross premium written direct in India, the total premium in respect of facultative
reinsurance accepted by him in India shall be taken into account)
(2) If the insurer fails to apply for the renewal of registration before the date specified in
sub-regulation (1), the Authority may accept an application for renewal of registration
on receipt of the fee payable with the application along with an additional fee by way
of penalty of ten per cent. of the fee payable with the application.

22
21. Manner of payment of fee for renewal of certificate.- The fee for renewal of
certificate shall be paid to the account of Insurance Regulatory and Development
Authority with the Reserve Bank of India.
22. Issue of duplicate certificate.--The Authority may, on receipt of fee of rupees five
thousand, issue a duplicate certificate to an insurer, if the insurer makes an application
to the Authority in Form IRDA/R

PROCEDURE FOR ACTION IN CASE OF DEFAULT

23. Suspension of certificate.— Without prejudice to any penalty which may be
imposed or any action taken under the provisions of the Act, the registration of an
Indian insurance company or insurer who ---
(a) Conducts its business in a manner prejudicial to the interests of the policyholders;
(b) Fails to furnish any information as required by the Authority relating to its
insurance business;
(c) Does not submit periodical returns as required under the Act or by the Authority;
(d) Does not cooperate in any inquiry conducted by the Authority;
(e) Indulges in manipulating the insurance business;
(f) Indulges in unfair trade practices;
(g) Fails to make investment in the infrastructure or social sector specified under sub-
section (1A) of section 27D of the Act,
May be suspended for a class or classes of insurance business for such period as may
be specified by the Authority by an order;
Provided that the Authority for reasons to be recorded in writing may, in case of
repeated defaults of the type mentioned above, impose a penalty of cancellation of
certificate.
24. Manner of making order of suspension or cancellation of certificate.—No order of
suspension or cancellation shall be imposed except after holding an enquiry in
accordance with the procedure specified in these regulations.
25. Manner of holding enquiry before suspension or cancellation.—(1) For the
purpose of holding an enquiry under regulation 24, the Authority may appoint an
enquiry officer.
(2) The enquiry officer shall issue to the insurer a notice at the registered office or the
principal place of business of the insurer.

23
(3) The insurer may, within thirty days from the date of receipt of such notice, furnish
to the enquiry officer a reply, together with copies of documentary or other evidence
relied on by it or sought by the Authority from the insurer.
(4) The enquiry officer shall give a reasonable opportunity of hearing to the insurer to
enable it to make submissions in support of its reply made under sub-regulation (3).
(5) Before the enquiry officer, the insurer may either appear in person or through any
person duly authorized by the insurer:
Provided that no advocate shall be permitted to represent the insurer at the enquiry:
Provided further that where an advocate has been appointed by the Authority as the
presenting officer under sub-regulation (6), it shall be lawful for the insurer to present
its case through an advocate.
(6) If it is considered necessary, the enquiry officer may ask the Authority to appoint
a presenting officer to present its case.
(7) The enquiry officer shall, after taking into account all relevant facts and
submissions made by the insurer, submit a report to the Authority and recommend the
penalty to be awarded as also the justification of the penalty proposed.
26. Show-cause notice and order. (1) On receipt of the report from the enquiry
officer, the Authority shall consider the same and if considered necessary by it, issue
a show-cause notice as to why a penalty as it considers appropriate should not be
imposed.
(2) The insurer shall, within twenty-one days of the date of receipt of the show-cause
notice, send a reply to the Authority.
(3) The Authority after considering the reply to the show-cause notice, if received,
shall as soon as possible but not later than thirty days from the receipt of the reply, if
any, pass such orders as it deems fit. If no reply is furnished to the Authority by the
insurer within90 days of the service of the notice, the Authority can proceed to decide
the issue ex-parte.
(4) An order passed under sub-regulation (3) shall give reasons therefore including
justification of the penalty imposed by that order.
(5) The Authority shall send a copy of the order made under sub-regulation (3) to the
insurer.
27. Effect of suspension or cancellation of certificate.--- On and from the date of
suspension or cancellation of the certificate, the insurer shall cease to transact
new insurance business:

24
 28. Publication of order.--- The order of the Authority passed under sub-regulation (3)
of regulation 26, shall be published in at least two daily newspapers in the area
where the insurer has his principal place of business.

PROVISIONS APPLICABLE TO EXISTING INSURERS

29. Registration of existing insurers.—(1) Every insurer carrying on insurance
business in India before the commencement of the Insurance Regulatory and
Development Authority Act, 1999 (41 of 1999) and requiring registration under
the Act, shall make an application, in Form IRDA/R2 for grant of certificate of
registration, within three months from the commencement of the Insurance
Regulatory and Development Authority Act, 1999 (41 of 1999).
(2) Every application shall be accompanied by---
(a) Original certificate of registration;
(b) A confirmation that the requirements of section 7 of the Act have been met;
(c) Evidence of having rupees one hundred corer or more paid-up share capital, in
case the application for grant of certificate of registration is for life insurance business
or general insurance business;
(d) Evidence of having rupees two hundred corer or more paid-up share capital, in
case of an application for grant of certificate of registration for re-insurance business;
(e) An affidavit by the principal officer of the applicant certifying that the
requirements of section 6 of the Act have been complied with;
(f) A certified copy of the standard forms of the insurer and statements of the assured
rates, advantages, terms and conditions to be offered in connection with insurance
policies together with a certificate in case of life insurance business by an actuary that
such rates, advantages, terms and conditions are workable and sound;
(g) The original receipt showing payment of fee of rupees fifty thousand for each class of
business;
(h) Any other information required by the Authority during the processing of the
application for registration.
(3) The Authority shall register every applicant, who submits an application in
accordance with sub-regulation (2), and grant a certificate in Form IRDA/R3.
30. Transitory Provisions. Every existing insurer shall be required to comply with all the
Regulations made by the Authority from the date of their notification: Provided that
the Regulations made by the Authority on the following subjects viz:-

25
(i) Accounts;
(ii) Assets, liabilities and solvency margin;
(iii) Reinsurance;
May, at the choice of an existing insurer, be complied with within a period of twelve
months from the commencement of those regulations:
Provided, however, the Authority may, on an application made to it by an existing
insurer, for valid reasons, grant a further period of time to comply with the above
regulations so, however, that the total time taken by an existing insurer to comply
with regulations in the areas mentioned above does not extend beyond twenty-four
months from the date(s) of commencement of those regulations.
Provided further that where an existing insurer does not conform to the regulations in
the areas mentioned above within the time allowed to him under this regulation, the
Authority shall proceed against him for failure to comply with its directions.
Notwithstanding the above, nothing prevents the Authority from seeking information
from an existing insurer on the subjects mentioned in the first proviso to this
regulation and issue directions to an insurer, wherever necessary.

2.3. GROWTH OF LIFE INSURANCE NEW BUSINESS IN INDIA

With the entry of private insurers in life insurance business, it is obvious that some
proportion of new business will go in the hands of private life insurers. An attempt,
therefore, has also been made to study the growth of new business in terms of policies
and premium income of Indian life insurance industry. Further, the share of private
insurers and LIC in total new business has also been studied. Before the liberalization
of insurance sector in India the only one insurance company that offered the life
insurance is LIC and enjoyed the monopoly in insurance sector. The private insurance
companies came into existence with the enactment of IRDA Act 1999. But, even in
the post-liberalization era LIC enjoyed the major share in terms of first year premiums
and renewal premiums when compared to private sector. which LIC issued 358 lakh
policies (80.90 per cent of total policies issued) and the private life insurers issued 84
laky policies (19.10 per cent). While LIC suffered a decline of 3.47 per cent (4.70 per
cent decline in 2010-11) in the number of new policies issued against the previous
year, the private sector insurers continued the previous years’ experience of
significant decline and reported a dip of 24.04 per cent (22.61 per cent decline in

26
2010-11) in the number of new policies issued. Overall, the industry witnessed 8.22
per cent decline (9.53 per cent decrease in 2010-11) in the number of new policies
issued. Table 1.5 reveals that total new business policies of life insurance industry
increased from 197.73 lac in 2000-01 to 441.93 lac in 2011-12.1
The market share of private insurers in first year premium was 28.15 per cent in
2011-12 (31.16 percent in 2010-11). The same for LIC was 71.85 per cent (68.84 per
cent in 2010-11). Similarly, in renewal premium, LIC continued to have a higher
share at 69.91 per cent (70.48 per cent in 2010-11) when compared to 30.09 per cent
(29.52 per cent in 2010-11) share of private insurers. On the basis of total premium
income, the market share of LIC increased marginally from 69.77 per cent in 2010-
11 to 70.68 per cent in 2011-12. Accordingly, the market share of private insurers
has gone down marginally from 30.23 per cent in 2010-11 to 29.32 per cent in 2011-
12.
The fresh premium of LIC of India has been increasing year after year. It was Rs.
9,700.98 corer in 2000-01 and had increased to 81.862.25 in 2011-12. But the growth
rate of fresh premium of LIC of India shows a fluctuating trend. The growth rate was
-18.44 per cent in 2002-03 which increased to 8.58 per cent in 2003-04. There is a
persistent boost till 2006-07 and which decreased in 2007-08. Compared to the
previous year, it is decreased by 5.92 percent in 2011-12. In private sector also there
is a continual increase in the fresh business premium during the years from 2000-01
to 2010-11 but compared with the previous year a decrease of 18.55 percent was
registered during the year 2011-12. It was Rs. 6.45 crore in 2000-01 which has
increased to Rs. 32,079.92 crore in 2009-10. The rate of growth of private sector also
shows the downward trend. Coefficient of variation stood at 66.37 per cent and
131.59 per cent in terms of premium for LIC and private life insurers respectively.38
This shows that growth was more consistent for LIC as compared to private life
insurers both in terms of policies and premia.1

2.4 INSURANCE INFORMATION BUREAU (IIB):

Insurance Information Bureau (IIB) was formed in October 2009 with the objective of
providing efficient functioning of the insurance sector as well as the protection of the
interests of the policyholders by providing reliable, timely and accurate information.
IIB aims to act as a single point of official reference for the entire insurance industry

27
data and also to ensure that data is available to various shareholders including
insurance companies, intermediaries, market players, researchers, policyholders and
general public for real time decision making. IIB collects transactional data (Motor,
Health, Fire, Marine and Engineering) from all insurers in online mode. IIB publishes
periodical reports on Motor, Health and other lines of business. The industry
“aggregates” data published by IIB enables companies to set internal benchmarks. In
addition to periodical reports, IIB publishes many ad-hoc reports from time to time.

1Dr.Sonika Chaudhary, Priti Kiran, “Life Insurance Industry in India - Current Scenario”,
International Journal of Management and Business Studies, Vol. 1, Issue 3, September 2011,
148.

28
2.5 GRIEVANCE REDRESSAL UNDER IRDA

The Consumer Affairs Department of IRDA handles policyholder grievances, apart

from carrying out awareness campaigns on insurance. The department looks into
complaints from policyholders against life and non-life insurance companies.
Prospects and policyholders are advised to first file their complaints with the
respective insurance companies. If the insurance companies do not attend to the
complaints received within the stipulated turnaround time of 15 days or in case the
complainants are not satisfied with the resolution, they may escalate the complaints to
IRDA. The Authority facilitates the process of resolution by taking up the matter with
the insurance companies to strengthen the redressal framework. IRDA also examines
the complaints from a regulatory perspective and takes steps as deemed fit.
The IRDA Grievance Call Centre (IGCC) receives and registers complaints through a
toll free number. The IGCC interfaces with the Integrated Grievance Management
System (IGMS), the online system for grievance management that not only offers a
gateway for complainants to register and track grievances but is also a tool for the
Authority to monitor disposal of grievances by insurance companies.
Further, the requirement of insurance companies to have Board approved grievance
redressed policies; compliance requirements relating to IRDA guidelines for
grievance redressed and the requirement under the corporate governance guidelines to
have a policyholder protection committee as a mandatory committee have gone a long
way in protecting the interests of policyholders. In addition, the IGMS provides a
central repository of complaints across the industry and this facilitates both IRDA as
well as the insurance companies to carry out “root-cause” analysis of grievances to
identify systemic and policy related issues. This has also enabled the Authority to
identify the concerns of policyholders and to initiate corrective action. The Authority
is visiting/revisiting areas such as group insurance, tying and bundling insurance with
various goods and services, and the need to use plain language in insurance policies.

Dr. Sonika Chaudhary, Priti Kiran, “Life Insurance Industry in India - Current Scenario”,
1

International Journal of Management and Business Studies, Vol. 1, Issue 3, September

2011, 150.

29
2.6 INITIATIVES TOWARDS POLICYHOLDERS PROTECTION:

With a view to protecting the interests of policyholders, the Authority has taken a
number of initiatives. Guidelines relating to distance marketing have been issued by
IRDA which address challenges relating to miss-selling using distance marketing
mode, fallout of the advancement in technology. While the benefits of having new
and faster channels need to be reaped, the loopholes created by them need plugging
and this is precisely what the guidelines are aimed at. IRDA has issued guidelines to
agents for ensuring persistency of life insurance policies to ensure that servicing of
policies by agents is sustained.
Carrying forward its discussion paper on the proposed Guidelines on Prospect Product
Matrix for the Life Insurance industry, the Authority has put up the draft of the
guidelines and the inputs received from the stakeholders are under the active
examination of the Authority.
IRDA has taken several initiatives to protect the interests of policyholders.
Policyholders have the right to expect insurance companies to keep the promises they
make. When there is an error of omission or commission not consistent with expected
or defined service levels, there is a deficiency, in service which results in giving scope
for a grievance. Apart from providing a tool for monitoring disposal of grievances by
insurance companies, the Integrated Grievance Management System (IGMS), enables
IRDA to monitor market conduct issues and take necessary steps to ensure better
protection of policyholders. The Authority has been carrying out a sustained
campaign to create awareness about insurance grievance redressal systems, rights and
duties of policyholders, etc., through various media. In an attempt to improve general
public’s understanding of insurance which helps them in making informed choices
about the use of insurance services, the Authority has launched an exclusive website
www.policyholder.gov.in for insurance education.
The user friendly and menu driven website contains information in the simplest
possible language about IRDA, buying insurance, making a claim, how to make a
complaint under heading of consumer complaint, etc. It also encompasses information
about the various initiatives taken by IRDA towards consumer protection, Handbooks
on insurance for most common products providing details of coverage offered,
frequently asked questions, Policyholder servicing Turn Around Times (TATs), what
to do in case of grievance, etc. IRDA is encouraging all insurers and other

30
stakeholders to provide a link to IRDA Policyholder’s education website in their
respective website. It is expected that visiting the IRDA’s website may help
consumers to be in a better position while purchasing insurance products as per their
requirements as well as to understand their rights and responsibilities as consumers of
insurance products and services.

31
2.7 FOREIGN DIRECT INVESTMENT (FDI) IN INSURANCE
SECTOR
The Central Government has proposed to enhance foreign direct investment (FDI) in
insurance to 49% in its next wave of reforms announced recently. At present foreign
investment in private insurance companies is restricted to 26% of their capital, which
is now proposed to be increased to 49% by passing an amendment to the Insurance
Act. Announcing this decision, finance minister P Chidambaram said “the benefits of
this amendment to the insurance act will go to the private sector insurance companies,
which require huge amounts of capital and that capital will be facilitated with the
increase in foreign investment to 49%.”1 He also clarified that this will not apply to
public sector insurers like Life Insurance Corporation of India (LIC) and the five
general insurance companies At present there are 44 private insurance companies
authorized by the Insurance Regulatory and Development Authority (IRDA)
operating in the country. These comprise of 23 in life insurance business, 17 in
general insurance business and four in health insurance business, since the insurance
sector was opened for private sector in the year 2000. These are all joint ventures
between the Indian promoters who hold up to 74% and foreign insurance companies
who hold up to 26% as mandated by the law. The insurance business requires
additional capital as it grows and this has to come from the promoters. If the Indian
promoters are unable to contribute their share of the capital, they will not be able to
grow. Foreign companies with deep pockets will be able to fill this gap, if they are
allowed to invest up to 49% of the capital. It is estimated that the private insurers
need about Rs. 60,000 corer of additional capital during the next five years.47
Therefore, the raising of FDI cap to 49% will come handy for the foreign partner to
increase their stake in the company, without the local partner having to put matching
capital in to the company. The foreign partner will be more than happy to increase its
stake, as it will help it get a bigger share of the pie, and will also give it a larger role
in running the company according to its ways, by virtue of a higher shareholding in
the company. This will, therefore, be a boon to the foreign insurers to come to India
in a big way. Moreover, since September 1, 2010 when IRDA regulations on ULIPs
kicked-in, the cash flow for life insurance companies has got further affected.

32
FDI in Insurance Sector 48
Private Sector FDI* (Rs. Cr.) FDI (%)
FDI in Life Insurance 5053.98 24.05
FDI in Non-Life Insurance 896.33 24.76
Total 5,950.31

To sum up, with 26% FDI cap in the last few years, capital worth Rs. 5,950.30 crore
has come into India. While there is a need for additional long term capital, there is an
even greater need to increase the commitment of the foreign partners.

1 . International Journal of Research in Economics and Social Sciences, ISSN: 2249-7382,

Volume 3, Issue 3 (April 2013), Euro Asia Research and Development Association, 70-
73.

33
JUDICIAL PRONOUNCEMENT-

Life Insurance Corporation Of India vs Smt. Asha Goel & other on 13 December,
2000

An appeal, filed by the Life Insurance Corporation of India (hereinafter referred to as the
Corporation), are directed against the judgment of a Division Bench of the Bombay High
Court in writ appeal no.843/85 allowing the appeal on the ground that the appellant
should have had an opportunity of leading evidence relevant to their contention that
the insurance policy was obtained by misrepresentation, and therefore, avoidable at the
instance of the Corporation, and remitting the writ petition to the writ court for fresh
decision, after allowing the Corporation to lead evidence. The Division Bench did not
accept the objection raised by the Corporation against maintainability of the writ petition
on the ground that the case involves enforcement of contractual rights for adjudication of
which a proceeding under Article 226 of the Constitution is not the proper forum. The
contention on behalf of the Corporation was that the writ petition should be dismissed as
not maintainable leaving it to the writ petitioner, respondent no.1 herein, to file a civil suit
for enforcement of her claim. The factual backdrop of the case relevant for the purpose of
the present proceeding may be stated thus : Late Naval Kishore Goel, husband of Smt.
Asha Goel - respondent No.1, was an employee of M/s Digvijay Woollen Mills Limited
at Jamnagar as a Labour Officer. He submitted a proposal for a life insurance policy at
Meerut in the State of U.P. on 29th May, 1979 which was accepted and the policy bearing
No.48264637 for a sum of Rs.1,00,000 (Rs. One lakh) was issued by the Corporation in
his favour. The insured passed away on 12th December, 1980 at the age of 46 leaving
behind his wife, a daughter and a son. The cause of death was certified as acute
Myocardial Infarction and Cardiac arrest. The respondent No.1 being nominee of the
deceased under the policy informed the Divisional Manager, Meerut City, about the death
of her husband, submitted the claim along with other papers as instructed by the
Divisional Manager and requested for consideration of her claim and for making
payment. The Divisional Manager by his letter dated 8th June, 1981 repudiated any
liability under the policy and refused to make any payment on the ground that the
deceased had withheld correct information regarding his health at the time of effecting
the insurance with the Corporation. The Divisional Manager drew the attention of the
claimant that at the time of submitting the proposal for insurance on May 29, 1979, the

34
deceased had stated his usual state of health as good; that he had not consulted a medical
practitioner within the last five years for any ailment requiring treatment for more than a
week; and had answered the question if remained absent from place of your work on
ground of health during the last five years in the negative. According to the Divisional
Manager, the answers given by the deceased as aforementioned were false. Since the
respondent no.1 failed to get any relief from the authorities of the Corporation despite
best efforts she filed the writ petition seeking a writ of mandamus directing the
Corporation and its officers to pay the sum assured and other accruing benefits with
interest. The writ petition was opposed by the Corporation on the ground of
maintainability as noted earlier. Alternatively the contention was raised that in case the
High Court is inclined to entertain the writ petition then opportunity should be given to
the Corporation to lead evidence in support of its plea of repudiation of the claim.

