The Insurance Act 1938 provides the basic framework for regulation of the insurance industry in India. With the enactment of IRDA Act, 1999, the insurance business was opened to the private sector. The number of insurance companies has shot up from six nationalised insurance companies in 1999 to 51 insurance companies (24 life and 27 non-life), excluding GIC (General Insurance Corporation of India), the national reinsurer, as on date.
Based on the report of the Law Commission published in 2004 and the Expert Committee constituted by IRDA under the chairmanship of KP Narasimhan, published in 2005, an Insurance Amendment Bill was introduced in the Rajya Sabha in December 2008. The Bill was referred to the Standing Committee on Finance. Subsequently, owing to the dissolution of the 14th Lok Sabha, the Committee could not present its report. Upon constitution of the 15th Lok Sabha, the Bill was referred to the Standing Committee on Finance in September 2009. This article summarises the key amendments proposed to the Insurance Bill with the corresponding recommendations of the Standing Committee.
Section 2 (6C)—Health insurance business to be recognised as a separate line of business
So far, there is no definition of health insurance as a separate line of business. The Bill proposes to define health insurance as effecting of contracts which provide for sickness benefits, long-term care, domestic and overseas travel cover and personal accident cover. Necessary amendments are being made in the definition of life insurance business to include health insurance business.
Section 2(7A)—Definition of Indian insurance company (which also defines the extent of foreign equity in insurance sector)
The Bill proposes to amend the definition of the Indian Insurance Company as a public limited company in which the foreign equity does not exceed 49%. However, the Standing Committee on Finance, based on various comments received, was of the view that the possibility of tapping the alternate routes of the domestic market for meeting the capital requirements of the sector has to be explored first and therefore has recommended for retention of the foreign equity cap at 26%.
The Bill also proposes to recognise Lloyds, the Society of Underwriters based in London, one of the world’s large insurers, to be recognised as a foreign insurance company, for doing business in joint venture with Indian partners and to act as reinsurers through their branches in India. However, since Lloyds do not have any Indian representation or underwriting desks in India, the Standing Committee has advised that this proposal be reviewed.
Section 6—Minimum capital prescribed for health insurance companies and foreign reinsurance companies operating through a branch in India
The Bill proposes to fix the minimum capital for health insurance business at Rs. 500 million. However, the Standing Committee has found no justification for a preferential treatment for health insurance companies and has recommended for raising it to Rs. 1 billion on par with life and general insurance companies.
It has also been prescribed that foreign reinsurance companies operating as reinsurers through their branch(es) in India shall have a minimum net owned funds of Rs. 50 billion.
Section 6A—Recognition of tier-II capital for insurers
Currently only equity share capital can be issued by insurance companies. The Bill seeks to vest powers with IRDA to allow insurance companies to raise other forms of capital as may be approved by the Authority. However, such Tier-II capital will not have any voting rights.
Section 6AA—Divesting of equity by Indian promoters to 26% after 10 years
The existing provisions state that no Indian promoter shall hold more than 26% in an Indian insurance company beyond 10 years from the date of commencement of business. The Bill proposes to delete this section. This would mean that an Indian promoter can continue to hold up to 100% in Indian insurance companies even after the 10th year.
However, the Standing Committee has recommended retention of this Section to enable diversification of ownership in insurance companies.
If the foreign equity cap in insurance has been retained at 26%, after 10 years of existence, either the insurance companies must go public or Indian promoters must be allowed to continue at 74%. However, many insurance companies who have crossed 10 years are still not ready for a public issue and therefore, retaining this section would mean that the Indian promoter holding 74% would have to dilute it’s equity to 26% and have at least two more Indian promoters (with each not holding more than 26%) after the 10th year, which is difficult in the current situation. Therefore, it is recommended that this Section be deleted or alternatively the 10 year window for dilution be increased to atleast 15 years.
Section 29—Liberalisation of restrictions on sanction of loans and advances by insurers
Currently, the Section prohibits any kind of loan or advances other than a highly restricted list, viz., to insurance agents not exceeding the previous year’s renewal commission, with the overall ceiling of loans or advances restricted to a very nominal sum of One hundred rupees. Further, any other loans and advances are generally prohibited. This has created an operational hurdle for many insurance companies as sanction of trade advances to vendors and employees in the normal course of business was also restricted by the Section.
