N.G.BEDEKAR COLLEGE OF COMMERCE
CHENDANI BUNDER ROAD, THANE (W) – 400601. MUMBAI UNIVERSITY PROJECT ON INSURANCE REGULATORY & DEVELOPMENT AUTHORITY BACHELOR OF COMMERCE FINANCIAL MARKETS SEMESTER V SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF BACHELOR OF COMMERCE FINANCIAL MARKETS SUBMITTED BY: AKSHAY S. TAWADE ROLL NO. 39
Declaration
I Mr. AKSHAY S. TAWADE student of N.G.BEDEKAR College
of BACHELOR OF COMMERCE – FINANCIAL MARKETS Semester V for the academic year 2011-2012 Hereby declare that I have completed the project on “INSURANCE REGULATORY & DEVELOPMENT AUTHORITY”. The Information submitted is true & original to the best of my knowledge.
Signature of the student
(Mr. AKSHAY S. TAWADE)
ACKNOWLEDGEMENT
This project on INSURANCE REGULATORY & DEVELOPMENT AUTHORITY (IRDA) is a result of cooperation, hard work and good wishes of many people. I, student of N.G. BEDEKAR COLLEGE OF COMMERCE would like to thank my project guide, Prof. S.KRISHNAN for his involvement in my project work & timely assessment that provided me inspiration and valued guidance throughout my study. I also take this opportunity to express my sincere gratitude to the library staff’s who provided me right information & study material at the right time. I express my deep gratitude to all my college friends & my family members whose efforts and creativity has helped me in giving the final shape and structure to the project work. I am also thankful to all those seen and unseen hands and heads, which have been of direct or indirect, help in the completion of this project work.
AKSHAY S.TAWADE
EXECUTIVE SUMMARY
It is rightly said that, “A good name keep its brightness even in dark days.” But my clear friends the important things that “It is the insurance sector that the matters, not the same.” In this project I tried my level best to present the subject matter in the simplest & convincing language. I earnestly hope that after reading this project one will get a nutshell idea of analyzing an INSURANCE with REGULATORY INSURANCE DEVELOPMENT AUTHORITY
COMPANIES regarding control over the insurance sector.
CONTENTS
INTRODUCTION TO INSURANCE
1.1 INTRODUCTION Insurance is an institution, which eliminates risk and which substitutes certainty for uncertainty. Insurance is the protection of the economic value of assets. It is a method of spreading over a large number of persons, a possible financial loss which can not be born by an individual. It is a risk sharing device. The occurrence which causes any damages to the assets called perils. The damage that these perils may cause to the assets is called risk that the asset is exposing to. The concept of risk is integral to the concept of insurance. The risk means, that where is a probability of loss to an assets. If there is no risk there is no need for
insurance hence insurance exists there is timing and manner of death though it is certain. Insurance business consists of spreading risks over time and sharing them between persons and organizations. There are two type of insurance i.e. Life insurance And General Insurance. Life insurance covers the risk that exists in one’s life. These risks may arise due to accident, illness or natural cause like fire, food, and earthquake. Life insurance products have to suit the requirement of customers i.e. dieing too early, living too long, and living with disability. Any insurance other than human lives comes under the scope of General Insurance.It is also called as non life insurance. General insurance includes fire insurance, marine insurance, motor insurance, health insurance and accident insurance etc. 1.2 DEFINITIONS OF INSURANCE
Insurance is a plan by which large no of people associate themselves and transfer to the shoulders of all, risk that attach to individuals - By John Magee
Insurance may be defined as a device for reducing risk by combining sufficient no of exposure units to make their individual losses collectively predictable. The predictable loss then shared proportionately all units in the combinations.
- By Robert I Mahr & Emerson Cammack
Insurance is a contract in which a sum of money is paid to the assured as consideration of insurers incurring the risk of paying a large sum upon a given contingency
-
By Justice Tindall
1.3 HISTORY OF INSURANCE : In India, insurance has a deeprooted 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 (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 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 14 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 14 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.
1.4 MEANING OF INSURANCE
Insurance is a financial service for collecting the savings of the public and providing them with risk coverage. The main function of insurance is to provide protection against the possible chances of generating losses. It eliminates worries and miseries of losses at destruction of property and death. It also provides capital to the society as the funds
accumulated are invested in productive heads. Insurance comes under the service sector, while marketing this service due care is to be taken in quality product and customer satisfaction. The insurance business is
based on the skill and excellence of agents and this makes a strong case in favour of personal selling. It is a contract between two parties i.e. the
insurer and the insured. Thus, insurance is a device to protect life and property against financial loss. The insurance company operates by collecting small contributions from many people who are exposed to risks. This money collected is used to settle those who fall victim of such risks. These contributions which the insurance company collects are called premium. To some individuals, insurance is seen as an investment Insurance is a way we share our risk with others. It is a way of getting protection to reduce damages.
1.5 IMPORTANCE OF INSURANCE
1. Insurance contract protects against the possible occurrence of contingences i.e. perils (fire, flood, lighting,’ etc). 2. The insurer undertakes to compensate the insured for a loss arising from the risk insured against. 3. The purpose of insurance is the elimination of risks and the loss is to be shared i.e., substitution of certainty for uncertainty. 4. Contract of insurance act as a cooperative way of spreading risk 5. The Essence of insurance of contract by which the loss suffered by a person spread over the whole of insured community.
6. Payment of insurance for insurance contract is sufficient to acquire the right and remedies available to that person. 7. The insurance provides funds to the government and public which will lead to economic development.
1.6 FUNCTIONS OF INSURANCE
Provide Protection
Contribute towards the developmen t of larger Industries
Collective bearing of risk
Small capital to cover larger risks
Functions of Insurance
Assessmen t Of risk
Preventio n of Losses
Provide Certainty
Table 1.1
Provide Protection – The primary function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening
of the risk, but can certainly provide for the losses of risk. Insurance is actually a protection against economic loss, by sharing the risk with others.
Collective bearing of risk – Insurance is a device to share the financial loss of few among many others. Insurance is a mean by which few losses are shared among larger number of people. All the insured contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid.
Assessment of risk – Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also.
Provide Certainty - Insurance is a device, which helps to change from uncertainty to certainty. Insurance is device whereby the uncertain risks may be made more certain.
Prevention of Losses –
Insurance cautions individuals and businessmen to adopt suitable device to prevent unfortunate consequences of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc.
Small capital to cover larger risks – Insurance relieves the businessmen from security investments, by paying small amount of premium against larger risks and uncertainty.
Contributes towards the development of larger industries – Insurance provides development opportunity to those larger industries having more risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery.
OPERATORS IN THE INSURANCE INDUSTRY : Following are the main types of operators in insurance industry.
Insurance Market
Insured (Policyholder / Customer )
Insurance Products
Insurance Intermediaries (Agents, Brokers, etc.)
Insurer
Reinsurer
Regulator (IRDA)
1.7 CLASSIFICATION OF INSURANCE
Classification Of Insurance
Life Insurance General Insurance Marine Insurance
Non Life Insurance
Miscellaneous Insurance
Fidelity Guarantee Insurance Crop
Fire Insurance Motor vehicles Insurance Personal Accident Insurance
Insurance Burglary Insurance Cattle Insurance
Cash In Transit Insurance
Table 1.2
A] Life insurance
Life insurance is a contract whereby the insurer in consideration of premium paid either in a lump sum or in periodical installment undertake to pay an annuity or certain sum of money, either on the death of the insured or on the expiry of a certain number of year whichever is earlier.
B] Non-life Insurance a) General Insurance Marine Insurance IT is a contract of insurance under which the insurer undertakes to indemnify the insured against losses incidental to marine adventure. It may covers loss or damages to the ship, cargo, Freight, Vessels or any other subject of marine adventure.
Fire Insurance It is a contract of agreement between the insurer and the insured whereby the insurer undertakes to indemnify the insured for destruction of or damage to property caused by fire or others specified perils during an agreed period of time in return for payment of a premium in lumpsum or by installments.
Motor vehicles insurance
It falls under general insurance. Its importance increasing day by day. In motor insurance the owners liabilities to compensate people who were killed or injured through the negligence of the motorists or driver is passed on to the insurance company. This business is the largest single section of accident insurance, if judged by premium income, but this relates to motor insurance as a whole.
Personal Accident Insurance It is a contract of Insurance which provides an absolute protection against death or disability arising solely and directly from accident caused by violent external and visible means. b) Miscellaneous Insurance Fidelity Guarantee Insurance It falls under the miscellaneous class of insurance. This is the type of contract of insurance and also a contract of guarantee which general principles of insurance apply. Fidelity guarantee does not mean the guarantees of the employee’s honesty. But it guarantees the employees for any damages or loss resulting from the employee’s dishonesty or disloyalty. Insurer is liable to compensate the said loss to the employer as prescribe by the contract.
Crop Insurance
It is a contract to provide a major of financial support to farmers in the event of crop failure due to drought or flood. It covers all risks or of loss or damage relating to production of rice, weat, millets, oilseeds and pulses etc. Burglary Insurance It falls under the classification of insurance of property in the case of burglary policy, the loss or damage of household goods and properties and personal effects due to theft, larceny, burglary, house breaking and acts of such nature are covered. Actual loss is compensated. Cattle Insurance It is a contract whereby a sum of money secured to the assured in the event of death of animals like Bulls, Baffelos, Cows, and Heifers. It is a contract against death resulting from accident, disease, parturitions or pregnant condition as the case may be. The insurer usually undertakes to pay the access sum in the event of loss.
Cash In Transit Insurance The form of insurance cover to the insured against any loss in the event of money or cash being stolen from his business premises or while it is being carried or to the bank. The scope of cash in transit insurance is important to any business as large sum of money are drawn from banks to pay wages and to meet the day to day expenses. 1.8 PRINCIPLES OF CONTRACT OF INSURANCE
A Contract of insurance may be define as a contract between two parties where by a person undertakes in consideration of a fixed sum of money to pay to the other a fixed amount of money on the happening of a certain event or to pay the amount of actual loss when it takes place through a risk insured. Following are the important principles required for a valid contract of Insurance
Principles of Insurance Principles of Insurance
Utmost Good Faith Utmost Good Faith Insurable Interest Insurable Interest
Indemnity Indemnity Contribution Contribution
Subrogation Subrogation Mitigation of Loss Mitigation of Loss Causa Proxima Causa Proxima
Table 1.2
Utmost Good Faith
Since insurance shifts risk from one party to another, it is essential that there must be utmost good faith and mutual confidence between the insured and the insurer. In a contract of insurance the insured knows more about the subject matter of the contract than the insurer. Consequently, he is duty bound to disclose accurately all material facts and nothing should be withheld or concealed. Any fact is material, which goes to the root of the contract of insurance and has a bearing on the risk involved. It is only when the insurer knows the whole truth that he is in a position to judge (a) whether he should accept the risk and (b) what premium he should charge. If that were so, the insured might be tempted to bring about the event insured against in order to get money. Insurable Interest – A contract of insurance affected without insurable interest is void. It means that the insured must have an actual pecuniary interest and not a mere anxiety or sentimental interest in the subject matter of the insurance. The insured must be so situated with regard to the thing insured that he would have benefit by its existence and loss from its destruction. The owner of a ship run a risk of losing his ship, the charterer of the ship runs a risk of losing his freight and the owner of the cargo incurs the risk of losing his goods and profit. So, all these persons have something at stake and all of them have insurable interest. It is the existence of insurable interest in a contract of insurance, which distinguishes it from a mere watering agreement.
Indemnity A contract of insurance contained in a fire, marine, burglary or any other policy (excepting life assurance and personal accident and sickness insurance) is a contract of indemnity. This means that the insured, in case of loss against which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy, i.e. he shall be fully indemnified. The object of every contract of insurance is to place the insured in the same financial position, as nearly as possible, after the loss, as if his loss had not taken place at all. It would be against public policy to allow an insured to make a profit out of his loss or damage
Contribution – Where there are two or more insurance on one risk, the principle of contribution comes into play. The aim of contribution is to distribute the actual amount of loss among the different insurers who are liable for the same risk under different policies in respect of the same subject matter. Any one insurer may pay to the insured the full amount of the loss covered by the policy and then become entitled to contribution from his co-insurers in proportion to the amount which each has undertaken to pay in case of loss of the same subject-matter. In other words, the right of contribution arises when (I) there are different policies which relate to the same subject-matter (ii) the policies cover the same peril which
caused the loss, and (iii) all the policies are in force at the time of the loss, and (iv) one of the insurers has paid to the insured more than his share of the loss.
Subrogation – The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire and marine insurance. According to it, when an insured has received full indemnity in respect of his loss, all rights and remedies which he has against third person will pass on to the insurer and will be exercised for his benefit until he (the insurer) recoups the amount he has paid under the policy. It must be clarified here that the insurer's right of subrogation arises only when he has paid for the loss for which he is liable under the policy and this right extend only to the rights and remedies available to the insured in respect of the thing to which the contract of insurance relates.
Mitigation of Loss – In the event of some mishap to the insured property, the insured must take all necessary steps to mitigate or minimize the loss, just as any prudent person would do in those circumstances. If he does not do so, the insurer can avoid the payment of loss attributable to his negligence. But it must be remembered that though the insured is bound to do his best for his insurer, he is, not bound to do so at the risk of his life.
Causa Proxima – The rule of causa proxima means that the cause of the loss must be proximate or immediate and not remote. If the proximate cause of the loss is a peril insured against, the insured can recover. When a loss has been brought about by two or more causes, the question arises as to which is the causa proxima, although the result could not have happened without the remote cause. But if the loss is brought about by any cause attributable to the misconduct of the insured, the insurer is not liable.
MISSION
To protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.
The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto."
