PROJECT REPORT ON

“THE NEW INSURANCE AMENDMENT ACT, 2015”

Submitted to:

Mr. Papa Rao

Faculty Insurance Law

Submitted by:

Sirshendu Mazumdar

Roll no. 152

Semester X

Hidayatullah National Law University, Raipur

Submitted on: 6th April, 2018

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 CONTENTS

ACKNOWLEDGEMENTS 3

OBJECTIVES 4

RESEARCH METHODOLOGY 5

CHAPTER 1: AN INTRODUCTION 6

CHAPTER 2: THE NEW ERA OF INSURANCE LAW IN INDIA 7

a. Giving teeth to the Regulator 8

b. Increasing the threshold of penalties 10

c. Refusal of Claim 11

d. Assignment of policies 11

e. Curbing on the agents 12

CONCLUSION 13

BIBLIOGRAPHY 15

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 ACKNOWLEDGEMENTS

I feel highly elated to work on the topic “The New Insurance Amendment Act, 2015.”
The practical realization of this project has obligated the assistance and help of many
people. I express my deepest regard and gratitude to my teacher, Mr. Papa Rao for his
unstinted support. His consistent supervision, constant inspiration and invaluable
guidance have been of immense help in understanding and carrying out the nuances of
the project report.

My gratitude also goes out to the staff and administration of HNLU for the
infrastructure in the form of our library and IT Lab that was a source of great help for
the completion of this project.

-Sirshendu Mazumdar
(Semester X)

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 OBJECTIVES OF THE RESEARCH

This Research has been carried out in order to understand the subject like:

1. To research on the changes brought by the New Insurance Amendment Act of 2015.
2. To see its implication on the Indian Society.
3. To research on whether it will result in filling up the loop holes in the system.

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 RESEARCH METHODOLOGY

This project report is based on analytical and descriptive Research Methodology. The
research problem has been provided by our faculty keeping in view the needs of the
topic. Secondary and Electronic resources have been largely used to gather information
and data about the topic. Additionally the Research is Doctrinal in approach.
Books and other reference as guided by Faculty have been primarily helpful in giving
this project a firm structure. Websites, dictionaries and articles have also been referred.

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 CHAPTER 1: AN INTRODUCTION

On March 12, 2015 Rajya Sabha passed the Insurance Bill which paved the way of
reforming the insurance sector in India.1 The bill aims to revamp the insurance model by
increasing the Foreign Direct Investment upto 49% from 24% previously allowed. 2 This is
highly needed because there is an urgent need of fresh liquidity in the market. Not only does
the Bill looks into the liquidity aspect for the cash stripped sector, it also provides for various
other reforms which was felt to be present in order to manage the system in a much more
efficient way. The Bill will provide an opportunity in including the Indian insurance sector
regime along with the global regulatory scheme and capital flows. However, it will also make
the insurance sector vulnerable to any adverse global effects in currency flow like the bubble
burst in 2007-2008 in the United States.

The present aim of this article is to highlight the changes that have been brought out
by the Insurance Bill so that any reader of this article can understand the new system with a
much more lucid understanding.

1
‘Rajya Sabha passes the new Insurance Bill’, THE TRIBUNE, March 13, 2015
available at <http://www.tribuneindia.com/news/nation/rs-passes-insurance-bill/52916.html>

2
Id.

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 CHAPTER 2: GIVING TEETH TO THE REGULATOR
In mainstream discussion in the media, the entire discussion has been how the Bill
provides for increase in the FDI limit allowing more foreign investments in the insurance
sector which could bail out the companies that need some serious inflow of cash. Without a
doubt that it is one of the most highlighted issue of the Bill, however, at the same time, there
are other various provisions which have been provided that in toto benefits all the interested
parties in the insurance sector. This part of the paper, discusses such changes which have
introduced in the Bill with a birds’ eye view from the perspective of the interested parties, so
that each party can easily understand what are the provisions that may be impacting him/her
the most and in which possible way.