This decision was relied upon in Life Insurance Corporation of India vs.
Smt.G.M.Channabasamma (1991) (1) SCC 357, in which the following observations
were made: It is well settled that a contract of insurance is contract uberrima fides and
there must be complete good faith on the part of the assured. The assured is thus under a
solemn obligation to make full disclosure of material facts which may be relevant for the
insurer to take into account while deciding whether the proposal should be accepted or
not. While making a disclosure of the relevant facts, the duty of the insured to state them
correctly cannot be diluted. Section 45 of the Act has made special provisions for
a life insurance policy if it is called in question by the insurer after the expiry of two
years from the date on which it was effected. Having regard to the facts of the
present case, learned counsel for the parties have rightly stated that this distinction is not
material in the present appeal. If the allegations of fact made on behalf of the appellant
Company are found to be correct, all the three conditions mentioned in the section and
discussed in Mithoolal Nayak vs. Life Insurance Corporation of India must be held to
have been satisfied. We must, therefore, proceed to examine the evidence led by the
parties in the case

35
Dewan Daulat Rai Kapoor Etc. vs New Delhi Municipal Committee & others on 20
December, 1979 1980 AIR 545, Supreme Court of India

That takes us to the third decision in Guntur Municipal Council v. Guntur Town Rate
Payers' Association(1) which extended still further the principle of the decision in Padma
Devi's case. This was a case where the annual value was to be determined under the
Madras District Municipalities Act, 1920 which applied in the city of Guntur. Section
82 sub-section (2) of the Act gave a definition of "annual value" practically in the same
terms as section 3(1)(b) of the Punjab Municipal Act, 1911 and section 116 of the Delhi
Municipal Corporation Act, 1957 without the second proviso. There was also in force in
the city of Guntur, the Andhra Pradesh Buildings (Lease Rent and Eviction) Control Act,
1960, which provided inter alia for fixation of fair rent of buildings
Ordinarily we would have examined the validity of this argument first on principle and
then turned to the authorities, but we propose to reverse this order because the decisions
in the LifeInsurance Corporation's case and the Guntur Municipal Council's case (supra)
completely cover the present controversy and do not leave any scope for further
argument. Of course, the decision in Padma Devi's case may be said to be distinguishable
on the ground that in the present cases, unlike Padma Devi's case, the standard rent of the
building was not fixed by the Controller and hence it could not be said that it was
unlawful or penal for the landlord to receive anything more than then the standard rent.
But so far as the decision in Life InsuranceCorporation's case is concerned, it is difficult
to see how its applicability could be disputed, because there also, as in the present case,
the standard rent of the building was not fixed by the Controller and in the absence of
fixation of the standard rent, it was open to the landlord to receive rent in excess of the
standard rent determinable under the Act. The only distinction which could be urged on
behalf of the Revenue was that under the West Bengal Premises Rent Control (Temporary
Provisions) Act, 1950, which came up for consideration in
the Life InsuranceCorporation's case, the standard rent was statutorily determinable on
the application of a mathematical formula without any discretion being left in the
Controller, while under the Delhi Rent Control Act, 1958, the standard rent was not a
certain and definite figure to be arrived at mathematically by application of the formulae
laid down in section 6 but it was left to the Controller under section 9 sub-section (2)
to fix the standard rent at such amount as appeared to him to be reasonable having regard

36
to the provisions of section 6 and the circumstances of thecase and hence, until the
standard rent was fixed by the Controller, it could not be said what would be the standard
rent of the building. Now undoubtedly there is some difference in the provisions of the
two statutes but this difference is not of such a character as to affect the applicability of
the decision in the Life Insurance Corporation's case, because in that case too, the
prohibition against the landlord to receive any rent in excess of the standard rent was
operative only after the fixation of the standard rent by the Controller and so long as the
standard rent was not fixed, it was not unlawful or penal for the landlord to receive any
rent in excess of the standard rent. If the standard rent though not fixed and hence not
legally enforceable, could provide the measure for the reasonable expectation of the
landlord to receive rent from a hypothetical tenant in
the Life Insurance Corporation's case, there is no reason, why it should not equally be
held to provide such measure in the present cases; as in the one case so also in the other.
The upper limit of the standard rent, though yet to be fixed by the Controller, would enter
into the determination of the reasonable rent. Moreover, it is not correct to say that
undersection 9 sub-section (2) of the Delhi Rent Control Act, 1958 it is left to the
unfettered and unguided discretion of the Controller to fix any standard rent which he
considers, reasonable. He is required to fix the standard rent in accordance with the
relevant formula laid down in section 6and he cannot ignore that formula by saying that
in the circumstances of the case, he considers it reasonable to do so. The only discretion
given to him is to make adjustments in the result arrived at on the application of the
relevant formula, where it is necessary to do so by reason of the fact that the landlord
might have made some addition, alteration or improvement in the building or
circumstances might have transpired affecting the condition or utility of the building or
some such circumstances of similar character. The compulsive force of the formulae laid
down insection 6 for the determination of the standard rent is not in any way whittled
down by section 9sub-section (2) but a marginal discretion is given to the Controller to
mitigate the rigour of the formulae where the circumstances of the case do require. The
amount calculated in accordance with the relevant formulae set out in section 6 would,
therefore, ordinarily represent the standard rent of the building, unless the landlord or the
tenant, as the case may be, can persuade the Controller that there are circumstances
requiring adjustment in the amount so arrived at. It would thus be seen that there is no
material distinction between the West Bengal Premises Rent Control (Temporary
Provisions) Act, 1950 and the Delhi Rent Control Act, 1958 so far as the provisions

37
regarding determinations of standard rent are concerned and the decision in
the LifeInsurance Corporation's case must be held to be applicable in determination of
that annual value in the present cases.

But more than the decision in the Life Insurance case decision, it is the Guntur
Municipal Council's case which is nearest to the present case and is almost
indistinguishable. In that casealso, so in the present cases, the standard rent of the
building was not fixed by the Controller and under the Andhra Pradesh Rent Act which
applied in the town of Guntur, in the absence of fixation of the fair-rent, it was lawfully
competent to the landlord to recover rent in excess of the fair-rent determinable under that
Act. Moreover, the Andhra Pradesh Rent Act did not prescribe any clear-cut formula to
be applied mechanically for statutorily determining the standard rent, but it was left to the
Controller to fix the standard rent having regard to (a) the prevailing rates of rent in the
locality for the same or similar accommodation in similar circumstances during the 12
months prior to 5th April, 1944; (b) the rental value entered in the property tax
assessment book of the concerned local authority relating to the period mentioned in
clause

38
The Municipal Corporation Of Mumbai vs Dalamal Tower Premises, 2006 (3)
BomCR 557 on 27 March, 2006 - Bombay High Court

The Supreme Court in the case of Diwan Daulat Rai Kapoor and Ors. v. New Delhi
Municipal Committee was concerned with the question whether in case of a building in
respect of which no standard rent has been fixed by the Controller under the Delhi Rent
Control Act, 1958, the annual value must be limited to the measure of the standard rent
determinable under that Act or it can be determined on the basis of the higher rent
actually received by the landlord from the tenant. After considering its previous decisions
in Padma Debi case, Life Insurance Corporation case, Guntur Municipal
Council case and Ratnaprabha case, it was held that in the case of a self-occupied
building, the annual value would be limited by the measure of standard rent determinable
under the Act, for it can reasonably be presumed that no hypothetical tenant would
ordinarily agree to pay more rent than what he could be made liable to pay under the Act.
In the case of India Automobiles Limited v. Calcutta Municipal Corporation and Anr. ,
the matter related to determination of the annual value in terms of section 174 of the
Calcutta Municipal Corporation Act, 1980 in respect of nine storeyed building used for
commercial purposes. That property was leased out to the tenants. The matter was
referred to the three Judge Bench to reconsider paragraph 11 of
the Life Insurance Corporation case, "But under the Act, the quantum of the
consolidated rate depends upon the annual value of land or building on the gross rent for
which the land or building might reasonably be expected to let, and not the gross rent at
which the subordinate interest of a tenant may be expected to sublet". Thus, the issue
before the Supreme Court in this case was whether the rent realised by a tenant from such
tenant can be taken into consideration for determination of annual value. The three Judge
Bench considered its earlier decisions in Padma Debi, Life Insurance Corporation of
India, Guntur Municipal Council, Ratnaprabha, Dewan Daulat Rai Kapoor, Balbir Singh,
Srikant Kashinath Jituri, Indian Oil Corporation Ltd., Assistant General Manager, Central
Bank of India, East India Commercial Co. (P) Ltd. and Government Servant Page 1059
Co-operative House Building Society Ltd. The Court referred to the two category
of cases on the basis of the various statutes relating to the determination of the annual
value for the purposes of Municipal Acts. The first category was of the cases where the
Municipal Laws of the States did not expressly exclude application of the Rent

39
Restriction Acts in the matter of determination of annual value of a building for the
purposes of levying municipal taxes. The other category related to the caseswhere the
municipal laws expressly excludes application of the Rent Restriction Acts in the matter
of determination of annual value of land or building on rental basis. The Supreme Court
ruled that in the first category of cases the determination of annual value has to be made
on the basis of fair or standard rent notwithstanding the actual rent even if it exceeds the
statutory limits; in the other group, where a restriction in the Rent Act has been excluded,
the determination of annual value of the building could be based on rental method
provided under the relevant Municipal Act. Padma
Debi case, Life Insurance Corporation case, Guntur Town Rate Payers'
Association case and Dewan Daulat Rai Kapoor case were found to be covered by the
first category and the cases in Ratnaprabha case, AGM, Central Bank of India case, East
India Commercial Company case, Balbir Singh case, Indian Oil Corporation case and
Srikantcase were found to be covered by other group. In paragraphs 23,24 and 25, the
Supreme Court held thus-
Section 3(1)(b) of the Maharashtra Rent Control Act, 1999 exempts the premises let to
Banks and Companies having a capital of more than Rs. one crore. The premises in
occupation of such Banks and companies are, thus, exempted from the applicability of the
Rent Control Act. It is true that the exemption subsists only as long as the tenancy of such
class of tenants exists.
The crucial words in Section 154(1) are "the amount of annual rent for which such land or
building might reasonably be expected to let from year to year". That is the touchstone for
fixing the rateable value in the Act. Where the property is controlled by the Rent Control
Act, the rateable value cannot be more than the fair or standard rent which can be fixed
under the Rent Control Act. On the other hand, where the Municipal laws exclude the
applicability of the Rent Acts by incorporating non obstante clause in the taxing statute,
the constraints or restrictions of fair or standard rent do not apply in fixing the rateable
value. In this category of the cases, the limits indicated in Padma
Debi case, Life Insurance Corporation case, Guntur Town Rate Payers'
Association case and Dewan Daulat Rai Kapoor case are not attracted. In so far as the
Bombay Municipal Corporation Act is concerned, there is no non obstante clause in the
taxing provisions excluding the applicability of the Rent Control Act. Can it be said, that
the property excepted from the Rent Control Act, not because of any such provision in the
Municipal Corporation Act but because of exclusion in the Rent Control Act itself, be not

40
taxed by fixing rateable value keeping in view all relevant factors including the rent
which the tenant is getting from sub-tenant or member of the society from his tenant (by
whatever name called)? In respect of the property, for whatever reason, where the Rent
Control Act is not applicable, the reasonable determination of such rent by the Municipal
authorities after taking into consideration all relevant factors including the rent/licence fee
which the member was getting from his tenant or licensee cannot be said to be altogether
irrelevant. In India Automobiles, the three Judge Bench of the Supreme Court Page 1065
scanned its previous decisions and it was held that the basis for determination of annual
rent value has to be the standard rent where the Rent Control Act was applicable and in
all other cases reasonable determination of such rent by the municipal authorities keeping
in view various factors including the rent which the tenant is getting from his subtenant.
The contention that allowing the Corporation to assess the annual rateable value on the
basis of the income of a tenant from the property would be grossly unfair and would have
the effect of rendering the provisions of the Act unreasonable, arbitrary and
unconstitutional was negatived. It was held that only because the owner of the building is
not getting the same rent which the sub-tenant was paying to his lessor cannot be made a
basis to deprive the Corporation from determining the annual valuation and taxing the
land or building on that basis.

41
Itc Limited Gurgaon vs. Commr.Of I.T(Tds) Delhi on 26 April, 2016 Supreme Court
of India
The latest judgement is ITC Limited Gurgaon Vs. Commr. of I.T (TDS) Delhi whose
corams are Kurian Josph and Rohinton Fali Nariman. The date of the judgement was 26
April 2016.

1. Leave granted.

2. These appeals arise out of a common judgment of the Delhi High Court dated
11.5.2011.

3. The assessees are engaged in the business of owning, operating, and managing hotels.
Surveys conducted at the business premises of the assessees allegedly revealed that the
assessees had been paying tips to its employees but not deducting taxes thereon.

4. The Assessing Officer treated the receipt of the tips as income under the head “salary”
in the hands of the various employees and held that the assessees were liable to deduct tax
at source from such payments under Section 192 of the Income Tax Act, 1961. The
assessees were treated by the Assessing Officers as assessees-in-default under Section
201(1) of the Act. The Assessing Officers in various assessment orders worked out the
different amounts of tax to be paid by all the aforesaid assessees under Section 201(1), as
also interest under Section 201 (1A) of the said Act for assessment years 2003-2004,
2004-2005 and 2005-2006.

5. The CIT (Appeals) vide his common order dated 28.11.2008 allowed the various
appeals of the assessees holding that the assessees could not be treated as assessees- in-
default under Section 201(1) of the Act for non- deduction of tax on tips collected by
them and distributed to their employees. Appeals filed by the Revenue to the Income Tax
Appellate Tribunal (ITAT) came to be dismissed by the Tribunal by relying upon its own
order for assessment year 1986-1987 in the case of ITC and the case of Nehru Palace
Hotels Limited. Against the said orders of the Tribunal, appeals were preferred by the
Revenue to the High Court.

6. The High Court vide the impugned judgment dated 11.5.2011 framed the questions of
law as follows:-

42
“(a) Whether on the facts and in the circumstances of the case, the Ld. ITAT erred in law
and on merits holding that the assessee was not an “assessee in default” for short/non
deduction of tax at source on account of banquet and restaurant tips collected and paid by
it to its employees?

(b) Whether on the facts and in the circumstances of the case, the Ld. ITAT erred in law
and on merits in holding that the payment of banquet and restaurant tips to the employees
of the assessee in its capacity as employer were not profits in lieu of salary within the
meaning of Section 17 (3) (ii) of the Income Tax Act, 1961?”

7. The High Court held, after considering Sections 15, 17 and 192 of the Income Tax Act,
that tips would amount to ‘profit in addition to salary or wages’ and would fall under
Section 15(b) read with Section 17(1)(iv) and 17(3)(ii). Even so, the High Court held that
when tips are received by employees directly in cash, the employer has no role to play
and would therefore be outside the purview of Section 192 of the Act. However, the
moment a tip is included and paid by way of a credit card by a customer, since such tip
goes into the account of the employer after which it is distributed to the employees, the
receipt of such money from the employer would, according to the High Court, amount to
“salary” within the extended definition contained in Section 17 of the Act. For arriving at
this interpretation, the High Court relied upon the decision of this Court in Karamchari
Union, Agra v. Union of India, (2000) 3 SCC 335, while distinguishing the judgments of
this Court in Rambagh Palace Hotel v. Rajasthan Hotel Workers’ Union, (1976) 4 SCC
817 and Quality Inn Southern Star v. ESI Corpn., (2008) 2 SCC 549. After distinguishing
the said judgments, the High Court arrived at the following conclusion:-

“From the above discussion, we may conclude that the receipt of the tips constitute
income at the hands of the recipients and is chargeable to the income tax under the head
“salary” under Section 15 of the Act. That being so, it was obligatory upon the assessees
to deduct taxes at source from such payments under Section 192 of the Act.”

8. Since the assesses were, therefore, declared to be assessees-in- default under Section
201 of the Act, the High Court found that despite the fact that the assessees did not deduct
the said amounts based on a bonafide belief and no dishonest intention could be attributed
to any of them, yet the High Court held that levy of interest under Section 201(1A) would
follow, as the payment of simple interest under the said provision is mandatory; and not

43
being penal in nature, no question of bonafide belief would arise to absolve the assessees
from any interest liability under the said provision.

9. Learned senior advocates Shri Vohra and Shri Syali, assailed the judgment of the High
Court before us. They argued that tips are paid by customers out of their own volition as
payments to the employees being waiters in a restaurant for the quality of service
provided to them and for courteous behavior. Since this payment is gratuitous, and the
assessees act as mere trustees in collecting the tips charged to the customers’ credit cards,
and then pass over the same to the employees, it is clear that no amount by way of tip has
any connection with the contract of employment between the employer and the employee.
They further submitted that the tips received by the employees are not remuneration or
reward for services rendered by the employees to the assessees. They argued that there
was no vested right of an employee to claim any tip from a customer. It was further
argued that the expression “employer” contained in Sections 15 and 17 is of crucial
importance, and must be contrasted with the expression “any person” occurring in Section
17 (3)(iii). It was also argued, based on the Hotel Receipts Tax Act and a circular issued
thereunder, that tips do not form any part of taxable receipts of the employers. Further,
we were shown a publication in which guidelines were issued by the Australian Tax
Office stating that voluntary tips are not consideration for the supply of food or service in
a hotel or restaurant. The intervenor represented by Shri S. Ganesh also argued that
Section 192 is attracted only when any person responsible for paying any income
chargeable under the head “salary” is to deduct income tax on the amount payable.
According to the learned counsel, since the income received from tips is not income
chargeable under the head “salary”, so far as the employees are concerned, but income
from other sources, Section 192 is not at all attracted. It was further agued by him that the
machinery provision contained in Section 192 is not possible of compliance inasmuch as
it is impossible for the employer to predicate how much each individual employee would
get by way of income from tips, particularly when the schemes for distribution are many
and varied and may include different sums being received by different employees based
on various criteria. He also argued that no question of Section 201 would come into play
in this case as it is only in consequence of failure to comply with Section 192 that Section
201 is at all attracted. It was also argued that since the High Court had found that the
conduct of the assessees was bonafide, interest therefore could not have been charged

44
from them under Section 201(1A). All the learned counsel have relied upon various
judgments of this Court and other courts in support of their submissions.

A great deal of argument was made by both sides on the nature of interest contained
inSection 201(1A) of the Act. We find it unnecessary to go into this question for the
simple reason that as held in Commissioner of Income Tax, New Delhi v. Eli Lilly and
Company (India) Private Limited, (2009) 15 SCC 1 at paragraph 91, interest
under section 201(1A) can only be levied when a person is declared as an assessee-in-
default. Having found that the appellants in the present cases are outside Section 192 of
the Act, the appellants cannot be stated to be assessees-in-default and hence no question
of interest therefore arises.

38. In the view we have taken it is unnecessary to go into various other submissions made
by counsel on both sides. The appeals filed by the assessees are, therefore, allowed and
civil appeals arising out of SLP (Civil) Nos.9587-9589 of 2012 filed by Revenue are
dismissed. The judgment of the High Court is set aside with no order as to costs.

45
Prithvi Insurance Co. Ltd. vs Commissioner Of Income-Tax, on 3 May, 1963
Equivalent citations: 1964 52 ITR 238 Madras High Court
The profits and gains of any business of insurance otherthan Life Insurance business
shall be taken to be the balance of the profits disclosed by the annual accounts, etc., etc. It
is only the method of computation that is required to be differently made in
the case of Life Insuranceand in the case of any business of insurance other
than Life Insurance.
The argument of Mr. Ranganathan, learned Counsel for the department, that " any other
business " in Rule 1 would include business of General Insurance does not fit in with the
controlling provision Section 10(7), which clearly regards business of insurance as
embracing all kinds of such business, be it Life or General Insurance. Neither Section
10(7) of the Act nor the Rules found in the Schedule necessarily involves the conclusion
that a business of LifeInsurance is different from the business of General Insurance in
so far as the Indian Income-tax Act is concerned.

Originally, the Tribunal had referred two questions which were:

1. Whether all insurance business covered by Section 10(7) of the Schedule of the Act is
not the same business.

2. Whether the losses in the Life Insurance business can beset off under Section
24(2) against the profits of any business of insurance other than Life Insurance.

In framing the further question set out above and calling for a statement of the case,.
Chagla, C.J., observed:

Now Section 24(2) would only apply if the business done by the assessee company
of lifeInsurance was the same as the business done by the company in respect of
General Insurance. It is only when losses are incurred under the same head that they can
be carried forward to the next year under Section 24(2), and the finding of the Tribunal on
this aspect of the case is thatLife Insurance business and other
General Insurance business constitute different businesses and therefore it is not open to
the assessee the claim to benefit of Section 24(2).

46
After referring to the contention for the Department that no question of law arose in that
regard, the learned Judges went on to say:

but on a careful perusal of the order of the Tribunal we find that the basis of this finding
is not any appreciation of evidence or an assessment of facts before it. The finding is
based upon the view of the law that the Tribunal has taken, and briefly put, the view of
the Tribunal is that inasmuch as the law required an insurance company to maintain a
separate account with regard to Life Insurance business and also maintain a
separate Life Insurance Fund, in no view of the case can Life Insurance business
constitute the same business vis-a-vis the other businesses carried on by
the Life Insurance Company. Now, in coming to this conclusion we find that the
Tribunal has not taken into consideration at all the decision of the Appellate Assistant
Commissioner which was in favour of the assessee. The Appellate Assistant
Commissioner based his decision on three important facts. One was that the higher staff
was common to all types of insurance business; the other was that the agents employed
to securelife insurance were mostly the same as those employed for securing
other insurance business ; and the third was that important items of expenses were
common and they were allocated subsequently to different kinds of insurance business.
Now, these are all questions of fact and it was open to the Tribunal to have considered
these facts and come to a conclusion ; but we find that the Tribunal has not taken into
consideration these facts at all. On the contrary, in paragraph 14. the Tribunal says :
'These two branches of insurance are so different to each other that invariably special
staff is employed for each type of insurance.' With respect to the Tribunal, we are not
concerned with what that general practice is, nor are we concerned with what several or a
majority of insurance companies do. What we are concerned with, and what we are
interested in, is to find out what this particular insurance company does. Therefore, it
seems to us that although we are not prepared to ask the Tribunal to refer the question as
formulated by the assessee, which raises a general question with regard to
all insurance companies, we are prepared to accede to the request of the assessee and ask
the Tribunal to refer to us a question of law which is relevant with regard to the facts
found with regard to the specific insurancecompany...

