Concept of Insurance in India

ASSIGNMENT
ON
CONCEPT OF INSURANCE
Submitted by:
Nancy Shamim
B.A., LLB, V year,
Section B.
Submitted to:
Dr. Asad Malik
CHAPTER 1
1.1 ACKNOWLEDGEMENT
Firstly, I would like to express my profound sense of gratitude towards the Almighty ALLAH
for providing me with the authentic circumstances which were mandatory for the completion of
my research work.
I am also thankful to Dr.Asad Malik, for his invaluable support, encouragement, supervision and
useful suggestions throughout this research work. His moral support and continuous guidance
enabled me to complete my work successfully. His intellectual thrust and blessings motivated me
to work rigorously on this study. In fact this study could not have seen the light of the day if his
contribution had not been available. It would be no exaggeration to say that it is his unflinching
faith and unquestioning support that has provided the sustenance necessary to see it through to its
present shape.
I express my deep sincere gratitude towards my Mother for her blessing, patience, and moral
support in the successful completion of this project. I express my gratitude to my all teachers and
friends who has supported and encouraged me during my study at Faculty of Law, Jamia
MilliaIslamia, New Delhi.
Nancy Shamim
B.A.LL.B (Hons) 9th Semester
5th Year
1.2 TABLE OF CONTENT

CHAPTER 1
1.1 ACKNOWLEDGEMENT
1.2 TABLE OF CONTENT
1.4 LIST OF ABBREVIATIONS
1.5 STATEMENT OF PROBLEM
1.8 SCOPE OF THE STUDY
1.6 HYPOTHESIS
1.7 OBJECTIVE OF THE STUDY
CHAPTER 2
2.1 RESEARCH METHODOLOGY
2.2 CHAPTERIZATION SCHEME
CHAPTER 3
3.1 INTRODUCTION
3.2 WHAT IS INSURANCE LAW?
3.3 NEED FOR INSURANCE
3.4 TYPES OF INSURANCE
3.4 GENERAL PRINCIPLES AND CONCEPTS OF INSURANCE
3.5 DIFFERENTIATION INSURANCE AND GUARANTEE
3.6 INSURANCE AND WAGER
3.8 MATERIAL FACTS
3.7 DISCLOSURES
3.9 FACTS, WHICH MUST BE DISCLOSED
3.10 REPRESENTATIONS
3.11 EFFECT OF NON-DISCLOSURE
3.10 EXAMPLES OF MATERIAL FACTS
3.12 ACTIVE AND PASSIVE DUTY OF DISCLOSURE
3.13 MORAL HAZARDS
CHAPTER 4
4.1 NATURE OF INSURANCE CONTRACT
4.2 FEATURES OF INSURANCE CONTRACT
CHAPTER 5 REGULATORY ENVIRONMENT SPECIFIC LEGISLATIONS
5.1 HISTORY OF INSURANCE IN INDIA
5.2 LIFE INSURANCE
5.3 GENERAL INSURANCE
5.4 REGULATION OF INSURANCE BUSINESS IN INDIA
5.5 ACTS/REGULATIONS COMMON TO GENERAL AND LIFE INSURANCE
BUSINESS IN INDIA
5.6 REGULATIONS GOVERNING/ AFFECTING LIFE INSURANCE BUSINESS IN
INDIA THE FOLLOWING ACTS GOVERN /REGULATE THE LIFE INSURANCE
BUSINESS IN INDIA.
5.7 REGULATIONS AFFECTING GENERAL INSURANCE BUSINESS IN INDIA
CHAPTER 6 INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY
4
6.1 CONSTITUTION OF INSURANCE REGULATORY AND DEVELOPMENT

AUTHORITY
6.2 POWERS /FUNCTIONS OF IRDA
6.3 FRAMEWORK UNDER THE INSURANCE ACT, 1938
6.5 RECENT CHANGES IN THE REGULATION LAWS OF INSURANCE INDUSTRY
IN INDIA
IRDA (INVESTMENT) REGULATIONS, 2013
IRDA (SCHEME OF AMALGAMATION AND TRANSFER OF LIFE
INSURANCE BUSINESS) REGULATIONS, 2013 AND IRDA (SCHEME OF
AMALGAMATION AND TRANSFER OF GENERAL INSURANCE BUSINESS
REGULATIONS, 2011)
IRDAI (Surrender Value) REGULATIONS, 2015
MAJOR HIGHLIGHTS OF THE INSURANCE LAWS (AMENDMENT) ACT,
20151
CHAPTER 7
7.1 IRDA GUIDELINES FOR GRIEVANCE REDRESSAL
7.2 IRDA (Micro Insurance) Regulations, 2005
7.3 IRDA (OBLIGATIONS OF INSURERS TO RURAL AND SOCIAL SECTORS)
REGULATIONS, 2000 (AS AMENDED FROM TIME TO TIME)
7.4 IRDA GUIDELINES TO FINANCIAL INCLUSION
CHAPTER 8
8.1 CONCLUSION
8.2 BIBLIOGRAPHY
1 https://www.economictimes.indiatimes.com
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1.4 LIST OF ABBREVIATIONS

SEBI - Securities and Exchange Board of India
IRDA-Insurance Regulatory and Development Authority
ECGC - Export Credit Guarantee Corporation
AICL - Agricultural Insurance Company of India Ltd
GIC - General Insurance Corporation of India
LIC - Life Insurance Corporation of India
GIN-General Insurance Nationalization Act
IA-Insurance Act
IAA-Insurance Amendment Act
FEMA-Exchange Control Regulations
ISA-Indian Stamp Act
CPA-Consumer Protection Act
IO-Insurance Ombudsman
MMTA-Multi-Modal Transportation Act
MVA- Vehicles Act.
ISVAA-Inland Steam Vessels Amendment Act
MIA-Marine Insurance Act
CGSA-Carriage of Goods by Sea Act
MSA-Merchant Shipping Act
BLA-Bill of Lading Act
6
IPA-Indian Ports (Major Ports) Act

IRA-Indian Railways Act
CA-Carriers Act
IPOA-Indian Post Office Act
CAA-Carriage by Air Act
WCA-Workmens' Compensation Act
PLIA-Public Liability Insurance Act. 1991
1.6 TABLE OF CASES

1.
2.
3.
4.
5.
6.
Lazarus Estate Ltd. Vs. Beasley 1956(1) QB 702.

Duchess of Kingstone, Smith's Leading Cases, 13th Edn., p.644
The Oriental Insurance Company ... vs Harapriya Nayak And Ors. 1994 I OLR 88
In S.P. Chengalvaraya Naidu v. Jagannath AIR 1994 SC 853
United India Insurance Co. Ltd vs Rajendra Singh & Ors Special Leave Petition (civil)
8479 of 1999
A.V. Papayya Sastry & Ors vs Government Of A.P. & Ors Appeal (civil) 5097-5099 of
2004
Meghmala v G. Narasimha Reddy reported in (2010) 8 SCC 383
Baskar vs The National Insurance Co Ltd Civil Miscellaneous Appeal No.2065 of 2012
and M.P.No.1 of 2012
7.
8.
9.
10. Adhir Ranjan Kar vs Atanu Kumar Mondal & Anr on 2 March, 2015 (W. P.C.R.C.
340 (W) of 2013)
1.5 STATEMENT OF PROBLEM

India, one of the fastest growing economies in the world, has a burgeoning middle class, and has
witnessed a significant rise in the demand for insurance products. Over the last 10 years, the
insurance industry has grown at a capital annual compounded growth rate (CAGR) of around
20%. However, with the exponential growth in the industry, there has also been an increased
incidence of frauds in the country.
Laws pertaining to Insurance are sufficient as they have been time to time amended by the
Legislature as per the changing demand of current scenario. But the industry has progressed on a
slow pace. Hence, companies need a more vigorous progressive management framework.
1.6 HYPOTHESIS
The current research and study is based on the following hypotheses:1. There are sufficient safeguards for the insurance industry in India.
2. The insurance industry has stringent regulations governing it.
1.7 OBJECTIVE OF THE STUDY

In this research work, the Researcher endeavours to impart the knowledge and give the insight to
the masses on the following broad objectives:1. To appraise the existing law on the regulation regarding the Insurance Industry in India.
2. To setup more vigorous fraud management framework in Insurance Companies.
3. Last But not the least, to bring awareness among the common mass about the concept of
Insurance and legislations dealing with it.
1.8 SCOPE OF THE STUDY

Any perception of this work would perhaps seem minuscule considering the fact that this work
has produced from a mere student of law, particularly in the light of the knowledge that so many
legal luminaries have deliberated on the matter since time immemorial.
The study due to incorporation of a number of restrictions like time and resources, deals keeping
in focus all the states and union territories in India.
9
The study by putting forward its recommendations, most humbly, hopes to make a small
contribution in the field of legal reforms in India. The study also relates and incorporates
International Instruments/Conventions/foreign legislations and policies of the United Nation
Organisation and different foreign National laws.
CHAPTER 2
10
2.1 RESEARCH METHODOLOGY

The present work has been undertaken with guided intellectual inquisition based on organized
and systematic investigation by employing doctrinal research methodology.
The methodology followed by the Researcher in the present work has been undertaken with
guided intellectual inquisition based and organized and by systematic investigation by employing
purely doctrinal/non-empirical in nature. For the purpose of preparing this research work, the
Researcher has relied on various books, statutes, articles, journals, newspaper articles and other
such literature. The Researcher has also relied on various case laws to substantiate or refute his
points as and when they arise.
2.2 CHAPTERIZATION SCHEME