2.1 INTRODUCTION TO IRDA INSURANCE ACT, 1938:
The Insurance Act, 1938 and its subsequent amendments in 1950 and 1999 are serious attempts to address various issues relating to the business. Some of them are:
• • • • • •
Protection of policy holder interest. Limiting the expenses of insurance organizations. Establishment of tariff advisory committee. Solvency levels to be maintained. Creation of Insurance organization. Defining the roles and responsibilities functionaries associated with the business. of various
2.2 INSURANCE REGULATORY DEVELOPMENT AUTHORITY:-
The Insurance Act, 1938 provides that the Government should appoint a Controller of Insurance to ensure that the insurance business and companies registered under the Act comply with the various provisions of the Act. The controller has also the power of special investigation and to take over the management of the companies. After nationalization of the insurance industry the responsibilities of the supervision had reduced. But, with the proposal of privatization, as private companies being permitted to transact insurance business in India, it became necessary to establish an authority to regulate Insurance Corporation. The Government of India in April, 1993 appointed the Committee of Reforms in Insurance Sector with Shri. R. N. Malhotra, who is a former Governor of Reserve Bank of India. As per the committee recommendations, the Government set up a regulatory body known as. “ Insurance Regulatory Development Authority.” The bill for the same was passed in both houses of parliament and subsequently government implemented it. Following are 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.
2.2.1 PROFILE OF IRDA:-
The IRDA shall consist of not more than ten (10) members. All five will work as full time or whole time members. 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. The Authority is a ten member team consisting of: (a) A Chairman; (b) Five whole-time members; (c) Four part-time members, all are appointed by the Government of India: The whole time members shall hold office for five years or until the age of 62 whichever is earlier. The chairman shall hold the office for five years or until the age of 65 years whichever is earlier. The part – time members will hold the office not more than five years. The above said members are to be appointed by the Central Government from among the persons of ability and standing who have knowledge or experience in life insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration or any other discipline which would, in the opinion of Central government. Removal from office in IRDA: (1) The central Government may remove from office any member who: (a) is, or at any time has been , adjudged as an insolvent or (b) has become physically or mentally incapable of acting as a member or (c) has been convicted of any offence which, involves moral turpitude or (d) has acquired such financial or other interest as is likely to affect periodically his functions as a member or (e) Has so abused his as to render his continuation in office detrimental to the public interest.
(2) No such member shall be removed under clause d and c of Section 1 unless he has been given a reasonable opportunity of being heard in the matter. The advisory committee consists of following individuals and ex-officio authorities: (a) IRDA. Chiarman: Hari Narayana is the current Chairman of
(b) Full-time Members: Currently, they are Mr. K. K Srinivasan (Nonlife Member), Sri. G. Prabhakara (Life Member), Dr. R. Kannan (Member, Actuary) and Sri R. K. Nair (Member, F & I). (c) There is provision for a panel of other members and part time members. IRDA formed a high powered Insurance Law Reforms Committee known as KPN Committee with important insurance advisors like Mr. N. Govardhan and Dr. K C Mishra as its members. (d) There were also a few non-advisory committee members like Mr. Liaquat Khan and Mr. T. Viswanathan etc. Full force and utility of various institutions like Advisory Committee and self-regulatory organizations are not yet realized as the regulator seems to be in a long learning mode. Due to over delegations, Individual incumbents decide the pace and extent of utilization of prudential and statutory bodies. Research is limited to opinion seeking through legacy channels. Market waits for revision of insurance act and establishment meaningfully functioning regulatory organs devoid of excess delegation and subjective localization of development agencies.
2.2.2 OBJECTIVES OF IRDA
1) (2) To take care of the policy holders interest. To open up the insurance sector for private sector. ensure continued financial soundness and
(3) To solvency. (4) (5)
To regulate insurance and reinsurance companies. To eliminate dishonesty and unhealthy competitions. the activities of intermediaries in
(6) To supervise insurance sector.
(7) To amend the Insurance Act, 1938 and Life Insurance Corporation Act, 1956 and General Business Nationalization Act, 1972. The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto." In 2010, the Government of India ruled that the Unit Linked Insurance Plans (ULIPs) will be governed by IRDA, and not the market regulator Securities and Exchange Board of India.
2.2.3 DUTIES, POWERS, FUNCTIONS OF IRDA:Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA. Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and reinsurance business. For smooth functioning of insurance business, the regulatory authority has vested with adequate duties and powers. They are as follows: It issues the applicants in insurance arena, a certificate of registration as well as renewal, modification, withdrawal, suspension or cancellation of such registrations.
•
It protects the interests of the policy holders in any insurance company in the matters related to the assignment of policy, nomination by policy holders, insurable interest, and resolution of insurance claim, submission value of policy and other terms and proposals in the contract.
•
It also specifies obligatory credentials, code of conduct and practical instructions for mediator as well as the insurance company. Apart from this, it also defines the code of conduct for the surveyors and loss assessors involved with the insurance business.
•
One of the major functions of IRDA includes endorsing competence in the insurance business. Apart from this, upholding and regulating professional organizations in insurance and reinsurance business is also a major duty of IRDA.
•
IRDA is also entitled to for asking information, undertaking inspection and investigating the audit of the insurers, mediators, insurance intermediaries and other organizations related to the insurance sector.
•
It is also concerned with the regulation of the rates, profits, provisions and conditions that may be offered by insurers in respect of general insurance business if it is not controlled or regulated by the Tariff Advisory Committee.
•
It is also entitled to supervise the functioning of the Tariff Advisory Committee.
•
IRDA specifies the terms and pattern in which books of accounts are to be maintained and statement of accounts shall be provided by insurers and other insurance mediators.
•
It also regulates investment of funds by insurance companies as well as the maintenance of margin of solvency.
• •
It is also empowered to be involved in the arbitration of disagreements between insurers and intermediaries or insurance intermediaries. It is meant to specify the proportion of premium income of the insurer to finance policies.
• •
IRDA also specifies the share of life insurance business and general insurance business to be accepted by the insurer in the rural or social sector. IRDA has provided for a separate channel for lodging complaints against deficiency of services rendered by Insurance Companies. If you have a complaint/grievance against an insurance company for poor quality of service rendered by any of its offices/branches, please approach the Nodal Officer of the Insurance Company concerned. In case you are not satisfied with the Insurance Company’s response you may also file a complaint with the Insurance Ombudsman in your State. The Insurance Ombudsman is an independent office to provide speedy and cost effective resolution of grievances to the customers. Policyholders who have complaints against insurers are required to first approach the Grievance/Customer Complaints Cell of the concerned insurer. If they do not receive a response from insurer(s) within a reasonable period of time or are dissatisfied with the response of the company, they may approach the Grievance Cell of the IRDA.
2.2.4
IRDA INITIATIVES:
Some of the initiatives of IRDA, by way of subsequent rules framed by it are: (1) IRDA's regulation stipulate that the prospectus issued by the insurer should explicitly state the scope of benefits, conditions, warranties, entitlements exceptions, and right to participate in bonus under every plan of insurance (2) A decision on the proposal should be made by the insurer within 15 days (3)IRDA has framed regulations regarding advertisement by insurance companies and other intermediaries. They apply to all categories and media employed (4) IRDA can adjudicate disputes between the insurance companies and intermediaries (5) IRDA regulation requires that every insurance company appoint an actuary (6) IRDA regulation has laid down the following stipulations as regards settlement of claim: (a) All the requirements needed under death claim are to be sought in one instance (b) Admit or repudiate the claim in 30 days (c) All investigations need to be completed in 6 months (d) Interest at 2 % over bank rate is payable in case of delayed settlement Indian insurance sector: Since opening up, the number of participants in the industry has gone up from six insurers in the year 2000 to 44 insurers operating in the life, non-life and reinsurance segments.
Companies
2000
2011 (October end)
Public Sector Life Insurers General Insurers Specialized Instt. 1 4 1
Private Sector 21 15 -
Public Sector 1 4 3
Total
22 19 04
Total
6
36
8
44
The improved performance of the economy has been reflected in the insurance industry. The premium underwritten in India and abroad by life insurers in 2005-06 increased by 27.78 per cent, which was higher than the growth (24.31 per cent) in 2004-05. In the case of non-life insurers, the corresponding growth was 15.61 per cent as against the previous year's growth of 11.57 per cent. First year premium, including single premium, accounted for 36.63 per cent of the total life premium. Renewal premium accounted for the remainder. First year premium, including single premium, recorded a growth of 47.94 per cent driven by a significant jump in the unit-linked business. By the end of March 2009, there were eighteen life insurance companies operating in India. Subsequently, Aegon Religare life Insurance Company Limited and Canara HSBC Oriental Bank of Commerce Life Insurance Co.ltd., DLF Pramerica Life Insurance Company Limited were given Certificate of Registration by the Authority. With these three new companies the total number of life insurance companies operating in India rose to 22.
2.3 OMBUDSMAN:The institution of Insurance Ombudsman was created by a Government of India Notification dated 11th November, 1998 with the purpose of quick disposal of the grievances of the insured customers and to mitigate their problems involved in redressal of those grievances. This institution is of great importance and relevance for the protection of interests of policy holders and also in building their confidence in the system. The institution has helped to generate and sustain the faith and confidence amongst the consumers and insurers. Appointment of Insurance Ombudsman: The governing body of insurance council issues orders of appointment of the insurance Ombudsman on the recommendations of the committee comprising of Chairman, IRDA, Chairman, LIC, Chairman, GIC and a representative of the Central Government. Insurance council comprises of members of the Life Insurance council and general insurance council formed under Section 40 C of the Insurance Act, 1938. The governing body of insurance council consists of representatives of insurance companies. Eligibility: Ombudsman are drawn from Insurance Industry, Civil Services and Judicial Services. Terms of office: An insurance Ombudsman is appointed for a term of three years or till the incumbent attains the age of sixty five years, whichever is earlier. Re-appointment is not permitted. Territorial jurisdiction of Ombudsman: The governing body has appointed twelve Ombudsman across the country allotting them different geographical areas as their areas of jurisdiction. The Ombudsman may hold sitting at various places within their area of jurisdiction in order to expedite disposal of complaints. The offices of the twelve insurance Ombudsmen are locatedat (1) Bhopal, (2) Bhubaneswar, (3) Cochin, (4) Guwahati, (5) Chandigarh, (6)New Delhi, (7) Chennai, (8) Kolkata, (9) Ahmedabad, (10) Lucknow, (11) Mumbai, (12) Hyderabad.
The areas of jurisdiction of each Ombudsman have been mentioned in the list of Ombudsman.
Office Management: The Ombudsman has a secretarial staff provided to him by the insurance council to assist him in discharging his duties. The total expenses on Ombudsman and his staff are incurred by the insurance companies who are members of the insurance council in such proportion as may be decided by the governing body. Removal from office: An Ombudsman may be removed from service for gross misconduct committed by him during his term of office. The governing body may appoint such person as it thinks fit to conduct enquiry in relation to misconduct of the Ombudsman. All enquiries on misconduct will be sent to Insurance Regulatory and Development Authority which may take a decision as to the proposed action to be taken against the Ombudsman. On recommendations of the IRDA, the Governing Body may terminate his services, in case he is found guilty. Power of Ombudsman: Insurance Ombudsman has two types of functions to perform (1) conciliation, (2) Award making. The insurance Ombudsman is empowered to receive and consider complaints in respect of personal lines of insurance from any person who has any grievance against an insurer. The complaint may relate to any grievance against the insurer i.e. (a) any partial or total repudiation of claims by the insurance companies, (b) dispute with regard to premium paid or payable in terms of the policy, (c) dispute on the legal construction of the policy wordings in case such dispute relates to claims; (d) delay in settlement of claims and (e) non-issuance of any insurance document to customers after receipt of premium. Ombudsman's powers are restricted to insurance contracts of value not exceeding Rs. 20 lakhs. The insurance companies are required to honour the awards passed by an Insurance Ombudsman within three months. Manner of lodging complaint: The complaint by an aggrieved person has to be in writing, and addressed to the insurance Ombudsman of the jurisdiction under which
the office of the insurer falls. The complaint can also be lodged through the legal heirs of the insured. Before lodging a complaint: (a) The complainant should have made a representation to the insurer named in the complaint and the insurer either should have rejected the complaint or the complainant have not received any reply within a period of one month after the concerned insurer has received his complaint or he is not satisfied with the reply of the insurer. (b) The complaint is not made later than one year after the insurer had replied. (c) The same complaint on the subject should not be pending with before any court, consumer forum or arbitrator. Recommendations of the Ombudsman: When a complaint is settled through the mediation of the Ombudsman, he shall make the recommendations which he thinks fair in the circumstances of the case. Such a recommendation shall be made not later than one month and copies of the same sent to complainant and the insurance company concerned. If the complainant accepts recommendations, he will send a communication in writing within 15 days of the date of receipt accepting the settlement. Award: The ombudsman shall pass an award within a period of three months from the receipt of the complaint. The awards are binding upon the insurance companies. If the policy holder is not satisfied with the award of the Ombudsman he can approach other venues like Consumer Forums and Courts of law for redressal of his grievances. As per the policy-holder's protection regulations, every insurer shall inform the policy holder along with the policy document in respect of the insurance Ombudsman in whose jurisdiction his office falls for the purpose of grievances redressal arising if any subsequently. Steady increase in number of complaints received by various Ombudsman shows that the policy-holders are reposing their confidence in the institution of Insurance Ombudsman.
3.1 MALHOTRA COMMITTEE RECOMMENDATIONS :-
The committee appointed by the central government under the chairmanship of the former Governor of Reserve Bank of India, has submitted the reports which includes the following recommendations :-
1. Capital investment in the insurance company is to be increased to one hundred crore for life insurance business or general insurance business and rupees two hundred crores for the reinsurance business. 2. The company, in which the foreign capital is invested, the share of the foreign investment to the total investment should not be more than 26% of the share capital. 3. The co-operative societies, existing banks are allowed to undertake the business of insurance in India. It has recommended for the joint ventures of the insurance business either for the regular insurance business or the reinsurance business. 4. Licensing system is to be amended to enable the private & cooperative societies to take part in the insurance business. 5. It has recommended for redeploying the existing staff for the optimum utilization of the manpower. 6. To open branches in India & to undertake the reinsurance business in India. 7. The regulations made by the IRDA has defined the rural areas & social sector & listed out the targets to be achieved by the existing & new entrants within a period of five years from the date of the act.