But for that provision, the English Income Tax Act also could not treat the different
classes ofinsurance as different businesses. Such a provision is lacking in the Indian

47
Income-tax Act, and if at all, any inference that can flow from Section 10(7) of the Act is
clearly against the contentions of the Department. The principal reason why
the Insurance Act calls for a separation; of theLife business from the other classes
of insurance business is that in the case of LifeInsurance, the insured person is entitled
to a return of the sums of premia paid by him or of stated amount in the event of his death
or his surviving a stated number of years. In the case of other classes of insurance, it is
true that a risk is undertaken by the insurer and indemnity offered against that risk. But,
unless the risk occurs, the insurer is under no liability to pay any part of the amount in
respect of that contract of insurance. Clearly, therefore, in the case ofLife Insurance, a
certain sum becomes payable to the insured or his successors-in-interest, while in
the case of other classes of insurance, no such amount is payable unless the risk happens.
It is for this purpose that accounts are maintained separately and a Life Fund is created by
operation of the Insurance Act. But these facts cannot, in our opinion, justify the
classification of the two kinds of businesses into two different businesses for the purposes
of the Income.

48
 CHAPTER-3

GENERAL INSURANCE SECTOR IN INDIA AN OVERVIEW WITH

IRDA IMPACT
3.1 THE GENERAL INSURANCE CORPORATION ACT, 1972
In 60’s and 70’s, the law relating to other forms of insurance also underwent reforms.
The Indian Marine Insurance Act, 1963 was enacted to regulate marine insurance in
India. This Act is a replica of the English Marine Insurance Act, 1909. The general
insurance business was also nationalized in 1972 by setting a government corporation
called the General Insurance Corporation with four subsidiary companies for carrying on
the general insurance business. The nationalized companies were expected not to confine
themselves to the present activities but to cover new fields in due course of time. India is
the fifth largest general insurance market in Asia with annual premiums of $6.3 billion in
FY09. India has second largest population in Asia (and the world) and an increasing
middle class population. The low penetration of general insurance presents tremendous
opportunity. It was projected that from 2006-2026 the working class population is
expected to increase from 675.8 million to 795.5 million48. The market continues to be
dominated by public sector, though share has declined since FY01. The large, middle
class population, increased awareness and income levels have fuelled growth of the
general insurance business. The maximum foreign partner investment is soon expected to
increase to 49%, which is currently 26%
The industry has witnessed radical changes since the opening up of the market in 2000
Between FY01 and FY08 the industry grew at 19.5% per annum and ~10% in FY09.
Key growth drivers in the future can be summarized as under:
Growing economy
Low insurance penetration as a % of GDP
Higher disposable income and savings
Increasing urbanization and awareness
Detariffing has strengthened the bargaining power of the consumer, but in the short run
has hurt profitability of the insurance companies. Companies will have to customize
products and improve customer experience in order to win further market share. Increase
in the FDI cap from 26% to 49% will help increase growth. It will be critical to develop

49
systems that will ensure accurate pricing of risks, and adequate training of underwriters
and sales force. On the whole, while the short term scenario for the general insurance
sector appears to be challenging, the long term prospects definitely present ample
opportunities for growth.
General Insurance industry logs 12.5351 per cent growth in FY 2008.During the period,
tour public sector non-life insurance companies collected Rs16, 899 crores in reviewed
fiscal, against Rs16, 278 crores in previous fiscal.
The 13 non-life insurers collected Rs. 28, 131 crores in premium in FY‘08, against Rs.
24, 998 crores collected in the previous fiscal, according to industry data.
Private players increased their business from Rs. 8,720 crores to Rs. 11, 231 crores during
the period.
In percentage terms, while public sector firms could increase their premiums by just 4%,
nine private sector players clocked premium growth of 29%.
Private sector players‘ market share has grown to about 40% in FY‘08 as compared to the
public sector‘s 60% share.
During the fiscal 2007-2008, market leader New India Assurance premium collection
grew by 5% to Rs5, 274 crores52.
With the economy growing at a healthy rate, new and exciting areas of insurance are
opening up in the Indian market to provide youth with great career opportunities.
The Indian market is big and very attractive to many companies, Indian or foreign, for the
fact that there is a vast uninsured or underinsured area in the economy. There is little
awareness about the general insurance, and therefore, insurance penetration is very low in
India compared to many other countries, even the developing ones. This vast unexploited
market draws many companies.
The general insurance had grown by leaps and bounds in the country during the
past decade from Rs.10, 000 corers in 1999 to Rs.40, 000 corers in 2011. The target is
to cross the Rs. one lakh corers mark by 2020, but it could be achieved much earlier,
probably by 2017 or so53.
The general insurance sector is growing at a healthy 13 per cent per annum, but the
premium density was only 4.4 US dollars, very low in comparison with many other
countries54.
The market share of private general insurers has been increasing over the years since
liberalization. In FY09, the private insurers had a market share of 41.08% which was
higher than 34.90% in FY0755. As a consequence, there has been a decline in the market

50
share of the public insurers to 58.92% in FY09 from 65.10% in FY07. Despite the decline
in the market share of the public sector insurance companies the volume of premium
underwritten by them has increased over the previous year reflecting an expansion in the
general insurance market.
Figure SNI 256Market shares of Public General Insurance Companies
Among the public sector insurers, New India had the largest market share at 30.59% in
FY0957, lower than its market share of 31.36% in the previous year. Oriental Insurance,
National Insurance and United India Insurance had market shares at 21.96%, 23.72% and
23.71% respectively in FY09 as against 22.63%, 23.81% and 22.22% in the previous
year. Among the private insurers, ICICI Lombard had the highest market share of 27.20%
in FY09 followed by Bajaj Allianz with a share of 21.00%. Reliance General Insurance
has registered a decline in its market share from 17.33% in FY08 to 15.23% in FY09.
Some of the factors that have enabled private sector players to improve their market
share include:
Leverage: The private sector players continue to leverage on the business relationships of
their parents and their quality of service to gain market share in the general insurance
market.
Operational Flexibility: The private general insurers enjoy considerable operational
flexibility, whereas the public sector companies have been constrained by their traditions.
In the past, private insurers had aggressively targeted the more profitable corporate fire
and engineering businesses by combining them with discounted offers on de-tariffed
products, for example, personal accident & health, marine cargo and hulls. Private
general insurance players especially during their initial years have selectively targeted
more profitable business lines than the public sector companies for growth purposes.
They have benefitted from the experiences of the public sector as well as their
international joint-venture partners. The inherent operational flexibility of the private
players such as aggressive pricing has also allowed them to capture a greater share of
large corporate accounts.
Innovation: Public players‘ limited capacity to innovate impacted their ability to tailor
and aggressively price products for large corporations. The private players by contrast
have focused on account-level profitability for large corporations and have expanded their
shares by cross-subsidizing tariff products. However, a strong relationship that the public
sector general insurance companies have with their existing corporate clients has enabled
them to retain their dominant market position.

51
Strong Infrastructure and Systems: Private players are not hindered by their charters or
legacy systems and have constructed technologically advanced infrastructure. They
started with large investments in technology, which helped them to build robust data
management systems. This characteristic enabled quick and effective decision-making for
pricing and claims settlements, which are vital for building franchises. On the other hand,
public entities have only recently upgraded their systems and have to grapple with
transition issues, such as moving from paper to paper-less systems. Hence they are
burdened by legacy systems and fragmented databases.
Claims Settlement: The public insurers have also been hampered in claims servicing by
their process oriented approach. They have been unable to expedite claim settlements
through out-of-court negotiations since a large proportion of their claims pertain to the
third party motor segment, which is subject to adjudication by the Motor Accident Claim
Tribunal. The result is a time-consuming process. However, the combination of superior
technology and selective underwriting has allowed the private sector players to set high
standards for policyholder services, thereby differentiating themselves from public sector
insurers. The claim settlement performance of the private sector has also been superior
because of the limited amount of third party motor business that they have underwritten.
Distribution: The Indian general insurance industry has historically been dominated by
the agency channel, through which 75% of total premium income was sourced. But in
recent periods other channels such as banc assurance, brokers, corporate agents, direct
marketing and direct sales channels are gaining importance. In a deregulated
environment, the broking community is slowly becoming an integral part of the insurance
and risk financing process. Most insurers now have tie-ups with the banks, which acts as
corporate agents and are remunerated on a commission basis. For example, ICICI
Lombard sources a major portion of its business from a tie-up with ICICI Bank.
Similarly, Bajaj Allianz General Insurance Company Limited (BAIL, second largest
private player) has tie-ups with large number of banks, which contribute a big share of its
total premium income. As of September 10, 2008, 281 brokers were registered with
IRDA, including 242 direct brokers, 33 composite brokers and 6 reinsurance brokers.
This has enabled private players to enter into uncovered markets and expand their share
in overall general insurance market.

52
3.2 VARIOUS INSURANCE REGULATIONS FORMED UNDER
IRDA SINCE 2000 TO 2015
The IRDA has issued various insurance regulations from the year 2000 to 2015, which
are as under:
IRDA Actuarial Report and Abstract 2000
IRDA Registration of Indian Insurance Companies 2000
IRDA Insurance Advertisement and Disclosure 2000
IRDA The IRDA (Meetings) 2000
IRDA Investments (Life and General) 2000
IRDA Statements of Accounts 2000
IRDA The Insurance Advisory Committee (Meetings) Regulations, 2000
IRDA Assets, Liabilities, and Solvency Margin of Insurers Regulations, 2000
IRDA Obligations of Insurers to Rural Social Sectors Regulations, 2000
IRDA Licensing of Insurance Agents Regulations, 2000
IRDA Appointed Actuary 2000
IRDA General Insurance - Reinsurance Regulations, 2000
IRDA The IRDA (Staff) 2000
IRDA Surveyors and Loss Assessors 2000
IRDA Reinsurance –Life 2000
IRDA Revised Investment Regulations in April 2001
IRDA (third party administrators) regulations 2001
IRDA (protection of policyholder‘s interest ) regulations, 2002
IRDA ( licensing of corporate agents) regulations 2002
IRDA (manner of receipt of premium) regulation 2002
IRDA (licensing of brokers) regulation 2002
IRDA (micro-insurance) regulations, 2005
IRDA (Treatment of Discontinued Linked Insurance Policies) Regulations, 2010
IRDA (Sharing of Database for Distribution of Insurance Products)
Regulations, 2010

53
3.3 INSURER UNDER REGULATION OF IRDA
The IRDA regulates the insurers on various aspects of the financial matters such as the
share capital, calculation of premium, accounting of premium, transfer of funds to
various reserves, investment of funds in various securities and deposits with banks,
payment of commission to the agents, incurring of expenditure on the administration and
management of company, claim settlements, investments in assets, valuation of assets
preparation of financial statements, appropriation of excess incomes, audit and inspection
of books and accounts, disclosures relating to financial matters and maintenance of
solvency margins. Nothing is left to the discretion of the management of an insurance
company.1
By the end of December 2006, the IRDA had issued more than 25 regulations and also
issued several guidelines to insurer on a variety of matters.
(a) IRDA (Obligations of Insurers to Rural or Social Sector) Regulations, 2000
Section 30 of IRDA Act, 1999, facilitates the insertion of Section 32B and 32C into the
Insurance Act 1938. These provisions impose obligations on insurers to undertake
insurance business in rural and social sectors. They also impose a responsibility to
undertake the business to unorganized sectors, backward classes,
economically vulnerable and other categories of persons. The IRDA regulates the
business of insurance companies and lays down the norms for fulfilling social obligations
through its IRDA (Obligations of Insurers to rural or social sectors) Regulations, 2000.2
Accordingly, every insurer has to carry on insurance business in the rural sector and
concentrate at least 15% of its business in the rural areas. Every insurer has to insure at
least 20,000 lives every financial year in and after 2004. These rules have directed all the
existing insurers and newly registered companies to move in the directions of social
insurance.

1 Supra n.41,

2 p.41.

54
(b) IRDA (Preparation of Financial Statements and Auditors Reports of
Insurance Companies) Regulations, 2000
The insurers are under obligation to maintain books of accounts as required under the
Companies Act, 1956 and also under Insurance Act, 1938. The IRDA (Preparation of
Financial Statements and Auditors Reports of Insurance Companies / Regulations,
2000),1 explains the methodology and accounting principles to be used for the
preparation of financial statements. These regulations provide for variant formats, define
the accounting standards required to be adhered to, lay down the procedure to determine
the value of investments the insurance companies make, and the contents required to be
stated in the report that the management submits. Part II of the regulations require the
insurer to disclose information such as contingent liabilities, encumbrance of assets,
commitments made, outstanding for loans, investments and fixed asset claims, actuarial
assumptions for claim liabilities and other related matters.
Every insurer has to arrange audit balance sheet, profit and loss account, revenue account,
and profit and loss appropriation account by an auditor. The insurers are directed to
maintain separate accounts for each class of business.
(c) IRDA (Insurance Advertisement and Disclosure) Regulations, 2000
The insurers are bound by the IRDA (Insurance Advertisement and Disclosure
Regulation, 2000).In fact, the law relating to advertisements binds the insurers while they
issue advertisements to market their insurance products. In addition to the existing law of
advertisements, all insurers are bound by the IRDA regulations.49 The IRDA regulations
on advertisements are made with an objective to check misleading advertisements from
being issued by the insurance companies and protect the common person from
ornamental and ambiguous advertisements. Every advertisement, the insurer issues, is
subject to inspection and review by the authority. Every insurer has an obligation to have
a statutory warning as prescribed under section 41 of the Insurance Act, 1938, which
states that `no rebate is given or commission is payable to any person who directly or
indirectly induces a person to
purchase the policies’. Thus, the insurers are bound tight under the IRDA regulations.1

1
Notified by IRDA, dated 14.07.2000, published in Gazette, Extraordinary Part III
Sector 4, dated 19.07.2000.

55
(d) IRDA (Assets, Liabilities and Solvency Margins of Insurance) Regulations,
2000
Asset liability management is an extremely important area of investment management
particularly for an insurance company which deals with financial risks of human lives and
the small investors.
India has adopted the Solvency Model, which may be characterized by Fixed Ratio
Models. The IRDA guidelines provide the outline of valuation of Assets and Liabilities
and Determination of Solvency Margin.51 Every insurer shall determine the
Required Solvency Margin, the Available Solvency Margin and the Solvency Ratio as
specified under IRDA (Actuarial Report and Abstract), Regulation 2000.1
At present the life insurance companies in India have to maintain 150 percent solvency
margin which includes a 50 percent additional cushions over and above the norms
specified in the regulations. To maintain this solvency ratio, the insurance companies are
allowed to bring in additional capital
(e) IRDA (Protection of Policy-holder’s interest) Regulations, 2002
Insurance business is people centric and the insurance policyholder is a consumer of the
insurance services. He is the ultimate user of the company’s services.
The insurance company is obliged to treat the policyholder as an important component of
insurance business. The IRDA has framed regulations called, ‘The
IRDA (protection of policyholders’ interests) regulations 2002’. These provisions impose
duties on the insurer. Insurers have to undertake insurance business in accordance with
the IRDA prescribed code of conduct, and with the councils established under Section
64C of the Insurance Act.
The insurers are under a duty to clearly inform about the scope of the benefits of the
insurance policy, the extent of insurance cover, exceptions and conditions of the
insurance cover, and claims whether they are earning profit or not. This information
should be stated in a simple and explicit manner without any ambiguity. The insurer is
bound to provide all material information in respect of the insurance product which he
proposes to market to the prospective purchaser. The agent appointed by the insurer has
to fulfill this function whenever required and pass the information to the policyholder as
and when required.1

1
Notified by IRDA, dated 14.07.2000, published in Gazette, Extraordinary Part III,
Section 4, dated 19.07.2000.

56
(f) IRDA (Standard Proposal Form for Life Insurance) Regulations, 2013
Through this regulation IRDA asked all life insurers to adopt a standard Proposal Form
for policyholders seeking insurance cover. This move will go a long way in bringing
uniformity and transparency.1
The objective of this regulation is to provide for a standard proposal form for individual
policies in life insurance that has an inbuilt flexibility for seeking specialized information
that is product specific to a particular category. The “Standard Proposal Form” notified
by IRDA contains columns for personal information and suitability analysis for
policyholder.2
The new regulation will require insurers to have in place a process and system to assess
the needs analysis carried out for each and every proposal received and the soundness of
a recommendation about a particular product. The regulation applies to all individual
policies issued by life insurance companies, irrespective of segment or type of product.3

(g) IRDA (Life Insurance – Reinsurance) Regulations, 2013

Insurance Regulatory and Development Authority (IRDA) has mandated life insurance
companies to reinsure with domestic reinsurers, a percentage of sum assured on each
policy. In the regulation, it is said that this percentage will be notified by the regulator
and will not exceed 30 percent of the sum assured.58 Further, IRDA has asked life
insurers, in their re-insurance program, to have maximum retention

within the country. As per the gazette notification, the retention limit ranges from Rs. 5
Lakhs to Rs. 30 Lakhs, based on the age of the insurer and the type of the product

57
(h) IRDA (Licensing of Banks as Insurance Brokers) Regulations, 2013
Insurance Regulatory and Development Authority (IRDA) has allowed banks to act as
brokers and sell products of more than one insurer so as to increase the penetration of the
sector across the country. According to IRDA (Licensing of Banks as Insurance Brokers)
Regulations, 2013, there is no capital requirement for insurance broking carried out by
banks.1 To qualify for the license, each bank will have to have the principal officer, an
officer of general manager or equivalent category, who is appointed exclusively to carry
out the functions of an insurance broker. Every insurance broker will, before the
commencement of business, deposit and keep deposits with any scheduled bank as sum of
Rs. 50 Lakh. The license once issued will be for three years from the date of issue, it said,
adding that the renewal of license can be applied 30 days before its expiry. While The
Reserve Bank of India’s approval is required for the banks to become brokers, IRDA is of
opinion that in case of any dispute arising out of insurance transactions, its jurisdiction
should prevail.3

(i) IRDA (Investment) (Fifth Amendment) Regulations, 2013

IRDA recently amended the Investment Regulations for the sector. The amendments in
investment regulations aim to address the difficulties faced by housing and insurance
companies in securing long term funding.62 With the new amendment IRDA tweaked
norms for Insurance Companies to invest their funds in different
market instruments like government securities and corporate debt to channelize long term
savings in infrastructure sector.1
Life insurance companies can now invest in central government securities which should
not be less than 25 % of the total corpus. However, the total investment in central
government securities, state government securities and other approved securities cannot
be less than 50 percent taken together. At the same time, it has allowed life insurers to
invest in housing and infrastructure bonds, with ratings of not less than AA by credit
rating agencies. The total investment in the category will not be less than 15 percent.64
These initiatives taken by IRDA are in sync with the recommendations of planning
commission which pondered on the issue of funding constraints faced by housing and
infrastructural companies.2

(j) IRDA (Issuance of Capital by Life Insurance Companies) Regulations, 2011

India’s Insurance regulator has released the long anticipated norm that will govern initial
58
public offerings (IPOs) by life insurance companies in a bid to help them raise capital
from public. According to the regulation only those insurers who have completed 10
years of operations will be allowed to float IPOs.3
No life insurer can approach market regulator Securities and Exchange Board of India
(SEBI) for IPO approval without going to IRDA’s approval, the guidelines say.
Moreover, IRDA’s approval for an IPO will only be valid for a year, within which the
company can approach SEBI. This is in the line of listing norms laid down by SEBI for
companies wanting to raise capital through public markets.
Companies going public have to mandatorily disclose a record of policyholder protection
and the pendency of the policyholder’s complaints for the last five years in the draft red
herring prospectus to be filed with SEBI.1

(k) IRDA (Non-Linked Insurance Products) Regulations, 2013 and IRDA

(Linked Insurance Products) Regulations, 2013
A summary of the specifications and areas covered under the new regulations
is as follows:2
i. Minimum death benefit specification for single and regular premium products,
varying by age of the insured
ii. Minimum policy term and premium term of five years for individual products
iii. Commission caps for individual regular premium products varying by premium
payment term; absolute commission caps for group insurance products at scheme
level.
iv. Enhanced minimum guaranteed surrender value varying by policy duration
v. Benefit illustrations at gross investment returns of 4 per cent and 8 per cent and as
specified by the IRDA and Life Insurance Council
vi. Conditions on charges levied on linked products, including the requirement to
submit comprehensive documentation on guarantee charges levied
vii. Requirements for with profits fund management
viii. Separate category of variable insurance products and governing provisions (for
both linked and non-linked products)
ix. Provisions for pension and group products (for both linked and non-linked
products)

59
 3.4 PUBLIC SECTOR & PRIVATE SECTOR BUSINESS
SCENARIO:
The research work is being carried out for the period 2000 to 2008 and hence, we
have to understand what the situation prior to 2000 was and what has been the
situation during the period 2000 to 2008. The pre-liberalization period is the period
prior to 2000 and in this period there was monopoly of the General Insurance
Corporation of India and its following four subsidiaries:

National Insurance Company

New India Assurance Company
Oriental Insurance Company
United India Insurance Company
Insurance Regulatory and Development Authority Act (IRDA) came into effect in the
year 1999.This Act removed the exclusive privilege of GIC and its subsidiaries to carry
on general insurance business in India. The supervisory role of GIC over the subsidiaries
ended and they were made four independent companies. There were 14 general insurance
companies in the private sector by 2008.