CHAPTER 1:This Chapter deals with the list of Abbreviation used in this research work.
CHAPTER 2:
It includes the methodology used in the research work comprising

chapterization scheme.
CHAPTER 3:
The chapter includes the introduction part of the research work

comprising need of insurance, the general principles dealing with the
Insurance and differentiation of insurance from wager and guarantee.
CHAPTER 4:
The Fourth Chapter covers the nature of insurance contract
CHAPTER 5:
The Fifth Chapter titled Regulatory Environment Specific

Legislations explains in brief the history of insurance in India and also
the legislation dealing with the Insurance in India.
CHAPTER 6:
Sixth Chapter titled Insurance Regulatory And Development

Authority explains in detail the legislations and regulation common to
both life insurance and general insurance in India
CHAPTER 7:
The chapter titled Irda Guidelines For Grievance Redressal deals with
the procedure of grievances redressal as per IRDA
11
CHAPTER 8:
The last chapter concludes the research work along with suggestions
and bibliography
CHAPTER 3
12
3.1 INTRODUCTION
Insurance may be described as a social device to reduce or eliminate risk of life and property.
Under the plan of insurance, a large number of people associate themselves by sharing risk,
attached to individual. The risk, which can be insured against include fire, the peril of sea, death,
incident, & burglary. Any risk contingent upon these may be insured against at a premium
commensurate with the risk involved2.
Insurance is actually a contract between two parties whereby one party called insurer undertakes
in exchange for a fixed sum called premium to pay the other party on happening of a certain
event.
Insurance is a contract whereby, in return for the payment of premium by the insured, the
insurers pay the financial losses suffered by the insured as a result of the occurrence of
unforeseen events. With the help of Insurance, large number of people exposed to similar risks
makes contributions to a common fund out of which the losses suffered by the unfortunate few,
due to accidental events, are made good.
An insurer is a company selling the insurance; an insured or policyholder is the person or entity
buying the insurance. The insurance rate is a factor used to determine the amount to be charged
for a certain amount of insurance coverage, called the premium.
According to J.B. Maclean3 :
Insurance is a method of spreading over a large number of persons a possible financial loss too
serious to be conveniently borne by an individual.
3.2 WHAT IS INSURANCE LAW?
Insurance law is the name given to practices of law surrounding insurance, including insurance
policies and claims. Insurance regulation that governs the business of insurance is typically
aimed at assuring the solvency of insurance companies. Thus, this type of regulation governs
capitalization, reserve policies, rates and various other "back office" processes4.
2 Insurance Laws of India, CA Rajkumar S. Adukia, http://taxguru.in/wpcontent/uploads/2012/11/insurance-hb-1101.pdf

3LH. Longley Cook,.Life Insurance, http://www.jstor.org/stable/41139497?
seq=1#page_scan_tab_contents
4 Insurance Law,http://en.jurispedia.org/index.php/Insurance_law_%28us%29
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3.3 NEED FOR INSURANCE

All assets have some economic value attached to them. There is also a possibility that these
assets may get damaged destroyed or become non-operational due to risks like breakdowns, fire,
floods, earthquake etc. Different assets are exposed to different types of risks like a car has a risk
of theft or meeting an accident, a house is exposed to risk of catching fire, a human is exposed to
risk of death/accident5. Hence insurance is required for the following reasons:
1. Insurance acts as an important tool in providing a sense of security to the society on a whole.
In case the bread earner of a family dies, the family suffers from direct financial loss as family's
income ceases. Life insurance is one alternate arrangement that offers some respite to the family
from financial distress.
2. The basic need of insurance arises as risks are uncertain and unpredictable in nature. Getting
insurance for an asset does not mean that the asset is protected against risks or its exposure to
risk is reduced, but it actually implies that in case the asset suffers any loss in value due to such
risk, the insurance company bears the loss and compensates the insured by making payment to
him.
3. Insurance acts as a useful instrument in promoting savings and investments, particularly
within the lower income and middle income families. These savings are used as investments to
fuel economic growth.
3.4 TYPES OF INSURANCE6
Insurance business is divided into following types of business namely:
1) Life Insurance
2) General Insurance
Marine insurance
Fire insurance
Motor vehicle insurance
Miscellaneous insurance
5 Insurance,http://mfsolutions.in/insurance.php
6 Types of
Insurance,http://www.insuranceinfo.com.my/learn_the_basics/types_of_insurance.ph
p
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3) Reinsurance
3.4 GENERAL PRINCIPLES AND CONCEPTS OF INSURANCE

The business of insurance aims to protect the economic value of assets or life of a person.
Through a contract of insurance the insurer agrees to make good any loss on the insured property
or loss of life (as the case may be) that may occur in course of time in consideration for a small
premium to be paid by the insured7.
Apart from the above essentials of a valid contract, insurance contracts are subject to additional
principles.
These are:
Principle of Utmost good faith

Principle of Insurable interest
Principle of Indemnity
Principle of Subrogation
Principle of Contribution
Principle of Proximate cause
Principle of Loss of Minimization
These distinctive features are based on the basic principles of law and are applicable to all types
of insurance contracts. These principles provide guidelines based upon which insurance
agreements are undertaken.
A proper understanding of these principles is therefore necessary for a clear interpretation of
insurance contracts and helps in proper termination of contracts, settlement of claims,
enforcement of rules and smooth award of verdicts in case of disputes8.
Now I will be discussing various principles of Insurance in detail
7 Life Insurance
Planning,https://www.insuranceinstituteofindia.com/documents/10156/d72483376621-4895-82c0-341bb9ed275c
8 Principles of Insurance, http://bassed-insurance.blogspot.in/2011/10/normal-0false-false-false-en-us-x-none_8731.html
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1. PRINCIPLE OF UBERRIMAE FIDEI (UTMOST GOOD FAITH9)
Principle of Uberrimae fidei (a Latin phrase), or in simple English words, the Principle of
Utmost Good Faith, is a very basic and first primary principle of insurance. According to this
principle, the insurance contract must be signed by both parties (i.e insurer and insured) in an
absolute good faith or belief or trust.
The person getting insured must willingly disclose and surrender to the insurer his complete true
information regarding the subject matter of insurance. The insurer's liability gets void (i.e legally
revoked or cancelled) if any facts, about the subject matter of insurance are either omitted,
hidden, falsified or presented in a wrong manner by the insured.
The principle of Uberrimae fidei applies to all types of insurance contracts.
2. PRINCIPLE OF INSURABLE INTEREST10
9 Doctrine of Utmost goodfaith, http://bassedinsurance.blogspot.in/2011/10/normal-0-false-false-false-en-us-x-none_8731.html

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The principle of insurable interest states that the person getting insured must have insurable
interest in the object of insurance. A person has an insurable interest when the physical existence
of the insured object gives him some gain but its non-existence will give him a loss. In simple
words, the insured person must suffer some financial loss by the damage of the insured object.
For example: The owner of a taxicab has insurable interest in the taxicab because he is getting
income from it. But, if he sells it, he will not have an insurable interest left in that taxicab.
From above example, we can conclude that, ownership plays a very crucial role in evaluating
insurable interest. Every person has an insurable interest in his own life. A merchant has
insurable interest in his business of trading. Similarly, a creditor has insurable interest in his
debtor.
3. PRINCIPLE OF INDEMNITY11
10 Insurable Interest,http://www.businessdictionary.com/definition/insurableinterest.html
11 What are principles of Insurance, http://www.allbankingsolutions.com/TopTopics/Principles-of-insurance.shtml
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Indem
nity means security, protection and compensation given against damage, loss or injury.
According to the principle of indemnity, an insurance contract is signed only for getting
protection against unpredicted financial losses arising due to future uncertainties. Insurance
contract is not made for making profit else its sole purpose is to give compensation in case of any
damage or loss.
In an insurance contract, the amount of compensations paid is in proportion to the incurred
losses. The amount of compensations is limited to the amount assured or the actual losses,
whichever is less. The compensation must not be less or more than the actual damage.
Compensation is not paid if the specified loss does not happen due to a particular reason during a
specific time period. Thus, insurance is only for giving protection against losses and not for
making profit12.
However, in case of life insurance, the principle of indemnity does not apply because the value of
human life cannot be measured in terms of money.
4. PRINCIPLE OF SUBROGATION13
12 Principles of Insurance - 7 Basic General Insurance Principles, p://kalyancity.blogspot.in/2011/03/principles-of-insurance-7-basic-general.html
13Subrogation Principles and Practice, http://www.cila.co.uk/files/Property/Principles