8. It has recommended for utilizing the latest developments of information technology for providing the better services to the customers & the policyholders. 9. It has recommended for recalculating the tariffs & premium for existing & new insurance products. 10. 11. 12. 13. It has permitted the Postal Life Insurance & other Government insurance schemes to continue. A new concept of Insurance, the accountability of the insurer Recommended to start the insurance ombudsman scheme Recommended to have a statutory body with corporate veil & insured, is recommended. to help the insured. & advantages on par with the SEBI Board . Considering the above recommendations, the central government, has enacted. The Insurance Regulatory & Development Authority Act is applicable to all the states except Jammu & Kashmir, for which this act is applicable with modifications made by the Government.
3.2 Composition of Authority under IRDA Act, 1999
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
The Authority is a ten member team consisting of (a) (b) (c) a Chairman; five whole-time members; four part-time members,
(all appointed by the Government of India)
Expectations :The law of India has following expectations from IRDA 1. To protect the interest of and secure fair treatment to policyholders; 2. 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; 3. To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates; 4. 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;
5. To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery; 6. 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; 7. To take action where such standards are inadequate or ineffectively enforced; 8. To bring about optimum amount of self-regulation in day to day working of the industry consistent with the requirements of prudential regulation.
Advisory Committee :IRDA has a Chairman and some permanent and some part time members but the regulations are enacted under the guidance of a statutory advisory committee. The advisory committee consists of following individuals and ex-officio authorities:
Mr Hari narayana is the third Chairman of IRDA. Mr C S Rao was the second Chairman of IRDA after Mr N Rangachari as the first Chairman. Mr K K srinivasan is the Nonlife Member of IRDA. There is provision for a panel of other members and part time members. IRDA formed a high powered Insurance Law Reforms Committee known as KPN Committee with important insurance advisors like Mr N Govardhan and Dr K C Mishra as its members. There were also a few non-advisory committee members like Mr Liaquat Khan and Mr T Viswanathan etc. Full force and utility of various institutions like Advisory Committee and self-regulatory organizations are not yet realized as the regulator seems to be in a long learning mode. Due to over delegations, Individual incumbents decide the pace and extent of utilization of prudential and statutory bodies. Research is limited to opinion seeking through legacy channels. Market waits for revision of insurance act and establishment meaningfully functioning regulatory organs devoid of excess delegation and subjective localization of development agencies. IRDA Journal is available as soft copy in its website. Unlike other Indian administrative Regulatory Agencies IRDA is perceived as a silent regulator with activities confined to its local existence.
New IRDA Chairman Government of India has circulated to broadbase IRDA chairman selection process. It is felt in the market that placing of retired civil servants as IRDA Chairman has served the purpose of administrative fiefdom of the regulator. Mostly, the regulator has become passive to market realities and most of the original public policy intentions have been systematically replaced by personal preferences. There seems to be no oversight of public policy erosions. Taking advantage of the completion of term of current incumbent, there seem to be an attempt to correct the future course but people do not perceive any outcome to result as the market does not seem to throw up candidates of the stature of Haward Davies for Indian market. But a right leadership is the solution to the requirement of this booming market.
Profiles of Chairman and Members of The Authority Shri J. Hari Narayan (Chairman) Mr. C. R. Muralidharan, Member(F & A) Mr. K. K. Srinivasan, Member(Non-Life) Mr. G. Prabhakara, Member(Life) Mr. R. Kannan, Member(Actuary)
4.1 Third Party Administrator
1.
Conditions of and Procedure for Licensing of TPA (1) Only a company with a share capital and registered under
the Companies Act, 1956 can function as a TPA. (2) The main or primary object of the company shall be to carry
on business in India as a TPA in the health services, and on being licensed by the Authority, the company shall not engage itself in any other business. 3. The minimum paid up capital of the company shall be in equity shares amounting to Rs. 1 crore(Rupees One crore only); 4. At no point of time of its functioning the TPA shall have a working capital of less than Rs. 1 crore; 5. At least one of the directors of the TPA shall be a qualified medical doctor registered with the Medical Council of India; 6. The aggregate holdings of equity shares by a foreign company shall not at any time exceed twenty-six percent of the paid up equity capital of a third party administrator. 7. Any transfer of shares exceeding 5% of the paid up share capital shall be intimated by the TPA to the Authority within 15 days of the transfer indicating the names and particulars of the transferor and transferee.
Explanation : For the purpose of this sub-regulation "working capital" means the difference between the aggregate of the current assets and current liabilities as on the date of reckoning 2. (1) The TPA shall obtain from the Authority a licence to function as a TPA for rendering health services.
2. The application for licence shall be made in writing to the Authority in Form TPA-1 appended to these regulations and shall be accompanied by a non-refundable processing fee of Rs. 20,000 (Rupees Twenty Thousand only) to the Authority by way of a crossed demand draft in favour of the Authority payable in Delhi. 3. The Authority may, in the course of examination of the application, call for such information or ask for production of such documents, as it may deem fit, and it shall be incumbent upon the applicant to furnish the same within the specified time. 4. The Authority, on examination of the application and details furnished by the applicant, may issue a licence, if it is satisfied that the applicant TPA is eligible to function as a TPA. 5. Every TPA approved by the Authority shall pay a further sum of Rs. 30,000 (Rupees Thirty Thousand only) to the Authority as licence fee before the licence is granted to it and the same shall be paid to the Authority in the manner as stated in sub-regulation (2) of this regulation. 6. A TPA whose application has been rejected by the Authority shall not, for a period of two years from the date of such a rejection, apply once again to the Authority for a licence.
7. A copy of the agreement entered into between the TPA and the insurance company or any modification thereof, shall be filed, within 15 days of its execution or modification, as the case may be, with the Authority. 3.More than one TPA may be engaged by an insurance company and, similarly, a TPA can serve more than one insurance company.
4.
The parties to the agreement shall agree between themselves on the scope of the contract and the facilities that have to be provided. company. Such an agreement shall also prescribe the remuneration that may be payable to the TPA by the insurance
5.
(1)
Every TPA shall appoint, with due intimation to the Executive Officer (CEO)
Authority, from among its directors or senior employees, a Chief Administrative Officer (CAO) or Chief of the activities of the TPA. (2) Such a CAO or CEO shall possess the educational qualifications mentioned in sub-regulation ( 4 ) of this regulation and also undergo a specified period of training with any institution recognised by the Authority. (3) i. ii. iii. He shall not be : a person of unsound mind; an undischarged insolvent; a person who had been subjected to a term of imprisonment for a period of three months by a court of competent jurisdiction on grounds of misconduct, misfeasance, forgery etc. who shall be responsible for the proper day to day administration
iv.
(4)
The qualifications referred to in sub-regulation(2) are -
1. a degree in arts, science or commerce or management or health or hospital administration or medicine; and
2. a pass in the Associateship examination conducted by the Insurance Institute of India or such equivalent examination as may be recognised by the Authority and notified from time to time; 3. completion of practical training, as may be specified by the Authority, not exceeding one hundred hours with an institution recognised by the Authority, for these purposes, from time to time. 4. The Authority may grant, on an application made to it, by the CAO or CEO through the TPA, time not exceeding twenty four months from the date of the coming into force of these regulations for fulfilling the qualification, requirements as stated in sub-clauses (2) and (3) of this sub-regulation. 6. (1) Every application received by the Authority pursuant to these Regulations shall be considered by it within a reasonable time and its decision thereon communicated to the applicant. 2. On an examination of the material placed before it and on the basis of enquiries made by it, where the Authority is of the opinion that the application does not deserve acceptance, it shall communicate its opinion to the applicant, who shall be given a reasonable opportunity to represent against the proposed rejection of the application. 3. Where on a complete examination of the materials, documents, information, etc., available to it, the Authority finally comes to the conclusion that an application be rejected, it shall do so by making an order in writing, which shall be communicated to the applicant at the earliest.
4. Where the Authority decides to issue a licence to the applicant to act as TPA, it shall issue the same in Form TPA-2. 7. Every licence granted by the Authority to a TPA or any renewal
thereof, in terms of these regulations, shall remain in force for three years, unless the Authority decides, either to revoke or cancel it earlier, as provided in these regulations. 8. (1) A licence granted to a TPA may be renewed for a further period of three years on submission of the prescribed renewal application in Form TPA-3 alongwith a renewal fee of Rs. 30,000/-(Rupees Thirty Thousand only), atleast thirty days prior to the date of expiry of the licence. 2. Any failure on the part of the TPA to get its licence renewed before its expiry has to be explained to the Authority. A delayed application shall state the reasons for the delay and be accompanied by a late fee of Rs. 100/- (Rupees One Hundred only). 3. The Authority after examining the reasons given in the application by the TPA may renew the licence, if it is satisfied that the TPA was prevented by sufficient cause from applying for the renewal of its licence at least 30 days (Thirty days) before the date on which the licence ceased to remain in force.
4. The Authority may, if it is satisfied that undue hardship would be caused otherwise, accept any application after the licence ceased to remain in force, on payment by the applicant of a payment of Rs. 750/- (Rupees Seven Hundred Fifty only).
9. Where a licence granted by the Authority is lost or mutilated, the Authority may issue a duplicate licence on payment of a fee of Rs. 1,000/-(Rupees One Thousand only) accompanied by an application in writing made by the TPA.
4.2 REVOCATION OR CANCELLATION OF A LICENCE:1. A licence granted to a TPA may after due notice be revoked or
cancelled by the Authority for one or more of the reasons as provided in regulation 14. 2. The Authority may initiate action under regulation 13 for any of the following reasons: 1) the Authority, on the basis of information received by it, or on the basis of its own enquiry or investigation, is of the opinion that the TPA is functioning improperly and/or against the interests of the insured/policyholder or insurance company; 2) the Authority, on the basis of information in its possession, is of the opinion that the financial condition of the TPA has deteriorated and that the TPA cannot function effectively or that the TPA has committed a breach of regulations (3), (4), (5) and (8) of these regulations; 3) the Authority, after enquiry or upon information, is of the opinion that the character and ownership of the TPA has changed significantly since the grant of licence;
4) the Authority, finds that the licence or any renewal thereof granted to the TPA was on the basis of fraud or misrepresentation of facts; 5) there is a breach on the part of the TPA in following the procedure or acquiring the qualifications laid down by regulation 8 of these regulations; 6) the TPA is subject to winding up proceedings made under Companies Act, 1956 or any statutory modification thereof. 7) there is a breach of code of conduct prescribed by regulation 21 of these regulations;
3. Before proceeding under regulation 13 to revoke or cancel a licence granted to a TPA, the Authority shall grant a reasonable opportunity of being heard to the TPA.
4. (1) Every order made by the Authority under regulation 13 shall be in writing, stating clearly the reasons for the revocation TPA as soon as same is made. (2) The Authority shall also send copies thereof to the insurance company with whom the TPA has subsisting agreement(s). or cancellation of the licence and the order shall be served on the
5.
The TPA on receipt of an order under regulation 13 shall forthwith
cease to carry on its functions as TPA in relation to the insurance company and the insurance company shall immediately take such alternative steps including appointment of another TPA, as may be
necessary to continue to cater to the insured/policyholders served by the TPA whose licence has been revoked or cancelled. 6. A TPA whose licence has been revoked or cancelled in terms of
these regulations may file a review application with the Authority within 30 days of the receipt of the order cancelling or revoking the licence. 7. Within reasonable period of the receipt of the application for
review but not later than 90 days thereof, the Authority shall dispose of the application after affording the applicant a reasonable opportunity of being heard. 8. Nothing contained in these regulations may be deemed to prevent
or prohibit an insurance company in cancelling or modifying for good and sufficient reasons an agreement that has been entered into by it with a TPA.
4.3 Code of Conduct for TPA
1. A TPA licensed under these regulations shall as far as possible act in the best professional manner. 2. In particular and without prejudice to the generality of the provisions contained above, it shall be the duty of every TPA, its Chief Administrative Officer or Chief Executive Officer and its employees or representatives toa) establish its or his or their identity to the public and the insured/policyholder and that of the insurance company with which it has entered into an agreement. (b) disclose its licence to the insured/policyholder/prospect.
(c)
disclose the details of the services it is authorised to render in respect of health insurance products under an agreement with an insurance company;
(d)
bring to the notice of the insurance company with whom it has an agreement, any adverse report or inconsistencies or any material fact that is relevant for the insurance company’s business;
(e)
obtain all the requisite documents pertaining to the examination of an insurance claim arising out of insurance contract concluded by the insurance company with the insured/policyholder;
(f)
render necessary assistance specified under the agreement and advice to policyholders or claimants or beneficiaries in complying with the requirements for settlement of claims with the insurance company;
(g) (h)
conduct itself /himself in a courteous and professional manner; refrain from acting in a manner, which may influence directly or indirectly insured/policyholder of a particular insurance company to shift the insurance portfolio from the existing insurance company to another insurance company;
(i)
refrain from trading on information and the records of its business;
(j)
maintain the confidentiality of the data collected by it in the course of its agreement;
(k)
refrain from resorting to advertisements of its business or the services carried out by it on behalf of a particular insurance
company, without the prior written approval by the insurance company; (l) refrain from inducing an insured/policyholder to omit any material information, or submit wrong information; (m) refrain from demanding or receiving a share of the proceeds or indemnity from the claimant under an insurance contract;
follow the guidelines/directions that may be issued down by the Authority from time to time.
How Insurance Works The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums. Lets take some examples to understand how insurance actually works:
Example 1 SUPPOSE
• •
Example 2 SUPPOSE
•
Houses in a village = 1000 Value of 1 House = Rs. 40,000/-
Number of Persons = 5000 Age and Physical condition = 50 years & Healthy Number of persons dying in a yr = 50 Economic value of loss
•
• •
Houses burning in a yr = 5 Total annual loss due to fire = Rs. 2,00,000/-
•
•
suffered by family of each
•
Contribution of each house owner = Rs. 300/•
dying person = Rs. 1,00,000/Total annual loss due to deaths = Rs. 50,00,000/•
Contribution per person = Rs. 1,200/-
UNDERLYING
ASSUMPTION UNDERLYING
ASSUMPTION
All 1000 house owners are exposed All 5000 persons are exposed to to a common risk, i.e. fire PROCEDURE as premium to the pool of funds Total value of the fund = Rs. 3,00,000 (i.e. 1000 houses * Rs. Total 300) 5 houses get burnt during the year 50 persons die in a year on an Insurance company pays Rs. average company pays Rs. 40,000/- out of the pool to all 5 house owners whose house got Insurance burnt 1,00,000/- out of the pool to the family members of all 50 persons dying in a year EFFECT OF INSURANCE EFFECT people, OF thus INSURANCE reducing the 1,200) value of the fund = Rs. 60,00,000 (i.e. 5000 persons * Rs. common risk, i.e. death PROCEDURE each as premium to the pool of funds
All owners contribute Rs. 300/- each Everybody contributes Rs. 1200/-
Risk of 5 house owners is spread Risk of 50 persons is spread over over 1000 house owners in the 5000 village, thus reducing the burden on burden on any one person.
any one of the owners.