3.5 INSURED UNDER IRDA REGULATIONS

Impact of IRDA act on general insurance policy holders or insured
The formation of the Malhotra Committee in 1993 initiated reforms in the Indian
insurance sector. The aim of the Malhotra Committee was to assess the functionality of
the Indian insurance sector. This committee was also in charge of recommending the
future path of insurance in India.
The Malhotra Committee attempted to improve various aspects of the insurance sector,
making them more appropriate and effective for the Indian market.
The recommendations of the committee put stress on offering operational autonomy to
the insurance service providers and also suggested forming an independent regulatory
body. The Insurance Regulatory and Development Authority Act of 1999 brought about
several crucial policy changes in the insurance sector of India. It led to the formation of
the Insurance Regulatory and Development Authority (IRDA) in 2000. The goals of the
IRDA are to safeguard the interests of insurance policyholders, as well as to initiate
different policy measures to help sustain growth in the Indian insurance sector. The

60
Authority has notified 27 Regulations on various issues which include Registration of
Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance, Obligation of
Insurers to Rural and Social sector, Investment and Accounting Procedure, Protection of
policy holders' interest etc. Applications were invited by the Authority with effect from
15th August, 2000 for issue of the Certificate of Registration to both life and non-life
insurers. The Authority has its Head Quarter at Hyderabad.
Protection of the interest of general insurance policy holders
IRDA has the responsibility of protecting the interest of insurance policyholders.
Towards achieving this objective, the Authority has taken the following steps:‖58
IRDA has notified Protection of Policyholders Interest Regulations 2001 to
provide for: policy proposal documents in easily understandable language; claims
procedure in both life and non-life; setting up of grievance redressal machinery;
speedy settlement of claims; and policyholders' servicing. The Regulation also
provides for payment of interest by insurers for the delay in settlement of claim.
The insurers are required to maintain solvency margins so that they are in a
position to meet their obligations towards policyholders with regard to payment of
claims.
It is obligatory on the part of the insurance companies to disclose clearly the
benefits, terms and conditions under the policy. The advertisements issued by the
insurers should not mislead the insuring public.
All insurers are required to set up proper grievance redress machinery in their
head office and at their other offices.
The Authority takes up with the insurers any complaint received from the
policyholders in connection with services provided by them under the insurance
contract.

61
 3.6 NATIONALIZATION OF GENERAL INSURANCE
BUSINESS IN INDIA
Mr. P. S. Palande, Mr. Shah and Mr. M. L. Lunawat, in their book, “Insurance in India”,
has discussed this chapter in detail. The essence of the same is as under;
Nationalization Phase of Indian General Insurance Business:
The Government had nationalized the insurance business in India, but it gathered the
momentum in the year 1944. In this same year, a bill to amend the Life Insurance Act
1938 was introduced by the government in the Legislative Assembly. The government
took the control of 154 Indian insurance companies, 16 non-Indian companies and 75
provident societies in the year 1956 and nationalized these companies. The Life Insurance
Company was formed by an act of parliament in this year which is called as LIC Act,
1956. The capital contribution of the government of India was Rs. 5 Corer.
The government, in the year, 1972 formulated an act called The General Insurance
Business (Nationalization) Act. This act nationalized the general insurance business in
India with effect from 1st January 1973 and the amalgamation of private companies was
effected.
The nationalization process was accomplished in two stages. In the first stage, the
government took over the management of these companies by passing an ordinance and
in the second stage; the government took over the ownership of these companies by
means of a comprehensive bill. The government nationalized the LIC in the year 1956
with the objective of spreading the life insurance much more widely and in particular to
the rural areas with a view to reach all insurable persons in the country. The purpose was
to provide them adequate financial cover at a reasonable cost. Today, LIC is India‘s
leading Insurance Company, with 2000 branches. Thus, LIC has the highest number of
branches across India in the insurance sector.
The question comes to mind that why the nationalization was done? Was it required?
What prompted government to nationalize the insurance business? What are factors that
lead the government to nationalize this business?
The insurance sector in India was an open competitive market. From this, it became
nationalized business. Today, it has come back to liberalized market. Therefore, it can be
said that the insurance sector in India has experienced a 360-degree journey over a period
of more than a hundred years.
India became independent in the year 1947 and within ten years of independence, the

62
insurance business was brought under the control of the government. These government
controlled companies functioned under the burden of bureaucracy and inefficiency. These
companies had millions of policyholders. This was due to the fact that there were no other
alternatives available to the policyholders. This was the situation till the re-opening of the
sector in the 1990s. Prior to this, if there were any attempts regarding opening up of the
sector, there used to be very violent criticism and agitation from insurance employees
unions. There was a Congress led government at the centre during the period 1991-1996
and this government introduced reforms in various sectors of the economy. However, this
government could not bring about a change in the insurance sector. It was the BJP-led
coalition government which took the challenge to instate the present liberal structure.
They had to face the criticism from some of their coalition partners.
The argument behind opening up of the sector was consumer-centric, which claimed that
opening up the insurance sector would give better products and service to consumers.
Those who were not in favour of opening up of the sector or the privatization of the sector
argued that in a poor country like India insurance needs to have social objectives and
newcomers will not have that commitment.
The insurance sector was finally opened to competition again in 1999- 2000. It will,
therefore, take some time before we can gauge its true performance. By 1956, as many as
154 Indian insurers, 16 non-Indian insurers and 75 provident societies (in all, 254 entities)
had entered the life insurance business in India. This figure may look big, but the fact is
that the geographical spread and the number of lives covered were rather small.
At that time, the insurance companies, by and large, were governed by short-term
considerations. Because of this, the business was confined mainly to cities and the more
affluent segments of the society. The insurance policies were being offered to the people
in high income groups and usually people with small income groups were neglected. It
was required to reach the poor and small income group people. The income and financial
position of small income group people had not even been attempted for offering policies
to them.
It is during this period that a number of malpractices occurred in the industry. This caused
losses to the unsuspecting public.
There were also some instances of mismanagement and misutilisation of funds collected.
This was highly objectionable and harmful development in this field. These diversions of
funds were so large that it led to a situation where the insurance companies were not in a
position to honour their commitment to their own customers.
63
Some of the companies were winding up. This process gathered momentum especially
after the First World War. In between 1914 and 1920; many insurance companies were
closed down. This caused large losses for the small investors.
The Union Government‘s efforts at regulating the industry through various legislative
measures were not very effective. The former Finance Minister, Dr. C. D. Deshmukh said
in Parliament, during the debate on the life insurance
(Emergency Provisions) Bill, 1956, that: ―The industry was not playing the role
expected of insurance in a modern state and efforts at improving the standard by further
legislation.”
The managements were expected to act as trustees. The concept of trusteeship seemed
entirely lacking. Indeed, most management had no appreciation of the clear and vital
distinction that exists between trust moneys and those which belong to joint stock
companies.
Because of these developments, the demand for stricter government control of the
industry gathered momentum and called for nationalization of the insurance business.
Again, quoting Dr. C. D. Deshmukh, „ Misuse of power, position and privilege that we
have reasons to believe occurs under existing conditions is one of the most compelling
reasons that have influenced us in deciding to nationalize life insurance‟.
Although that was the immediate cause of nationalization, Dr. C. D. Deshmukh argued
that the principal point about nationalization was that the state did not have to make out a
case that the private sector had failed. Nationalization is justified on many other grounds
of ideology, philosophy and the objective of a welfare state. It was necessary in order that
the interest of the insuring public and the industry could be safeguarded, the country‘s
economy promoted and more funds provided for economic development. These were the
considerations which persuaded the Government of India to opt for nationalization of this
industry.
The general insurance business of India has been doing very well after nationalization. It
has grown in spread and volume after nationalization.

3.7 POST-NATIONALIZATION PROCESS

The GIC‘s equity capital increased from the original capital of Rs. 215 million to Rs. 2.15
billion through bonus issues in 1982, 1986, 1990 and 1994. The four companies
continued to expand their activities and, by 2001-2002, they operated through 2,699

64
branch offices, 1,360 divisional offices and 92 regional offices spread all over the
country. The gross premium income of the non-life insurance business grew from Rs.
2.04 billion in 1973 to Rs. 280.5 billion in 2007-200859. The net premium income of the
four subsidiaries was Rs. 87.45 billion and GIC‘s operations produced a net premium
income of Rs. 26.71 billion. Of this, direct overseas operations of the subsidiaries
produced a gross premium income of Rs. 9.3829 billion.
Even with a conservative approach towards investments and after fully providing for
technical and other reserves, the industry has always made profit. It grew from Rs. 380
million in 1973 to Rs. 8.74 billion (net) in 1999-2000, but came down to Rs. 5.1740
billion in 200160. In 2001-2002, the GIC itself ended up with a loss of Rs. 2.0470 billion
(up from a loss of Rs. 3.3489 billion in the previous year.) on underwriting, but it‘s total
profit when other income is taken into account, was Rs. 3.0671 billion, down from Rs.
4.0101 billion in 2000-2001.
As of March 31, 2002, GIC‘s total investment was Rs. 71.3583 billion, the income from
which amounted to Rs. 7.6638 billion. For the general insurance companies as a whole,
income from investments has been consistently rising and was Rs. 28.6369 billion in
2001-2002. GIC‘s reserves as on March 31, 2002 stood at Rs.
27.1560 billion and its assets were of the order of Rs. 103.7884 billion as at the end of
2002.
The general insurance industry has contributed handsomely to the national exchequer in
dividends and taxes. Thus, GIC has been consistently paying, an annual dividend at 25
per cent to the government, although for 2002, it declared a lower dividend of 20 per cent
(as against 30 per cent in 2001)61.
Taxes paid by the general insurance industry during the same period amounted to Rs.
1.2015 billion, of which Rs. 0.5 billion was from the GIC and Rs. 0.7015 billion was paid
by the four companies.
Unfortunately, even after nationalization, general insurance, like the life insurance
business, also continued to show a bias towards the city based trade and industry for a
number of years. Its emphasis has now changed and from a virtual nil premium base in
1973. Its rural and non-traditional business rose to Rs. 3.3614 billion as on March 31,
1998. The premium acquired during the year 2000-2001 was Rs. 4.2505 billion.
Despite all these achievements, coverage by general insurance is still lower in India as
compared with other countries.
The awareness level is low for general insurance products
65
 The commission structure was not very attractive for good agents to survive on a full
time basis
The distribution channels were not responsive to customer needs
Their knowledge was not adequate
Customer service needed improvement
In particular, personal lines of business did not get adequate attention
These are some of the reasons for its slow growth in India.
The GIC was designated as the Indian reinsurer under section 101(A)(8)(ii) of the
Insurance Act, 1938 and has done well for itself in this area.

3.8 THE BENEFITS OF NATIONALIZATION

The benefits of Nationalization can be summarized as follows:
1. Distribution
2. Variety of Product
3. Trust and Faith
4. Large Work force of Agent
The success of the insurance companies will be determined by their reach. This is true for
all the insurance companies, irrespective of the age or the ownership. Today, the
nationalized companies have a large reach and presence when compared with private
companies. This is so, because, building a distribution network is expensive and time
consuming. This is the challenge before the new entrants. It would be very difficult for
them to penetrate in the market easily.
There are different product policies designed by the Nationalized Insurance companies.
They are varied and focus on the need of Indian customer. This is the reason that even in
a small village, there is a policyholder of the nationalized insurance company. In the
initial stage, new entrant cannot expect the penetration and variety of products. This is
because the small amount of policies will increase their carrying cost.
The reason for believing in nationalized companies is that these companies are owned by
the government itself and they are existing since 1956. The people of India have real faith
and are confident in with Nationalized Insurance Companies.
Since the government companies are there in this field for quite a long time, these
nationalized companies have large and distributed human resource. This is very important
for targeting huge mass. The same will not be possible for the new private entrants in the

66
initial years. Even if they do, they would lack in experience and patience which is
foremost quality of an agent.
The above are some of the benefits of nationalization. But there are many other areas in
insurance sector, where the new entrants would plan their strategy and can penetrate the
market.

3.9 OPPORTUNITIES FOR NEW ENTRANTS

There are various opportunities for the new entrants in the field of general
insurance:
1. They can introduce innovative products offering a right mix of flexibility/risk/return
depending which will suit the appetite of the customers

2. They can target specific niches, which are poorly served or are not served at all.
3. Being the agrarian economy again there are immense opportunities for the new
entrants to provide the liability and risks associated in this sector like weather
insurance, rainfall insurance, cyclone insurance, crop insurance etc.
4. The financial sector is aggressively targeting retail investors. Housing finance, auto
finance, credit cards and consumer loans all offer an opportunity for insurance
companies to introduce new products like creditor insurance etc. Similarly, organized
sector sales of TVs, refrigerators, washing machines and audio systems. Only a
negligible portion of these purchases is insured. Potential buyers for most of this
insurance lie in the middle class. This is a huge market for new private entrants.
5. The lack of a comprehensive social security system combined with a willingness to
save in India will lead to a large demand for pension products. However, current
penetration is poor. Making pension products into attractive saving instruments would
require only simple innovations already prevalent in other markets. For example, their
returns might be tied to index-linked funds or a specific basket of equities. Buyers
could be allowed to switch funds before the annuities begin and to invest different
amounts at different times
6. Health insurance is another segment with great potential because existing Indian
products are insufficient. Indian products do not cover disability arising out of illness
or disability for over 100 weeks due to accident. Neither do they cover a potential loss
of earnings through disability.

67
3.10 TRENDS IN GENERAL INSURANCE BUSINESS
With the de-regulation in Indian Insurance industry, the monopoly of public sector
general insurance companies‘in general insurance sector has come to an end. This has
augmented the innovative practices initiated by the private players. Growth in the
interactive technology such as internet has further created a wave
of excitement in the insurance market. Indian economy and Indian general Insurance
sector is likely to achieve a double digit growth. Here is a glimpse of Insurance Industry
over 190 years.
Insurance is a Rs 450 billion industry in India. The value of the market is determined by
gross premium incomes. Indian Insurance market was at its all-time high in 2003 with a
growth of about 17.4% over the previous year.
Since 2001 Insurance is growing at the rate of 15-20 % annually. The growth in the
insurance industry is affected by volatility in real estate rates, GDP rates and long term
interest rates. Fluctuations in exchange rates also affect the growth in this sector. The
gross premium as a percentage of the GDP has gone up from 2.3 in the year 2000 to 7.6
in 2008.‖62Together with banking services, it adds about 7% to the country‘s GDP.
The Indian Insurance Industry has gone through following phases:
Ancient Historical Times
British-India Period
Post-Independence era of Indian Insurance
Nationalization Phase of Indian Insurance
Liberalization of Indian Insurance
General Insurance in 21st Century
The Government of India liberalized the insurance sector in March 2000 with the passage
of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry
restrictions for private players and allowing foreign players to enter the market with some
limits on direct foreign ownership.

3.11 CHALLENGES/PROBLEMS FACED BY PUBLIC

SECTOR GENERAL INSURANCE COMPANIES
The prospects of Indian Public Sector General Insurance Industries are very bright,
however, at the same time, the industry is facing various challenges and these could be
summarized as under:

68
Private insurance companies are entering the market every year. Therefore, the companies
should carve out niche areas such that the threat of new entrants might not be an obstacle
for them. There is also a chance that the big players might squeeze the small new
entrants.
Power of Suppliers
Those who are supplying the capital are not that big a threat. For instance, if someone as
a very talented insurance underwriter is presently working for a small insurance
company, there exists a chance that any big player willing to enter the insurance industry
might attract that person off.
Power of Buyers
No individual is a big threat to the insurance industry and big corporate houses have a lot
more negotiating capability with the insurance companies. Big corporate clients like
airlines and pharmaceutical companies pay millions of dollars every year in premiums.
Availability of Substitutes
There exist a lot of substitutes in the insurance industry. The large insurance companies
provide similar kinds of services – be it auto, home, commercial, health or life insurance.
Besides this, other areas can be focused to grow and survive in the Indian Market
Understanding Customer needs
Understanding the customer better will allow insurance companies to design appropriate
and-customized products, determine pricing correctly and increase profitability.
High-level Training and Development
Ensure high levels of training and development not just for staff but also for agents and
distribution organizations. Existing organizations will have to train staff for better service
and flexibility, while all companies will have to train employees to cope with new
products and an intensive use of information technology.
Agent Relationship
Build strong relationships with intermediaries such as agents.
Market Segmentation
They must segment the market carefully to arrive at the appropriate products and pricing
and should cater the needs of every individual.
Revamped Marketing Strategy
Worldwide, insurance products move along a continuum from pure service products to
pure commodity products then they could be sold through the medical shops, groceries,
novelty stores etc. Once communization, popularity and awareness of the products are
69
attained then the products can move to remote channels such as the telephone or direct
mail. Brand loyalty could shift from the insurer to the seller.
Despite innumerable delays the sector has finally opened up for private competition. The
threat of private players shaking up and giving the run for incremental market share for
the Public Sector mammoths has been overplayed. The number of potential buyers of
insurance is certainly attractive but much of this population might not be accessible for
the new insurers. Since distribution will be a key determinant of success for all insurance
companies regardless of age or ownership, Indian Insurance companies should broaden
the distribution network. As the product moves towards the mature stages of
communization (increased awareness and popularity) they could then use a host of new
channels like grocery stores, direct mails. Regulators must formulate strong and fair
guidelines and ensure that old and new players are subject to the same rules and at the
same time the government should ensure that the IRDA does not become yet another
toothless tiger. In a reopened Indian insurance market, regulators must formulate strong
fair and transparent guidelines and make sure that old and new players are subject to the
same rules. Companies meanwhile must be prepared to set and meet high standards for
themselves. The big challenge for both companies and regulators is to ensure that they
replicate the benefits of the past while eliminating its ills.