%20and%20Practice.pdf
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Subrog
ation means substituting one creditor for another. Principle of Subrogation is an extension and
another corollary of the principle of indemnity. It also applies to all contracts of indemnity.
According to the principle of subrogation, when the insured is compensated for the losses due to
damage to his insured property, then the ownership right of such property shifts to the insurer.
This principle is applicable only when the damaged property has any value after the event
causing the damage. The insurer can benefit out of subrogation rights only to the extent of the
amount he has paid to the insured as compensation.
For example: Mr. Arvind insures his house for ` 1 million. The house is totally destroyed by the
negligence of his neighbour Mr. Mohan. The insurance company shall settle the claim of Mr.
Arvind for ` 1 million. At the same time, it can file a law suit against Mr. Mohan for ` 1.2
million, the market value of the house. If insurance company wins the case and collects ` 1.2
million from Mr. Mohan, then the insurance company will retain ` 1 million (which it has already
paid to Mr. Arvind) plus other expenses such as court fees. The balance amount, if any will be
given to Mr. Arvind, the insured14.
5. PRINCIPLE OF CONTRIBUTION
Principle of Contribution is a corollary of the principle of indemnity. It applies to all contracts of

indemnity, if the insured has taken out more than one policy on the same subject matter.
According to this principle, the insured can claim the compensation only to the extent of actual
14 Insurance Law and Practice,
https://www.icsi.edu/docs/webmodules/Publications/9.3%20INSURANCE%20LAW
%20AND%20PRACTICE.pdf
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loss either from all insurers or from any one insurer. If one insurer pays full compensation then
that insurer can claim proportionate claim from the other insurers.
For example: Mr. Arvind insures his property worth Rs. 100,000 with two insurers "AIG Ltd."
for `90,000 and "MetLife Ltd." for `60,000. Arvind's actual property destroyed is worth ` 60,000,
then Mr. Arvind can claim the full loss of `60,000 either from AIG Ltd. or MetLife Ltd., or he
can claim `36,000 from AIG Ltd. and `24,000 from Metlife Ltd.
So, if the insured claims full amount of compensation from one insurer then he cannot claim the
same compensation from other insurer and make a profit. Secondly, if one insurance company
pays the full compensation then it can recover the proportionate contribution from the other
insurance company.
6. PRINCIPLE OF CAUSA PROXIMA15 (NEAREST CAUSE)
Principl
e of Causa Proxima (a Latin phrase), or in simple English words, the Principle of Proximate (i.e
Nearest) Cause, means when a loss is caused by more than one causes, the proximate or the
nearest or the closest cause should be taken into consideration to decide the liability of the
insurer.
The principle states that to find out whether the insurer is liable for the loss or not, the proximate
(closest) and not the remote (farest) must be looked into.
For example: A cargo ship's base was punctured due to rats and so sea water entered and cargo
was damaged. Here there are two causes for the damage of the cargo ship - (i) The cargo ship
getting punctured beacuse of rats, and (ii) The sea water entering ship through puncture. The risk
of sea water is insured but the first cause is not. The nearest cause of damage is sea water which
is insured and therefore the insurer must pay the compensation.
15 Insurance: Causa Proxima,

http://www.advocatekhoj.com/library/lawareas/insurance/causa.php?
Title=Insurance&STitle=Causa%20Proxima
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However, in case of life insurance, the principle of Causa Proxima does not apply. Whatever may
be the reason of death (whether a natural death or an unnatural death) the insurer is liable to pay
the amount of insurance.
7. PRINCIPLE OF LOSS MINIMIZATION16
According to the Principle of Loss Minimization, insured must always try his level best to
minimize the loss of his insured property, in case of uncertain events like a fire outbreak or blast,
etc. The insured must take all possible measures and necessary steps to control and reduce the
losses in such a scenario. The insured must not neglect and behave irresponsibly during such
events just because the property is insured. Hence it is a responsibility of the insured to protect
his insured property and avoid further losses.
For example: Assume, Mr. Arvind's house is set on fire due to an electric short-circuit. In this
tragic scenario, Mr. Arvind must try his level bst to stop fire by all possible means, like first
calling nearest fire department office, asking neighbours for emergency fire extinguishers, etc.
He must not remain inactive and watch his house burning hoping, "Why should I worry? I've
insured my house."
3.5 DIFFERENTIATION INSURANCE AND GUARANTEE17
Insurance is a contract of indemnity whereby Insurer agrees to indemnify, or pay, the insured for
certain types of loss while in a contract of guarantee, one party agrees to act on behalf of another
should that second party default. In plain terms, this means that if an individual fails to pay her
guaranteed debt or to perform some other duty or obligation, the guarantor, the party who has
agreed to act on behalf of another, will step in to pay or perform the obligation.
There are two major differences between insurance and guarantees. One difference is that
insurance is a direct agreement between the insurance provider and the policyholder, while a
guarantee involves an indirect agreement between a beneficiary and a third party, along with the
primary agreement between the principal and beneficiary. A second difference is that insurance
16Understanding Insurance Principles: Loss minimization and Causa Proxima
https://insurancecompanyblog.wordpress.com/2012/08/15/in-the-advent-o/
17 https://www.access-legal.co.in
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policy calculations are based on underwriting and possible loss, while a guarantee is focused
strictly on performance or nonperformance. In addition, insurance providers or policyholders can
cancel policies with notice, while guarantees often cannot be canceled. The difference between a
contract of Insurance and a contract of guarantee are as given below:
INSURANCE
GUARANTEE
In a contract of Guarantee there are three

In a contract of insurance, there are two parties parties i.e. Main Debtor, Creditor & Surety.
i.e. insurer and insured
Insurance contract is generally Cancellable.
Contract of Guarantee is Non-Cancellable
Insurance premium is based on the probability In contract of business, loss cannot be

and quantum of losses
estimated generally so fee is charged for the
guarantee service rendered
An insurance contract transfers the Risk
There is No Transfer of Risk in a contract of

guarantee
3.6 INSURANCE AND WAGER 18

A contract of Insurance, i.e. life, accident, fire, marine, etc. is not a wager though it is
performable upon an uncertain event. It is so because; the principle of insurable interest
distinguishes insurance from a wagering contract. Insurable interest is the interest which one has
in the safety or preservation of the subject matter of insurance. Where insurable interest is not
present in insurance contracts, it becomes a wagering contract and is therefore void.
The following are the points of distinction between wagering agreements and insurance
contracts.
18 http://www.preservearticles.com/2012012621517/difference-between-contractof-insurance-and-wagering-agreement.html
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1. The parties have no insurable interest iii a wagering agreement. But the holder of an insurance
policy must have an insurable interest.
2. In wagering agreement, neither party has any interest in happening or non-happening of an
event. But in a contract of insurance, both parties are interested in the subject-matter.
3. Contracts of insurance are contracts of indemnity except life insurance contract, which is a
contingent contract. But a wagering agreement is a conditional contract.
4. Contract of insurance are based on scientific and actuarial calculation of risks, where as
wagering agreements are a gamble without any scientific calculation of risk.
5. Contracts of insurance are regarded as beneficial to the public and hence encouraged by the
State but wagering agreements serve no useful purpose.
6. A contract of insurance is a valid contract where as a wagering agreement is void being
expressly declared by law.
3.7 DISCLOSURES 19
The principle of Uberrimae fidei applies to all types of insurance contracts and is a very basic
and primary principle of insurance. According to this principle, the insurance contract must be
signed by both parties (i.e insurer and insured) in absolute good faith or belief or trust.
The person getting insured must willingly disclose and surrender to the insurer all relevant
complete true information regarding the subject matter of insurance. The insurer's liability is
voidable (i.e legally revoked or cancelled) if any facts, about the subject matter of insurance are
either omitted, hidden, falsified or presented in a wrong manner by the insured.
The principle forbids either party to an insurance contract, by non-disclosure or misrepresentation of a material fact, which he knows or ought to know, to draw the other into the
bargain, from his ignorance of that fact and his believing the contrary. The duty of the utmost
good faith is implied in insurance contracts because they are entered into by parties who have not
the same access to relevant information. In this, they differ from contracts of sale to which the
maxim caveat emptor (let the buyer beware) applies.
Although the duty rests upon both parties, it is the duty of the proposer which needs to be
discussed in some detail for he usually has the advantage of knowing most of the particulars
relating to the subject-matter. Until a definite offer to enter into an insurance contract has been
unconditionally accepted the duty of the utmost good faith must be strictly observed. The
obligation arises again prior to each renewal and, to a limited extent, when the insured desires an
19 https://www.sebi.gov.in
23
alteration in the policy. In the latter case, he must inform the insurer of any facts material to the
alteration.
3.8 MATERIAL FACTS20