One of the most underlying features of the new Bill is that it gives more power to the
regulator. In India, the regulator who has the responsibility of regulating the insurance sector
is the Insurance Regulatory and Development Authority.3 One of the main changes that the
Bill has introduced is that though the liquidity expenses of the insurance company will be
managed by the company itself, however, the technicalities of compounding commission has
been handed over to the IRDA.4 What can be understood from such a feature is that the
permissible limit of expenses will be in conformity as per the Insurance Act 1938, IRDA will
be responsible in fixing the commission charges.

The Insurance Rules, 1939 under section 17D provides for the limitations “on expenses that
life insurance companies may incur from the premium income and for a particular class of
insurance product, whereas section 40B of the Insurance Act, 1938, restricts the expenses of
insurers according to the rules specified in 17D”.5

The expenses as provided under the rules, includes all the administrative as well as any kind
of the operational expenses that the insurances companies may have to spend as well the

3
Hereinafter referred to as ‘IRDA’.

4
‘Critically examine why the insurance Bill, 2015, which was passed by the Parliament in 2015, is considered as
part of major economic reforms in the country’, THE INSIGHT, March 13, 2015 online at
http://www.insightsonindia.com/2015/03/13/6-critically-examine-why-the-insurance-bill-2015-which-was-
passed-by-the-parliament-in-2015-is-considered-as-part-of-major-economic-reforms-in-the-country/

5
‘Why is Insurance Bill so important’, LIVE MINT, December 16, 2014 available at
<http://www.livemint.com/Money/dVgOr9BxKZajh7QiM4MIyM/Why-is-the-insurance-Bill-so-
important.html>

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commissions that such companies may make. Section 17D of the Insurance Rules provides
such limitations based on the following factors:6

a. How long has been the insurance company in practice?

b. How much business has the company done and?
c. How long the policy has been sold for?
Since, there exists fixed criteria under the Rules, the IRDA has no teeth of providing an
incentive to the companies. IRDA has for long provided that the first year commission that
the companies should receive should be more if the premium that the companies are charging
is high.7 The Bill provides for incentives that IRDA may grant in relation to the commission
that are charged which would provide flexibility to the already scrapped insurance sector.

Increasing the threshold of penalties

The other most important benefit which can be taken by the Bill is the increase in the penalty
amount that the insurance companies now have to pay because of defrauding act of their
agents. This was solemnly adopted in the Bill so as to safeguard the interest of the assured.

To give a brief background of the issue, in 2013, when the Select Committee was discussing
the contents of the Bill, in relation to the penalties that may be lined up against the Insurance
Companies, the lobbyist from the Insurance Sector represented before the Committee that
they do not have any control over any defrauding activity of the agents.8 It is not possible for

6
The Commission structure at this point is as per follows:
a. Less than 10 years in the business –
i. Commission =40% of the premium
ii. Commission =7.5% of the premium
iii. Commission = 5% of the premium
b. More than 10 years in the business –
i. Commission = 35% of the premium
ii. Commission =7.5% of the premium
iii. Commission = 5% of the premium

7
Agency Commission and Brokerage, report no. PA 15 of 2008 online at
http://saiindia.gov.in/english/home/our_products/audit_report/Government_Wise/union_audit/recent_rep
orts/union_performance/2007_2008/Commercial/Report_no_15/chap-5.pdf

8
‘Insurance Bill: Parliamentary panel pitches for 49% foreign investment cap’, DECEMBER 10, 2014 online at
http://www.thehindu.com/business/insurance-bill-parliamentary-panel-pitches-for-49-foreign-investment-
cap/article6679428.ece

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Insurance Companies to monitor day to day activity of the agents and hence, any fine that
may be imposed upon them is unjustified and highly extreme step.9

However, the Select Committee was of the opinion that reports about defrauding activities of
the insurance agents had increased tremendously and unless and until the companies are
made liable to pay penalties, such activity would not stop.10 This observation by the Select
Committee is highly important because if we look at sectors other than insurance sectors,
there exist a mechanism of high penalties in cases of violation of the rules and regulations.11

The reason why SEBI has been able to crackdown on violation of its regulations is because
the penalties that are prescribed by SEBI are very huge in amount and it can sometimes
barred entities from trading in the securities on the market.12 Hence, the kind of compliance
that one sees with respect to the securities market is extremely high.13

The Bill takes a middle path taking care of the interests of the both what lobbyist wanted and
what the Select Committee had in mind. The Bill provides that the insurance companies do
have to take liability of the acts and omissions which are carried out by their agents. At the
same time the, Bill provides that IRDA can use its power by taking into cognizance of the
factual matrix in deciding the quantum of penalties that may be levied.