Complaints from Policyholders Policyholders who have complaints against insurers are required to first approach the Grievance/Customer Complaints Cell of the concerned insurer. If they do not receive a response from insurer(s) within a reasonable period of time or are dissatisfied with the response of the company, they may approach the Grievance Cell of the IRDA. Role of Insurance as a Risk Mitigation Measure Insurance is a potentially important mitigation measure in disasterprone areas as it brings quality in the infrastructure and assets by inculcating a consciousness and a culture of safety by its insistence on following building codes, norms, guidelines, quality materials in construction etc. Disaster insurance mostly works under the premise of 'higher the risk higher the premium, lesser the risk lesser the premium", thus creating awareness about the cost to be paid for living and operating in vulnerable areas. In spite of repeated exposure to natural disasters there is no organized information system on availability of resources for disaster response at district, state and national levels. Government agencies have faced problems in mobilizing equipments and skilled human resources to respond immediately to emergency situations. There is an immediate need for collating all the resources available, starting from the block or taluka to the State and national level, for disaster response and putting it in a centralized database. To address this issue, Ministry of Home Affairs in collaboration with United Nations Development Programme
(UNDP) has initiated 'India Disaster Resource Network (IDRN) for collection and compilation of resources inventory from the block or taluka level. The multi-sectoral and multi-hazard prevention based approach to disaster management also calls for development of an appropriate component of disaster awareness at all levels. This will aid in building the knowledge, attitude and skills of a community to cope with the effects of disasters. BENEFITS OF IRDA :Saving for Old Age – The IRDA Standard Pension Plan The Insurance Regulatory and Development Authority (IRDA) has devised a simple, standard pension plan for all life insurance companies to offer to the public. The objective of the IRDA is to provide a plan with a uniform technical structure that all life insurance companies would sell to the public. The presence of such a plan in the market would increase the general awareness of the public towards pension savings and act as an entrylevel product into this vital area of investment that each Indian investor should be considering for himself or herself. Here are highlights and some technical details of the plan.
India, like many countries in the world, is faced with the phenomenon of an ageing population. Combined with a change in societal structure tending away from joint families and close-knit ties with relatives, this trend calls for better financial planning for old age income on the part of individuals.
The IRDA has been concerned about the lack of awareness among the public about the growing importance of retirement savings on the one hand, and the lack of suitable and acceptable pension plans in the market on the other. It wanted a standard, simple plan with a uniform technical structure to be sold by all life insurance companies to the public and set up a committee in December, 2002, to devise such a plan. Mr. N. Rangachary, Chairman, IRDA, at a meeting of life and non-life insurance company chief executives and actuaries held at Hyderabad on December 18, 2002, first suggested such a product be fashioned and launched. Following this, a committee was set up under the chairmanship of Mr. N. K. Shinkar, Consulting Actuary, IRDA, and with Mr. P.A. Balasubramanian, Member (Actuary), IRDA, Mr. K.P. Narasimhan, exPresident, Actuarial Society of India, Mr. J. S. Salunkhe, former Chairman, Life Insurance Corporation of India (LIC), Mr. S. P. Subhedar, Senior Advisor, Prudential International Corporation, Mr. Nick Taket, Appointed Actuary (AA), HDFC Standard Life Insurance Company, Mr. V. Rajagopalan AA, ICICI Prudential Life Insurance Company and Dr. R. Kannan, AA, SBI Life Insurance Company, as members. The following are the highlights of the IRDA Standard Pension Plan as proposed by the Shinkar Committee. IRDA''s ULIP guidelines will protect policyholdersnews :The Insurance Regulatory and Development Authority (IRDA) recently introduced its much-awaited guidelines to govern unit-linked insurance policies (ULIPs), which are among the most popular class of life insurance policies sold in the country today. Till the privatisation of the
insurance industry around the end of the century, only the Unit Trust of India (UTI) sold unit-linked insurance plans, apart from the Dhanaraksha Plan of the LIC Mutual Fund. ULIPs are life insurance policies where the insurance cover is bundled with an investment benefit under a single contract; the customer gets insurance cover as well as investment returns based on market performance. As in mutual funds, there are different options like predominantly equity-oriented investments, pure debt investments, government securities investments, etc, which the customer can choose, depending on his or her risk appetite. The most important point is that the risk under ULIPs is borne by the policyholder. Though unit-linked insurance schemes have proved to be incredibly popular, there were no regulations and there were complaints that some insurance companies were taking unfair advantage of this, selling ULIP policies that were little more than thinly disguised mutual funds. IRDA's new regulations are aimed at ensuring that the customer gets a fair deal, at enhancing transparency, providing a better understanding of the product design and assuring a reasonable amount of insurance cover in ULIPs, consistent with the long-term nature of life insurance products. The primary advantage of ULIPs is that the customer gets the advantages of both insurance and mutual fund investment in a single contract. An in-house team invests and manages the premiums and gets the customer a return. ULIPs also offer tax deduction of up to Rs100,000 from the gross total income under Section 80C of the Income Tax Act, 1961. Returns from ULIPs are exempt from tax, subject to the conditions under Section 10(10D). The downside is that, generally, there are limited guarantees, and market risks are passed on to the customer completely.
Returns could be lucrative if the market is upbeat, but the unit value could decline if the market goes down. The new provisions IRDA has prescribed a minimum sum assured equal to 50 per cent of the total annualised premium during the entire policy term or five times the annualised premium, whichever is higher. This regulation is aimed at maintaining the basic characteristic of a life insurance policy, where life cover should be the primary benefit. Till the policyholder turns 60 years old, the sum assured cannot be reduced by partial withdrawals. This is aimed at protecting the life insurance cover. Premium Holiday: If the policyholder stops paying premium
instalments after paying premiums for three years, the risk premiums and the applicable charges can be adjusted from the balance in the account value, till such time as the balance in the account reduces to one year's premium. This would help policyholders who are unable to pay premiums owing to a temporary disruption in income because of change in employment, or any other sudden drop in income. The premium holiday option ensures continued insurance protection by transferring the risk premium and charges due from the account value, which is built up over a period. But the policy would lapse and this benefit would not be available if premium payments are stopped within three years. Top-up Premiums: Top up premiums are irregular dump-in amounts allowed in a ULIP. Up to now, there were no restrictions; it was possible, for example, to dump in Rs1 crore in a ULIP and invest the entire amount in the market. But this vitiates the basic characteristic of the policy by making the insurance component insignificant. To plug this loophole, IRDA has prescribed that a sum assured must back any dumpin that exceeds 25 per cent of normal premium, which will be constant
throughout the term of the policy. Any appropriation towards a dump-in can take place only if the normal premiums are paid.
Withdrawals from ULIPs: Earlier, withdrawals from ULIPs were possible even within a year of issue. Depending on the option selected, they were reduced from the sum assured, resulting in dilution of death benefits to the nominees. Now, withdrawals will be allowed only after three years. The new guidelines provide that except for withdrawals made during the two years immediately preceding death, no other withdrawals can be reduced from the sum assured. But once the customer is past the age of 60, all withdrawals can be reduced from the sum assured. Lock-in period: A top-up premium cannot be withdrawn for three years. This places ULIPs on par with mutual fund contributions under Section 80C of the Income Tax Act, 1961. The only relaxation in this condition is on withdrawal of top-up premiums made during the last three years of the policy contract. Settlement options: The policyholder has settlement options, to receive the policy benefits in various forms, rather than a lump sum. For example, the company can give the policyholder an option to receive the maturity benefit in the form of a monthly pension. IRDA has restricted such extended periods of settlement to five years from the date of maturity. The company should also make clear the inherent risk involved in extended periods of settlement. Date of unitisation: The invest-able portion of the contributions (after deducting risk premium, charges, etc) is invested based on net asset
value (which reflects the average market value of the invested contributions). So far, insurance companies were unitising on the date of placing of the policy, which could be much later than the date on which the customer gave the cheque towards the first premium, renewal premium or dump-in premium. This often resulted in loss to policyholders, as the market moved up between the date of receipt of the cheque and the date of placing the policy. To resolve this anomaly, the IRDA has prescribed the following guidelines:
•
Contributions by local cheque / DD: If the payment is received up to 4.15 pm, payable at par at the place of receipt, the same day's closing NAV will be applied. After 4.15 pm, the next day's closing NAV is applicable.
•
Contributions by outstation cheque: The closing NAV on the date of realisation of the outstation cheque is applicable.
This provision ensures that the company banks the cheques on time. The company will make good any loss on account of delays on its part. This rule is applicable for redemptions too. Charges: Charges are costs appropriated by insurance companies from ULIP premiums. The IRDA has listed the charges that insurance companies can levy on policyholders, as well as laid out the standard definitions for use in policy contracts. This is aimed at clarity and to enable customers to understand and compare costs between different insurance companies. Statement of Account: A statement of account, which forms part of the policy document, must be issued at the end of each policy year and also when a transaction takes place, giving complete information on the nature of the transaction (investment / switch over, etc), the NAV on the date of transaction, number of units before and after the transaction,
etc. The annual statement must give the number of units in the account and the NAV on the date of the statement, besides other relevant information. Market Conduct: There is an inherent risk in investing in ULIPs, as the performance of the funds underlying the ULIPs governs their returns. To address these risks, the IRDA has authorised the Life Insurance Council to formulate a Code of Conduct for sale of ULIPs. This includes mandatory training for agents before they are authorised to sell ULIPs, documentation to enable the customer to understand and acknowledge the risk involved in buying ULIPs, a code of conduct for their sale, educating policyholders on risk factors, terminology, charges, etc. Disclosure norms: To prevent misleading information, the IRDA has prescribed norms for mandatory disclosures. All promotional materials must specify all fund options (like equity funds, debt funds, balanced funds, etc), the minimum and maximum percentage of investments in fund options, all charges with limits, and the risk profile. All promotional materials and policy documents must carry a clear statement that the investment risk is borne solely by the policyholder. The size of the fonts used in disclosures must be the same as that used for other purposes in promotional materials and policy documents. All advertisements for ULIPs must clearly address the question of risk and distinguish ULIPs from conventional life insurance products. They must disclose all charges and guarantees, if any, and include a statement that the fund name and the company name do not indicate the performance of the fund. Advertisements must be simple, understandable to policyholders and avoid legal and financial jargon, to avoid misleading sales.
Past performance can be given only on completion of one calendar year from the introduction of the fund. Emphasis on past performance should be minimal. Under no circumstances can there be any justification for projecting or suggesting there should future be a performance clear-cut based on that past past performance; statement
performance is no indication of future performance.
4.4 Insurance Regulatory and Development Authority (IRDA) Guideline.
The IRDA is a corporate body. It is advised by an insurance advisory committee consisting of not more than 25 members. The IRDA Act, provided for the establishment of the IRDA to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of insurance industry.It also amended the insurance act, 1938, the life insurance corporation act, 1956 and the general insurance business (nationalization) act, 1972.
IRDA Guidelines
1 )There are limits on SA, and top-up conditions. 2 )Surrender benefit is possible only after 3rd policy anniversary. 3 )First partial withdrawal only after 3rd policy anniversary. 4) SA can be reduced up to the extent of partial withdrawals during 2 years prior to death and after age 60. 5) There is Lock-in period for each top-up amount and for partial withdrawal, except during last three years of contract. 6) Death benefits to be guaranteed. 7) Maturity benefits may be guaranteed, at levels reasonable in relation to current and long term interest rates scenario.
8) Policy to become paid up, if there is default in premium after 3 years. 9) Opportunity to be given to revive lapsed policy. 10) Auto cover facility allowed for full SA for limited period. 11) No auto cover facility if at least 3 years premium not paid. 12) If policy is not revived, surrender value to be paid at the end of 3rd policy anniversary or end of revival period, whichever is later. 13)No risk cover after policy term.
CONCLUSION
An efficient, competitive insurance market does not evolve overnight from a restrictive one. All market players, including regulators and institutions, need some time to adjust to a changed environment. Entry is costly, even with fewer entry barriers and a more transparent system. New insurers will enter a market gradually as they perceive profitable opportunities and establish a reputation among consumers. At the same time, the danger exists that government could move too slowly or fail to take all critical measures necessary to support effective competition and to protect consumers. Deregulation and liberalization require the implementation of a reasoned, careful strategy containing all necessary regulatory elements. Objectives must be clear and benchmarks established that will move the market towards competition that serves the public interest. Overall regulation will be less intrusive but it will also be more intense and selective. This fact will demand more highly qualified regulatory officials and staff, especially in the technical areas. Sound research to support informed public policy decisions will become more important in investigating key public policy issues and in measuring market structure and performance. The internationalization of financial services promises to continue. This new order of global business has revealed gaps in existing regulatory and trade policy approaches. The result is competitive imbalances that hinder and distort global competition.
Simultaneously, these new realities can result in greater consumer exploitation and fraud if regulators fail to make appropriate adjustments. The policy question is how to continue to promote competition through liberalization while ensuring adequate consumer protection. Divergent national regulatory approaches caused fewer difficulties when financial services markets were insulated from each other and largely national in character. For the future, however, regulatory diversity can impede the continued internationalization of financial services. As has been discussed elsewhere, such diversity might (1) magnify the negative effects of market imperfections, (2) provoke more stringent national trade-related regulation, and (3) increase transactional costs.5 Many observers believe that regulatory harmonization is necessary. Others note the great complexities in achieving even minimal regulatory harmonization. We believe that regulatory convergence is inevitable and in each country’s national interest.