Material fact is every circumstance or information, which would influence the judgment of a
prudent insurer in assessing the risk. Those circumstances which influence the insurers decision
to accept or refuse the risk or which affect the fixing of the premium or the terms and conditions
of the contract, must be disclosed.
A material fact is one which would have influenced the judgment of a prudent insurer in deciding
whether he would accept the risk in whole or in part and, if so, at what amount of premium. The
materiality of a fact depends upon the application of this test to the particular circumstances of
the case as at the date that the fact should have been communicated.
Material facts may have a bearing on the physical hazard or on the moral hazard, or they may
show that if a loss occurs the insurer's liability is likely to be greater than would normally be
expected.
3.9 FACTS, WHICH MUST BE DISCLOSED
(i) Facts, which show that a risk represents a greater exposure than would be expected from its
nature e.g., the fact that a part of the building is being used for storage of inflammable materials.
(ii) External factors that make the risk greater than normal e.g. the building is located next to a
warehouse storing explosive material.
(iii) Facts, which would make the amount of loss greater than that normally expected e.g. there is
no segregation of hazardous goods from non-hazardous goods in the storage facility.
(iv) History of Insurance (a) Details of previous losses and claims (b) if any other Insurance
Company has earlier declined to insure the property and the special condition imposed by the
other insurers; if any.
(v) The existence of other insurances.
(vi) Full facts relating to the description of the subject matter of Insurance
3.10 EXAMPLES OF MATERIAL FACTS21
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(a) In Fire Insurance: The construction of the building, the nature of its use i.e. whether it is of
concrete or Kucha - having thatched roofing and whether it is being used for residential purposes
or as a godown, whether fire fighting equipment is available or not.
(b) In Motor Insurance: The type of vehicle, the purpose of its use, its age (Model), Cubic
capacity and the fact that the driver has a consistently bad driving record.
(c) In Marine Insurance: Type of packing, mode of carriage, name of carrier, nature of goods, the
route.
(d) In Personal Accident Insurance: Age, height, weight, occupation, previous medical history
and occupation especially if it is likely to increase the chance of an accident. Proclivity of
substance abuse has to be disclosed as well- eg. alcohol or drug addiction.
(e) Burglary Insurance: Nature of stock, value of stock, type of security precautions taken.
The above are just indicatory of the type of material facts that must be disclosed.
Details of previous losses is a material fact that has to be disclosed in all cases.
3.11 EFFECT OF NON-DISCLOSURE 22
Where there has been non-disclosure, whether innocent or fraudulent, sometimes called
concealment the contract is voidable at the option of the insurer. This is the position where the
matter is not dealt with by a policy condition. The ground is usually covered by a policy
condition which may do no more than state the common law rule.
3.12 REPRESENTATIONS 23
Representations are statements made during the negotiations with the object of inducing the
other party to enter into the contract: they must be distinguished from statements which are
introduced into the contract, and upon the truth of which the validity of the contract is made to
depend. Representations may be as to a matter of fact, and, if material must be substantially
correct.
Where there has been misrepresentation it is necessary to decide whether it was fraudulent or
innocent. A fraudulent misrepresentation is one which was known to be false ; or which was
made without belief in its truth, or recklessly, careless whether it was true or false. Fraudulent
misrepresentation of a material fact entitles the insurer to avoid the policy.
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Every material fact which the insured ought to know in the ordinary course of business must be
stated; an innocent misrepresentation of such a fact would entitle the insurer to avoid the policy.
This must be so, otherwise the duty to disclose material facts and to state them accurately would
not be correlative.
3.12 ACTIVE AND PASSIVE DUTY OF DISCLOSURE24
The question here is what method is used to acquire the material information.
Two different approaches are used in this respect. The first - an active duty of disclosure, and
the second approach is characterized as a passive duty of disclosure. The former argues that the
duty to assess what information is material for the insurer rests with the person effecting the
insurance. On the other hand, a passive duty of disclosure implies that the insurer will have to
define what information is material through a questionnaire. A passive duty of disclosure implies
that information not asked for is not material.
The common law systems seem mainly to apply an active duty of disclosure, but elements of a
passive duty of disclosure is found in some countries in the form of proposals.
3.13 MORAL HAZARDS25
Moral hazard is a situation in which one agent decides on how much risk to take, while another
agent bears (parts of) the negative consequences of risky choices.
The person who buys insurance is protected against monetary damages. Therefore, he may
engage in more risky behavior than if he has to bear the risk himself.
Moral hazard can arise in the insurance industry when insured parties behave differently as a
result of having insurance. There are two types of moral hazard in insurance: ex ante and ex post.
Ex-Ante Moral Hazard - Ed the Aggressive Driver: Ed, a driver with no auto insurance, drives
very cautiously because he would be fully responsible for any damages to his vehicle. Ed decides
to get auto insurance and, once his policy goes into effect, he begins speeding and making unsafe
lane changes. Ed's case is an example of ex-ante moral hazard. As an insured motorist, Ed has
taken on more risk than he did without insurance. Ed's choice reflects his new, reduced liability.
Ex-Post Moral Hazard - Marie and Her Allergies: Marie has had no health insurance for a few
years and develops allergy symptoms each spring. This winter she starts a new job that offers
insurance and decides to consult a physician for her problems. Had Marie continued without
insurance, she may never have gone to a doctor. But, with insurance, she makes an appointment
and is given a prescription for her allergies. This is an example of ex-post moral hazard, because
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Marie is now using insurance to cover costs she would not have incurred prior to getting
insurance.
Insurers try to decrease their exposure by shifting a portion of liability to policyholders in the
form of deductibles and co-payments. Both represent the amount of money a policyholder must
pay before the insurance company's coverage begins. Policyholders can often opt for lower
deductibles and co-payments, but this will raise their insurance premiums.
CHAPTER 4
4.1 NATURE OF INSURANCE CONTRACT 26
A contract of insurance is an agreement whereby one party, called the insurer, undertakes, in
return for an agreed consideration, called the premium, to pay the other party, namely the
insured, a sum of money or its equivalent in kind, upon the occurrence of a specified event
resulting in a loss to him. The policy is a document which is an evidence of the contract of
insurance.
As per Anson, a contract is an agreement enforceable at law made between two or more persons
by which rights are acquired by one more persons to certain acts or forbearance on the part of
other or others.
The Indian Contract Act, 1872, sets forth the basic requirements of a Contract. As per Section 10
of the Act:
All agreements are contracts if they are made by the free consent of parties competent to
contract, for a lawful consideration and with a lawful object, and are not hereby expressly
declared to be void...
An Insurance policy is also a contract entered into between two parties, viz., the Insurance
Company and the Policyholder and fulfills the requirements enshrined in the Indian Contract Act.
4.2 FEATURES OF INSURANCE CONTRACT 27
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Though all contracts share fundamental concepts and basic elements, insurance contracts
typically possess a number of characteristics not widely found in other types of contractual
agreements. The most common of these features are listed here:
(a) Aleatory28
If one party to a contract might receive considerably more in value than he or she gives up under
the terms of the agreement, the contract is said to be aleatory. Insurance contracts are of this type
because, depending upon chance or any number of uncertain outcomes, the insured (or his or her
beneficiaries) may receive substantially more in claim proceeds than was paid to the insurance
company in premium dollars. On the other hand, the insurer could ultimately receive
significantly more money than the insured party if a claim is never filed.
(b) Adhesion29
In a contract of adhesion, one party draws up the contract in its entirety and presents it to the
other party on a 'take it or leave it' basis; the receiving party does not have the option of
negotiating, revising, or deleting any part or provision of the document. Insurance contracts are
of this type, because the insurer writes the contract and the insured either 'adheres' to it or is
denied coverage. In a court of law, when legal determinations must be made because of
ambiguity in a contract of adhesion, the court will render its interpretation against the party that
wrote the contract. Typically, the court will grant any reasonable expectation on the part of the
insured (or his or her beneficiaries) arising from an insurer-prepared contract.
(c) Utmost Good Faith30
Although all contracts ideally should be executed in good faith, insurance contracts are held to an
even higher standard, requiring the utmost of this quality between the parties. Due to the nature
of an insurance agreement, each party needs - and is legally entitled - to rely upon the
representations and declarations of the other. Each party must have a reasonable expectation that
the other party is not attempting to defraud, mislead, or conceal information and is indeed
conducting themselves in good faith. In a contract of utmost good faith, each party has a duty to
reveal all material information (that is, information that would likely influence a party's decision
28 Tripathey pal, Nalini Parava, Insurance Theory and practice, New Delhi,
Prentice Hall of India private limited, 2005, pp (30-31)
29 Infra note
30 Infra note
28
to either enter into or decline the contract), and if any such data is not disclosed, the other party
will usually have the right to void the agreement.
(d) Executory31
An executory contract is one in which the covenants of one or more parties to the contract
remain partially or completely unfulfilled. Insurance contracts necessarily fall under this strict
definition; of course, it's stated in the insurance and agreement that the insurer will only perform
its obligation after certain events take place (in other words, losses occur).
(e) Unilateral32
A contract may either be bilateral or unilateral. In a bilateral contract, each party exchanges a
promise for a promise. However, in a unilateral contract, the promise of one party is exchanged
for a specific act of the other party. Insurance contracts are unilateral; the insured performs the
act of paying the policy premium, and the insurer promises to reimburse the insured for any
covered losses that may occur. It must be noted that once the insured has paid the policy
premium, nothing else is required on his or her part; no other promises of performance were
made. Only the insurer has covenanted any further action, and only the insurer can be held liable
for breach of contract.
(f) Conditional33
A condition is a provision of a contract which limits the rights provided by the contract. In
addition to being executory, aleatory, adhesive, and of the utmost good faith, insurance contracts
are also conditional. Even when a loss is suffered, certain conditions must be met before the
contract can be legally enforced. For example, the insured individual or beneficiary must satisfy
the condition of submitting to the insurance company sufficient proof of loss, or prove that he or
she has an insurable interest in the person insured.
There are two basic types of conditions: conditions precedent and conditions subsequent. A
condition precedent is any event or act that must take place or be performed before the
contractual right will be granted. For instance, before an insured individual can collect medical
benefits, he or she must become sick or injured. Further, before a beneficiary will be paid a death
benefit, the insured must actually become deceased. A condition subsequent is an event or act
that serves to cancel a contractual right. A suicide clause is an example of such a condition.
31 Infra note
33 Infra note
29
Typical suicide clauses cancel the right of payment of the death benefit if the insured individual
takes his or her own life within two years of a life insurance policy's effective date.
(g) Personal contract34
Insurance contracts are usually personal agreements between the insurance company and the
insured individual, and are not transferable to another person without the insurer's consent. (Life
insurance and some maritime insurance policies are notable exceptions to this standard.) As an
illustration, if the owner of a car sells the vehicle and no provision is made for the buyer to
continue the existing car insurance (which, in actuality, would simply be the writing of the new
policy), then coverage will cease with the transfer of title to the new owner.
(h) Warranties and Representations35