Under the Bill the quantum of penalties that have been fixed is Rs. 1 lakh per day per incident
as compared to Rs. 5 lakh14 that is present under the present regime. The extent of penalties

9
The argument that was put forward was that they number of agents that these insurance companies have are
extremely large and they are spread in every part of the country. Therefore, it will be extremely difficult to
monitor the day to day activities of the agents.

10
REPORT OF THE SELECT COMMITTEE ON THE INSURANCE LAWS (AMENDMENT) BILL, 2008, presented to the
Rajya Sabha on 10 December, 2014 online at
http://www.prsindia.org/uploads/media/Insurance/Select%20committee%20on%20Insurance%20Laws.pdf

11
Id.

12
Order of SEBI in respect of BP Equities Private Limited on March, 2015 online at
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1427710883923.pdf

13
Response of queries by SEBI online at
http://www.sebi.gov.in/cms/sebi_data/tenderdocs/1426479884130.pdf

14
Section 102 of the Insurance Act, 1938 online at
http://financialservices.gov.in/Insurance/Acts/TheInsuranceAct_1938.pdf

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can extend upto maximum of Rs. 1 crore.15 However, such kind of penalties provision in my
opinion should not stop new companies to enter the insurance market as we have to
understand that in present times, as can be seen under the securities market, penalties form a
large part of regulatory mechanism. Having a penalty mechanism, allows the party to appeal
against the order of the authority which helps in formulating a better regulation.

Refusal of Claim

One of the most beneficial amendments for the customers that have been introduced is the
fact that the insurance companies will now not reject a request a claim after three years.
Under the present regime, the insurance company has a right to reject a claim arising out of a
policy based on non disclosure of material factual matrix.16 Under the new Bill, the insurance
company has been provided three years in which they have to establish that there has been a
material suppression of facts. The insurance companies will not be in a position to reject a
claim after three years on any of the grounds.

This kind of position is in the extreme favour of the assured as now it does not have to worry
about the claim getting rejected. This will also help the insurance company as the current
provision will require the companies to strengthen their due diligence process. Moreover,
such a provision would also help to disassociate fraud as a policy which has been bought
keeping in mind to commit fraud, as execution of such a policy is immediate and not after a
period of three years. However, one of the issue which is still problematic from the customers
view point is that the burden of proof17 has been placed on the beneficiary of the life
insurance policy holder. This would again discretion to the insurance company to reject a
claim based on the grounds of concealment of facts. Therefore, what is required a guideline
by IRDA on this issue.

The Bill also provides an opportunity to the insurance companies to cancel any policy within
3 years of the policy. However, the insurance companies have to provide a strong reason as to

15
Chandralekha Mukherji, Four ways policyholders will benefit from Insurance Bill, December 13, 2014 THE ECONOMIC
TIMES, online at http://articles.economictimes.indiatimes.com/2014-12-13/news/57012118_1_insurance-bill-
foreign-investment-cap-hdfc-life

16
Id.

17
See the case of The Icici Lombard General v. Annakkili on 6 February, 2012 to understand the difference
between the burden of proof that existed earlier and which exists now.

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why it is cancelling the policy and whether the facts which led to the cancellation of the
policy where known to it at the first place. This feature has been introduced so as to reduce
the fraudulent claims that may arise of the insurance policy.18

Assignment of policies

The Bill has made easier to assign life insurance policies to a third party.19 The assignment
can be done either wholly or in partial of the insurance policy. The person who will
transferring the policy has to sign the policy, clearly explaining what will be the terms and
condition and getting attested by his agent of the policy. However, the Bill also provides an
opportunity to the insurance company to reject any such assignment, if it is of the opinion
that such a transfer is not in the interest of the policy holder. However, such rejection has to
be communicated to the holder of the policy as well as the person whom the policy has been
assigned with a month of the attestation explain the reasons for such a rejection. Once a
policy has been validly assigned, the assignor will have all the rights under the policy. This
amendment under the Bill has been introduced after carefully studying various foreign
jurisdictions where such a phenomenon is common.20