BIBLIOGRAPHY & REFERENCE
1. www.irda.org.in
REFERED BOOKS
1. Laws & regulations of irda. 2. Insurance sector in India. 3. Environmental studies of Banking & Insurance. 4. Insurance Fund Management.(Finanacial Markets)
doc_420857831.doc
CHENDANI BUNDER ROAD, THANE (W) – 400601. MUMBAI UNIVERSITY PROJECT ON INSURANCE REGULATORY & DEVELOPMENT AUTHORITY BACHELOR OF COMMERCE FINANCIAL MARKETS SEMESTER V SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF BACHELOR OF COMMERCE FINANCIAL MARKETS SUBMITTED BY: AKSHAY S. TAWADE ROLL NO. 39
Declaration
I Mr. AKSHAY S. TAWADE student of N.G.BEDEKAR College
of BACHELOR OF COMMERCE – FINANCIAL MARKETS Semester V for the academic year 2011-2012 Hereby declare that I have completed the project on “INSURANCE REGULATORY & DEVELOPMENT AUTHORITY”. The Information submitted is true & original to the best of my knowledge.
Signature of the student
(Mr. AKSHAY S. TAWADE)
ACKNOWLEDGEMENT
This project on INSURANCE REGULATORY & DEVELOPMENT AUTHORITY (IRDA) is a result of cooperation, hard work and good wishes of many people. I, student of N.G. BEDEKAR COLLEGE OF COMMERCE would like to thank my project guide, Prof. S.KRISHNAN for his involvement in my project work & timely assessment that provided me inspiration and valued guidance throughout my study. I also take this opportunity to express my sincere gratitude to the library staff’s who provided me right information & study material at the right time. I express my deep gratitude to all my college friends & my family members whose efforts and creativity has helped me in giving the final shape and structure to the project work. I am also thankful to all those seen and unseen hands and heads, which have been of direct or indirect, help in the completion of this project work.
AKSHAY S.TAWADE
EXECUTIVE SUMMARY
It is rightly said that, “A good name keep its brightness even in dark days.” But my clear friends the important things that “It is the insurance sector that the matters, not the same.” In this project I tried my level best to present the subject matter in the simplest & convincing language. I earnestly hope that after reading this project one will get a nutshell idea of analyzing an INSURANCE with REGULATORY INSURANCE DEVELOPMENT AUTHORITY
COMPANIES regarding control over the insurance sector.
CONTENTS
INTRODUCTION TO INSURANCE
1.1 INTRODUCTION Insurance is an institution, which eliminates risk and which substitutes certainty for uncertainty. Insurance is the protection of the economic value of assets. It is a method of spreading over a large number of persons, a possible financial loss which can not be born by an individual. It is a risk sharing device. The occurrence which causes any damages to the assets called perils. The damage that these perils may cause to the assets is called risk that the asset is exposing to. The concept of risk is integral to the concept of insurance. The risk means, that where is a probability of loss to an assets. If there is no risk there is no need for
insurance hence insurance exists there is timing and manner of death though it is certain. Insurance business consists of spreading risks over time and sharing them between persons and organizations. There are two type of insurance i.e. Life insurance And General Insurance. Life insurance covers the risk that exists in one’s life. These risks may arise due to accident, illness or natural cause like fire, food, and earthquake. Life insurance products have to suit the requirement of customers i.e. dieing too early, living too long, and living with disability. Any insurance other than human lives comes under the scope of General Insurance.It is also called as non life insurance. General insurance includes fire insurance, marine insurance, motor insurance, health insurance and accident insurance etc. 1.2 DEFINITIONS OF INSURANCE
Insurance is a plan by which large no of people associate themselves and transfer to the shoulders of all, risk that attach to individuals - By John Magee
Insurance may be defined as a device for reducing risk by combining sufficient no of exposure units to make their individual losses collectively predictable. The predictable loss then shared proportionately all units in the combinations.
- By Robert I Mahr & Emerson Cammack
Insurance is a contract in which a sum of money is paid to the assured as consideration of insurers incurring the risk of paying a large sum upon a given contingency
-
By Justice Tindall
1.3 HISTORY OF INSURANCE : In India, insurance has a deeprooted 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 (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 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 14 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 14 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.
1.4 MEANING OF INSURANCE
Insurance is a financial service for collecting the savings of the public and providing them with risk coverage. The main function of insurance is to provide protection against the possible chances of generating losses. It eliminates worries and miseries of losses at destruction of property and death. It also provides capital to the society as the funds
accumulated are invested in productive heads. Insurance comes under the service sector, while marketing this service due care is to be taken in quality product and customer satisfaction. The insurance business is
based on the skill and excellence of agents and this makes a strong case in favour of personal selling. It is a contract between two parties i.e. the
insurer and the insured. Thus, insurance is a device to protect life and property against financial loss. The insurance company operates by collecting small contributions from many people who are exposed to risks. This money collected is used to settle those who fall victim of such risks. These contributions which the insurance company collects are called premium. To some individuals, insurance is seen as an investment Insurance is a way we share our risk with others. It is a way of getting protection to reduce damages.
1.5 IMPORTANCE OF INSURANCE
1. Insurance contract protects against the possible occurrence of contingences i.e. perils (fire, flood, lighting,’ etc). 2. The insurer undertakes to compensate the insured for a loss arising from the risk insured against. 3. The purpose of insurance is the elimination of risks and the loss is to be shared i.e., substitution of certainty for uncertainty. 4. Contract of insurance act as a cooperative way of spreading risk 5. The Essence of insurance of contract by which the loss suffered by a person spread over the whole of insured community.
6. Payment of insurance for insurance contract is sufficient to acquire the right and remedies available to that person. 7. The insurance provides funds to the government and public which will lead to economic development.
1.6 FUNCTIONS OF INSURANCE
Provide Protection
Contribute towards the developmen t of larger Industries
Collective bearing of risk
Small capital to cover larger risks
Functions of Insurance
Assessmen t Of risk
Preventio n of Losses
Provide Certainty
Table 1.1
Provide Protection – The primary function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening
of the risk, but can certainly provide for the losses of risk. Insurance is actually a protection against economic loss, by sharing the risk with others.
Collective bearing of risk – Insurance is a device to share the financial loss of few among many others. Insurance is a mean by which few losses are shared among larger number of people. All the insured contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid.
Assessment of risk – Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also.
Provide Certainty - Insurance is a device, which helps to change from uncertainty to certainty. Insurance is device whereby the uncertain risks may be made more certain.
Prevention of Losses –
Insurance cautions individuals and businessmen to adopt suitable device to prevent unfortunate consequences of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc.
Small capital to cover larger risks – Insurance relieves the businessmen from security investments, by paying small amount of premium against larger risks and uncertainty.
Contributes towards the development of larger industries – Insurance provides development opportunity to those larger industries having more risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery.
OPERATORS IN THE INSURANCE INDUSTRY : Following are the main types of operators in insurance industry.
Insurance Market
Insured (Policyholder / Customer )
Insurance Products
Insurance Intermediaries (Agents, Brokers, etc.)
Insurer
Reinsurer
Regulator (IRDA)
1.7 CLASSIFICATION OF INSURANCE
Classification Of Insurance
Life Insurance General Insurance Marine Insurance
Non Life Insurance
Miscellaneous Insurance
Fidelity Guarantee Insurance Crop
Fire Insurance Motor vehicles Insurance Personal Accident Insurance
Insurance Burglary Insurance Cattle Insurance
Cash In Transit Insurance
Table 1.2
A] Life insurance
Life insurance is a contract whereby the insurer in consideration of premium paid either in a lump sum or in periodical installment undertake to pay an annuity or certain sum of money, either on the death of the insured or on the expiry of a certain number of year whichever is earlier.
B] Non-life Insurance a) General Insurance Marine Insurance IT is a contract of insurance under which the insurer undertakes to indemnify the insured against losses incidental to marine adventure. It may covers loss or damages to the ship, cargo, Freight, Vessels or any other subject of marine adventure.
Fire Insurance It is a contract of agreement between the insurer and the insured whereby the insurer undertakes to indemnify the insured for destruction of or damage to property caused by fire or others specified perils during an agreed period of time in return for payment of a premium in lumpsum or by installments.
Motor vehicles insurance
It falls under general insurance. Its importance increasing day by day. In motor insurance the owners liabilities to compensate people who were killed or injured through the negligence of the motorists or driver is passed on to the insurance company. This business is the largest single section of accident insurance, if judged by premium income, but this relates to motor insurance as a whole.
Personal Accident Insurance It is a contract of Insurance which provides an absolute protection against death or disability arising solely and directly from accident caused by violent external and visible means. b) Miscellaneous Insurance Fidelity Guarantee Insurance It falls under the miscellaneous class of insurance. This is the type of contract of insurance and also a contract of guarantee which general principles of insurance apply. Fidelity guarantee does not mean the guarantees of the employee’s honesty. But it guarantees the employees for any damages or loss resulting from the employee’s dishonesty or disloyalty. Insurer is liable to compensate the said loss to the employer as prescribe by the contract.
Crop Insurance
It is a contract to provide a major of financial support to farmers in the event of crop failure due to drought or flood. It covers all risks or of loss or damage relating to production of rice, weat, millets, oilseeds and pulses etc. Burglary Insurance It falls under the classification of insurance of property in the case of burglary policy, the loss or damage of household goods and properties and personal effects due to theft, larceny, burglary, house breaking and acts of such nature are covered. Actual loss is compensated. Cattle Insurance It is a contract whereby a sum of money secured to the assured in the event of death of animals like Bulls, Baffelos, Cows, and Heifers. It is a contract against death resulting from accident, disease, parturitions or pregnant condition as the case may be. The insurer usually undertakes to pay the access sum in the event of loss.
Cash In Transit Insurance The form of insurance cover to the insured against any loss in the event of money or cash being stolen from his business premises or while it is being carried or to the bank. The scope of cash in transit insurance is important to any business as large sum of money are drawn from banks to pay wages and to meet the day to day expenses. 1.8 PRINCIPLES OF CONTRACT OF INSURANCE
A Contract of insurance may be define as a contract between two parties where by a person undertakes in consideration of a fixed sum of money to pay to the other a fixed amount of money on the happening of a certain event or to pay the amount of actual loss when it takes place through a risk insured. Following are the important principles required for a valid contract of Insurance
Principles of Insurance Principles of Insurance
Utmost Good Faith Utmost Good Faith Insurable Interest Insurable Interest
Indemnity Indemnity Contribution Contribution
Subrogation Subrogation Mitigation of Loss Mitigation of Loss Causa Proxima Causa Proxima
Table 1.2
Utmost Good Faith
Since insurance shifts risk from one party to another, it is essential that there must be utmost good faith and mutual confidence between the insured and the insurer. In a contract of insurance the insured knows more about the subject matter of the contract than the insurer. Consequently, he is duty bound to disclose accurately all material facts and nothing should be withheld or concealed. Any fact is material, which goes to the root of the contract of insurance and has a bearing on the risk involved. It is only when the insurer knows the whole truth that he is in a position to judge (a) whether he should accept the risk and (b) what premium he should charge. If that were so, the insured might be tempted to bring about the event insured against in order to get money. Insurable Interest – A contract of insurance affected without insurable interest is void. It means that the insured must have an actual pecuniary interest and not a mere anxiety or sentimental interest in the subject matter of the insurance. The insured must be so situated with regard to the thing insured that he would have benefit by its existence and loss from its destruction. The owner of a ship run a risk of losing his ship, the charterer of the ship runs a risk of losing his freight and the owner of the cargo incurs the risk of losing his goods and profit. So, all these persons have something at stake and all of them have insurable interest. It is the existence of insurable interest in a contract of insurance, which distinguishes it from a mere watering agreement.
Indemnity A contract of insurance contained in a fire, marine, burglary or any other policy (excepting life assurance and personal accident and sickness insurance) is a contract of indemnity. This means that the insured, in case of loss against which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy, i.e. he shall be fully indemnified. The object of every contract of insurance is to place the insured in the same financial position, as nearly as possible, after the loss, as if his loss had not taken place at all. It would be against public policy to allow an insured to make a profit out of his loss or damage
Contribution – Where there are two or more insurance on one risk, the principle of contribution comes into play. The aim of contribution is to distribute the actual amount of loss among the different insurers who are liable for the same risk under different policies in respect of the same subject matter. Any one insurer may pay to the insured the full amount of the loss covered by the policy and then become entitled to contribution from his co-insurers in proportion to the amount which each has undertaken to pay in case of loss of the same subject-matter. In other words, the right of contribution arises when (I) there are different policies which relate to the same subject-matter (ii) the policies cover the same peril which
caused the loss, and (iii) all the policies are in force at the time of the loss, and (iv) one of the insurers has paid to the insured more than his share of the loss.
Subrogation – The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire and marine insurance. According to it, when an insured has received full indemnity in respect of his loss, all rights and remedies which he has against third person will pass on to the insurer and will be exercised for his benefit until he (the insurer) recoups the amount he has paid under the policy. It must be clarified here that the insurer's right of subrogation arises only when he has paid for the loss for which he is liable under the policy and this right extend only to the rights and remedies available to the insured in respect of the thing to which the contract of insurance relates.
Mitigation of Loss – In the event of some mishap to the insured property, the insured must take all necessary steps to mitigate or minimize the loss, just as any prudent person would do in those circumstances. If he does not do so, the insurer can avoid the payment of loss attributable to his negligence. But it must be remembered that though the insured is bound to do his best for his insurer, he is, not bound to do so at the risk of his life.
Causa Proxima – The rule of causa proxima means that the cause of the loss must be proximate or immediate and not remote. If the proximate cause of the loss is a peril insured against, the insured can recover. When a loss has been brought about by two or more causes, the question arises as to which is the causa proxima, although the result could not have happened without the remote cause. But if the loss is brought about by any cause attributable to the misconduct of the insured, the insurer is not liable.
MISSION
To protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.
The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto."