70
JUDICIAL PRONOUNCEMENTS-

Nibro Ltd. vs National Insurance Co. Ltd. on 6 March, 1990

AIR 1991 Delhi 25, 1991
It was submitted by learned counsel for the plaintiff that the observations of the Supreme
Court in Life Insurance Corporation of India [1984] 56 Comp Case 174 cannot be relied
upon by the defendant because in that case the Supreme Court was dealing with a case of
lifeinsurance and not general insurance. In my view, after reading the observations of
the Supreme Court in the two authorities cited hereinabove, whether the case relates
to general insurance or life insurance makes no difference. As observed by the Supreme
Court itself in Life Insurance Corporation of India [1984]56 Comp Case 174,
the general rule is that the contract of insurance will be concluded only when the party
to whom an offer has been made accepts it unconditionally and communicated his
acceptance to the person making the offer. Whether it is done by giving a cover-note or
by issuing a letter depends on the facts of each case. In order to hold that there was
binding contract of insurance , there must be an offer put forward by one party to the
contract and acceptance of it by another. As observed in MacGillivray and Parkington
on Insurance Law, eighth edition, chapter 2, page 87, para 212, the material terms of a
contract of insurance are : the definition of the risk to be covered, the duration of
the insurance cover, the amount and mode of payment of the premium and the amount
of insurance payable in the event of a loss. As to all these there must be a consensus ad
item, that is to say, there must be either an express agreement or the circumstances must
be such as to admit of a reasonable inference.
This suit for recovery of Rs.7,40,606.65 together with costs and interest has been filed by
the plaintiff against the defendant - National Insurance Co. Ltd. The plaintiff is a
company incorporated under the Companies Act, 1956, having its registered office at E-5,
Hauz Khas, New Delhi. The plaint has been signed and instituted by one Shri G. Jhajharia
who claims to be the director and principle officer of the plaintiff company authorised to
sign the plaint and institute the suit. The defendant is a nationalised company.
The plaintiff has a factory at Delhi Road, Gurgaon, Haryana. It is stated in the plaint that
the factory of the plaintiff was insured by the defendant since 1973 against, theft, fire,
damage, etc., from time to time under the policies taken by the plaintiff. The plaintiff with
a view to reinsure its factory requested Shri Dilip Bhattacharjee, the Development Officer
of Division No.II of the defendant, to visit and inspect the premises. Accodingly, Shri
71
Dilip Bhattacharjee visited the factory of the plaintiff on May 31, 1982, and agreed to
insure the factory building goods and raw material against theft, fire, damages, etc. He
further agreed to issue the cover note on the next day. According to the plaintiff, on June
1, 1982, Shri Dilip Bhattacharjee collected a cheque for Rs.12,324 which included
Rs.6,364 towards fire insurance premium, Rs.5,400 towards burglary and Rs.516 towards
traders' combined risk. It is alleged in the plaint that Shri Dilip Bhattacharjee signed the
cover-note in the presence of Shri A.K. Jhajharia; however, Shri Dilip Bhattacharjee said
that he will issue the insurance policy very soon and took away the cover-note with him
to do the needful in the matter. According to the plaintiff, Shri Bhattacharjee issued
insurance cover-notes under cover-notes Nos.614129 and 591291 on June 1, 1982, itself
for an aggregate sum of Rs.40,60,000. It is alleged that the plaintiff's proposal and the
cheque were duly accepted by the insurance company through Shri Dilip Bhattacharjee,
the Development Officer, and the above mentioned cover-notes were issued on June 1,
1982, to convey the acceptance.
In the present case, admittedly, the factory of the plaintiff was insured by the bank only
till December 29, 1981, for a period between 1978 and December 29, 1981. From
December 30, 1981, till June 1, 1982, the factory was not insured. It is admitted by the
plaintiff that no policy was issued by the defendant. It is also admitted that the cheque
which was allegedly given by the plaintiff was never encashed by the defendant. The
short question, therefore, to be determined is whether Shri Dilip Bhattacharjee issued
cover-notes and whether the same were received by the plaintiff on June 1, 1982, as
alleged. Admittedly, the case of the plaintiff is that Shri Dilip Bhattacharjee took away
the cover-notes on June 1, 1982., itself. Rather, PW-2, Shri Ashok Kumar Jhajharia, in his
statement has stated that Shri Dilip Bhattacharjee handed over the cover-notes to him on
June 1, 1982, and there were in his possession for 10 minutes and Shri Dilip
Bhattacharjee immediately took them back with the promise that he will issue the policy
shortly. Thus, admittedly the cover-notes are not in the possession of the plaintiff.

72
National Insurance Co. Ltd. vs Komal & Ors. on 27 April, 2012 Delhi High Court
In view of the facts and circumstances and aforesaid proposition of law, we are convinced
that this is a fit case wherein the rate of interest should be revised upwardly and enhanced
even in absence of appeal or cross-objection by the original claimant, who is a living
victim of the violent accident. In the case of State of Madhya Pradesh v. Diwan Chandra
Gupta reported in 1989 ACJ 320, the Madhya Pradesh High Court was pleased to
enhance the rate of interest from 6% to 12% from the date of the application till payment
even without cross- objection. Without any cross-objection, in an appeal at the instance of
the insurer, like one on hand, interest was directed to be paid at the rate of 12% per
annum from the date of the application by the Madhya Pradesh High Court in
the case of New India Assurance Co. Ltd. v. Shakuntla Bai reported in 1987 ACJ 224.
Similar view was taken by the Gauhati High Court in the case of United India Fire
& General Insurance Company Limited v. Malati Bala reported in 1985 (1) Gau. LR
443. In that case the award of the Tribunal was faulted by the High Court for not giving
reasons for awarding only 6% interest and not higher interest, taking the view that the
Tribunal had committed jurisdictional error in doing so and that could be corrected by the
High Court without cross- objection of the claimant-respondent.
"1. When this appeal came, for hearing before one of us (S. K. Dubey, J.), sitting singly,
and it was heard at some length by him, he took the view that the interpretation ofSection
110-CC, Motor Vehicles Act, 1939, for short, the 'Act', in the context of Order 41, Rule
33, CPC by another learned single Judge of this Court in the case of Oriental Fire
and General Insurance Co. Ltd. Indore v. Kamla Bai, 1990 MPJR 140, hereinafter
referred to as Kamlabai's case was required to be examined by Larger Bench. Indeed,
according to him, the view expressed in the decision cited, conflicted directly with this
Court's decision in Manjula Devi Bhuta v. Manjushri Raha, 1968 Jab LJ 189 and
otherwise also, the question was a general importance to decide whether in appeal, the
Court had power, jurisdiction or duly to award interest at a higher rate in the absence of
cross-objection in that regard by the claimant.
In a recent decision rendered on 3-5-1990 in the case of Ramesh Chandra v. Randhir
Singh, 1990 (II) 86. The view taken is that for award of interest, no pleading is necessary,
while in the decision rendered on 15-11- 1989, in the case of R. L. Gupta v.
Jupiter General Insurance Company, 1990 (1) MPWN 177, in categorical terms, the
Apex Court observed that "there have been several orders of this Court in recent casesin

73
compensation disputes where the Court has awarded 12% interest" and on that ground,
their Lordships raised interest also from 6% to 12% while enhancing the compensation.
130). Without cross-objection, in Insurer's appeal, interest was directed to be paid by him
at the rate of 12% per annum from date of application in New India Assurance Co. v.
Shakuntalabai, AIR 1987 MP 244 : 1987 ACJ 224 : 1987 Jab LJ 462.
1. Evidently, the trend-setter is the decision of a learned single Judge of this Court
rendered on 30-11-1985 in State of M.P. v. Shantibai, 1986 (1) MPWN 54,
whereinSection 110-CC was compared with Section 34, CPC to hold the view that
in the absence of specific statutory mandate prescribed in Section 110-CC, about
rate of interest, minimum interest charged by commercial Bank being 12%, that
should be specified to make the award of interest reasonable. Without cross-
objection of the respondent, the award was modified in appeal by this Court by
raising the interest from 6% to 12%. For the view taken, inspiration was derived
from a Bench decision of the Gauhati High Court in the case of United India Fire
and General InsuranceCompany v. Malati Bala, (1985) 1 Gauhati LR 443. In
that case, the award of the Tribunal was faulted by the High Court for not giving
reasons for awarding only 6% interest and not higher interest, taking the view that
Tribunal had committed jurisdictional error in doing so and that could be
corrected by the High Court without cross-objection of the claimant/respondent.
In the case of Sardar Ishwar Singh v. Himachal Puri, 1992 ACC 5 : AIR 1990 MP
282 decided on 18-9-1989, power was exercised suo motu in owner's appeal to
enhance interest to 12% per annum while enhancing the compensation. We have
no doubt that in so far as this Court is concerned, it has been the considered and
consistent view of several Benches of this Court for at least last five years that for
proper award of interest under Section 110- CC it is necessary to specify, even
without cross-objection, the rate of interest, to be payable at 12% per annum from
date of application till realisation, while awarding or enhancing compensation in
appeal.

74
Asstt. Cit, Rg. 4(1) vs Claridges Investments And others on 9 August, 2007
Income Tax Appellate Tribunal - Mumbai

1. These cross appeals arise out of the order dated 31-3-2006 of the Commissioner
(Appeals) for the assessment year 2001-02. We have heard these appeals together and
dispose the same by this consolidated order.

2. The first dispute in the revenue's appeal is directed against the disallowance of loss of
Rs. 13,11,01,153 relating to purchase and sale of units of mutual funds. The learned
Commissioner (Departmental Representative) vehemently relied upon the discussions in
the assessment order and the case of the revenue according to him is fully supported by
the decision of the Hon'ble Punjab & Haryana High Court in the case of Vaneet Jain v.
CIT (2007) 294 ITR 432 (P&H).

3. The learned Counsel for the assessee, on the other hand, strongly argued that the
decision of the Special Bench of the Tribunal in the case of Wallfort Shares & Stock
Brokers Ltd. v. ITO(2005) 96 ITD 1 (Mum) completely covers the issue in favour of the
assessee. He also relied upon the decision of the Delhi High Court in the case of CIT v.
Vikram Aditya Associates (P) Ltd. .

4. We have carefully considered the rival contentions and have gone through the record.
In our view, the order of the Commissioner (Appeals) does not require any interference.
The Mumbai Benches of the Tribunal after considering the decisions of the Delhi High
Court and the Punjab & Haryana High Court have accepted similar contentions of the
assessee in the following cases:

(i) Ashok Kumar Damani 'A 'Bench (IT Appeal No. 7004 (Mum.) of 2004)

(ii) Oxemberg Fashions Ltd. 'E' Bench (IT Appeal No. 5617 (Mum.) of 2004)

(iii) Ronak Manharlal Sheth I Bench (IT Appeal No. 2966 (Mum.) of 2004) although
contrary views are expressed by 'E' Bench in the case of Ompraskash Agarwal (IT Appeal
No. 7895 (Mum.) of 2004). In the light of the principle laid down by the Hon'ble
Supreme Court in the case of CIT v. Vegetable Products Ltd. and also the decision of the
jurisdictional High Court in the case ofSiemens India Ltd. v. K. Subramanian ITO (1983)
143 ITR 1202 (Bom.) when there is conflict between the judgments of non-jurisdictional

75
High Courts, then the view favourable to the assessee should be adopted. Respectfully
following the Special Bench decision in the case of Wallfort Shares & Stock Brokers Ltd.
(supra), we confirm the order of the Commissioner (Appeals).

We have carefully considered the rival submissions. In the case of Rajesh Kumar (supra)
Hon'ble Apex Court has unmistakably laid down that it is mandatory to give an assessee
an opportunity of being heard before a reference for special audit under Section
142(2A) is made in the case of that assessee. Hon'ble Supreme Court has observed:

A direction issued under Section 142(2A) of the Income Tax Act, 1961, for special audit
of the accounts of the assessee is not administrative in nature: it is a quasi-judicial order.
In view ofSection 136 the entire proceeding before the assessing officer being judicial, a
part thereof, which indisputably is resorted to in aid of the ultimate order of assessment,
without any statutory interdict, cannot be called an administrative order.

The expression 'having regard to' in Section 142(2A) is significant. An opinion must be
formed strictly in terms of the factors enumerated therein. The expression indicates that in
exercising the power regard must be had also to the factors enumerated therein together
with all factors relevant for the exercise of the power. The factors enumerated in Section
142(2A) are not exhaustive. Once it is held that the assessee suffers civil consequences
and any order passed would be prejudicial to him, the principles of natural justice must be
held to be implicit. The principles of natural justice are required to be applied inter-alia to
minimize arbitrariness. If the assessests put to notice, he could show that the nature of the
accounts is not such as would require appointment of special auditors.

76
Oriental Fire & General Insurance company vs Bachan Singh And Ors. AIR 1982 P
H 267, 1984 55 on 5 January, 1982 Punjab-Haryana High Court
The facts, though brief disclose a long delay which sometimes occurs even in the urgent
compensation cases of claims by victims of motor vehicle accidents. Way back on the 4th
of Dec. 1970, Gurmel Singh deceased the son of Bachan Singh respondent was fatally run
over by truck No. HRK 6664. An application for compensation on behalf of the
dependents of the deceased was preferred against Prabh Dayal, the driver of the truck,
Dai Ram the alleged owner thereof, and the Oriental Fire
& General Insurance Company Ltd., who were the insurers of the offending vehicle.
The case of the claimants rested on the ground that the truck was being rashly and
negligently driven by Prabh Dayal driver. In resisting the claim application the
respondents took the plea that Dai Ram was not the owner of the truck though it was
admitted that it stood insured with the Oriental Fire and General Insurance Co. Ltd. and
was driven by Prabh Dayal at that time. The Tribunal on issue No. 3 held that Dai Ram
was not the owner of the truck and in fact M/s. Bal Kishan Ram Dhari of Samalkha were
its real owners who were not impleaded as such. It was, however, found that the death of
Gurmel Singh deceased was on account of rash and negligent driving by Prabh Dayal and
compensation therefor was assessed at Rs.16,600/-. The claim petition, however, was
dismissed in view of the aforesaid finding on issue No. However, on appeal the dismissal
of the claim application was set aside and the matter was remanded to the Tribunal to
decide the same afresh in the light of the observations of the appellate Court. For the
purposes of this reference it is unnecessary to advert to the chequered history of the
second trial before the Tribunal and it suffices to mention that during the course thereof
Prabh Dayal driver died and the counsel for the claimants made a statement to the effect
that he had left no estate and consequently his name be struck off from the array of
respondents which was accordingly done. The tribunal then found that M/s. Bal Kishan
Ram Dhari were the owners of the truck and not Dai Ram respondent. The firm stand
taken on behalf of the owners before the tribunal was that the evidence recorded at the
original trial when they were not parties to the proceedings could not be looked at for
fastening them with liability. Consequently it was contended that there was no evidence
against them that the death of the deceased was caused by rash and negligent driving of
the truck by Prabh Dayal, after they were impleaded as parties. This stand found favour
with the Tribunal and as a necessary corollary thereof M/s. Bal Kishan Ram Dhari the
owners were exonerated from all liability. Nevertheless the Tribunal found that the
77
appellant insurer M/s. Oriental Fire and General Insurance Co. Ltd., would continue to
be liable in view of the observations in Norati Devi's case (AIR 1978 Punj & Har 113)
(supra).

It would follow from a plain look at Ss. 110 to 110-F of the Act that a Motor Accidents
Claims Tribunal when constituted, would substitute the civil courts and, therefore, the
provisions of S. 96of the Act would be ipso facto attracted to the situation. It is
unnecessary to elaborate the matter because the issue came up pointedly before a Division
Bench of the Calcutta High Court in Hukam Chand Insurance Co. Ltd., v. V. Subhashini
Roy, 1971 Acc CJ 156, and expressly dissenting from the view in K.
Gopalakrishnan's case (AIR 1968 Mad 436) (supra), and, Madras Motor
and General Insurance Co. case (AIR 1974 Andh Pra 310) (supra), it observed as
follows:--

In fairness to Mr. Sahni, it must be noticed that he also placed reliance on

the VanguardInsurance Co. Ltd. v. Foolchand Mandal, AIR 1967 Patna 342, and, Assam
Corporation v. Binu Rani Ao, 1974 Acc CJ 381 : (AIR 1975 Gauhati 3). Undoubtedly, the
observations made therein would lend some assistance to his stand. However, in view of
the detailed discussion, both on principle, the language of the statute and the massive
weight of precedent to the contrary, I am unable to subscribe to the same and with the
greatest respect feel compelled to record to dissent therefrom as well.

78
United India Insurance Company vs K.N. Surendran Nair II (1990) ACC 192 on 1
January, 1800
There is some force in this argument of the learned Counsel for the Insurance Company.
However, we do not go into the question wince we fell that the decision reported
in British IndiaGeneral Insurance Company v. Captain Itbar Singh may not be
applicable to the case in hand.(emphasis supplied). In our view the decision of the
Supreme Court does not lend support to the view taken by the Madras High Court which
provides the basis for the above observation of the Division Bench. A reference in this
connection to the following observations of the Supreme Court in British
India General Insurance case is profitable;

1. The Insurance Company, the third respondent in O.P.(M.V) No. 774/1981 before the
Motor Accidents Claims Tribunal, Ernakulam is the appellant.

2. On a perusal of the memorandum of appeal it is clear that the grounds urged there in
are grounds which can be availed of only by the insured.

3. The counsel for the claimant therefore argued that the appeal was not maintainable.
Dilating on this argument the counsel submitted that the Insurance Company was not
entitled to take any defence which is not specified in Sub-section 2 of Section 96 of
the Motor Vehicles Act 1939, for short, The Act. Before we consider this case of the
claimant we shall briefly state the arguments advanced by the counsel for the appellant.
The counsel submits that the appeal may be treated as one filed on behalf of the insured
and that is possible in view of Section 110C(2 A) of Chapter VIII of the The Act. Had
that not been the position there was no need for the Tribunal to allow the appellant to
cross-examine the witnesses with permission, the counsel submits. He has a further case
that in any event, in view of clause (2) of the conditions incorporated in the policy, the
appellant has every right to take up the defence, the insured ordinarily can take in a case
like this.

4. We shall now consider the argument based on Section 110C (2A) Section 110C (2A)
reads:

79
Where in the course of any inquiry, the Claims Tribunal is satisfied that:

(i) There is collusion between the person making the claim and the person against whom
the claim is made, or

(ii) The person against whom the claim is made has filed to contest the claim, it may, for
reasons to be recorded by it in writing, direct that the insurer who may be liable in respect
of such claim, shall be impleaded as a party to the proceeding and the insurer so
impleaded shall thereupon have the right to contest the claim on all or any of the grounds
that are available to the person against whom the claim has been made.

This section provides that where in the course of any enquiry the Claims Tribunal is
either satisfied that there was collusion between the claimant and the person against
whom the claim was made of the person aganist whom the claim was made had failed to
contest the claim; then the Tribunal, for reasons to be recorded in writing, can direct that
the insurer who will be liable in respect of the claim shall be impleaded as a party to the
proceeding and the insurer so impleaded has the right to contest the claim on all or any of
the grounds that are available to the insured.

5. This Sub-section would suggest that an order under this section enabling an insurer to
contest the claim on all or any of the grounds that are available to the insured can be
passed by the Tribunal only as a seqpel to the order directing impleadment of the insurer,
he would pass on his being satisfied that either there is collusion between the claimant
and the insured or the insured has failed to contest the claim, the counsel representing the
contesting respondents submit. We are not impressed by this argument. This Sub-section
in our view was introduced to safeguard the interests of the insurer which is going
by Section 96(2) is not entitled to take any defence which is not specified therein. Apart
from Section 96(2) an insurer had no right to get itself impleaded as a party to the action
by the claimant against the insured causing the injury. This right is a statutory right.
While conferring this right, Sub-section 2 of Section 96 has imposed certain restrictions
in regard to the defences, the insurer can take. The insurer is not entitled to take any
defence which is not specified in that Sub-section In short the only method of avoiding
the liability provided for under Sub-Section 2 is setting up the defences enumerated
therein. (See British India General Insurance Co. v. Captain Ithar Singh and Ors. . The
restriction thus imposed on the defences made it impossible for the insurer to contest the

80
claim not properly contested by the insured. The intention of the legislature thus is clear
that the Sub-Section is meant to safe-guard the interest of the insurer. The objective of the
Sub-Section could be achieved only if the insurer is allowed to contest the claim on all or
any of the grounds available to the insured. However, a literal adherence to the words
used in the section namely that "an insurer who may be liable in respect of such claim,
shall be impleaded as a party to the proceeding and the insurer so impleaded shall
thereupon have the right to contest'' would result in the insurer who had already been
impleaded under Section 96(2) not getting a chance to contest the claim on all or any of
the grounds available to the insured even if it is established that the insured is hand and
glove with the claimant and as such not contesting the claim. A grammatical or literal
interpretation of these words, in our view, would lead too manifest absurdity. In such
circumstances, a construction not quite strictly grammatical or literal can be adopted. (See
craies on Statute law, 17th Edn. Page 87-88). We therefore are of the view that the insurer
who is already a party to the claim petition having been impleaded under Section
96(2) can also avail of this defence. Such an insurer accordingly can move the Tribunal
under this Sub-section and obtain the requisite permission to contest the claim on all or
any of the grounds the insured would take. If the insurer makes an application in this
regard, the Tribunal shall consider the same on merits after notice to the claimant and
insured and pass appropriate orders in writing enabling the insurer to contest the claim on
the grounds available to the insured. In the present case there is nothing on record to show
that the insurer-appellant has obtained such permission from the Tribunal and if that be so
the insurer-appellant is not entitled to contest the claim on the grounds that are available
only to the insured. The above argument of the learned Counsel therefore is rejected.

81
 CHAPTER-4

PRE IRDA ERA AN OVERVIEW

4.1 INSURANCE IN PRE IRDA ERA

Insurance in India refers to the market for insurance in India which covers both the public
and private sector organizations. It is listed in the Constitution of India in the Seventh
Schedule as a Union List subject, meaning it can only be legislated by the Central
government. The insurance sector has gone through a number of phases by allowing
private companies to solicit insurance and also allowing foreign direct investment. India
allowed private companies in insurance sector in 2000, setting a limit on FDI to 26%,
which was increased to 49% in 2014.[1] However, the largest life-insurance company in
India, Life Insurance Corporation of India is still owned by the government and carries a
sovereign guarantee for all insurance policies issued by it. In India, insurance has a deep-
rooted history. Insurance in various forms has been mentioned in the writings of Manu
(Manusmrithi), Yagnavalkya (Dharmashastra) and Kantilla (Arthashastra). The
fundamental basis of the historical reference to insurance in these ancient Indian texts is
the same i.e. pooling of resources that could be re-distributed in times of calamities such
as fire, floods, epidemics and famine. The early references to Insurance in these texts
have reference to marine trade loans and carriers' contracts.
Insurance in its current form has its history dating back until 1818, when Oriental Life
Insurance Company [3] was started by Anita Bhavsar in Kolkata to cater to the needs of
European community. The pre-independence era in India saw discrimination between the
lives of foreigners (English) and Indians with higher premiums being charged for the
latter. In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer.
At the dawn of the twentieth century, many insurance companies were founded. In the
year 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to
regulate the insurance business. The Life Insurance Companies Act, 1912 made it
necessary that the premium-rate tables and periodical valuations of companies should be
certified by an actuary. However, the disparity still existed as discrimination between
Indian and foreign companies. The oldest existing insurance company in India is the
National Insurance Company , which was founded in 1906, and is still in business.