Curbing on the agents

One of the prime reasons why there were reports of mis-selling of insurance policies was
because the insurance companies were providing large number of gifts to the agents apart
from the commission that they are entitled to do.21 Amendments in the new Bill provide that
the insurance companies will now won’t be able to do so. If there are any reports in which it
is found out by IRDA that any insurance company is involved in any such kind of activity
that it can levy huge penalties on the company. Such a provision would also help to curb
selling of those policies by agents which are not well suited for the customers thereby
preventing mis-selling of policies.

18
Chandrakant Mishra, 10 Benefits to you because of the New Insurance Bill, online at
http://www.planmoneytax.com/benefits-of-new-insurance-bill/

19
‘7 benefits if Insurance Bill is passed’, BUSINESS STANDARD, October 26, 2014, online at http://www.business-
standard.com/article/pf/7-benefits-if-insurance-bill-is-passed-114102600673_1.html

20
Insurance Company v. Brune’s Assignee, 96 U.S. 588 (1877) online at
https://supreme.justia.com/cases/federal/us/96/588/case.html

21
Such gifts include cars, foreign tours etc.

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The Bill at the same time provides opportunity to the insurance companies to appoint agents
on their own, the only caveat being that such agents should meet the qualifications as
prescribed by the IRDA. The IRDA will still have the power to taken actions against the
agents for the benefit of the policy holders.22 The Bill has also capped the limit of
commission that the insurance companies can now pay to the agents in order to maintain
regulatory oversight on the issue.23

However, the insurance companies see this as an opportunity to increase their number of
insurance agents which can strengthen their network in the rural sector. It will also increase to
greater due diligence from the insurance companies because of the huge payments that they
have now pay due to increase in penalties of the action of the agents.

22
Section 42 (4) of the Insurance Act.

23
‘7 benefits if Insurance Bill is passed’, BUSINESS STANDARD, October 26, 2014, online at http://www.business-
standard.com/article/pf/7-benefits-if-insurance-bill-is-passed-114102600673_1.html

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 CONCLUSION
The new amendments in the Bill have been met with positive response from insurance
companies both domestically and globally. A market which is 73% dominated by the Life
Insurance Corporation of India, allowing foreign direct investment to 49% would provide an
opportunity to private players to fight the near monopoly of LIC in the market. Companies
such as Metlife US etc. have already announced that they will increase investment in their
Indian counterparts.24 Hence, in coming days we could see a slew of competition in the
insurance sector which was heavily demanded. However, the key challenge before the private
players will be their distribution system as at the present time, the penetration of LIC in the
rural regions of India is something which the private players have not been able to
overcome.25

But the Bill provides an opportunity to the private players in challenging the
dominance of LIC, by giving power to the insurance companies to appoint distribution agents
on their own. The companies can utilize the Bancassurance model to their benefit.26 Under
this model, the insurance companies may enter into agreement with banks through which they
can sell their policies. It uses the synergies of both the insurance companies and the banks to
create a mutually beneficial condition for the both the players.27 This would also help the
insurance companies to save themselves from the scourge of penalties as having banks as
distributive agents will minimize fraudulent activities of the agents and also save commission
that the insurance companies to the agents.

Off all these activities, however, it will be customers who will be attain the most. New
entry of private players in the market will lead to an increase in the number of new product
policies in the market from which the customer can choose from. Hence, it can be easily seen

24
‘India Opens Up Insurance Sector to Foreign Players, FORBES, March 23, 2015 online at
http://www.forbes.com/sites/greatspeculations/2015/03/23/india-opens-up-insurance-sector-to-foreign-
players/2/

25
Report of the Indian Brand Equity Foundation on the Insurance sector, February 15, 2015 online at
http://www.ibef.org/industry/insurance-sector-india.aspx

26
SHASHANK MANISH & KISHORE KUNALi, Bancassurance, Vol 5 (4), INDIA LAW JOURNAL, online at
http://www.indialawjournal.com/volume5/issue_2/article_4.html
27
More details online at http://www.investopedia.com/terms/b/bancassurance.asp

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that introduction of the Bill has given a new life to the insurance sector which was needed
from a long time. This Bill is a win-win situation of all the three stakeholders in the industry
i.e. Government, the insurance companies and the customer which is nowadays very rare to
find.