2.1 INTRODUCTION TO IRDA INSURANCE ACT, 1938:
The Insurance Act, 1938 and its subsequent amendments in 1950 and 1999 are serious attempts to address various issues relating to the business. Some of them are:
• • • • • •
Protection of policy holder interest. Limiting the expenses of insurance organizations. Establishment of tariff advisory committee. Solvency levels to be maintained. Creation of Insurance organization. Defining the roles and responsibilities functionaries associated with the business. of various
2.2 INSURANCE REGULATORY DEVELOPMENT AUTHORITY:-
The Insurance Act, 1938 provides that the Government should appoint a Controller of Insurance to ensure that the insurance business and companies registered under the Act comply with the various provisions of the Act. The controller has also the power of special investigation and to take over the management of the companies. After nationalization of the insurance industry the responsibilities of the supervision had reduced. But, with the proposal of privatization, as private companies being permitted to transact insurance business in India, it became necessary to establish an authority to regulate Insurance Corporation. The Government of India in April, 1993 appointed the Committee of Reforms in Insurance Sector with Shri. R. N. Malhotra, who is a former Governor of Reserve Bank of India. As per the committee recommendations, the Government set up a regulatory body known as. “ Insurance Regulatory Development Authority.” The bill for the same was passed in both houses of parliament and subsequently government implemented it. Following are 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.
2.2.1 PROFILE OF IRDA:-
The IRDA shall consist of not more than ten (10) members. All five will work as full time or whole time members. 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. The Authority is a ten member team consisting of: (a) A Chairman; (b) Five whole-time members; (c) Four part-time members, all are appointed by the Government of India: The whole time members shall hold office for five years or until the age of 62 whichever is earlier. The chairman shall hold the office for five years or until the age of 65 years whichever is earlier. The part – time members will hold the office not more than five years. The above said members are to be appointed by the Central Government from among the persons of ability and standing who have knowledge or experience in life insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration or any other discipline which would, in the opinion of Central government. Removal from office in IRDA: (1) The central Government may remove from office any member who: (a) is, or at any time has been , adjudged as an insolvent or (b) has become physically or mentally incapable of acting as a member or (c) has been convicted of any offence which, involves moral turpitude or (d) has acquired such financial or other interest as is likely to affect periodically his functions as a member or (e) Has so abused his as to render his continuation in office detrimental to the public interest.
(2) No such member shall be removed under clause d and c of Section 1 unless he has been given a reasonable opportunity of being heard in the matter. The advisory committee consists of following individuals and ex-officio authorities: (a) IRDA. Chiarman: Hari Narayana is the current Chairman of
(b) Full-time Members: Currently, they are Mr. K. K Srinivasan (Nonlife Member), Sri. G. Prabhakara (Life Member), Dr. R. Kannan (Member, Actuary) and Sri R. K. Nair (Member, F & I). (c) There is provision for a panel of other members and part time members. IRDA formed a high powered Insurance Law Reforms Committee known as KPN Committee with important insurance advisors like Mr. N. Govardhan and Dr. K C Mishra as its members. (d) There were also a few non-advisory committee members like Mr. Liaquat Khan and Mr. T. Viswanathan etc. Full force and utility of various institutions like Advisory Committee and self-regulatory organizations are not yet realized as the regulator seems to be in a long learning mode. Due to over delegations, Individual incumbents decide the pace and extent of utilization of prudential and statutory bodies. Research is limited to opinion seeking through legacy channels. Market waits for revision of insurance act and establishment meaningfully functioning regulatory organs devoid of excess delegation and subjective localization of development agencies.
2.2.2 OBJECTIVES OF IRDA
1) (2) To take care of the policy holders interest. To open up the insurance sector for private sector. ensure continued financial soundness and(3) To solvency. (4) (5)
To regulate insurance and reinsurance companies. To eliminate dishonesty and unhealthy competitions. the activities of intermediaries in
(6) To supervise insurance sector.
(7) To amend the Insurance Act, 1938 and Life Insurance Corporation Act, 1956 and General Business Nationalization Act, 1972. The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto." In 2010, the Government of India ruled that the Unit Linked Insurance Plans (ULIPs) will be governed by IRDA, and not the market regulator Securities and Exchange Board of India.
2.2.3 DUTIES, POWERS, FUNCTIONS OF IRDA:Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA. Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and reinsurance business. For smooth functioning of insurance business, the regulatory authority has vested with adequate duties and powers. They are as follows: It issues the applicants in insurance arena, a certificate of registration as well as renewal, modification, withdrawal, suspension or cancellation of such registrations.
•
It protects the interests of the policy holders in any insurance company in the matters related to the assignment of policy, nomination by policy holders, insurable interest, and resolution of insurance claim, submission value of policy and other terms and proposals in the contract.
•
It also specifies obligatory credentials, code of conduct and practical instructions for mediator as well as the insurance company. Apart from this, it also defines the code of conduct for the surveyors and loss assessors involved with the insurance business.
•
One of the major functions of IRDA includes endorsing competence in the insurance business. Apart from this, upholding and regulating professional organizations in insurance and reinsurance business is also a major duty of IRDA.
•
IRDA is also entitled to for asking information, undertaking inspection and investigating the audit of the insurers, mediators, insurance intermediaries and other organizations related to the insurance sector.
•
It is also concerned with the regulation of the rates, profits, provisions and conditions that may be offered by insurers in respect of general insurance business if it is not controlled or regulated by the Tariff Advisory Committee.
•
It is also entitled to supervise the functioning of the Tariff Advisory Committee.
•
IRDA specifies the terms and pattern in which books of accounts are to be maintained and statement of accounts shall be provided by insurers and other insurance mediators.
•
It also regulates investment of funds by insurance companies as well as the maintenance of margin of solvency.
• •
It is also empowered to be involved in the arbitration of disagreements between insurers and intermediaries or insurance intermediaries. It is meant to specify the proportion of premium income of the insurer to finance policies.
• •
IRDA also specifies the share of life insurance business and general insurance business to be accepted by the insurer in the rural or social sector. IRDA has provided for a separate channel for lodging complaints against deficiency of services rendered by Insurance Companies. If you have a complaint/grievance against an insurance company for poor quality of service rendered by any of its offices/branches, please approach the Nodal Officer of the Insurance Company concerned. In case you are not satisfied with the Insurance Company’s response you may also file a complaint with the Insurance Ombudsman in your State. The Insurance Ombudsman is an independent office to provide speedy and cost effective resolution of grievances to the customers. Policyholders who have complaints against insurers are required to first approach the Grievance/Customer Complaints Cell of the concerned insurer. If they do not receive a response from insurer(s) within a reasonable period of time or are dissatisfied with the response of the company, they may approach the Grievance Cell of the IRDA.
2.2.4
IRDA INITIATIVES:
Some of the initiatives of IRDA, by way of subsequent rules framed by it are: (1) IRDA's regulation stipulate that the prospectus issued by the insurer should explicitly state the scope of benefits, conditions, warranties, entitlements exceptions, and right to participate in bonus under every plan of insurance (2) A decision on the proposal should be made by the insurer within 15 days (3)IRDA has framed regulations regarding advertisement by insurance companies and other intermediaries. They apply to all categories and media employed (4) IRDA can adjudicate disputes between the insurance companies and intermediaries (5) IRDA regulation requires that every insurance company appoint an actuary (6) IRDA regulation has laid down the following stipulations as regards settlement of claim: (a) All the requirements needed under death claim are to be sought in one instance (b) Admit or repudiate the claim in 30 days (c) All investigations need to be completed in 6 months (d) Interest at 2 % over bank rate is payable in case of delayed settlement Indian insurance sector: Since opening up, the number of participants in the industry has gone up from six insurers in the year 2000 to 44 insurers operating in the life, non-life and reinsurance segments.
Companies
2000
2011 (October end)
Public Sector Life Insurers General Insurers Specialized Instt. 1 4 1
Private Sector 21 15 -
Public Sector 1 4 3
Total
22 19 04
Total
6
36
8
44
The improved performance of the economy has been reflected in the insurance industry. The premium underwritten in India and abroad by life insurers in 2005-06 increased by 27.78 per cent, which was higher than the growth (24.31 per cent) in 2004-05. In the case of non-life insurers, the corresponding growth was 15.61 per cent as against the previous year's growth of 11.57 per cent. First year premium, including single premium, accounted for 36.63 per cent of the total life premium. Renewal premium accounted for the remainder. First year premium, including single premium, recorded a growth of 47.94 per cent driven by a significant jump in the unit-linked business. By the end of March 2009, there were eighteen life insurance companies operating in India. Subsequently, Aegon Religare life Insurance Company Limited and Canara HSBC Oriental Bank of Commerce Life Insurance Co.ltd., DLF Pramerica Life Insurance Company Limited were given Certificate of Registration by the Authority. With these three new companies the total number of life insurance companies operating in India rose to 22.
2.3 OMBUDSMAN:The institution of Insurance Ombudsman was created by a Government of India Notification dated 11th November, 1998 with the purpose of quick disposal of the grievances of the insured customers and to mitigate their problems involved in redressal of those grievances. This institution is of great importance and relevance for the protection of interests of policy holders and also in building their confidence in the system. The institution has helped to generate and sustain the faith and confidence amongst the consumers and insurers. Appointment of Insurance Ombudsman: The governing body of insurance council issues orders of appointment of the insurance Ombudsman on the recommendations of the committee comprising of Chairman, IRDA, Chairman, LIC, Chairman, GIC and a representative of the Central Government. Insurance council comprises of members of the Life Insurance council and general insurance council formed under Section 40 C of the Insurance Act, 1938. The governing body of insurance council consists of representatives of insurance companies. Eligibility: Ombudsman are drawn from Insurance Industry, Civil Services and Judicial Services. Terms of office: An insurance Ombudsman is appointed for a term of three years or till the incumbent attains the age of sixty five years, whichever is earlier. Re-appointment is not permitted. Territorial jurisdiction of Ombudsman: The governing body has appointed twelve Ombudsman across the country allotting them different geographical areas as their areas of jurisdiction. The Ombudsman may hold sitting at various places within their area of jurisdiction in order to expedite disposal of complaints. The offices of the twelve insurance Ombudsmen are locatedat (1) Bhopal, (2) Bhubaneswar, (3) Cochin, (4) Guwahati, (5) Chandigarh, (6)New Delhi, (7) Chennai, (8) Kolkata, (9) Ahmedabad, (10) Lucknow, (11) Mumbai, (12) Hyderabad.
The areas of jurisdiction of each Ombudsman have been mentioned in the list of Ombudsman.
Office Management: The Ombudsman has a secretarial staff provided to him by the insurance council to assist him in discharging his duties. The total expenses on Ombudsman and his staff are incurred by the insurance companies who are members of the insurance council in such proportion as may be decided by the governing body. Removal from office: An Ombudsman may be removed from service for gross misconduct committed by him during his term of office. The governing body may appoint such person as it thinks fit to conduct enquiry in relation to misconduct of the Ombudsman. All enquiries on misconduct will be sent to Insurance Regulatory and Development Authority which may take a decision as to the proposed action to be taken against the Ombudsman. On recommendations of the IRDA, the Governing Body may terminate his services, in case he is found guilty. Power of Ombudsman: Insurance Ombudsman has two types of functions to perform (1) conciliation, (2) Award making. The insurance Ombudsman is empowered to receive and consider complaints in respect of personal lines of insurance from any person who has any grievance against an insurer. The complaint may relate to any grievance against the insurer i.e. (a) any partial or total repudiation of claims by the insurance companies, (b) dispute with regard to premium paid or payable in terms of the policy, (c) dispute on the legal construction of the policy wordings in case such dispute relates to claims; (d) delay in settlement of claims and (e) non-issuance of any insurance document to customers after receipt of premium. Ombudsman's powers are restricted to insurance contracts of value not exceeding Rs. 20 lakhs. The insurance companies are required to honour the awards passed by an Insurance Ombudsman within three months. Manner of lodging complaint: The complaint by an aggrieved person has to be in writing, and addressed to the insurance Ombudsman of the jurisdiction under which
the office of the insurer falls. The complaint can also be lodged through the legal heirs of the insured. Before lodging a complaint: (a) The complainant should have made a representation to the insurer named in the complaint and the insurer either should have rejected the complaint or the complainant have not received any reply within a period of one month after the concerned insurer has received his complaint or he is not satisfied with the reply of the insurer. (b) The complaint is not made later than one year after the insurer had replied. (c) The same complaint on the subject should not be pending with before any court, consumer forum or arbitrator. Recommendations of the Ombudsman: When a complaint is settled through the mediation of the Ombudsman, he shall make the recommendations which he thinks fair in the circumstances of the case. Such a recommendation shall be made not later than one month and copies of the same sent to complainant and the insurance company concerned. If the complainant accepts recommendations, he will send a communication in writing within 15 days of the date of receipt accepting the settlement. Award: The ombudsman shall pass an award within a period of three months from the receipt of the complaint. The awards are binding upon the insurance companies. If the policy holder is not satisfied with the award of the Ombudsman he can approach other venues like Consumer Forums and Courts of law for redressal of his grievances. As per the policy-holder's protection regulations, every insurer shall inform the policy holder along with the policy document in respect of the insurance Ombudsman in whose jurisdiction his office falls for the purpose of grievances redressal arising if any subsequently. Steady increase in number of complaints received by various Ombudsman shows that the policy-holders are reposing their confidence in the institution of Insurance Ombudsman.
3.1 MALHOTRA COMMITTEE RECOMMENDATIONS :-
The committee appointed by the central government under the chairmanship of the former Governor of Reserve Bank of India, has submitted the reports which includes the following recommendations :-
1. Capital investment in the insurance company is to be increased to one hundred crore for life insurance business or general insurance business and rupees two hundred crores for the reinsurance business. 2. The company, in which the foreign capital is invested, the share of the foreign investment to the total investment should not be more than 26% of the share capital. 3. The co-operative societies, existing banks are allowed to undertake the business of insurance in India. It has recommended for the joint ventures of the insurance business either for the regular insurance business or the reinsurance business. 4. Licensing system is to be amended to enable the private & cooperative societies to take part in the insurance business. 5. It has recommended for redeploying the existing staff for the optimum utilization of the manpower. 6. To open branches in India & to undertake the reinsurance business in India. 7. The regulations made by the IRDA has defined the rural areas & social sector & listed out the targets to be achieved by the existing & new entrants within a period of five years from the date of the act.
8. It has recommended for utilizing the latest developments of information technology for providing the better services to the customers & the policyholders. 9. It has recommended for recalculating the tariffs & premium for existing & new insurance products. 10. 11. 12. 13. It has permitted the Postal Life Insurance & other Government insurance schemes to continue. A new concept of Insurance, the accountability of the insurer Recommended to start the insurance ombudsman scheme Recommended to have a statutory body with corporate veil & insured, is recommended. to help the insured. & advantages on par with the SEBI Board . Considering the above recommendations, the central government, has enacted. The Insurance Regulatory & Development Authority Act is applicable to all the states except Jammu & Kashmir, for which this act is applicable with modifications made by the Government.