82
The Government of India issued an Ordinance on 19 January 1956 nationalising the Life
Insurance sector and Life Insurance Corporation came into existence in the same year.
The Life Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as
also 75 provident societies—245 Indian and foreign insurers in all. In 1972 with the
General Insurance Business (Nationalization) Act was passed by the Indian Parliament,
and consequently, General Insurance business was nationalized with effect from 1
January 1973. 107 insurers were amalgamated and grouped into four companies, namely
National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental
Insurance Company Ltd and the United India Insurance Company Ltd. The General
Insurance Corporation of India was incorporated as a company in 1971 and it commence
business on 1 January 1973.
The LIC had monopoly till the late 90s when the Insurance sector was reopened to the
private sector. Before that, the industry consisted of only two state insurers: Life Insurers
(Life Insurance Corporation of India, LIC) and General Insurers (General Insurance
Corporation of India, GIC). GIC had four subsidiary companies. With effect from
December 2000, these subsidiaries have been de-linked from the parent company and
were set up as independent insurance companies: Oriental Insurance Company Limited,
New India Assurance Company Limited, National Insurance Company Limited and
United India Insurance Company Limited.
Legal structure The insurance sector went through a full circle of phases from being
unregulated to completely regulated and then currently being partly deregulated. It is
governed by a number of acts. The Insurance Act of 1938[4] was the first legislation
governing all forms of insurance to provide strict state control over insurance
business.Life insurance in India was completely nationalized on 19 January 1956, through
the Life Insurance Corporation Act. All 245 insurance companies operating then in the
country were merged into one entity, the Life Insurance Corporation of India.
The General Insurance Business Act of 1972 was enacted to nationalize about 100
general insurance companies then and subsequently merging them into four companies.
All the companies were amalgamated into National Insurance, New India Assurance,
Oriental Insurance and United India Insurance, which were headquartered in each of the
four metropolitan cities.Until 1999, there were no private insurance companies in India.
The government then introduced the Insurance Regulatory and Development Authority
Act in 1999, thereby de-regulating the insurance sector and allowing private companies.

83
Furthermore, foreign investment was also allowed and capped at 26% holding in the
Indian insurance companies.
In 2006, the Actuaries Act was passed by parliament to give the profession statutory
status on par with Chartered Accountants, Notaries, Cost & Works Accountants,
Advocates, Architects and Company Secretaries. A minimum capital of US$80
million(Rs.400 Crore) is required by legislation to set up an insurance business.
Authorities [edit]
The primary regulator for insurance in India is the Insurance Regulatory and
Development Authority of India (IRDAI) which was established in 1999 under the
government legislation called the Insurance Regulatory and Development Authority Act,
1999.[5][6]
The industry recognizes examinations conducted by IAI (for 280 actuaries), III (for 2.2
million individual agents, 680 corporate agents, 380 brokers and 29 third-party
administrators) and IIISLA (for 8,200 surveyors and loss assessors). There are 9 licensed
Web aggregators. TAC is the sole data repository for the non-life industry. IBAI gives
voice to brokers while GI Council and LI Council are platforms for insurers. AIGIEA,
AIIEA, AIIEF, AILICEF, AILIEA, FLICOA, GIEAIA, GIEU and NFIFWI cater to the
employees of the insurers. In addition, there are a dozen Ombudsman offices to address
client grievances.

4.2. BRIEF HISTORY OF INSURANCE SECTOR IN INDIA

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu (
Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings
talk in terms of pooling of resources that could be re-distributed in times of calamities
such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day
insurance. Ancient Indian history has preserved the earliest traces of insurance in the
form of marine trade loans and carriers’ contracts. Insurance in India has evolved over
time heavily drawing from other countries, England in particular. 1818 saw the advent of
life insurance business in India with the establishment of the Oriental Life Insurance
Company in Calcutta. This Company however failed in 1834. In 1829, the Madras
Equitable had begun transacting life insurance business in the Madras Presidency. 1870
saw the enactment of the British Insurance Act and in the last three decades of the
nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India

84
(1897) were started in the Bombay Residency. This era, however, was dominated by
foreign insurance offices which did good business in India, namely Albert Life
Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian
offices were up for hard competition from the foreign companies.
In 1914, the Government of India started publishing returns of Insurance Companies in
India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to
regulate life business. In 1928, the Indian Insurance Companies Act was enacted to
enable the Government to collect statistical information about both life and non-life
business transacted in India by Indian and foreign insurers including provident insurance
societies. In 1938, with a view to protecting the interest of the Insurance public, the
earlier legislation was consolidated and amended by the Insurance Act, 1938 with
comprehensive provisions for effective control over the activities of insurers.
The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there
were a large number of insurance companies and the level of competition was high. There
were also allegations of unfair trade practices. The Government of India, therefore,
decided to nationalize insurance business.
An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector
and Life Insurance Corporation came into existence in the same year. The LIC absorbed
154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign
insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector.
The history of general insurance dates back to the Industrial Revolution in the west and
the consequent growth of sea-faring trade and commerce in the 17th century. It came to
India as a legacy of British occupation. General Insurance in India has its roots in the
establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the
British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first
company to transact all classes of general insurance business.
1957 saw the formation of the General Insurance Council, a wing of the Insurance
Associaton of India. The General Insurance Council framed a code of conduct for
ensuring fair conduct and sound business practices.
In 1968, the Insurance Act was amended to regulate investments and set minimum
solvency margins. The Tariff Advisory Committee was also set up then.
In 1972 with the passing of the General Insurance Business (Nationalisation) Act,
general insurance business was nationalized with effect from 1st January, 1973. 107
85
insurers were amalgamated and grouped into four companies, namely National Insurance
Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company
Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of
India was incorporated as a company in 1971 and it commence business on January 1sst
1973.
This millennium has seen insurance come a full circle in a journey extending to nearly
200 years. The process of re-opening of the sector had begun in the early 1990s and the
last decade and more has seen it been opened up substantially. In 1993, the Government
set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to
propose recommendations for reforms in the insurance sector.The objective was to
complement the reforms initiated in the financial sector. The committee submitted its
report in 1994 wherein , among other things, it recommended that the private sector be
permitted to enter the insurance industry. They stated that foreign companies be allowed
to enter by floating Indian companies, preferably a joint venture with Indian partners.
Following the recommendations of the Malhotra Committee report, in 1999, the
Insurance Regulatory and Development Authority (IRDA) was constituted as an
autonomous body to regulate and develop the insurance industry. The IRDA was
incorporated as a statutory body in April, 2000. The key objectives of the IRDA include
promotion of competition so as to enhance customer satisfaction through increased
consumer choice and lower premiums, while ensuring the financial security of the
insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority
has the power to frame regulations under Section 114A of the Insurance Act, 1938 and
has from 2000 onwards framed various regulations ranging from registration of
companies for carrying on insurance business to protection of policyholders’ interests.
In December, 2000, the subsidiaries of the General Insurance Corporation of India were
restructured as independent companies and at the same time GIC was converted into a
national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in
July, 2002.
Today there are 28 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and 24 life insurance companies operating in the country.
The insurance sector is a colossal one and is growing at a speedy rate of 15-20%.
Together with banking services, insurance services add about 7% to the country’s GDP.
86
A well-developed and evolved insurance sector is a boon for economic development as it
provides long- term funds for infrastructure development at the same time strengthening
the risk taking ability of the country.

4.3. IMPACT OF INSURANCE ACT 1938 ON INSURANCE SECTOR

In 1938, with a view to protect the interests of the insurable public, the earlier legislation
was consolidated and amended by the Insurance Act, 1938 with comprehensive
provisions for the effective control over the activities of insurers. It came into effect from
1st July 1939 and was amended in 1950 and later in 1999. It is the principal enactment
relating to the business of insurance in India. The Act contains provisions regarding
Licensing of Agents and their remunerations, prohibition of rebates and protection of
policyholders’ interest. It also has provisions placing limits on the expenses of insurers,
use of funds and patterns of investments, maintaining solvency levels and constitution of
Insurance Associations and Insurance
Councils. Like all other financial institutions, insurance is an activity that needs to be
regulated as health of the insurance sector reflects a country’s economy. This sector not
only generates long terms funds for infrastructural development but also increase a
country’s risk taking capacity.1 The basic rationale to regulate this sector is to maintain
the confidence of the financial system and to provide appropriate degree of consumer
protection. Moreover, the smooth functioning of a business depends on the trust and
confidence reposed by the customers in the solvency of the financial institutions. A
proper regulatory mechanism is therefore the sine qua non of success and growth of
insurance industry as it inspires the confidence of all stakeholders.
The Indian Insurance Sector went through a full circle of phases from being unregulated
to completely regulated and then currently being partly regulated. And the law relating to
insurance has also gradually developed, undergoing several phases from nationalization
of the insurance industry to the recent reforms permitting entry of private players and
foreign investment in the insurance industry.2
As long as the insurance remained the monopoly of government it was governed by a
number of acts and the need for an independent regulatory authority was not felt. The
announcement of the new industrial policy in 1991 led to the transition of the insurance

1
www.ibe&org/industry/insurance-sector-India-aspx. Accessed on 12/11/13 at 12:30 P.M.
2
Ibid.

87
sector from a strictly regularized one to a liberalized one. The deregulated regime
provided for entry of private players and with the entry of private players, the need for a
regulatory authority became paramount.1 Then in order to prevent misuse by insurers of
policyholders’ and shareholders’ funds and to ensure accountability, it was imperative to
have in place an effective regulatory regime. And therefore, the regulation of insurance
required a paradigm shift from just a supervisory and monitoring role to a development
role so that the insurance business promoted economic growth.
Today, the primary regulator of insurance in India is the Insurance Regulatory and
Development Authority (IRDA) which was established in 1999 under the government
legislation called the Insurance Regulatory and Development Authority Act, 1999. It
oversees the functions of various insurance companies and provides them with valuable
guidelines.1

ROLE OF REGULATORY FRAMEWORK

Regulations define the requirements of an insurer, provide consumer protection through
the supervision of insurers to safeguard their solvency and thus shield the customer from
buying insurance from an unsuitable company.
The Indian insurance industry has a huge potential and the framework of insurance
regulation must enable the industry to tap this vast potential.2 The regulatory framework
in relation to insurance is desired to take care of three major concerns, viz.
b) Protection of interests of consumers.
c) Ensure the financial soundness of the insurance industry.
d) Pave the way to help a healthy growth of the insurance market, where both the
government and private parties play simultaneously.
A well developed and well regulated insurance sector is needed for economic
3
development of the country as it provides long term funds for development of a sound
infrastructural base and at the same time strengthens the risk taking capacity of the
insurance companies.3 But all regulators need to keep in mind that there is a fine
distinction between regulation and control as regulations lay down norms while controls
have a propensity to micromanage institutions. Thus the regulators must take care to

1
Ibid.
2
http://en.m.wikipedia.org/wiki/Insurance_in_India
3
Supra n.1.

88
ensure that regulations do not slide into control.1
The basic objectives of the insurance regulations are as under:
g) To protect customers from misleading sellers (by regulating the delivery channel,
e.g., through standards for agents/licensing agents and brokers) and unfair claims
practices; for example by requiring disclosure and by regulating complaints; or by
regulating rate setting/pricing (some jurisdictions have limits for rate or require
prior approval); and by regulating policies (forms/contracts and exclusions);
h) To protect the financial viability of insurers, e.g., by requiring standards for
qualifications, solvency, performance, risk limitation, disclosure, reserves,
reporting (periodicity, accounting and information systems), auditors, investment
restrictions;
i) To define general features of insurance, e.g., the provision of insurance, the types
of products and the different types of insurance (e.g., short and long term; national
or cross border operations; life insurance and general insurance;
j) To define duties and responsibilities, e.g., the persons permitted to engage in
insurance activities, ownership (management, domicile, holdings, and foreign
investors); the regulatory agency responsibilities for insurance regulations and
compliance; sanctions and penalties for non compliance or omission;
k) To define the conditions for the entry and exit of players in the market.2

4.4 DEVELOPMENT OF INSURANCE REGULATION IN INDIA

Regulatory supervision has an important impact on the development of market structure
as the market grows and strengthens itself with the reforms in regulatory measures.
Tracing the development of the Indian insurance sector reveals that it has witnessed a 360
degree turn over a period of two centuries.

1. The Indian Companies Act, 1883

Up to the end of nineteenth century, the insurance business in India was in its inception
stage. Therefore, no legislation was required till that time. Usually, the Companies Act,
1883 was applicable to business concerns, banking and insurance companies. Although
new Indian insurance companies and provident societies started at the time of national

1
http://www.indiacore.com/insurance.html
2
Fulbag Singh and Sonia Chawla, “Life Insurance Regulatory Framework in India: Developments, Issues
and Concerns”, The ICFAI Journal of Insurance Law, Vol. V, No.3, July 2007, p.15.

89
movement; but most of them were financially unsound. It was asserted that the Indian
Companies Act, 1883 was inadequate for the purpose.9 So, the regulatory supervision was
very weak and the insurance companies did not bother much about the consumer’s
interest.

2. The Provident Societies Act, 1912 and the Life Insurance Companies Act,1912
Insurance finally began in India with the passing of two Acts namely Provident Insurance
Societies Act, 1912 and Indian Life Insurance Companies Act, 1912. The later Act was
based on the English Act of 1909.1 This Act was passed exclusively for the regulation of
life insurance industry and other classes of insurance businesses were left out of the scope
of this Act as such kinds of insurance were still in rudimentary form and legislative
control over them was not considered necessary.2
This Act introduced a measure of control under which the rate tables and periodical
valuation were required to be certified by an actuary. And, the insurers were also required
to keep certain stated deposits, to prevent any financial weakness.
This Act put the life insurance business on a sounder footing and resulted in creating a
healthier atmosphere than before. It was also instrumental in the dissolution of some
unsound Indian as well as non-Indian life offices and in merging some of them with the
others. However it suffered from certain defects, like there was no check on irregularities
of unhealthy concerns and the investment of their funds, control and enquiry was slight,
non-compliance of rules and regulations was not strictly penalized. On top of that anyone
could start life insurance business only with the sum of Rs. 25,000 and this led to
mushroom growth of companies. Apart from this, the unsound concerns could not be
investigated under the Act since the government actuary was not vested with the power to
order investigation into the conduct of a company. The foreign companies were exempted
from submitting particulars regarding their Indian business. These defects were
compelling the above Acts to be replaced. The public was aware of the fact that the
Indian companies in foreign countries or in England were directed to have certain sum in
the shape of reserve as contrary to the above regulation. The law in India was not in line
with the law in force in other countries.

1
B.S. Bodla and M.C. Garg, “Insurance: Fundamentals, Environment and Procedures”, (2004), p.305, Deep
& Deep Publications PVT. LTD., New Delhi.
2
Ch. Bhanu Kiran & M. Mutyalu Naidu, “Life Insurance Marketing”, (2010), p.161, Associated
Publishers, Chennai.

90
Therefore persistent demands were made by various important public bodies in the
country for statutory provisions which would provide for disclosure and publication of
the business carried on by foreign companies in India.1

3. The Indian Insurance Companies Act, 1928

After a few years it was realized that there should be another efficient and adequate Act.
So, the government placed a bill for essential amendment of the Act, in Allahabad 1924.
The bill contained wide scope for Insurance business and came before the legislative
assembly after thorough comments by different bodies. The legislation was to be passed
in 1925 but it was postponed because the government of India thought it fit to watch the
course of new legislation on Insurance law in England. Great Britain appointed Clauson
Committee to report the possible and required changes in the legislation.13 The Clauson
Committee submitted its report in February 1927, but the Government of England took no
action on its recommendations.In the meantime, the government of India in 1928 passed
stopgap legislation with the main objective of collecting statistics regarding insurance
matters so that the information collected would be of value when the time would
come to pass a comprehensive legislation.14 The Act was not very comprehensive
andcould only serve the purpose of collection of statistical data. It required every
insurance company which conducted transaction in any class of insurance business in
British India to submit annual statements showing details of its business both in
andoutside India. Itallowed the government to collect statistical information fromboth
foreign and India insurance companies operating in India.
The statics to be collected were pertaining to total business in force, new business,
amount of claims paid and a summary of classified assets held by all life insurance
companies operating in India. The Government of India wanted to wait for the English
legislation, which was expected to be passed in 1929 or so and base the law for India on
the British model, but the legislation was not passed in Britain. The slow progress of
events in England again reviewed the agitation for amendment of the law of insurance in
India.

1-M.N. Mishra, “Law of Insurance”, Eighth Edition (2010), p.3, Central Law Agency,

91
4. The Insurance Act, 1938
Since the Act of 1928 was not comprehensive, demand for another Act1 was
made soon. Moreover, rapid increase in number of insurance companies and growth in
new business prompted several malpractices. So, to stop unhealthy competition of foreign
companies, indiscriminate growth - both of insurance companies and provident
companies and malpractices and frauds in vogue, some control at highest level became
necessary.
The government accepted the demand and decided to proceed with the reforms of
insurance law without waiting for the enactment of legislation in England. The
government appointed one special officer, Shri Sushil Chandra Sen, a well-known
Calcutta Solicitor in 1935 for investigating the special and required reform of
legislation.15 He was assigned with the special duty to report on the amendments
necessary to modernize insurance legislation in India. His report was considered by the
Advisory Committee appointed by Government of India. The committee made several
changes and the bill was finally introduced in the legislative assembly in1937. After
much debate and several changes, it emerged as the Insurance Act, 1938.
The Insurance Act of 1938 is the first comprehensive piece of insurance legislation in this
country governing both life and non-life branches of insurance. It does not follow the
principle of minimum interference with maximum publicity and direct control.
It is a very wide and well balanced Act. On one hand it provided for prevention of
mushroom companies; protection of assets; strict control over insurance business;
enforcement of sound working principles and prevention of misrepresentation of funds
where as on other hand it dealt with licensing of agents, their commission and
remuneration. Moreover, it covers several aspects of the insurance business such as
deposit mobilization, prohibition of rebates, supervision of insurance companies and
appointment of directors. It specifically stresses on the protection of policyholder’s
interest and client servicing. Apart from this, it also provided for constitution of Insurance
Associations and Insurance Councils and the Tariff Advisory Committee .
This Act was amended from time to time and remained the backbone of Indian insurance
industry for a long time. All the subsequent insurance legislations in India are drawn with
reference to this Act. Later in 1999 the Insurance Regulatory and Development Authority
Act, 1999 replaced this Act.

1
Mr A.C. Clauson was head of the committee appointed to revise the insurance legislation in that country.

92
5. The Insurance (Amendment) Act, 1950
In 1945, it was deemed necessary to protect the interest of Insured. Therefore, in the
chairmanship of Shri Cowasji Jehangir, a committee was appointed which was to
investigate all the misconduct of insurance business. The committee gave its reports after
a thorough inquiry on which recommendations were made for amending many important
sections and to introduce new sections. On this basis one amendment bill was made and
was sent to different select committees and at last it was enacted on18th April, 1950 by
the parliament. It provided for provisions pertaining to administration. According to this
Amended Act, the total right of control is with the Central Government and the Central
government controls the insurance business by appointing Controller of Insurance. The
insurance companies must follow the rules and regulations; otherwise they will be
penalized under the Act. Certain provisions of this Act also apply to the Life Insurance
Corporation of India constituted under the Life Insurance Corporation Act, 1956.
6. The Life Insurance Corporation Act, 1956
The Life Insurance Corporation Act, 1956 nationalized the business of Life Insurance in
India and provided for the establishment of life Insurance Corporation ( LIC) as a body
corporate consisting not more than 16 members appointed by the
Central Government, one of them being chairman. LIC has the exclusive privilege to
transact the business of life insurance in India to the best advantage of the community.
LIC is one organization that has played a great role in national reconstruction and
economic planning. It emerged as an important supplier of resources for the planning
process and contributed its lot in the creation of today’s India. Although, it was a state
monopoly but it worked for the people and the country and has been able to create trust
even among ordinary and illiterate people.18 Apart from this it has also been able to fulfill
the expectations of the policy makers, with its outstanding achievements in almost every
aspect- expanding the life insurance market, spreading insurance in rural areas, promoting
saving habit among the people, contributing to national development particularly through
socially oriented investment and creating employment opportunities for millions of
people in the country.
During 1956-2000, Indian Life Insurance Market was completely dominated by LIC of
India and the objectives of nationalization were achieved to a great extent.
7. The General Insurance Corporation Act, 1972
In 60’s and 70’s, the law relating to other forms of insurance also underwent reforms.
The Indian Marine Insurance Act, 1963 was enacted to regulate marine insurance in
93
India. This Act is a replica of the English Marine Insurance Act, 1909. The general
insurance business was also nationalized in 1972 by setting a government corporation
called the General Insurance Corporation with four subsidiary companies for carrying on
the general insurance business. The nationalized companies were expected not to confine
themselves to the present activities but to cover new fields in due course of time.
7.The Insurance Regulatory and Development Authority, 1999
1990’s saw the emergence of liberalization. It meant lifting the government
control and allowing the private enterprises including the MNC’s to operate in the
area of insurance, which was hitherto monopolized by the government. To offer a red
carpet to the private players the Government brought the Insurance Regulatory and
Development Authority Act, 1999. This Act provided for the establishment of an
Authority that protects the interests of policyholders, regulate, promote and insure the
orderly growth of the insurance sector and takes care of matters connected therewith
or incidental thereto.With the birth of IRDA, the government amended the Insurance Act,
1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business Act,
1972 for the sake of proper control at the Apex Level.21 The IRDA Act opened the Indian
Insurance market for private insurance companies and put an end to the monopoly
position of LIC.