A warranty is a statement that is considered guaranteed to be true and, once declared, becomes an
actual part of the contract. Typically, a breach of warranty provides sufficient grounds for the
contract to be voided. Conversely, a representation is a statement that is believed to be true to the
best of the other party's knowledge. In order to void a contract based on a misrepresentation, a
party must prove that the information misrepresented is indeed material to the agreement.
According to the laws of most states and in most circumstances, the responses that a person gives
on an insurance application are considered to be a representations, and not warranties.
As an example, consider an individual seeking life insurance coverage. He or she would
routinely be required to complete an application, on which the applicant's sex and age would be
requested. The accuracy of this information is necessary for the insurer to correctly ascertain its
risk and determine the policy premium. If the applicant gives these responses incorrectly, they
would likely be deemed (in the absence of outright fraud) as misrepresentations, and could
possibly be used by the insurance company as grounds for voiding the policy.
There is, however, a difference between the representation (or misrepresentation) of a fact and
the expression of an opinion. Take, for instance, a common insurance application question such
as, "To the best of your knowledge, do you now believe yourself to be in good health?" An
applicant answering 'yes' while knowing that he or she suffers from a particular condition would
be guilty of misrepresenting an actual fact. However, if the applicant had no symptoms of any
kind that would be recognizable to an average person and no doctor's opinion to the contrary, he
or she would simply be stating an opinion and not making a misrepresentation.
34 Infra note
30
(i) Misrepresentations and Concealments36

A misrepresentation is a statement, whether written or oral, that is false. Generally speaking, in
order for an insurance company to void a contract because of misrepresented information, the
information in question must be material to the decision to extend coverage.
Concealment, on the other hand, is the failure to disclose information that one clearly knows
about. To void a contract on the grounds of concealment, the insurer typically must prove that the
applicant willfully and intentionally concealed information that was of a material nature.
(j) Fraud37
Fraud is the intentional attempt to persuade, deceive, or trick someone in an effort to gain
something of value. Although misrepresentations or concealments may be used to perpetrate
fraud, by no means are all misrepresentations and concealments acts of fraud. For instance, if an
insurance applicant intentionally lies in order to obtain coverage or make a false claim, it could
very well be grounds for the charge of fraud. However, if an applicant misrepresents some piece
of information with no intent for gain (such as, for example, failing to disclose a medical
treatment that the applicant is personally embarrassed to discuss), then no fraud has occurred.
(k) Impersonation (False pretenses)38
When one person assumes the identity of another for the purpose of committing a fraud, that
person is guilty of the offense of impersonation (also known as false pretenses). For instance, an
individual that would likely be turned down for insurance coverage due to questionable health
might request a friend to stand in for him (or her) in order to complete a physical examination.
(l) Parol (or Oral) evidence rule39
This principle limits the effects that oral statements made before a contract's execution can have
on the contract. The assumption here is that any oral agreements made before the contract was
written were automatically incorporated into the drafting of the contract. Once the contract is
executed, any prior oral statements will therefore not be allowed in a court of law to alter or
counter the contract.
36 Infra note
37 Infra note
39 Infra note
31
CHAPTER
5
LEGISLATIONS
REGULATORY
ENVIRONMENT
SPECIFIC
5.1 HISTORY OF INSURANCE IN INDIA

In India, insurance has a deep-rooted history. It finds mention in the writings of
Manu( Manusmrithi), Yagnavalkya ( Dharmasastra ) and 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. Now, we will be discussing brief about the history of Life
Insurance and General Insurance in India.
32
5.2 LIFE INSURANCE40

Year 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 societies245 Indian and foreign insurers in all. The
LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.
5.3 GENERAL INSURANCE41
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.
40 IRDA Journal, May 2004, p 10-11.
41 IRDA Journal, May 2004, p 10-11.
33
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.
4.3 WHY REGULATION OF INSURANCE BUSINESSES IS REQUIRED?42
Any industry wherein the stakes of the public are high would come within the purview of a
Regulation reason being that failure of such companies could result in serious implications on
the economy of the country at large.
Insurance business involves collection of money from various Policyholders, investing them
properly, honouring the obligations of the Policyholders and providing an efficient service. It is
important to ensure that the entities providing these services stick to their commitments. Failure
to honour commitments by such entities could have major repercussions on the financial services
industry.
After liberlisation and entrance of Private players in Insurance business and Seeing the large
numbers of customers and high risk potential, Government of India constituted the Insurance
Regulatory and Development Authority in Year 1999.
5.4 REGULATION OF INSURANCE BUSINESS IN INDIA
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 Committee report 43, the Insurance Regulatory and
Development Authority (IRDA) was constituted as an autonomous body to regulate and develop
42 ICRA Report, The Indian insurance industry, May 2003
34
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 24 general insurance companies including the ECGC and Agriculture Insurance
Corporation of India and 23 life insurance companies operating in the country.
Beside IRDA Act and Insurance Act, 1938, there are some common Act/Regulation to the
General and Life Insurance Business in India and some Acts have been made for specific
requirement of Life Insurance/General Insurance
5.5 ACTS/REGULATIONS COMMON TO GENERAL AND LIFE INSURANCE

BUSINESS IN INDIA44
The following Acts regulate the Insurance Business in India.
Insurance Act, 1938
IRDA Act, 1999
Insurance Amendment Act, 2002
Exchange Control Regulations (FEMA)
43 Malhotra Committee report, in 1999
44 Rajan Saxena, 1 Edition,2005, Marketing Management,Tata McGraw-Hill
Education,
35
Insurance Co-op Society

Indian Stamp Act, 1899
Consumer Protection Act, 1986
Insurance Ombudsman
5.6 REGULATIONS GOVERNING/ AFFECTING LIFE INSURANCE BUSINESS IN

INDIA THE FOLLOWING ACTS GOVERN /REGULATE THE LIFE INSURANCE
BUSINESS IN INDIA.
LIC Act, 1956
Amendments to LIC Act
5.7 REGULATIONS AFFECTING GENERAL INSURANCE BUSINESS IN INDIA
The following acts affect, circumscribe or regulate in some way or the other, some aspect of the
general insurance business in india.
General Insurance Nationalization Act, 1972
Amendments to GIN Act, 1972
Multi-Modal Transportation Act, 1993
Motor Vehicles Act. 1988
Inland Steam Vessels Amendment Act, 1977
Marine Insurance Act, 1963
Carriage of Goods by Sea Act, 1925
Merchant Shipping Act, 1958
Bill of Lading Act, 1855
Indian Ports (Major Ports) Act, 1963
Indian Railways Act, 1989
Carriers Act, 1865
Indian Post Office Act, 1898
36
Carriage by Air Act, 1972

Workmens' Compensation Act, 1923ESI Act, 1948
Public Liability Insurance Act. 1991
CHAPTER 6
AUTHORITY
INSURANCE
REGULATORY AND
DEVELOPMENT
6.1 CONSTITUTION OF INSURANCE REGULATORY AND DEVELOPMENT

AUTHORITY
The IRD Act has established the Insurance Regulatory and Development Authority (IRDA or
Authority) as a statutory regulator to regulate and promote the insurance industry in India
and to protect the interests of holders of insurance policies. 45 The IRDA Act also carried out a
series of amendments to the Act of1938 and conferred the powers of the Controller of Insurance
on the IRDA. The members of the IRDA are appointed by the Central Government from amongst
45 Saxena, Rajan. Marketing Management, Tata McGraw-Hill Education, 2005
37
persons of ability, integrity and standing who have knowledge or experience in life insurance,
general insurance, actuarial science, finance, economics, law, accountancy, administration etc.
The Authority consists of a chairperson, not more than five whole-time members and not more
than four part-time members.
Every Chairperson and member of IRDA appointed shall hold office for a term of five years.
However, Chairperson shall not hold office once he or she attains 65 years while whole time
members shall not hold office beyond 62 years.
Central Government may remove any member from office if he or she is adjudged insolvent or is
physically or mentally incapacitated or has been convicted of an offence involving moral
turpitude or has acquired financial or other interests or has abused his position. Chairperson and
the whole time members shall not for a period of two years from the date of cessation of office in
IRDA, hold office as an employee with Central Government or any State Government or with
any company in the insurance sector.
6.2 POWERS /FUNCTIONS OF IRDA
Under IRDA Act46, IRDA has the following powers:
(a) Issue of Certificate of Registration to insurance companies, renew, modify, withdraw,
suspend or cancel the certificate of registration
(b) Protection of interests of policyholders in matters concerning assignment of policies,
nomination, insurable interest, claim settlement, surrender value and other terms and conditions
of insurance contract
(c) Specification of requisite qualifications, practical training and code of conduct for insurance
agents and intermediaries
(d) Specification of code of conduct for surveyors and loss assessors
(e) Promoting efficiency in the conduct of insurance business
(f) Promoting and regulating professional organizations connected with insurance and
reinsurance business
(g) Levying fees and other charges for carrying out the purposes of the Act
(h) Calling for information from or undertaking inspection of insurance companies,
intermediaries and other organizations connected with insurance business
46 Section 14 of the IRDA Act, IRDA

38
(i) Control and regulation of rates, advantages, terms and conditions that may be offered by
general insurance companies
(j) Specifying the form and manner in which books of account shall be maintained by insurance
companies and intermediaries
(k) Regulation of investments of funds by insurance companies (l) Regulation of maintenance of
margin of solvency
(m) Adjudication of disputes between insurers and insurance intermediaries
(n) Supervising the functioning of Tariff Advisory Committee
(o) Specifying the percentage of premium income of the insurer to finance schemes for promoting
and regulating professional organizations
(p) Specifying the percentage of insurance business to be undertaken by insurers in rural or
social sectors
(q) Such other powers as may be prescribed.
6.3 FRAMEWORK UNDER THE INSURANCE ACT, 1938
The Insurance Act, 1938, broadly provides the ground rules for the operating insurance
companies in India. The Act provides for the following:
The Insurance Act is the parent legislation which aimed at consolidating and amending the law
relating to the business of insurance in February 1938, when, during the British Rule in India,
there were many insurance companies which were operating. The Insurance Act, 1938, broadly
provides the ground rules for the operating insurance companies in India.47
The Insurance Act, 1938 48 has been segregated into five parts:
1. Part I: (Section 1 to Section 2B)
Part I of Insurance Act, 1938 deals with Definitions, interpretation of Certain Words and
expressions and Appointment of Authority in India
2. Part II: (Section 2C to Section 64)
Part II of Insurance Act contains provisions relating to:
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48 Insurance Act, 1938
39
(a) Insurers (Section 2 C to Section 26)