3.2 Composition of Authority under IRDA Act, 1999
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
The Authority is a ten member team consisting of (a) (b) (c) a Chairman; five whole-time members; four part-time members,
(all appointed by the Government of India)
Expectations :The law of India has following expectations from IRDA 1. To protect the interest of and secure fair treatment to policyholders; 2. 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; 3. To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates; 4. 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;
5. To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery; 6. 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; 7. To take action where such standards are inadequate or ineffectively enforced; 8. To bring about optimum amount of self-regulation in day to day working of the industry consistent with the requirements of prudential regulation.
Advisory Committee :IRDA has a Chairman and some permanent and some part time members but the regulations are enacted under the guidance of a statutory advisory committee. The advisory committee consists of following individuals and ex-officio authorities:
Mr Hari narayana is the third Chairman of IRDA. Mr C S Rao was the second Chairman of IRDA after Mr N Rangachari as the first Chairman. Mr K K srinivasan is the Nonlife Member of IRDA. There is provision for a panel of other members and part time members. IRDA formed a high powered Insurance Law Reforms Committee known as KPN Committee with important insurance advisors like Mr N Govardhan and Dr K C Mishra as its members. There were also a few non-advisory committee members like Mr Liaquat Khan and Mr T Viswanathan etc. Full force and utility of various institutions like Advisory Committee and self-regulatory organizations are not yet realized as the regulator seems to be in a long learning mode. Due to over delegations, Individual incumbents decide the pace and extent of utilization of prudential and statutory bodies. Research is limited to opinion seeking through legacy channels. Market waits for revision of insurance act and establishment meaningfully functioning regulatory organs devoid of excess delegation and subjective localization of development agencies. IRDA Journal is available as soft copy in its website. Unlike other Indian administrative Regulatory Agencies IRDA is perceived as a silent regulator with activities confined to its local existence.
New IRDA Chairman Government of India has circulated to broadbase IRDA chairman selection process. It is felt in the market that placing of retired civil servants as IRDA Chairman has served the purpose of administrative fiefdom of the regulator. Mostly, the regulator has become passive to market realities and most of the original public policy intentions have been systematically replaced by personal preferences. There seems to be no oversight of public policy erosions. Taking advantage of the completion of term of current incumbent, there seem to be an attempt to correct the future course but people do not perceive any outcome to result as the market does not seem to throw up candidates of the stature of Haward Davies for Indian market. But a right leadership is the solution to the requirement of this booming market.
Profiles of Chairman and Members of The Authority Shri J. Hari Narayan (Chairman) Mr. C. R. Muralidharan, Member(F & A) Mr. K. K. Srinivasan, Member(Non-Life) Mr. G. Prabhakara, Member(Life) Mr. R. Kannan, Member(Actuary)
4.1 Third Party Administrator
1.
Conditions of and Procedure for Licensing of TPA (1) Only a company with a share capital and registered under
the Companies Act, 1956 can function as a TPA. (2) The main or primary object of the company shall be to carry
on business in India as a TPA in the health services, and on being licensed by the Authority, the company shall not engage itself in any other business. 3. The minimum paid up capital of the company shall be in equity shares amounting to Rs. 1 crore(Rupees One crore only); 4. At no point of time of its functioning the TPA shall have a working capital of less than Rs. 1 crore; 5. At least one of the directors of the TPA shall be a qualified medical doctor registered with the Medical Council of India; 6. The aggregate holdings of equity shares by a foreign company shall not at any time exceed twenty-six percent of the paid up equity capital of a third party administrator. 7. Any transfer of shares exceeding 5% of the paid up share capital shall be intimated by the TPA to the Authority within 15 days of the transfer indicating the names and particulars of the transferor and transferee.
Explanation : For the purpose of this sub-regulation "working capital" means the difference between the aggregate of the current assets and current liabilities as on the date of reckoning 2. (1) The TPA shall obtain from the Authority a licence to function as a TPA for rendering health services.
2. The application for licence shall be made in writing to the Authority in Form TPA-1 appended to these regulations and shall be accompanied by a non-refundable processing fee of Rs. 20,000 (Rupees Twenty Thousand only) to the Authority by way of a crossed demand draft in favour of the Authority payable in Delhi. 3. The Authority may, in the course of examination of the application, call for such information or ask for production of such documents, as it may deem fit, and it shall be incumbent upon the applicant to furnish the same within the specified time. 4. The Authority, on examination of the application and details furnished by the applicant, may issue a licence, if it is satisfied that the applicant TPA is eligible to function as a TPA. 5. Every TPA approved by the Authority shall pay a further sum of Rs. 30,000 (Rupees Thirty Thousand only) to the Authority as licence fee before the licence is granted to it and the same shall be paid to the Authority in the manner as stated in sub-regulation (2) of this regulation. 6. A TPA whose application has been rejected by the Authority shall not, for a period of two years from the date of such a rejection, apply once again to the Authority for a licence.
7. A copy of the agreement entered into between the TPA and the insurance company or any modification thereof, shall be filed, within 15 days of its execution or modification, as the case may be, with the Authority. 3.More than one TPA may be engaged by an insurance company and, similarly, a TPA can serve more than one insurance company.
4.
The parties to the agreement shall agree between themselves on the scope of the contract and the facilities that have to be provided. company. Such an agreement shall also prescribe the remuneration that may be payable to the TPA by the insurance
5.
(1)
Every TPA shall appoint, with due intimation to the Executive Officer (CEO)
Authority, from among its directors or senior employees, a Chief Administrative Officer (CAO) or Chief of the activities of the TPA. (2) Such a CAO or CEO shall possess the educational qualifications mentioned in sub-regulation ( 4 ) of this regulation and also undergo a specified period of training with any institution recognised by the Authority. (3) i. ii. iii. He shall not be : a person of unsound mind; an undischarged insolvent; a person who had been subjected to a term of imprisonment for a period of three months by a court of competent jurisdiction on grounds of misconduct, misfeasance, forgery etc. who shall be responsible for the proper day to day administration
iv.
(4)
The qualifications referred to in sub-regulation(2) are -
1. a degree in arts, science or commerce or management or health or hospital administration or medicine; and
2. a pass in the Associateship examination conducted by the Insurance Institute of India or such equivalent examination as may be recognised by the Authority and notified from time to time; 3. completion of practical training, as may be specified by the Authority, not exceeding one hundred hours with an institution recognised by the Authority, for these purposes, from time to time. 4. The Authority may grant, on an application made to it, by the CAO or CEO through the TPA, time not exceeding twenty four months from the date of the coming into force of these regulations for fulfilling the qualification, requirements as stated in sub-clauses (2) and (3) of this sub-regulation. 6. (1) Every application received by the Authority pursuant to these Regulations shall be considered by it within a reasonable time and its decision thereon communicated to the applicant. 2. On an examination of the material placed before it and on the basis of enquiries made by it, where the Authority is of the opinion that the application does not deserve acceptance, it shall communicate its opinion to the applicant, who shall be given a reasonable opportunity to represent against the proposed rejection of the application. 3. Where on a complete examination of the materials, documents, information, etc., available to it, the Authority finally comes to the conclusion that an application be rejected, it shall do so by making an order in writing, which shall be communicated to the applicant at the earliest.
4. Where the Authority decides to issue a licence to the applicant to act as TPA, it shall issue the same in Form TPA-2. 7. Every licence granted by the Authority to a TPA or any renewal
thereof, in terms of these regulations, shall remain in force for three years, unless the Authority decides, either to revoke or cancel it earlier, as provided in these regulations. 8. (1) A licence granted to a TPA may be renewed for a further period of three years on submission of the prescribed renewal application in Form TPA-3 alongwith a renewal fee of Rs. 30,000/-(Rupees Thirty Thousand only), atleast thirty days prior to the date of expiry of the licence. 2. Any failure on the part of the TPA to get its licence renewed before its expiry has to be explained to the Authority. A delayed application shall state the reasons for the delay and be accompanied by a late fee of Rs. 100/- (Rupees One Hundred only). 3. The Authority after examining the reasons given in the application by the TPA may renew the licence, if it is satisfied that the TPA was prevented by sufficient cause from applying for the renewal of its licence at least 30 days (Thirty days) before the date on which the licence ceased to remain in force.
4. The Authority may, if it is satisfied that undue hardship would be caused otherwise, accept any application after the licence ceased to remain in force, on payment by the applicant of a payment of Rs. 750/- (Rupees Seven Hundred Fifty only).
9. Where a licence granted by the Authority is lost or mutilated, the Authority may issue a duplicate licence on payment of a fee of Rs. 1,000/-(Rupees One Thousand only) accompanied by an application in writing made by the TPA.
4.2 REVOCATION OR CANCELLATION OF A LICENCE:1. A licence granted to a TPA may after due notice be revoked or
cancelled by the Authority for one or more of the reasons as provided in regulation 14. 2. The Authority may initiate action under regulation 13 for any of the following reasons: 1) the Authority, on the basis of information received by it, or on the basis of its own enquiry or investigation, is of the opinion that the TPA is functioning improperly and/or against the interests of the insured/policyholder or insurance company; 2) the Authority, on the basis of information in its possession, is of the opinion that the financial condition of the TPA has deteriorated and that the TPA cannot function effectively or that the TPA has committed a breach of regulations (3), (4), (5) and (8) of these regulations; 3) the Authority, after enquiry or upon information, is of the opinion that the character and ownership of the TPA has changed significantly since the grant of licence;
4) the Authority, finds that the licence or any renewal thereof granted to the TPA was on the basis of fraud or misrepresentation of facts; 5) there is a breach on the part of the TPA in following the procedure or acquiring the qualifications laid down by regulation 8 of these regulations; 6) the TPA is subject to winding up proceedings made under Companies Act, 1956 or any statutory modification thereof. 7) there is a breach of code of conduct prescribed by regulation 21 of these regulations;
3. Before proceeding under regulation 13 to revoke or cancel a licence granted to a TPA, the Authority shall grant a reasonable opportunity of being heard to the TPA.
4. (1) Every order made by the Authority under regulation 13 shall be in writing, stating clearly the reasons for the revocation TPA as soon as same is made. (2) The Authority shall also send copies thereof to the insurance company with whom the TPA has subsisting agreement(s). or cancellation of the licence and the order shall be served on the
5.
The TPA on receipt of an order under regulation 13 shall forthwith
cease to carry on its functions as TPA in relation to the insurance company and the insurance company shall immediately take such alternative steps including appointment of another TPA, as may be
necessary to continue to cater to the insured/policyholders served by the TPA whose licence has been revoked or cancelled. 6. A TPA whose licence has been revoked or cancelled in terms of
these regulations may file a review application with the Authority within 30 days of the receipt of the order cancelling or revoking the licence. 7. Within reasonable period of the receipt of the application for
review but not later than 90 days thereof, the Authority shall dispose of the application after affording the applicant a reasonable opportunity of being heard. 8. Nothing contained in these regulations may be deemed to prevent
or prohibit an insurance company in cancelling or modifying for good and sufficient reasons an agreement that has been entered into by it with a TPA.
4.3 Code of Conduct for TPA
1. A TPA licensed under these regulations shall as far as possible act in the best professional manner. 2. In particular and without prejudice to the generality of the provisions contained above, it shall be the duty of every TPA, its Chief Administrative Officer or Chief Executive Officer and its employees or representatives to
a) establish its or his or their identity to the public and the insured/policyholder and that of the insurance company with which it has entered into an agreement. (b) disclose its licence to the insured/policyholder/prospect.(c)
disclose the details of the services it is authorised to render in respect of health insurance products under an agreement with an insurance company;
(d)
bring to the notice of the insurance company with whom it has an agreement, any adverse report or inconsistencies or any material fact that is relevant for the insurance company’s business;
(e)
obtain all the requisite documents pertaining to the examination of an insurance claim arising out of insurance contract concluded by the insurance company with the insured/policyholder;
(f)
render necessary assistance specified under the agreement and advice to policyholders or claimants or beneficiaries in complying with the requirements for settlement of claims with the insurance company;
(g) (h)
conduct itself /himself in a courteous and professional manner; refrain from acting in a manner, which may influence directly or indirectly insured/policyholder of a particular insurance company to shift the insurance portfolio from the existing insurance company to another insurance company;
(i)
refrain from trading on information and the records of its business;
(j)
maintain the confidentiality of the data collected by it in the course of its agreement;
(k)
refrain from resorting to advertisements of its business or the services carried out by it on behalf of a particular insurance
company, without the prior written approval by the insurance company; (l) refrain from inducing an insured/policyholder to omit any material information, or submit wrong information; (m) refrain from demanding or receiving a share of the proceeds or indemnity from the claimant under an insurance contract;
follow the guidelines/directions that may be issued down by the Authority from time to time.How Insurance Works The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums. Lets take some examples to understand how insurance actually works:
Example 1 SUPPOSE
• •
Example 2 SUPPOSE
•
Houses in a village = 1000 Value of 1 House = Rs. 40,000/-
Number of Persons = 5000 Age and Physical condition = 50 years & Healthy Number of persons dying in a yr = 50 Economic value of loss
•
• •
Houses burning in a yr = 5 Total annual loss due to fire = Rs. 2,00,000/-
•
•
suffered by family of each
•
Contribution of each house owner = Rs. 300/•
dying person = Rs. 1,00,000/Total annual loss due to deaths = Rs. 50,00,000/•
Contribution per person = Rs. 1,200/-
UNDERLYING
ASSUMPTION UNDERLYING
ASSUMPTION
All 1000 house owners are exposed All 5000 persons are exposed to to a common risk, i.e. fire PROCEDURE as premium to the pool of funds Total value of the fund = Rs. 3,00,000 (i.e. 1000 houses * Rs. Total 300) 5 houses get burnt during the year 50 persons die in a year on an Insurance company pays Rs. average company pays Rs. 40,000/- out of the pool to all 5 house owners whose house got Insurance burnt 1,00,000/- out of the pool to the family members of all 50 persons dying in a year EFFECT OF INSURANCE EFFECT people, OF thus INSURANCE reducing the 1,200) value of the fund = Rs. 60,00,000 (i.e. 5000 persons * Rs. common risk, i.e. death PROCEDURE each as premium to the pool of funds
All owners contribute Rs. 300/- each Everybody contributes Rs. 1200/-
Risk of 5 house owners is spread Risk of 50 persons is spread over over 1000 house owners in the 5000 village, thus reducing the burden on burden on any one person.
any one of the owners.