The Bill has substituted a new Section which enables sanction of loans and advances as per norms to be specified by the Authority and the Scheme approved by the board of directors of the insurer. The ceiling of advances to commission linked to his previous year’s renewal commission has, however, been retained in the Act.
Section 32D—Minimum business in third party risks of motor vehicles for general insurance companies
The Bill introduced a new Section 32D which mandated every general insurance company to undertake minimum percentage of business in third party risks of motor vehicles as may be specified by IRDA in the regulations, with health and reinsurance companies given exemption. However, some apprehensions were raised before the Committee that third party risk can be made mandatory only if the pricing is left to be decided by the insurers with the continuance of the motor third party pool system. In view of the above, the Committee has stated that till such time these issues are resolved, sharing of liability by the insurers through the mechanism of common pool would be the best course.
It may be pertinent to note that IRDA have already issued an order for dismantling theabove pool system.
Section 38—Recognition of partial assignments of insurance policies
The existing Section 38 which provides for transfer of insurance policies has been significantly amended. It is proposed to recognise ‘partial’ assignment—i.e. transferring a portion of the interest in a life insurance policy. This would help avoiding transfer of interests in policies beyond the requirement, as currently the policies can be transferred in toto only. An assignee getting a partial right in an insurance policy, shall not be entitled to further assign or transfer the residual amount payable under the same policy
Further, the Bill also proposes to empower insurers to reject requests for assignments if it is not bona fide or if it is against the interests of policyholders. This was intended to prevent trading in insurance policies.
The Standing Committee, however, has recommended that the Act should specifically prohibit speculative assignments instead of leaving the issue to the discretion of insurers.
Section 39—Protection of rights of nominees under insurance policies
Currently the position of a nominee under an insurance policy is a subject matter of litigation and is not settled. Unlike Banking Regulation Act, the existing Insurance Act does not give unfettered rights to the nominees to receive the policy monies to the exclusion of the legal heirs. Though the insurer can get a valid discharge by paying the claim amount to the nominee, the position of the nominee is that of a trustee for the legal heirs. While there have been many judicial precedents on the position of a nominee, the Bill proposes to put to an end to this ambiguity by recognising two types of nominees—a beneficial nominee and a collector nominee. A beneficial nominee has absolute rights under the policy to receive the policy benefits to the exclusion of the legal heirs. Only parents, spouse and children can be beneficial nominees. On the other hand, a collector nominee made responsible for handing over the proceeds to beneficial nominee or legal heirs of the policyholder as may be prescribed by the regulations.
The Standing Committee has advised the Ministry to examine the issue of possible contradiction of the above classifications with the Indian Succession Act.
Section 40, 40B & 40C—Vesting powers with IRDA on prescribing ceilings on insurance commission, payment of commission on orphan policies and fixing ceilings on expenses of management
The existing Sections 40, 40A, 40B & 40C are proposed to be consolidated into one section—under Section 40, which proposes to dispense with prescription of ceilings for commission under the Act and give powers to IRDA to prescribe commission by way of regulations.
However, the Standing Committee has differed in its views on this proposal and has recommended that a guaranteed minimum amount or percentage of premium which agents would be entitled to as Commission could be prescribed in the Act to continue the statutory protection currently bestowed by the Act on the insurance agents. It is pertinent to note that the existing Section 40A only prescribes ceilings for commission and does not guarantee any minimum commission.
Further, currently there are restrictions in Section 40(2A) which allows allotment of lapsed insurance policies solicited by terminated agents to existing agents of an insurer only under certain exceptional circumstances. This provision is proposed to be deleted as it does not support persistency of insurance policies. IRDA is proposed to be vested powers for drafting regulations in this regard.
The existing Sections 40B & 40C have been substituted by simple sections which state that the details of expenses of management shall be furnished in such manner and form as may be prescribed by IRDA by way of Regulations.
Section 42—Dispensing with the process of licensing of agents and entrusting responsibility of appointment of agents to insurers
The system of licensing of insurance agents has outlived its existence and therefore the Bill proposes to do away with the process of licensing of insurance agents. Henceforth, the power to appoint agents is proposed to be given to insurance companies subject to fulfilling the minimum qualifications, training and examination requirements as prescribed by IRDA. The disqualifications for insurance agents have been retained in the Act.