(b) Investment, Loans and Management(Section 27 to Section 32C)
(c) Investigation (Section 33) (d) Appointment of Staff (Section 33A to Section 34)
(e) Control over Management(Section 34A to Section 34H)
(f) Amalgamation and Transfer of Insurance Business(Section 35 to Section 37A)
(g) Assignment or Transfer of Policies and Nominations (Section 38 to Section 39)
(h) Commission and Rebates and Licensing of Agents(Section 40 to Section 44A)
(i) Special Provisions of Law(Section 45 to Section 52)
(j) Management by Administrator(Section 52 A to Section 52G)
(k) Acquisition of the Undertakings of Insurers in certain cases(Section 52H to Section 52N)
(l) Winding up(Section 53 to Section 61)
(m) Special Provisions relating to External Companies(Section 62 to Section 64)
PART II A (Section 64A to Section 64T)
PART II A contains provisions relating to Insurance Association of India, Council of the
Association and Commi1lees thereof (Section 64 to Section 64T) Lesson
PART IIB (Section 64U to Section 64UM)
PART II B contains provisions relating to TARIFF ADVISORY (Section 64U to Section 64UM)
PART IIC (Section 64 V to Section 64VC)
PART II C contains provisions relating to Solvency Margin, Advance Payment of Premium and
Restrictions on the Opening of A New Place of Business
3. PART III (Section 65 to Section 94)
Part III contains provisions relating to Provident Societies
PART IIIA (Section 94A)
Part III A contains provisions relating to Insurance Co-Operative Societies
4. PART IV (Section 95 to Section 101)
40
Part IV contains provisions relating to Mutual insurance Companies and cooperative life
insurance societies
PART IVA (Section 101A to Section 101C)
Part IV A contains provisions relating To Re-Insurance
5. PART V (Section 102 to Section 120)
Part V contains provisions relating to miscellaneous matters
6.4 THE DETAILS OF FEW OF THE IMPORTANT PROVISIONS OF INSURANCE
ACT, 1938
The details of few of the important provisions of Insurance Act, 1938 are described below:
(a) Incorporation of insurance companies, issue of licence and renewal of licence 49

Only Companies formed and registered under the Companies Act, 1956, whereunder the
foreign equity is not more than 26%, are allowed (IRDA allows only Public limited companies).
Every insurer who proposes to do insurance business has to register with IRDA and obtain a
licence before they start doing insurance business. Three lines of businesses recognised within
insurance Life insurance, Non-life insurance and Standalone Health insurance. Life insurance
companies provide insurance coverage on human lives i.e. provision of a defined sum on the
happening of any contingency linked to human life. Non-life insurance companies are also
allowed provide insurance coverage on all contingencies other than the ones linked to human
life, including health insurance.
Standalone Health insurance companies focus only on providing hospitalisation and sickness
coverage. In addition, re-insurance is also recognized as a separate line of business. Insurance
companies are allowed to pass on the risk which they assume to other insurers, called re-insurers.
Currently only one Reinsurer GIC is licensed in India as the National Reinsurer. Separate
companies will have to be formed for doing Life, Non-Life and Standalone Health insurance
business. Such companies cannot transact any business other than the insurance business for
which the licence is issued. All companies formed for the purpose of doing insurance business
shall carry the suffix Assurance or Insurance in their names to enable anyone to recognise
that they are engaged in insurance business.
A Public company is first incorporated under the Companies Act, 1956, with the primary
object of engaging in the business of life or non-life or standalone health insurance business.
49 (Sections 2C to 5)
41
Applicants for insurance licence will have to submit, among other things, certified true copy of
memorandum and articles of association, list of directors, certain affidavits and undertakings
from Promoters and the fees required for registration. IRDA conducts due diligence on the
Promoters, their background before they issue a licence. Reference is made to the Regulatory of
the country in which the foreign promoter operates, as most foreign promoters of insurance
companies are established players in other jurisdictions outside India.
IRDA is vested with powers under the Act to cancel the registration of insurers on certain
grounds such as default in complying with the provisions of the Act or Regulations passed
thereunder, carrying on business other than insurance business etc.
Licence is issued for a financial year and is renewable on an yearly basis on payment of the
required fees. The fee for renewal is 0.25% of the premium income generated by the insurance
company in the preceding financial year, subject to an overall cap of INR 5 Crores.
(b) Requirements as to Capital, Transfer of shares, Voting Rights etc50
Every insurer carrying on insurance business shall have a minimum paid up equity capital of
INR 100 Crores for life insurance and general insurance business and INR 200 crores for
an insurer carrying on reinsurance business. This capital shall be maintained after preliminary
expenses incurred upon formation of the insurance company and registration of insurance
business. The intention of prescribing a minimum capital is to ensure that only serious players
who look at a longer term for return of investment enter insurance business.
Further the capital of an insurance company shall consist of only Equity Share capital and
no other forms of capital are allowed.
All the equity shares shall have a single face value. Further, notwithstanding the provisions
contained in the Companies Act, 1956, the voting rights on equity shares shall be strictly in
proportion to the paid up amount of the equity shares held.
The Act also provides for restrictions on transfer of shares in an insurance company. Before an
insurance company can put through transfer of shares in excess of the following limits,
prior approval of IRDA is required:
(i) Where, after the transfer, the transferees holding will cross 5% of the paid up equity capital
of the insurance company (2.5% if the transferee is a banking company or an investment
company)
(ii) Where the nominal value of the shares proposed to be transferred by an individual, firm,
group or body corporate under the same management exceeds 1% of the paid up equity capital of
the insurance company
50 .(Sections 6, 6A to 6C)
42
Persons holding beneficial interest in the equity shares of an insurance company held in another
persons name, are required to submit a declaration of their interest to the insurance company,
failing which such person shall have no right or title in such shares and the insurance companies
are expected to record the beneficial ownership in a separate Register maintained for this
purpose.
While the maximum foreign in an insurance company is 26%, Indian Promoter(s) can hold upto
100% in an Indian insurance company. However, where the Indian promoter(s) hold more than
26% of the paid up equity capital of an insurance company, the holding of an Indian promoter in
excess of 26% shall, immediately after the completion of 10 years from the date of
commencement of insurance business, be brought down to 26%. The intention behind this
section was to broadbase the equity shareholding of an Insurance company after 10 years in such
a way that one Indian promoter cannot control more than 26% equity stake in an insurance
company. Either the holding in excess of 26% shall be divested in favour of other Indian
promoters or in favour of public upon listing.
(c) Deposits with Reserve Bank of India51
The Act52 mandates that every life insurance company shall maintain a sum equivalent to 1%
of the total gross premium written in India in any financial year commending after 31 day
of March 2000, but not exceeding INR 10 Crores with the Reserve Bank of India in the form of
Cash or approved securities. In respect of general insurance business, a sum equivalent to 3% of
the total gross premium written in India in any financial year commencing after 31 day of March
2000, but not exceeding INR 10 Crores is required to be maintained. For reinsurance companies,
a flat sum of INR 20 Crores has been prescribed. The deposit under Section 7 shall not be
available for discharge of any liability of the insurer, except for undischarged policy liabilities.
Further the deposit cannot be attached by any Policyholder towards any dues from the insurance
company. The deposit is refundable only upon the insurer ceasing to carry on insurance business
and the insurers liabilities have been satisfied, unless otherwise the Court orders return of the
deposit.
(d) Accounts, Audit and Actuarial report and Abstract53
Separate books of account are required to be maintained for each class of business. Since
separate companies will have to be formed for Life, Non-Life or Reinsurance, this provision is
automatically taken care for formation of separate companies and consequent maintenance of
51 (Sections 7 to 9)
52 Section 7 of the Insurance Act, 1938
53 (Sections 10, 11, 12)
43
separate books of account. Further a separate fund called Life insurance fund shall be formed,
the assets of which shall be separate and distinct from all other assets of the insurer. By virtue of
the powers given under Section 11, IRDA have framed Regulations for Financial Statements
which provides for forms of Revenue Account, Profit and Loss Account and Balance Sheet
alongwith the form of Management Report and some of the documents annexed to the financial
statements. Further, every insurer shall keep separate accounts relating to funds of shareholders
and policyholders. The forms provided in Schedule VI to the Companies Act, 1956 is not
applicable to Insurance companies as they are required to follow the forms prescribed under the
IRDA Regulations.
The accounts and the statements referred to in Section 11 shall be signed by the Chairman of the
Board of the Insurance company and two other Directors, the Principal Officer of the Company
(CEO or Managing Director) and shall be accompanied by a statement containing the names,
descriptions and occupations of, and the directorships held by the persons in charge of the
management of the business during the period to which the accounts and statements relate to.
Section 12 provides for audit of the financial statements shall be audited by an auditor. Detailed
guidelines have been framed by IRDA on the qualifications of persons who can be appointed as
Statutory Auditors of the Company.
Section 13 requires investigation of financial condition of the life insurance business carried on
by an actuary. While the section mandates actuarial valuation not more than once in two years,
IRDA have mandated an yearly actuarial valuation. IRDA have issued detailed regulations on
preparation of Actuarial Report and Abstract.
(e) Provisions Relating to Investments54
Section 27 requires insurance companies to invest in the manner specified in the section an
amount equivalent to the amount of liabilities of the insurance companies on account of matured
claims and on account of liability on policies maturing for payment after deducting the premiums
due but grace period not expired and the amount of loans outstanding against the policies issued
by the insurer. The manner in which the investment is required to be made is not less than 50%
in Government and Approved securities (out of which 25% only in Government securities) and
the balance in Approved investments as specified in Section 27A. The deposits made with
Reserve Bank of India under Section 7 are deemed to be Government Securities for this purpose.
Section 27A prescribes the approved investments for the purpose of Section 27. It lists down
various investments which have been recognised for this purpose. The following are some of the
approved investments recognized under the section:
(i) Approved securities as defined under Section 2(3) of the Insurance Act, 1938
54 (Sections 27, 27A, 27B, 27E)
44
(ii) Debentures of companies having a interest paying track record of 5 years immediately
preceding or five out of the 6 of 7 years immediately preceding, secured by a first charge on any
immovable property, plant or equipment of sssthe Company
(iii) Debentures of companies secured by a first charge on the immovable property, plant of
machinery of a Company where the book value or the market value whichever is less of the asset
is atleast three times the value of debentures (in such cases, interest track record is not
mandatory)
(iv) First debentures secured by a floating charge on all assets of a Company which has paid
dividends on Equity shares for five years or atleast five out of six or seven years preceding
(v) First mortgage on immovable property situated in India (other than leasehold property with
an outstanding term of less than 30 years and the value of property exceeds one-third of the
mortgage money (if it is building, one-half)
(vi) Preference shares of any company on which dividends on equity shares have been paid for
the immediately preceding five years or for atleast five out of the six or seven years immediately
preceding
(vii) Preference shares of a company which has paid dividends on such preference shares for five
years immediately preceding or for atleast five out of six or seven years immediately preceding
and such Preference shares have priority over equity shares in the event of winding up
(viii) Equity shares of a Company which has paid dividends of not less than four percent for the
seven years immediately preceding or for atleast seven out of the eight or nine years immediately
preceding
(viii) Fixed deposits with Banks
(ix) Such other investments notified by IRDA as Approved Investments through Regulations.
(f )Investment in Other investments
Any investment in other than Approved Investments as above is allowed upto 15% of the sum
specified in Section 27, provided such investments are made with the consent of all the directors
present at a Board meeting and eligible to vote, in respect of which a special notice has been
given to all the Directors in India.
(g) Ceilings On Investments
(a) in one Banking Company or Investment Company55
55 [Section 27A(3)]
45
An insurance company cannot out of the Controlled fund invest or keep invested in the shares of
any one banking company or investment company, an amount exceeding 11/4% of the amount
specified in Section 27 (or) 2% of the subscribed share capital and debentures of the Banking
company or investment company concerned, whichever is less
(b) in any Company other than Banking Company or Investment Company 56
An insurance company cannot out of the controlled fund invest or keep invested in the shares of
any one company other than banking or investment company, an maount exceeding 21/4% of the
amount specified in Section 27 (or) 10% of the subscribed share capital and debentures of the
Company.
(c) in Fixed Deposits or Current deposits of Banks or Co-operative Societies
Not more than 3% of the Controlled funds is allowed to be deposited in the Fixed or Current
deposits with any one Banking company or any one Co-operative Society registered under the
Co-operative Societies Act, 1912
(h) Formation Of Subsidiary Companies For Doing Insurance Business57