Complaints from Policyholders Policyholders who have complaints against insurers are required to first approach the Grievance/Customer Complaints Cell of the concerned insurer. If they do not receive a response from insurer(s) within a reasonable period of time or are dissatisfied with the response of the company, they may approach the Grievance Cell of the IRDA. Role of Insurance as a Risk Mitigation Measure Insurance is a potentially important mitigation measure in disasterprone areas as it brings quality in the infrastructure and assets by inculcating a consciousness and a culture of safety by its insistence on following building codes, norms, guidelines, quality materials in construction etc. Disaster insurance mostly works under the premise of 'higher the risk higher the premium, lesser the risk lesser the premium", thus creating awareness about the cost to be paid for living and operating in vulnerable areas. In spite of repeated exposure to natural disasters there is no organized information system on availability of resources for disaster response at district, state and national levels. Government agencies have faced problems in mobilizing equipments and skilled human resources to respond immediately to emergency situations. There is an immediate need for collating all the resources available, starting from the block or taluka to the State and national level, for disaster response and putting it in a centralized database. To address this issue, Ministry of Home Affairs in collaboration with United Nations Development Programme
(UNDP) has initiated 'India Disaster Resource Network (IDRN) for collection and compilation of resources inventory from the block or taluka level. The multi-sectoral and multi-hazard prevention based approach to disaster management also calls for development of an appropriate component of disaster awareness at all levels. This will aid in building the knowledge, attitude and skills of a community to cope with the effects of disasters. BENEFITS OF IRDA :Saving for Old Age – The IRDA Standard Pension Plan The Insurance Regulatory and Development Authority (IRDA) has devised a simple, standard pension plan for all life insurance companies to offer to the public. The objective of the IRDA is to provide a plan with a uniform technical structure that all life insurance companies would sell to the public. The presence of such a plan in the market would increase the general awareness of the public towards pension savings and act as an entrylevel product into this vital area of investment that each Indian investor should be considering for himself or herself. Here are highlights and some technical details of the plan.
India, like many countries in the world, is faced with the phenomenon of an ageing population. Combined with a change in societal structure tending away from joint families and close-knit ties with relatives, this trend calls for better financial planning for old age income on the part of individuals.
The IRDA has been concerned about the lack of awareness among the public about the growing importance of retirement savings on the one hand, and the lack of suitable and acceptable pension plans in the market on the other. It wanted a standard, simple plan with a uniform technical structure to be sold by all life insurance companies to the public and set up a committee in December, 2002, to devise such a plan. Mr. N. Rangachary, Chairman, IRDA, at a meeting of life and non-life insurance company chief executives and actuaries held at Hyderabad on December 18, 2002, first suggested such a product be fashioned and launched. Following this, a committee was set up under the chairmanship of Mr. N. K. Shinkar, Consulting Actuary, IRDA, and with Mr. P.A. Balasubramanian, Member (Actuary), IRDA, Mr. K.P. Narasimhan, exPresident, Actuarial Society of India, Mr. J. S. Salunkhe, former Chairman, Life Insurance Corporation of India (LIC), Mr. S. P. Subhedar, Senior Advisor, Prudential International Corporation, Mr. Nick Taket, Appointed Actuary (AA), HDFC Standard Life Insurance Company, Mr. V. Rajagopalan AA, ICICI Prudential Life Insurance Company and Dr. R. Kannan, AA, SBI Life Insurance Company, as members. The following are the highlights of the IRDA Standard Pension Plan as proposed by the Shinkar Committee. IRDA''s ULIP guidelines will protect policyholdersnews :The Insurance Regulatory and Development Authority (IRDA) recently introduced its much-awaited guidelines to govern unit-linked insurance policies (ULIPs), which are among the most popular class of life insurance policies sold in the country today. Till the privatisation of the
insurance industry around the end of the century, only the Unit Trust of India (UTI) sold unit-linked insurance plans, apart from the Dhanaraksha Plan of the LIC Mutual Fund. ULIPs are life insurance policies where the insurance cover is bundled with an investment benefit under a single contract; the customer gets insurance cover as well as investment returns based on market performance. As in mutual funds, there are different options like predominantly equity-oriented investments, pure debt investments, government securities investments, etc, which the customer can choose, depending on his or her risk appetite. The most important point is that the risk under ULIPs is borne by the policyholder. Though unit-linked insurance schemes have proved to be incredibly popular, there were no regulations and there were complaints that some insurance companies were taking unfair advantage of this, selling ULIP policies that were little more than thinly disguised mutual funds. IRDA's new regulations are aimed at ensuring that the customer gets a fair deal, at enhancing transparency, providing a better understanding of the product design and assuring a reasonable amount of insurance cover in ULIPs, consistent with the long-term nature of life insurance products. The primary advantage of ULIPs is that the customer gets the advantages of both insurance and mutual fund investment in a single contract. An in-house team invests and manages the premiums and gets the customer a return. ULIPs also offer tax deduction of up to Rs100,000 from the gross total income under Section 80C of the Income Tax Act, 1961. Returns from ULIPs are exempt from tax, subject to the conditions under Section 10(10D). The downside is that, generally, there are limited guarantees, and market risks are passed on to the customer completely.
Returns could be lucrative if the market is upbeat, but the unit value could decline if the market goes down. The new provisions IRDA has prescribed a minimum sum assured equal to 50 per cent of the total annualised premium during the entire policy term or five times the annualised premium, whichever is higher. This regulation is aimed at maintaining the basic characteristic of a life insurance policy, where life cover should be the primary benefit. Till the policyholder turns 60 years old, the sum assured cannot be reduced by partial withdrawals. This is aimed at protecting the life insurance cover. Premium Holiday: If the policyholder stops paying premium
instalments after paying premiums for three years, the risk premiums and the applicable charges can be adjusted from the balance in the account value, till such time as the balance in the account reduces to one year's premium. This would help policyholders who are unable to pay premiums owing to a temporary disruption in income because of change in employment, or any other sudden drop in income. The premium holiday option ensures continued insurance protection by transferring the risk premium and charges due from the account value, which is built up over a period. But the policy would lapse and this benefit would not be available if premium payments are stopped within three years. Top-up Premiums: Top up premiums are irregular dump-in amounts allowed in a ULIP. Up to now, there were no restrictions; it was possible, for example, to dump in Rs1 crore in a ULIP and invest the entire amount in the market. But this vitiates the basic characteristic of the policy by making the insurance component insignificant. To plug this loophole, IRDA has prescribed that a sum assured must back any dumpin that exceeds 25 per cent of normal premium, which will be constant
throughout the term of the policy. Any appropriation towards a dump-in can take place only if the normal premiums are paid.
Withdrawals from ULIPs: Earlier, withdrawals from ULIPs were possible even within a year of issue. Depending on the option selected, they were reduced from the sum assured, resulting in dilution of death benefits to the nominees. Now, withdrawals will be allowed only after three years. The new guidelines provide that except for withdrawals made during the two years immediately preceding death, no other withdrawals can be reduced from the sum assured. But once the customer is past the age of 60, all withdrawals can be reduced from the sum assured. Lock-in period: A top-up premium cannot be withdrawn for three years. This places ULIPs on par with mutual fund contributions under Section 80C of the Income Tax Act, 1961. The only relaxation in this condition is on withdrawal of top-up premiums made during the last three years of the policy contract. Settlement options: The policyholder has settlement options, to receive the policy benefits in various forms, rather than a lump sum. For example, the company can give the policyholder an option to receive the maturity benefit in the form of a monthly pension. IRDA has restricted such extended periods of settlement to five years from the date of maturity. The company should also make clear the inherent risk involved in extended periods of settlement. Date of unitisation: The invest-able portion of the contributions (after deducting risk premium, charges, etc) is invested based on net asset
value (which reflects the average market value of the invested contributions). So far, insurance companies were unitising on the date of placing of the policy, which could be much later than the date on which the customer gave the cheque towards the first premium, renewal premium or dump-in premium. This often resulted in loss to policyholders, as the market moved up between the date of receipt of the cheque and the date of placing the policy. To resolve this anomaly, the IRDA has prescribed the following guidelines:
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Contributions by local cheque / DD: If the payment is received up to 4.15 pm, payable at par at the place of receipt, the same day's closing NAV will be applied. After 4.15 pm, the next day's closing NAV is applicable.
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Contributions by outstation cheque: The closing NAV on the date of realisation of the outstation cheque is applicable.
This provision ensures that the company banks the cheques on time. The company will make good any loss on account of delays on its part. This rule is applicable for redemptions too. Charges: Charges are costs appropriated by insurance companies from ULIP premiums. The IRDA has listed the charges that insurance companies can levy on policyholders, as well as laid out the standard definitions for use in policy contracts. This is aimed at clarity and to enable customers to understand and compare costs between different insurance companies. Statement of Account: A statement of account, which forms part of the policy document, must be issued at the end of each policy year and also when a transaction takes place, giving complete information on the nature of the transaction (investment / switch over, etc), the NAV on the date of transaction, number of units before and after the transaction,
etc. The annual statement must give the number of units in the account and the NAV on the date of the statement, besides other relevant information. Market Conduct: There is an inherent risk in investing in ULIPs, as the performance of the funds underlying the ULIPs governs their returns. To address these risks, the IRDA has authorised the Life Insurance Council to formulate a Code of Conduct for sale of ULIPs. This includes mandatory training for agents before they are authorised to sell ULIPs, documentation to enable the customer to understand and acknowledge the risk involved in buying ULIPs, a code of conduct for their sale, educating policyholders on risk factors, terminology, charges, etc. Disclosure norms: To prevent misleading information, the IRDA has prescribed norms for mandatory disclosures. All promotional materials must specify all fund options (like equity funds, debt funds, balanced funds, etc), the minimum and maximum percentage of investments in fund options, all charges with limits, and the risk profile. All promotional materials and policy documents must carry a clear statement that the investment risk is borne solely by the policyholder. The size of the fonts used in disclosures must be the same as that used for other purposes in promotional materials and policy documents. All advertisements for ULIPs must clearly address the question of risk and distinguish ULIPs from conventional life insurance products. They must disclose all charges and guarantees, if any, and include a statement that the fund name and the company name do not indicate the performance of the fund. Advertisements must be simple, understandable to policyholders and avoid legal and financial jargon, to avoid misleading sales.
Past performance can be given only on completion of one calendar year from the introduction of the fund. Emphasis on past performance should be minimal. Under no circumstances can there be any justification for projecting or suggesting there should future be a performance clear-cut based on that past past performance; statement
performance is no indication of future performance.
4.4 Insurance Regulatory and Development Authority (IRDA) Guideline.
The IRDA is a corporate body. It is advised by an insurance advisory committee consisting of not more than 25 members. The IRDA Act, provided for the establishment of the IRDA to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of insurance industry.It also amended the insurance act, 1938, the life insurance corporation act, 1956 and the general insurance business (nationalization) act, 1972.
IRDA Guidelines
1 )There are limits on SA, and top-up conditions. 2 )Surrender benefit is possible only after 3rd policy anniversary. 3 )First partial withdrawal only after 3rd policy anniversary. 4) SA can be reduced up to the extent of partial withdrawals during 2 years prior to death and after age 60. 5) There is Lock-in period for each top-up amount and for partial withdrawal, except during last three years of contract. 6) Death benefits to be guaranteed. 7) Maturity benefits may be guaranteed, at levels reasonable in relation to current and long term interest rates scenario.
8) Policy to become paid up, if there is default in premium after 3 years. 9) Opportunity to be given to revive lapsed policy. 10) Auto cover facility allowed for full SA for limited period. 11) No auto cover facility if at least 3 years premium not paid. 12) If policy is not revived, surrender value to be paid at the end of 3rd policy anniversary or end of revival period, whichever is later. 13)No risk cover after policy term.
CONCLUSION
An efficient, competitive insurance market does not evolve overnight from a restrictive one. All market players, including regulators and institutions, need some time to adjust to a changed environment. Entry is costly, even with fewer entry barriers and a more transparent system. New insurers will enter a market gradually as they perceive profitable opportunities and establish a reputation among consumers. At the same time, the danger exists that government could move too slowly or fail to take all critical measures necessary to support effective competition and to protect consumers. Deregulation and liberalization require the implementation of a reasoned, careful strategy containing all necessary regulatory elements. Objectives must be clear and benchmarks established that will move the market towards competition that serves the public interest. Overall regulation will be less intrusive but it will also be more intense and selective. This fact will demand more highly qualified regulatory officials and staff, especially in the technical areas. Sound research to support informed public policy decisions will become more important in investigating key public policy issues and in measuring market structure and performance. The internationalization of financial services promises to continue. This new order of global business has revealed gaps in existing regulatory and trade policy approaches. The result is competitive imbalances that hinder and distort global competition.
Simultaneously, these new realities can result in greater consumer exploitation and fraud if regulators fail to make appropriate adjustments. The policy question is how to continue to promote competition through liberalization while ensuring adequate consumer protection. Divergent national regulatory approaches caused fewer difficulties when financial services markets were insulated from each other and largely national in character. For the future, however, regulatory diversity can impede the continued internationalization of financial services. As has been discussed elsewhere, such diversity might (1) magnify the negative effects of market imperfections, (2) provoke more stringent national trade-related regulation, and (3) increase transactional costs.5 Many observers believe that regulatory harmonization is necessary. Others note the great complexities in achieving even minimal regulatory harmonization. We believe that regulatory convergence is inevitable and in each country’s national interest.
BIBLIOGRAPHY & REFERENCE
1. www.irda.org.in
REFERED BOOKS
1. Laws & regulations of irda. 2. Insurance sector in India. 3. Environmental studies of Banking & Insurance. 4. Insurance Fund Management.(Finanacial Markets)
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