However, the Standing Committee has observed that keeping in mind the current unhealthy sales practices it might be inappropriate to do away with the role currently played by IRDA in licensing of agents and hence has recommended that the licensing system must continue.
Section 44—Payment of renewal commission after termination of agents
Currently, Section 44 mandates that an insurance company cannot deny payment of renewal commission after termination, if an insurance agent has served for five years with an insurer. If the agent has completed 10 years, such entitlement to renewal commission after termination vests only if the agent, after termination, does not work directly or indirectly with any insurer. Such renewal commission is payable to the legal heirs of deceased insurance agent after his death.
While the Bill sought to delete this section, the Standing Committee has recommended retention of this section to protect the interests of large number of agents. The object behind deletion of Section 44 was that while compensation is paid after termination, the policyholders are not serviced resulting in lapsation. This point may be examined before taking a final call. Necessary clause to protect the interests of existing agents may be introduced.
Section 45—Fixing time lines for denial of claims by insurers on the grounds of misstatements etc
Insurance contracts are contracts ‘uberrima fides’—meaning contracts of utmost good faith where the customer is expected to disclose about the status of health, family, income, etc to enable the insurer to correctly assess the risk and fix the premium. Where any non-disclosure is established or mis-statements have been made in the proposal form, the current provisions of Section 45 prevent an insurer from denying a claim received after two years from the date of effecting the policy unless the three cardinal principles as mentioned in the Section are satisfied (that such mis-statement or concealment was made on a material fact, that it was fraudulently made by the policyholder and that the policyholder knew at the time of making it that the statement was false or was material to disclose).
The Bill proposed to amend the section to state that an insurer cannot deny a claim under an insurance policy after five years for any reason whatsoever—i.e. even if the policyholder had fraudulently made a statement on material fact or fraudulently concealed a material fact.
The Standing Committee has proposed to reduce the five-year term to three years which means after three years no claim under an insurance policy can be repudiated on any ground whatsoever.
General
Substantial increase in penalties for violations
The penalties for non-compliance with provisions in the Insurance Act have been significantly increased. Some examples:
- Under Section 102, for failure to comply with IRDA directions etc, the penalty has been increased from Rs. 5 lakh to Rs. 1 lakh for each day subject to a ceiling of Rs. 1 crore
- For failure to achieve rural or social sector compliance—Rs. 25 crore
- For rebating, the penalty is increased from Rs. 500 to Rs. 1 lakh
- For allowing persons not eligible as insurance agents to sell, insurer is liable for a penalty of Rs. 1 crore
- For violations of provisions regarding investments under Section 27, 27A, 27B etc, maximum penalty is Rs. 25 crore
The Standing Committee has observed that the penalties proposed in the Bill are too steep and may not even be commensurate with the capital base of insurance companies. Accordingly, it has proposed that penalties be rationalised and the penalties proposed be revisited. Further Committee has also advised that alternative deterrents such as publicising names of defaulting companies be resorted to.
Securities Appellate Tribunal to be the appellate authority against IRDA’s orders
It is proposed to recognise Securities Appellate Tribunal (SAT) as the Appellate Authority against the orders passed by IRDA. The Standing Committee has advised that the composition of SAT as well as qualifications for members of SAT be reviewed keeping in mind the need for considering persons with special knowledge in the field of insurance as well.
Procedural matters removed from the Insurance Act and powers vested with the Authority by way of regulations
Some of the procedural matters proposed to be removed from the Act and powers vested with IRDA to frame Regulations:
- Power to prescribe documents required for registration of insurance companies
- Power to prescribe forms of Tier-II capital for insurers
- Power to curb excessive remuneration paid by insurers
- Power to prescribe fees for assignments and nominations under insurance policies which can be charged by insurers
- Procedure for collector nominee handing over the claim proceeds to the beneficiary nominee or legal heirs of the deceased life assured
- Power to prescribe ceilings on expenses of management
- Power to frame regulations for payment of commission on orphan policies
- Framing of scheme for sanction of loans and advances by insurers
Conclusion
The Bill would require amendments based on the recommendations of the Standing committee. Once the Bill is passed, it is expected to remove lot of operational hurdles and is expected to align the provisions of the 1938 Act in line with the current industry requirements.
The author is the vice-president (compliance) of Bharti-AXA Life Insurance. The views expressed herein are his personal views and should in no way be deemed to be the views of Bharti-AXA Life Insurance or any of its associate companies.
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