The restriction given as above will not be applicable if an insurance company invests in the share
capital of a su0bsidiary company for carrying on insurance business after getting previous
approval of the Authority. This is more relevant in the context of recent notification of IRDA
permitting formation of foreign subsidiaries engaged in insurance business.
(i) Prohibited Investments 58
Investments in the shares or debentures of a Private Limited Company and investments out
of Policyholders funds outside India are prohibited.
Encumbrance, charge or hypothecation of Assets forming part of Controlled fund
All assets forming part of Controlled fund to be kept of free of any encumbrance or charge
except to the extent not exceeding 1/10th of the controlled fund, subject to such conditions as
may be prescribed by IRDA. Such charge or encumbrance can be created only for the purpose of
56 [Section 27A(4)]
57 (Proviso to Section 27A(4)
58 (SECTION 27A(5) AND 27C)
46
a loan taken by an insurance company for the purpose of any investment. However, Government
Securities and Approved Securities forming part of the Controlled fund cannot be subject to any
charge or encumbrances
Note: Controlled Fund is defined as all funds pertaining to life insurance business, except for any
part of the fund in respect of which IRDA is satisfied that it would not be in the interests of the
insurer to apply the provisions of Section 27A.
Prohibition of Loans
Section 29 prohibits grant of any loans or temporary advances to any Director, Actuary or
Auditor of the insurance company or to any company or firm in which any such Director,
Actuary or Audi tor holds the position of a Director, Actuary or partner. This prohibition is not
applicable to:
(i) loans made by an insurer to a banking company in which such Director, Actuary or Auditor is
interested
(ii) loans or advances made by an insurance company to its subsidiary or to the loans or advances
made by an insurance company to its holding company
(iii) Policy loans granted by the insurance company within the surrender value of the policy
Minimum insurance business under Rural and Social Sectors59

Section 32B and 32C requires every insurer to undertake such minimum percentage of the
insurance business for covering risks associated with persons forming part of rural or social
sector, workers in the unorganized or informal sector or economically vulnerable or backward
classes of society or such classes as prescribed by IRDA.
(j) Assignments and Nominations under Insurance Policies60.
Assignments are transfer of insurance policies from policyholder to another with or without a
valid consideration. Any assignment to be valid must satisfy the following conditions:
(i) Endorsement for assignment upon the policy document or by a separate instrument signed in
either case by the transferor or his duly authorized agent and attested by one witness
59 Section 32B and 32C of Insurance Act,1938

60 Section 38 and 39 of Insurance Act, 1938
47
(ii) Notice of assignment to be given to the insurer and the endorsement or instrument itself or a
copy thereof certified to be correct both by transferor and transferee or their duly authorized
agents have been delivered to the insurer
(iii) Registration of assignment by the insurer in their records after receiving the above document
and effecting an endorsement upon the policy document
On and from the date of receipt of notice of assignment alongwith documents, the insurer shall
recognize transferee or assignee as the only person entitled to any benefits under the policy after
the date of assignment.
Nomination is effected by the person taking the policy on his own life, to decide the person who
will receive the benefits upon the death of the policyholder (since the policyholder will not be
alive at that time). For minor nominees, a Guardian (called appointee), other than the
policyholder himself, needs to be appointed. In order to effective, the name of the nominee must
be incorporated in the policy document itself, based on the name of the nominee mentioned in
the Proposal form (application for life insurance). However, a nomination, if not made at the
proposal stage, can be made by way of an endorsement in the policy by the Insurer subsequently,
for which a notice has to be given by the Policyholder to the insurer. Upon receipt of such notice,
the insurer shall register the nomination and make an endorsement on the Policy document.
Similar process is adopted for change of nominations as well. An assignment under a policy shall
automatically Lesson 4 Regulatory Environment Specific Legislations 67 cancel a nomination
subsisting on the date of assignment. This is because nomination is valid only for policies taken
on ones own life. Upon assignment, the policyholder becomes a person different from life
assured and assignee is the only person entitled to receive any benefit upon death of the life
assured (assignor).
(k) Indisputability of policies61
Insurance contracts are contracts of utmost good faith, based on the principles of ubberima
fidae. The person taking the insurance policy is expected to disclose the information required in
the application form concerning his health, occupation, family history, habits and all other
material questions truthfully without withholding any information required. This is to enable
accurate assessment of the risk and fixing of the premium by the insurer accordingly. Since only
the person taking the insurance is privy to the personal information, obligation to truthfully
disclose lies with the person taking the insurance. If there is any misstatement or concealment of
a material fact (any information which would have impacted the decision to accept the risk), the
insurance company has the right to cancel the contract (repudiation) and deny the policy benefits.
Section 45 however, places burden on the insurers right to repudiate beyond 2 years from the
61 Section 45 of Insurance Act, 1938
48
date the policy was affected. In such cases, the insurer has to prove the following 3 points in
order to repudiate any policy benefit:
(i) Statement(s) made in the proposal for insurance or in any medical report or any other
document leading to issue of policy was inaccurate or false on a material matter (i.e. on a matter
which could have affected judgment of underwriter)
(ii) The statements were made with fraudulent intention
(iii) The policyholder knew at the time of making the statement that it was false or knew that
material facts were suppressed
However, the insurers right of calling for proof of age even after 2 years subsequent to issuance
of policy and adjusting the terms of the policy accordingly would not be affected by the
provisions of the above section.
(k) Powers of IRDA with reference to control of management of insurance companies, takeover
of management, mergers, acquisitions and winding up62
Section 52A empowers IRDA to make a report to Central Government if the affairs of a Life
insurance Company are carried on in any manner prejudicial to the interests of policyholders.
Based on the Report, the Central Government is empowered to appoint an Administrator to
manage the affairs of the life insurance company. A report shall be filed by such Administrator to
the Central Government giving his recommendations on the way forward, including the options
of transfer of business to an existing insurer or winding up, as he deems fit. Central Government
is empowered to take such action as it deems fit based on the Report of the Administrator.
The Act63 empowers Central Government to acquire the undertaking of any insurer based on a
report from IRDA on failure to comply with directions or if the insurance company is being
managed in a manner detrimental to the public interest or in the interests of public or
policyholders it is appropriate to do so. Central Government may make a scheme for transfer of
undertaking of the insurer to another insurer in such cases and decide the appropriate
compensation in such cases. The Central Government may constitute a Tribunal comprising of a
Chairman ( a person who is or has been a Judge of the Supreme Court or a High Court) and two
other members (one of whom has experience in insurance and the other a Chartered Accountant)
for this purpose.
The Act64 empowers the Tribunal to order for winding up in accordance with the Companies Act,
1956, if based on a petition presented by shareholders holding not less than one-tenth of the
62Section 52A of Insurance Act, 1938
63 Section 52H of Insurance Act, 1938