The Bill also aims at improving the social development model, as penetration of more
insurance companies in the rural areas will help investments to be invested in policies and the
money that could have been used on outward expenses can be rationally used in the style of
insurances during urgent situations like accidents, which would previously involved huge
interest rate on money forwarded by money lenders.

Hence, the object and purpose of the new Amendments have been extremely
noteworthy, but however, what has to be seen is the implementation of the provisions of the
Bill by insurance companies as well as IRDA.

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 BIBLIOGRAPHY

● ‘7 benefits if Insurance Bill is passed’, BUSINESS STANDARD, October 26, 2014,

online at http://www.business-standard.com/article/pf/7-benefits-if-insurance-bill-is-
passed-114102600673_1.html

● ‘Critically examine why the insurance Bill, 2015, which was passed by the Parliament
in 2015, is considered as part of major economic reforms in the country’, THE
INSIGHT, March 13, 2015 online at http://www.insightsonindia.com/2015/03/13/6-
critically-examine-why-the-insurance-bill-2015-which-was-passed-by-the-parliament-
in-2015-is-considered-as-part-of-major-economic-reforms-in-the-country/

● ‘Insurance Bill: Parliamentary panel pitches for 49% foreign investment cap’,
DECEMBER 10, 2014 online at http://www.thehindu.com/business/insurance-bill-
parliamentary-panel-pitches-for-49-foreign-investment-cap/article6679428.ece

● ‘Rajya Sabha passes the new Insurance Bill’, THE TRIBUNE, March 13, 2015

● Agency Commission and Brokerage, report no. PA 15 of 2008 online at

http://saiindia.gov.in/english/home/our_products/audit_report/Government_Wise/unio
n_audit/recent_reports/union_performance/2007_2008/Commercial/Report_no_15/ch
ap-5.pdf

● Chandrakant Mishra, 10 Benefits to you because of the New Insurance Bill, online at
http://www.planmoneytax.com/benefits-of-new-insurance-bill/

● Chandralekha Mukherji, Four ways policyholders will benefit from Insurance Bill,
December 13, 2014 THE ECONOMIC TIMES, online at
http://articles.economictimes.indiatimes.com/2014-12-
13/news/57012118_1_insurance-bill-foreign-investment-cap-hdfc-lifeIndia Opens Up
Insurance Sector to Foreign Players, FORBES, March 23, 2015 online at
http://www.forbes.com/sites/greatspeculations/2015/03/23/india-opens-up-insurance-
sector-to-foreign-players/2/

● Order of SEBI in respect of BP Equities Private Limited on March, 2015 online at

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1427710883923.pdf

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 ● Report of the Indian Brand Equity Foundation on the Insurance sector, February 15,
2015 online at http://www.ibef.org/industry/insurance-sector-india.aspx

● REPORT OF THE SELECT COMMITTEE ON THE INSURANCE LAWS

(AMENDMENT) BILL, 2008, presented to the Rajya Sabha on 10 December, 2014
online at
http://www.prsindia.org/uploads/media/Insurance/Select%20committee%20on%20Ins
urance%20Laws.pdf

● Response of queries by SEBI online at

http://www.sebi.gov.in/cms/sebi_data/tenderdocs/1426479884130.pdf

● SHASHANK MANISH & KISHORE KUNALi, Bancassurance, Vol 5 (4), INDIA

LAW JOURNAL, online at
http://www.indialawjournal.com/volume5/issue_2/article_4.html

● Why is Insurance Bill so important’, LIVE MINT, December 16, 2014

DICTIONARIES:

● BRYAN AND GARNER, BLACK'S LAW DICTIONARY 1504 (7th Ed. Sweet &
Maxwell 2008).
● OXFORD DICTIONARY OF ENGLISH (2010, Oxford University Press)
● WEBSTER’S NEW ENCYCLOPAEDIC DICTIONARY (Revised Edition 1995, Bd&L
Publishers Inc.).

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