1-Harish M. Chandarana, “Insurance: Principles & Performance”, (2009), p.118, Paradise

Publishers, Jaipur.
2-Sadhak. H, “Life Insurance in India”, (2009), p.86, Response Books, New Delhi.
3-KSN Murthy and KVS Sarma, “Modern Law of Insurance”, Fourth Edition (2002), p.10,
LexisNexis Butterworths India, New Delhi.

94
9. The Insurance Law (Amendment) Bill, 2008
In India, insurance companies are not permitted to have foreign holdings of more than
26%. But now the private sector insurance companies are demanding a hike in the
sectoral FDI cap as they need capital from their foreign partners to expand their business.
This bill seeks to raise the limit to 49% and allow the entry of foreign reinsurers. It also
provides for permanent registration of insurance companies. As per the Bill, an insurer
cannot challenge a life insurance policy after a period of 5 years. Apart from this it
provides for appeals against the decisions of IRDA to lie with the Securities Appellate
Tribunal set up under SEBI Act, 1992.22 The Bill introduced in Rajya Sabha in 2008 is
still pending, however, to pursue reforms; the cabinet had already approved the proposal
to raise FDI cap to 49%.1
10. The Life Insurance Corporation (Amendment) Bill, 2009
The IRDA recommended certain amendments in the 53 year old Life Insurance
Corporation Act, 1956 to bring this Act in consonance with the Insurance Act, 1938 and
to gear the state giant to deal with the competition from private players. The Bill seeks to
raise the capital base of LIC from 5 crore to 100 crore besides capping the sovereign
guarantee provided by government and reducing the amount of surplus from any
investment made by LIC to be available for policyholders.2 The Act will bring LIC at
par with private insurers-both in life and non-life segment. The bill has already been
passed by Lok Sabha.25A brief review of reports of such committees / commissions /
groups and the important changes in the history of insurance regulation are as under:3

1-Supra n.9, p.356.

95
4.5 A BRIEF REVIEW OF INSURANCE REGULATIONS IN THE 20TH
CENTURY

Year Significant Regulatory Event

1912 The Indian Life Insurance Company Act

1928 Indian Insurance Companies Act

1938 The Insurance Act: Comprehensive Act to regulate insurance business in

India

1956 Nationalization of life insurance business in India with a monopoly

awarded to the Life Insurance Corporation of India

1972 Nationalization of general insurance business in India with the formation

of a holding company General Insurance Corporation

1993 Setting up of Malhotra Committee

1994 Recommendations of Malhotra Committee published

1995 Setting up of Mukherjee Committee

1996 Setting up of (interim) Insurance Regulatory Authority (IRA)

Recommendations of the IRA

1997 Mukherjee Committee Report submitted but not made public

1997 The Government gives greater autonomy to Life Insurance Corporation,

General Insurance Corporation and its subsidiaries with regard to the

restructuring of boards and flexibility in investment norms aimed at

channeling funds to the infrastructure sector

1998 The cabinet decides to allow 40% foreign equity to private insurance

companies – 26% to foreign companies and 14% to non resident Indians

and foreign institutional investors.

1999 The Standing Committee headed by Murali Deora decides that foreign

equity in private insurance should be limited to 26%. The IRA bill is

96
 renamed as the Insurance Regulatory and Development Authority Bill.

1999 Cabinet clears Insurance Regulatory and Development Authority Bill

2000 President gives assent to the Insurance Regulatory and Development

Authority Bill

2000 Monitor Group Report

2000 Report of the Advisory Group on Insurance Regulation Part I

2001 Report of the Advisory Group on Insurance Regulation Part II

2004 Law commission report on the Revision of the Insurance Act, 1938 and

the Insurance Regulatory and Development Authority Act, 1999

2005 Report of the KPN Committee on provisions of the Insurance Act, 1938.

2008 The Insurance Laws (Amendment) Bill, 2008.

2009 The Life Insurance Corporation Amendment Bill, 2009

97
 CHAPTER-5

OTHER DIRECT & INDIRECT IMPACTS OF IRDA ON

INSURANCE INDUSTRY

INTRODUCTION
Insurance sector is an important and integral component of macro economy and has
emerged as a dominant institutional player in the financial market. It influences the
health of economy through its multi-dimensional role in savings and capital market.
While the primary role of an insurance company is to provide insurance coverage for
managing personal financial risks, it plays a very crucial role in promoting savings by
selling a wide range of products and also actively contributing to the promotional
substance in promotion and sustenance of the capital market of a country. In the
emerging economy, characterized by the reduced role of state and declining state
supported social security, the importance and the role of the insurance industry has
increased significantly as a risk manager. Moreover, growing institutionalization of the
financial market has also provided a momentum to boost the insurance companies.
Therefore, a reassessment of the role of insurance in the context of the changing
market and economic environment is required.The world’s one of the largest
investments happens in insurance sector and it involves people’s long term savings. At
the same time their may be any mismanagement of funds with far reaching
implications. So regulating the insurance sector is very essential. For this purpose
Government of India enacted IRDA Act 1999, which opened up the insurance sector
for the private participation and which impacted on the market structure parameters
such as insurance penetration, insurance density and insurance market concentration.

5.1 IMPACT OF IRDA REGULATION ON INSURANCE DENSITY

& INSURANCE PENETRATION
The measure of macro variables like insurance penetration and density will reflect
level of development of insurance sector in any country. Since insurance sector along
with the banking and finance will constitute a majority of financial market, which
influences overall growth and development of economy. In the insurance sector, the
common people have deposited their saved money with trust. To protect the interest of

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the policy holders, government enacted regulations. So in this chapter we are
analyzing
the impact the regulation of insurance density and penetration.

WORLD INSURANCE SCENARIO

We are living in the era of globalization, where the national economies are integrated
with the world economy. All countries are interdependent on one another in the trade
of goods and services in general and in the transaction of financial services in
particular. Since insurance is a major part of financial services, which influences the
saving pattern of the economy as whole. So to analyze the growth and development of
insurance sector in any country, we have to study the insurance scenario of the world.
As per World Insurance Report 2012 published by reinsurance major Swiss Re, the
economic environment and financial markets in 2012 were challenging for insurers.
Growth of global real gross domestic product (GDP) slowed to 2.5 per cent in 2012
from 3 per cent in 2011, below the average over the previous 10 years. Economic
growth in advanced economies slowed to 1.2 per cent from 1.5 per cent in 2011,
largely due to the onset of recession in Western Europe. Emerging markets held up
better, but their growth slowed down due to their dependence on exports to advanced
markets.Expansionary monetary policies continued in all advanced markets,
supporting equity markets and pushing long-term bond yields to record lows. With
this, most stock markets posted a solid gain in 2012, rising 16 per cent on average. The
low interest rate environment continued to put downward pressure on insurers’
profitability, particularly on the life side. The global life insurance premium increased
by 2.3 per cent after contracting by 3.3 per cent I the previous year. While the growth
is encouraging, it is still lagging behind the average pre-crisis growth rate. The growth
in advanced markets was 1.8 per cent (-3 per cent in 2011), largely supported by the
robust performance in advanced Asia and the US, while Western Europe continued to
shirk. Growth was
reported in all key emerging markets (except India) and premiums expanded by 4.9
per cent. In non-life insurance market, growth in premium continued to accelerate
modernly, growing by 2.6 per cent in 2012 (1.9 per cent in 2011). In emerging
markets, the non-life premium registered solid, broad-based growth of 8.6 per cent in
2012 (8.1 per cent in 2011). Advanced markets growth picked up slightly to 1.5 per

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cent (0.9 per cent in 2011), expanding for the fourth consecutive year since declining
in 2008
The prospect for growth in life insurance business will remain sluggish in 2013 in the
advanced markets. While in emerging Asia, growth is expected to resume in China
and India. The prospect for non–life market is more positive. A gradual rate hardening
which begun in 2011 is expected to continue and broaden in scope. Interest rates are
not expected to raise much in 2013 impacting life insurers. The major central banks in
the US, Japan and Europe will continue their expansive monitory policies as long as
the weak growth environment and high unemployment persists. At the international
context in insurance penetration, India ranked 38th position among the 88 countries.
India’s insurance penetration is 3.96 per cent in 2012-13 (Fig.4.1). This is less than the
World average of 6.5 per cent and as well as some of the advanced countries such as
USA (8.18 per cent) U.K. (11.2 per cent), Japan (11.44 per cent), France (8.92 per
cent) and Germany (6.74 per cent). Among the Asian countries, the insurance
penetration in PR China (2.96 per cent) is less than Indian penetration At the
international context in insurance density, India ranked 78th position among the 88
countries. India’s insurance density is 53.2 USD in 2012-13 (Fig.4.2), which is very
much less than the World average of 655.7 USD and as well as some of the advanced
countries such as USA (4047 USD) U.K. (4350 USD), Japan (5167 USD), France
(3543 USD) and Germany (2804 USD). Among the Asian countries, the insurance
density in PR China (178.9 USD) is higher than Indian density.

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INSURANCE DENSITY IN INDIA
The measure of Insurance density reflects the level of development of the insurance
sector in a country. The Insurance density is calculated as the ratio of insurance
premium to population of a country (per capita premium).
During the first decade of insurance sector liberalization, the sector has reported
consistent increase in insurance density from USD 11.5 in 2001 to USD 64.4 in 2010
(Table.4.3). However, since then, the level of density has been declining and reached
USD 53.2 in 2012 (Fig.4.5). This indicates that during the past two years, the growth
in insurance density is lower than the growth in national GDP. This trend is because of
the impact of the Global Financial Crisis (GFC), as more private insurance firms are
exposed to the Financial Crisis and suffered huge losses, so the investors lost
confidence to invest in these private firms resulting in less investment by the insurance
investors. Though the investment in public firms has increased marginally, but due to
the drastic decrease in the investment in private firms has led to decline in overall
national insurance density.
The growth of GDP has significant influence on the level of insurance premium. GDP
is expected to have positive relationship with insurance penetration. To test this
relationship Pearson Correlation Matrix analysis was performed with the GDP and
insurance penetration for the period 2001 to 2012 (Table. 4.5). The analysis indicated
a positive correlation i.e. insurance penetration (r = 0.68) with GDP. Though in
general, higher level of GDP causes higher insurance penetration, yet, at the country
level the penetration level may be lower than the level of GDP, where as low GDP
countries have achieved better penetration. India with reasonably higher level of GDP
has low penetration (3.96 per cent) as against world penetration (6.5 per cent) in the
year 2012

5.2 IMPACT OF IRDA REGULATION ON INSURANCE MARKET

Market structure means the number firms in a market, and the distribution of market
shares between them. It refers to the nature and the degree of competition in the
market for goods and services. The structure of the market is determined by the nature
of competition prevailing in that market. The popular basis of clarifying the market
structure rests on three crucial elements, (i) the number of firms producing a product,
(ii) the nature of product produced by the firms, i.e. whether it is homogeneous or

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differentiated, and (iii) the ease with which new firms can enter the industry. The price
elasticity of demand for a firm’s product depends upon the number of competitive
firms producing the same or similar product as well as on the degree of substitution
which is possible between the product of a firm and other products produced by rival
firms. Therefore, a distinguishing feature of different market categories is the degree
of price elasticity of demand faced by an individual firm.On the basis of competition,
market structure takes two different forms/stages.
Perfect competition, where large number of firms operating, producing a
homogeneous product with uniform price.
Imperfect competition, wherein individual firms exercise control over the price to a
smaller or larger degree depending upon the degree of imperfection present in a
market. It has several sub categories.

Monopolistic competition – large number of firms produces some what

different products which are close substitutes of each other and pricing
differently.
Oligopoly – few firms producing homogeneous or differentiate d products
which are close substitutes of each other. Here the price will become
rigid/sticky.
Monopoly – the existence of a single producer or seller whi ch is producing
or selling a product which has no close substitutes. Since a monopoly firm
has a sole control over the supply of a product, so it has a very large control
over the price of its products.
Form the point of consumer’s benefit, the society prefers perfect competition (an
extreme scenario) over the other stages like monopolistic competition, Oligopoly and
Monopoly (the other extreme scenario)The common measures used in describing
market structure are the Concentration Ratio and Herfindahl-Hirschman Index. The
four-firm concentration ratio, for ex. shows the total market shares of the largest four-
firms as a proportion of the whole market. The Herfindahl-Hirschman Index works by
adding the squares of the proportional shares of all firms. In order to provide better
insurance cover/service to citizens and also to augment the flow of long term sources
for financing infrastructure, the insurance sector/industry in the country was opened
for private firm’s participation on the recommendation of the Malhotra committee.
The government opened up the insurance sector and also set up statutory IRDA. The
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IRDA act was enacted in 1999 to provide for the establishment of the IRDA to protect
the interest of policy holders, to regulate, promote and ensure orderly growth of the
industry and for matters connected therewith, the insurance. Since 1999, Indian
insurance sector has undergone a sea change in the wave of liberalization. There is a
substantial restructuring of domestic insurance sector including financial sector. The
process of liberalization has brought structural changes in the financial market in
general and insurance market in particular. These measures intended to improve
macro economic efficiency of the sector Until 1999, the insurance organization in
India was comprised of two state– owned monolithic institutions, namely the Life
Insurance Corporation of India (LIC) in life insurance business and the General
Insurance Corporation of India (GIC) and its four subsidiaries in general insurance
business. The setting up of the IRDA was a clear signal of the end of monopoly in the
insurance sector and paved way for different structure of insurance market in India.
More private Institutions entered into the market giving more competition to public
sector companies. Since the opening up of the insurance market, the first sets of
licenses were granted from October-2000 onwards. With this the new private sector
players entered the Indian insurance market in the form of joint ventures between
well-established international insurance players. With the private sector's entry into
the insurance business, a regulatory system became even more necessary in the
insurance industry where large monetary stakes are involved and for which there are
parallels in other parts of the world In this section an attempt is made to examine the
impact of regulation on dynamics of Indian insurance market structure. There is a
focus on the market share of both life and non-life insurance segments, since the
opening up of insurance sector for private participation. Insurance market
concentration is calculated n this basis Concentration Ratio and Herfindahl-Hirschman
(HH) Index.

5.3 IMPACT OF IRDA OVER NUMBER OF INSURER OR

INSURANCE COMPANIES IN INDIA
list of insurance companies operating in india (as on oct, 2013)
Public Sector Life Insurer
1. Life Insurance Corporation of India (LIC)
Private Sector Life Insurers

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 Aegon Religare Life Insurance Co. Ltd
Aviva Life Insurance Co. Ltd.
Bajaj Allianz Life Insurance Co. Ltd.
Bharti AXA Life Insurance Co. Ltd.
Birla Sun Life Insurance Co. Ltd.
Canara HSBC OBC Life Insurance Co. Ltd.
DLF Pramerica Life Insurance Co. Ltd.
Edelweiss Tokio Life Insurance Co. Ltd.
Future Generali Life Insurance Co. Ltd.
HDFC Standard Life Insurance Co. Ltd.
ICICI Prudential Life Insurance Co. Ltd.

IDBI Federal Life Insurance Co. Ltd.

ING Vysya Life Insurance Co. Ltd.
India First Life Insurance Co. Ltd.
Kotak Mahindra Old Mutual Life Insurance Co. Ltd.
Max Life Insurance Co. Ltd.
MetLife India Insurance Co. Ltd.
Reliance Life Insurance Co. Ltd.
Sahara India Life Insurance Co. Ltd.
SBI Life Insurance Co. Ltd.
Shriram Life Insurance Co. Ltd.
Star Union Dai-ichi Life Insurance Co. Ltd.
TATA AIA Life Insurance Co. Ltd.

Public Sector Non-Life Insurers

National Insurance Co. Ltd.
New India Assurance Co. Ltd.
Oriental Insurance Co. Ltd
United India Insurance Co. Ltd
Specialized Insurers
Agriculture Insurance Co. Ltd
Export Credit Guarantee Corporation Ltd

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Private Sector Non-Life Insurers
1. Bajaj Allianz General Insurance Co. Ltd.
2. Bharti AXA General Insurance Co. Ltd.
3. Cholamandalam MS General Insurance Co. Ltd
4. Future Generali India Insurance Co. Ltd.
5. HDFC ERGO General Insurance Co. Ltd.

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 6. ICICI Lombard General Insurance Co. Ltd.
7. IFFCO Tokio General Insurance Co. Ltd.
8. Liberty Videocon General Insurance Co. Ltd.
9. L & T General Insurance Co. Ltd.
10. Magma HDI General Insurance Co. Ltd.
11. Raheja QBE General Insurance Co. Ltd.
12. Reliance General Insurance Co. Ltd.
13. Royal Sundaram Alliance Insurance Co. Ltd.
14. SBI General Insurance Co. Ltd.
15. Shriram General Insurance Co. Ltd.
16. TATA AIG General Insurance Co. Ltd.
17. Universal Sompo General Insurance Co. Ltd.

Standalone Health Insurers

1. Apollo Munich Health Insurance Co. Ltd.
2. Max Bupa Health Insurance Co. Ltd.
3. Religare Health Insurance Co. Ltd.
4. Star Health and Allied Insurance Co. Ltd.

Re – Insurer
General Insurance Corporation of India

Insurance Market Share Analysis

The structure of insurance market can be better explained through the relative market
share held by the various players in the insurance market. The market share is
calculated on the basis of total premium income earned by the insurance firms.
Life Insurance Sector: Life insurance in India was a protected sector till the year
2000, as the market was controlled by the public sector monolith viz. Life Insurance
Corporation of India (LIC) in life insurance sector. After 2000, new regulations were
brought in the life insurance sector to faster the growth of insurance market.
Consequently many reform measures were brought in and this resulted in an inflow of
several private players into the insurance sector. As more and more private insurance
firms started operations, it changed the structure of Indian life insurance market.

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In the year 2001-02 the market share of the public sector corporation (LIC) was about
99.46 per cent and the private firms share was about 0.54 per cent. Over the years as
more and more private firms taking up the business, their market share is gradually
increasing. In the year 2012-13 the market share of public firms in life insurance sector
stood at 72.7 per cent and that of the private firms was 27.3 per cent (Table. 4.13).
Though the market share of private firms has been gradually increasing since 2001-02
from 0.54 per cent to30.23 per cent in 2010 -11, their after from 2011-12 the market
share of private firms has slightly decreased by about 1 per cent and in 2012-13 their
market share further decreased by about 2 per cent. This is due to the impact of Global
Financial Crisis (GFC), because many private firms are greatly exposed to the financial
crisis. On the other hand the market share of public firms has reduced from 99.46 per cent
in 2001-02 to 69.77 per cent in 2010-11, this is because of increasing competition from
private players, new and innovative products and better customer relationship
management by private firms. From the year 2011-12 onwards there is renewed trust on
public firms by insurance investors because the public firms exhibited immune to the
Global Financial Crisis. Thus decreasing market share of public firms once again started
increasing and in 2011-12 it increased by 1 per cent and in 2012-13 by 2 percent.
In the year 2001-02 the market share of the public firms was about 96.24 per cent and
the private firms was about 3.76 per cent. Over the years as more and more private firms
taking up the business, their market share has been rapidly increasing and in the year
2012-13 the market share of public firms in non-life insurance sector stood at 55.62 per
cent and of the private firms at 44.38 per cent (Table. 4.14). In the last section it has
been observed the life insurance segment is affected by Global Financial Crisis (GFC)
and changed the market structure of the industry. However, the GFC did not affect the
non-life insurance sector too much. This is because in the life insurance business, the
participation is directly related to the common people and in non-life insurance business
the participants are business organizations, who are the taking the calculated risk to do
business. It is evident from the fact that the share of non-life insurance companies is
increasing when compare to public companies.

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 CHAPTER 6
CONCLUSION
AND
SUGGESTIONS

CONCLUSION

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 all the territories of India.Insurance
law in India has its origin 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 1874. However, till the establishment of the
Bombay Mutual Life Assurance Society in 1871, Indians were charged an extra premium
upto 20% as compared to the Britishers. The first statutory measure in India to regulate
the life insurance business was taken in 1912 with the passing of the Indian Life
Assurance Companies Act, 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. The Life Insurance Corporation (“LIC”) was formed in September 1956 by the
Life Insurance Corporation Act, 1956 which granted LIC the exclusive privilege to
conduct life insurance business in India. The LIC absorbed 154 Indian, 16 non-Indian
insurers as also 75 provident societies-245 Indian and foreign insurers in all. Since 1956,
with the nationalization of insurance industry, the LIC had the monopoly in India’s life
insurance sector. As at 31st March, 2013, there were twenty four life insurance
companies operating in India.
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The present topic of research entitled ‘Life Insurance in India : A Study with Special
Reference to Insurance Regulatory and Development Authority Act, 1999’ aims at
studying the progress of life insurance business in India especially after the enactment of
IRDA Act, 1999, the protection afforded to the consumers i.e. the insureds under the
Consumer Protection Act as also the evolution of life insurance jurisprudence in India.
This thesis is contains Seven Chapters. The first chapter is introductory and includes the
objectives of the study, hypothesis, literature review, research methodology, and the
status of the life insurance industry in India pre and post liberalization period. The objects
include: the study the life insurance legislation in India, the history of life insurance in
India, the IRDA Act, and regulations made there under, the role of IRDA Act, 1999 in the
promotion and development of life insurance business in India and safeguarding the
interests of stakeholders as also to analyze the impact of privatization of life insurance
business on the LIC.The Central Government has proposed to enhance foreign direct
investment (FDI) in insurance sector to 49% in its next wave of reforms announced
recently. At present foreign investment in private insurance companies is restricted to
26% of their capital, which is now proposed to be increased to 49% by passing an
amendment to the Insurance Act. If the Indian promoters are unable to contribute their
share of the capital, they will not be able to grow. Foreign companies with deep pockets
will be able to fill this gap, if they are allowed to invest up to 49% of the capital. It is
estimated that the private insurers need about Rs. 60,000 crore of additional capital
during the next five years. Therefore, the raising of FDI cap to 49% will come handy for
the foreign partner to increase their stake in the company, without the local partner
having to put matching capital in to the company.
With 26% FDI cap in the last few years, capital worth Rs. 5,950.30 crore has come into
India. While there is a need for additional long term capital, there is an even greater need
to increase the commitment of the foreign partners.
The second chapter is devoted to regulatory framework of life insurance business. It
studies the Insurance Act, 1938, the LIC Act 1956 and IRDA Act 1999. The chapter
includes the study of taxation of life insurance companies, insurance intermediaries and

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principles of insurance law. This chapter deals with (i) the complexity of insurance
legislation, (ii) the study of the Insurance Act, 1938, The Life Insurance Corporation Act,
1956, The IRDA Act, 1999, Taxation of Insurance Companies, different intermediaries in
the life insurance business, Principles of Insurance Law, Role and responsibilities of
insurance brokers under IRDA Act as also the amendments to the Insurance Laws vide
the Insurance Laws (Amendment) Bill, 2008.

The IRDA Act 1999 was passed, by parliament in Dec. 1999 by which the Insurance Act
1938 and Life Insurance Corporation Act, 1956 and General Insurance Business Act,
1972 were amended to remove the exclusive privilege of nationalised insurance
companies to transact life and general insurance business and allow the entry of private
sector in the insurance. The Act aims at providing the setting up of a statutory regulatory
authority to regulate, promote and ensure the orderly growth of insurance industry in
India.
Under different regulations of IRDA the insurers in India are required to deposit with the
Reserve Bank of India (RBI) for and on behalf of the Central Government of India the
prescribed amounts, either in cash or in approved securities estimated at the market value
of the securities on the day of deposit, or partly in cash and partly in approved securities.
Every insurer is required to invest and keep invested certain amount of assets as
determined under the Insurance Act. The funds of the policyholders cannot be invested
(directly or indirectly) outside India. An insurer should maintain, at all times, an excess
of the value of his assets over the amount of his liabilities of not less than the relevant
amount.
An insurer is required under the IRDA (Assets, Liabilities and Solvency Margin of
Insurers) Regulations, 2000, to prepare a statement of solvency margin in accordance
with Schedule III-A, in respect of life insurance business, and in Form KG in accordance
with Schedule III-A, in respect of general insurance business, as the case may be. Every
insurer is required to prepare a statement of the value of assets in accordance with the
provisions of the aforesaid regulations. The aforesaid form should be furnished separately

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for business within India and the total business transacted by the insurer.Every insurer
has to submit a number of yearly, quarterly or monthly returns to the Authority showing
that as of 31st day of December of the preceding year the assets held and invested,
investments made out of the controlled fund and all other particulars necessary to
establish that the requirements of the Insurance Act have been complied with.An insurer
carrying on the business of insurance or reinsurance in India is required, under the IRDA
(Appointed Actuary) Regulations, 2000, to appoint a person fulfilling the eligibility
requirements, to act as an appointed actuary, after seeking the approval of the Authority
in this regard. The IRDA (Insurance Advertisements) Regulations, 2000, seeks to
regulate and control every insurance advertisement issued by the insurer, intermediary or
insurance agent.

Insurance companies and insurance agents, in India, are subject to tax for the premiums
and the commissions received by them respectively, under the Indian Income Tax Act,
1963. The Income Tax Act deals with the computation of the income of the insurance
companies such as : Companies carrying on life insurance business which are resident in
India; Companies carrying on any other kind of insurance business, which are resident in
India; and Non-resident persons carrying on the business of insurance in India through a
branch.
There is no recognized business method of ascertaining the profits derived from life
insurance business. This would depend on the actuarial calculations and valuations.
Persons desirous to act as an insurance agent for any insurer have to get them registered
as such under the provisions of the Insurance Act and the IRDA (Licensing of Agents)
Regulations, 2000. An insurance surveyor is a technical expert who inspects the damage
or loss of an insurance company. The insurer, based on the estimation of damage of the
surveyor, arrives at the amount of compensation payable to the assured.
Every insurer reinsures himself to protect against the risks to which it subjects himself in
the conduct of insurance business. The general insurance company has been designated
as the sole re-insurer in India. Every insurer is required to re-insure with an Indian re-

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insurer such percentage of the sum assured on each policy as specified by the Authority
in this regard.
Various principles of Insurance Laws have been discussed in the second chapter of the
thesis. These include principles relating to: good faith, misrepresentation, warranties,
conditions, Indemnity and Subrogation, Proximate Cause, Insurance and Consumer
Protection, Insurable Interest and Commencement of Policy.
The IRDA (Insurance Brokers) Regulations, 2002 provide a regulatory framework for the
licensing, functioning and control of brokers. An obligation has been cast on the brokers
to ensure that the consequences of non-disclosure and inaccuracies are pointed out to the
prospective client; avoid influencing the prospective client and make it clear that all the
answers or statements given are the latter’s own responsibility. Clients are required to
carefully check details of information given in the documents. The broker is required to
explain to the client the importance of disclosing all subsequent changes that might affect
the insurance throughout the duration of the policy and disclose on behalf of its clients all
material facts within its knowledge and give a fair presentation of the risk. Based on the
capital required, the brokers have been categorized as, Direct brokers, Reinsurance broker
and Composite broker. The minimum capital requirement as prescribed under IRDA
(Insurance Brokers) Regulations, 2002 is Rs. 50 lakhs, Rs. 200 lakhs and Rs. 250 lakhs
respectively. The third chapter contains the study of aspects of lapsation of insurance
policies. Generally recognized factors of lapsation, stakeholders’ and customers’
perspective on lapses and the impact of policy lapse on various stakeholders. IRDA
annual reports show that lapse rates vary greatly among the Indian insurers.Persistency
clearly comes out as the 5th ‘P of marketing’ for life insurers. The traditional 4 P’s may
be important at the customer acquisition stage but this 5th P is of vital significance in
customer and product lifecycle. Policies in force are not only a source of income but also
help in pricing the products competitively. Persistency improvement is a journey which is
not the last mile, but it is just the start of the journey. Increased lapsations of policies
enhance the break even period for the insurance company therefore persistency and
related pro-active measures are of prime importance for the good health of insurers. The

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business drain through lapsation acts as a double edged sword taking away profits from
insurer and reducing the earning of the distributors.The longer the term (period) of
insurance policy, the shorter will be the per day cost of insurance. It is the ‘term (period)
insurance’ which is adversely affected due to high lapse rates. This clearly points to the
need for educating customers about protection oriented aspect of insurance. It requires
that the customers make a proper comparison of products and prices before they purchase
a policy.The impact of lapses on insurers is not always clear and there can be several
conflicting outcomes. This makes it critical for regulators to take the right steps and for
consumers to be more aware about insurance. The insurers must understand why
policyholders lapse their policies, the costs involved and the options available. If the sale
of policies is done ethically and professionally by the agents and the policy is serviced
properly and assistance is given for payment of premium, the probability of lapse would
reduce. The agents would also reap the full benefits of the sale made by getting the full
renewal commission due to him. There will be other rewards for them in the form of
opportunities to sell further insurance to their existing policyholders; and a flood of
referrals will come his way to help them earn more commission.If insurers cooperate in
sharing their data to an organization agnostic and Indian industry specific study, then the
lapse factors common to all the insurers and lapse factors specific to organizations can be
recognized. A sanitized report could be published at a regular frequency for public
consumption. Also, adoption of organization independent unique IDs such as the Aadhar
can be used for across industry identification of propensity to lapse. Such an initiative
would no doubt, be very welcome in the Indian context, where the year on year growth is
very healthy. The fourth chapter titled ‘Regulatory Authorities for Life Insurance
Business in India’ includes the KSFs for success in the insurance business. Success in
business is the result of actual customer experience and the resulting customer advocacy
based on a day to day excellence in service, proving that the insurer/intermediary delivers
on promises enshrined in the vision and mission of the organisation. There is a need for
holistic investment in achieving positive customer experiences, using the right
technology, knowledge power, systems and processes, the right attitude and service

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culture to power the organization’s service-speak. It is more so in case of service failures.
The Indian insurance sector is set to grow by leaps and bounds in the years to come, but
its real mettle will be tested in the maturity of organizations to deliver real value and error
free service. It has been mentioned in the fourth chapter that 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 any employment either under the Central Government or under any
State Government; or any appointment in any company in the insurance sector.Objectives
of IRDA have also been discussed which include to protect the interest of and secure fair
treatment to policyholders; 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; to set,
promote, monitor and enforce high standards of integrity, financial soundness, fair
dealing and competence of those it regulates; 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; to ensure speedy settlement of genuine
claims, to prevent insurance frauds and other malpractices and put in place effective
grievance Redressal machinery; 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; to take
action where such standards are inadequate or ineffectively enforced; and to bring about
optimum amount of self-regulation in day to day working of the industry consistent with
the requirements of prudential regulation.

Customer complaints are common in the financial services area. Hence Regulators,
Ombudsmen, Consumer Forums and the Judiciary are hard on insurers who fail to honour
their commitments by using interpretations that are one sided or rely on the fine print
without the application of mind.Grievances can arise in all areas of insurance service, but
some of them are routine and can be handled quickly by insurers if tight processes and

114
timelines are maintained in service. Traditionally, insurers are blamed for not
distinguishing between real and technical reasons for denying claims. This is where
grievances have a real role for a merit based relook. Technical reasons have validity
when they touch the core areas of the claim but in some cases they are invoked ignorantly
or owing poor interpretational capability.The fifth chapter deals with consumer protection
laws in India. Definitions of consumer, beneficiary, complaint, unfair trade practice,
restrictive trade practice, deficiency in service, ‘contract of service’ and ‘contract for
service’, have been discussed. Different law cases relating to consumer protection have
been discussed in detail. These cases include: LIC and another Vs. Smt. Kanchanben H.
Shah CPA, 1986, LIC of India Vs. Smt. Sushma Singh, 1989, Gulab Hotchand
Bhagchandaney v. Egyptian Airlines III 1994 CPJ 172 (NC), Kinetic Engineering Ltd. v.
Samasi Saunand [1993] II CPR 409 (NC); Life Insurance Corporation of India v.
Gowramm [III (2009) CPJ 25 (NC)] 11.05.2009; Mithoolal Nayak v Life Insurance
Corporation of India [AIR 1962 SC 814]; Life Insurance Corporation of India (LIC) Vs.
Smt. Chandra Kanta Lohande, National Consumer Disputes Redressal Commission,
revision petition no. 3138 of 2003; L.I.C. Of India vs. Anuradha 26 March, 2004
Equivalent citations: II (2004) ACC 44, 2004 ACJ 1318, AIR 2004 SC 2070; Dev Raj
Sharma V. LIC, SLP (C) NO.9334 OF 2000 S.C; Dr. Anupam Nath Gupta Vs. Life
Insurance Corporation of India in the Court of the Ld. District Consumer Disputes
Redressal Forum at Siliguri. Consumer Case No. : 15/5/2011 Dated : 08.12.2011; Life
Insurance Corporation of India v. Dharamvir Anand, 1999(1) CPC 10 S.C; Life Insurance
Corporation of India v. Jaya Chandel, 2008(1) CPC 419 S.C.; Life Insurance Corporation
of India v. Mani Ram, 2005(2) CPC 422 S.C; Life Insurance Corporation of India v. S.
Sindhu, 2006(2) CPC 161 S.C.; Shashi Gupta v. Life Insurance Corporation of India and
Another, 1995(2) CPC 14 (S.C.); State Bank of Hyderabad vs (1) Nirmala W/o late
Vinod Kumar; (2) SBI Life Insurance Company Limited (National Consumer Disputes
Redressal Commission, 29 Feb 2012) and Life Insurance Corporation of India vs Sudesh
(National Consumer Disputes Redressal Commission, 27 Feb 2012).

115
Grievence Redressal Mechanism in Indian Life Insurance Industry and IRDA Guidelines
for Grievance Redressal by Insurance Companies have also been discussed. Every insurer
shall have a Board approved Grievance Redressal Policy which shall be filed with IRDA.
Every insurer shall have a designated Grievance Officer of a senior management level.
Every insurer shall have a system and a procedure for receiving, registering and disposing
of grievances in each of its offices. Any failure on the part of insurers to follow the
above-mentioned procedures and time-frames would attract penalties by the Insurance
Regulatory and Development Authority.

SUGGESTIONS
Following suggestions can be put forward to accelerate the healthy growth of life
insurance business in India:
1. Understanding Hidden Clauses of Insurance Policies - Government and non-
Government organizations (NGO) should come forward to guide the people about
the hidden clauses of the insurance policies which, if not understood, can play
havoc with the hard earned money of the people.
2. Prompt Disposal of Cases - Number of consumer forums at the district level
should be increased and proper staff strength be provided to facilitate prompt
disposal of the cases.
3. Punishment for Faulting Intermediaries - There should be severe punishment to
the faulting insurance agents/companies selling defective polices by
misrepresenting the facts.
4. Formulation of Policyholders’ Charters - Government should make laws fixing
time schedules for payment of the policy amount in the event of death / disability
and even in general cases of maturity of the policy.
5. Learning Lesson in Life Securitisation Companies Overseas - India could benefit
from the lessons learnt by other countries in life

116
 securitization. The protected cell structures could be emulated in order to facilitate
utilisation by insurance companies of securitization. The Securitization Act in
India should also incorporate changes in order to broaden its focus. It should
enable its use for securitization of different assets classes.
6. Shift in Emphasis - The emphasis should be shifted away from recovery of money
from defaulting borrowers to risks to the capital markets and raising of capital
therefrom.
7. Redefining Financial Institutions to include Life Insurance Entities - It is
suggested that the definition of a financial institution in the Securitization Act be
amended to include life insurance companies also. At present the definition of a
“financial institution” in the Securitization Act does not include life insurance
entities.
8. Curbing lapsation of policies: Lapsation can be controlled by an insightful mix of
proactive (P) and reactive (R) measures. The proactive measures can help reduce
instances of lapsation whereas the reactive measures can help reinstate the lapsed
policies.
9. Professionalisation of sales force. A well trained, passionate and professional
sales force can bring in right selling to the customer and increase the life duration
of the policies.
10. Understanding and appreciating Persistency: Life insurance industry is evolving
and direct channels of distribution are surfacing. The alternate channels of
distribution evolved post liberalization in life insurance in last decade but still
most of the insurance policies are purchased (or rather sold) through non direct
channels where the policyholder’s preferred touch point is the distributor. So the
insurer needs to ensure that the distribution and servicing work force understands
persistency and the ways in which it can be improved. Insurer needs to send
updates on due dates and lapsed policies to the distributor in time so that they can
impact the continuity of the policy.

117
11. Compensation strategies: From an earlier focus of insurers on levelised
compensation structure, of late the focus of insurers has been on heaped compensation
structure. Both compensation structures have their pros and cons for insurers depending
upon their current priorities and business life stage. Life insurance being long term
business, levelised compensation structure resonates more with the overall architecture
and can support persistency in a better way.
12. Linking Agent License to Persistency of policies : The regulator has laid
directions on agent license renewals and the same is linked to defined minimum
persistency levels. Such criterion along with compensation linkages to persistency can
drive agents to focus on persistency. Similar norms can be looked at for other distribution
channels to encourage and enforce persistency.
13. Flexibility in product features : Combination of product charge structure and
features impacts not only the sale but the continuity of a policy.
14. New age expanded service options: All customers are not the same and have
varying needs and preferences. Handling this diversity becomes more important and
critical when managing your existing set of customers. Premium payment options and
customer request handling needs to be supported at multiple communication levels like
website, contact center, SMS, e-mail, branch, advisor etc. so that the customers can
choose their preferred mode. Communication language also plays a big role in customer
experience and can impact persistency.
15. Grace Period and reinstatement window: Notice of intimation of lapse must go to
the policyholders within 15 days from the expiry of grace period if premiums were still
not paid. If within 30 days of receipt of this notice, the customer does not still pay the
premiums, the policy would irretrievably lapse. There can be genuine reasons wherein the
policyholder is not able to reinstate his policy like temporary financial constraint, long
duration out of station travel, non-receipt of communication from insurer, etc.
16. Policyholder Grievance Management: Having a satisfied customer goes a long
way in shaping the overall health of any business and it applies more so in long tail
business like life insurance. While an insurer can put in place measures to have good

118
sales, service, product options, etc. but customer satisfaction also depends on how they
are treated when they come up with their grievances.
17. Customers connect and education: Only if a company (in service industry) is
accountable and responsible to the customer and available for the customer, it can expect
to get its rewards i.e. growth by the customer. Being customer centric can be of limited
use, if customer’s needs, priorities and experiences are not captured and acted upon.
Engagement marketing encourages policyholder’s involvement in shaping the marketing
strategy of a company.
18. Increasing policyholder Contactability: Insurers need to invest efforts in
policyholder data cleansing and up-gradation. This ensures that adequate and updated
information is available about the policyholder. Updated contact details ensure that
communication reaches intended policyholders. This helps insurers achieve multiple
goals including persistency improvement. Some insurance companies have already
adopted such processes and are reaping the benefits of improved policyholder
contactability.
19. Regularizing the sales process and strict monitoring of the field force by the
insurer. The field force should be educated of the exact
target segment a product is designed for and should be instructed to sell only to them.
Rigorous control over the sale process may even result in loss in quantity, but quality will
be ensured and hence valuation will more closely follow product design assumptions.
20. Need to redesign the surrender charge structure: the surrender charge structure
should be designed in such a way that it is a big reason for policy holders not to lapse. Of
course there is very little leeway in designing the surrender charge structure as it has to
comply with regulator norms.
21. Personal factors should be better predicted through analytics. A typical Indian
person’s life cycle over time should be drawn out with the money need points mapped.
To this any time bound factors which prevent a policy from being renewed – education
expenses, marriage expenses, retirement – should be added. This would yield in better
prediction of “in-danger-of-lapse” policies and result in sharper focus on renewing them.

119
22. Avoiding extraneous factors, like tax benefits, for selling insurance policies. This
is easier said than done as more than often insurance contracts are sold as tax benefit
instruments rather than insurance products as such. Only proper education of sales force
can reduce, if not completely remove this effect.
23. Unique ID for agents: The prevalent commission structure is an unintended factor
in causing lapsation. The straight forward way to resolve this would be to levelize the
structure or provide more incentives for persistency. This might involve additional
expenditure. While this would not have been taken into account during design of existing
products, for new products too a thinner spread of commissions may make the product to
be perceived as non-remunerative. Any systemic hazard affecting the lapse ratio of an
economy as a whole can never be easily modelled. Even past data can only be a rough
indicator over the long term. One suggestion which could make the lapsation irrelevant is
developing a mandatory term insurance, as Employees Provident Fund. This will be a
low cost insurance whose face value is tied to the basic pay of an employee. Since it is
mandatory, coverage lapsation will be out of question. Such a mandatory scheme will
also help the families of employees at unfortunate death of the insured.

120
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 WEBSITES

 www.manupatra.com
 www.irda.gov.in
 www.licindia.in
 www.business-standard.com
 www.insuranceinstituteofindia.com
 www.legalservice.comwww.helpline .com
 www.expressindia.com

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