49
whole body of shareholders and holding not less than one-tenth of the whole share capital or by
not less than fifty policyholders holding life insurance policies in force for not less than three
years of total value of not less than INR 50,000, the Tribunal is satisfied to do so.
In addition, IRDA may also apply to the Tribunal for winding up on the following grounds:
(i) That the insurance company failed to deposit or keep deposited with Reserve Bank of India,
the amount required to be deposited under Section 7 or Section 98
(ii) That the insurance company has failed to comply with any requirement of the Insurance Act
or has continued contravention for a period of three months after notice of such failure or
contravention has been conveyed to the Company by IRDA
(iii) That it appears from returns or statements filed by the Company or from the results of the
Company that the company is deemed to be insolvent
(iv) That the continuance of the company is prejudicial to the interests of the policyholders or to
the public interest generally
It may be noted that the Act 65 prohibits voluntary winding up of insurance companies, except for
the purpose of effecting an amalgamation or reconstruction of the company or on the ground that
by reason of its liabilities it cannot continue its business. This provision overrides the provisions
of the Companies Act, 1956 on this point.
An appeal against the Tribunal formed under the Insurance Act shall lie with the National
Company Law Appellate Tribunal
(l) Insurance Association of India, Insurance Councils and Committees thereof

The Act66provides for constitution of an Insurance Association of India comprising of all insurers
who carry on insurance business in India. The Insurance Association shall have two councils a
Life Insurance Council and a General Insurance Council, comprising of the Life and Non-Life
insurance companies, respectively, as their members. An Executive Committee is also constituted
under the Section 64F for each of the above two Councils. The Executive Committee of the
respective councils shall comprise of the following members:
66 Section 64A of Insurance Act, 1938
50
(i) Two officials nominated by IRDA one as Chairman and the other as Member
(ii) Eight representatives of members of Insurance Association of India elected by the respective
members of the Councils
(iii) One non-official not connected with any insurance business, nominated by IRDA
(iv) Five persons connected with life insurance business (general insurance business for General
Insurance Council), nominated by IRDA
The Act67 empowers Life insurance council, with the approval of IRDA, to authorize its
Executive Committee to hold examinations for individuals who wish to qualify themselves as
insurance agents and that only such individuals who have passed such examinations shall be
eligible for issue of a licence under Section 42.
The Executive Committees of the Insurance Councils act as an advisory body for the Life
insurance and General insurance companies for setting up standard of conduct and sound
practice and in matters relating to efficient service to policyholders. Further they are also
empowered to render advice to IRDA in matters relating to controlling of expenses of the
insurance companies.
In this regard it is pertinent to note that Section the Insurance Rules 1939 68 prescribes limits to
expenses of management for insurance companies (the limits are calculated as a percentage of
the premiums sourced by the Insurance Companies). In this regard, Insurance councils are
empowered to recommend to IRDA for fixing revised limits for a particular insurance company
or for groups of insurance companies, having regard to the conditions obtaining in the respective
insurance businesses.
(m) Insurance Companies to accept risk on an insurance policy only after receipt of premiums in
advance
The Act69 prohibits insurance companies accepting a risk on an insurance policy without
receiving the consideration (Premium) in advance. A risk can also be assumed based on a
guaranteed provided e.g. Bank Guarantee, in accordance with the provisions of Insurance Rules.
However, in terms of sub-section (2) of Section 64VB, in respect of risks where the premium can
be ascertained in advance, the risk cannot be assumed earlier than the date on which the premium
has been paid in cash or cheque to the insurer. Any refund of premium on account of a
67 Section 64I of Insurance Act, 1938
68 Section 40B read with Rule 17D of the Insurance Rules 1939
69 Section 64VB of the Insurance Act, 1938
51
cancellation of a policy shall be paid by the insurance company directly to Lesson 4 Regulatory
Environment Specific Legislations 71 the life insured by a crossed account payee cheque or by
postal money order and a proper receipt shall be obtained from the insured. In any case, refund to
the account of the Agent is strictly prohibited. Further, where an insurance agent collects a
premium on behalf of an insurer, the Agent is required to deposit the premium collected without
deduction of his commission, within 24 hours of collection excluding bank and postal holidays.
(n) Opening of places of business requires prior approval of IRDA
The Act70 requires every insurance company to take a approval in advance in IRDA for opening
any place of business or for relocation of an existing place of business outside the same city,
town or village. The approval is required to be sought for opening of any offices, whether called
as Branch office, Head Office, Administrative office, Satellite office or any other similar names.
(o) Powers of IRDA for imposition of penalties for default in complying with the Act71
Section 102 empowers IRDA to impose a penalty not exceeding Rupees five lakhs for each of
the following failures by an insurance company:
(i) Failure to furnish any document, statement, account, return or report to IRDA
(ii) Failure to comply with the directions (Section 34 empowers IRDA to issue directions if it is
satisfied to do so in the interests of public or for prevention of affairs being conducted
detrimental to policyholders or to secure proper management of any insurer)
(iii) Failure to maintain the required solvency margin
(iv) Failure to comply with the directions on the insurance treaties
Further the Act72 empowers IRDA to impose a penalty not exceeding Rupees Five lakhs for
failure to comply with Section 32B, while Section 105C empowers IRDA to impose a penalty
not exceeding Rupees Twenty five lakhs for failure to comply with Section 32C, with
cancellation of certificate of registration for continuing failure.
70 Section 64VC of the Insurance Act, 1938

71 Section 102 of the Insurance Act, 1938
72 Section 105B of Insurance Act, 1938

52
6.5 RECENT CHANGES IN THE REGULATION LAWS OF INSURANCE INDUSTRY

IN INDIA
(1) IRDA (INVESTMENT) REGULATIONS, 201373
In a bid to direct long term savings in infrastructure sector, Insurance Regulatory Development
Authority (IRDA) amended investment regulations in Year 2013. These guidelines provide for
the following:
(i)Types of investments (based on nature of investments)
The objective behind this classification is to categorise the investments based on the avenues
where investments are made and place a ceiling (cap) or floor (minimum) depending on the type
of investment. Investments of insurers are categorised into the following buckets:
(a) Government Securities these are predominantly Securities issued by Central Government or
State Government which have a sovereign rating and carry a Very high safety
(b) Securities include securities issued by an authority constituted under a Central or State
Legislature or by a Corporation
(c) Approved Investments are controlled investments which satisfy any of the conditions
mentioned in Section 27A (for Life) and 27B (Non-Life) of the Insurance Act. Further, IRDA
have also specified additional investments as Approved investments under the Regulations
(d) Other investments these are investments which are other category of investments, other
than the ones specified above and which are not prohibited investments
(e) Prohibited investments investments in Private Limited Companies and investments out of
Policyholders funds outside India
(ii) Investment categories based on type of business
Investment assets of an insurer have broadly been classified as follows for the purpose of
regulating investments:
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(a) Unit reserves of unit linked business These constitute the reserves against the units of a unit
linked insurance business which are dependent upon the investment pattern chosen by the
Policyholders. Hence these investments are classified separately
(b) Pension & Annuity business Pension & Annuity business are relatively long term in nature
and guarantee annuity over a fairly long period of time and hence requires to be treated
differently. Group business other than unit linked and One year Renewal Group Term insurance
also fall under this category.
(c) Life insurance business this is the residual category which comprises of :
1. Shareholders funds representing solvency margin
2. Participating and Non-participating Policyholders funds
3. One year Renewable Group Term Insurance
4. Non-unit reserves of unit linked insurance business
(d) For a Non-life insurer (including Health business), there is only one category of investible
funds which includes both shareholders funds and policyholders funds
(iii) Prescription of floor and ceiling for investment categories (based on type of business)
(a) For unit reserves of unit linked business the investments are required to be made in such
forms of instruments in such proportion as per the pattern of investment for the fund selected by
the Policyholders. However, atleast 75% of the investments made as per the pattern shall be in
such instruments which belong to Approved investment category
(b) For Pension & Annuity business a minimum of 40% of the funds in this category will have
to be invested in Central government, State government or other Approved Securities (out of
which 20% shall be Central Government Securities). At the same time not more than 60% is
allowed in Approved investment categories. Investments in Other investments prohibited for
Pension & Annuity business
(c) For Life insurance business (other than (a) and (b) above): Out of the total funds in this
category of business:
Mandatory investments:
(i). a minimum of 50% to be invested in Central or State Government or Approved Securities
(out of which 25% shall be Central Government Securities)
(ii). a minimum of 15% to be invested in Housing & Infrastructure investments
Optional investments
54
(i). upto 50% allowed in Approved investments

(ii). upto 15% allowed in Other Investments
Note: The pattern of investments is not applicable for Shareholders funds held in excess of the
solvency margin, provided they are kept separately and based on an Actuarial certification filed
with the Authority and provided the Shareholders funds held to support solvency margin are
invested as per the investment pattern as above.
(iv) Housing & Infrastructure Investments
Bonds or debentures issued by HUDCO or National Housing Bank or Housing Finance
Companies accredited by the Bank for housing finance activities or carrying Government
guarantee of a rating of not less than AA only would qualify. If an Asset backed Security is
backed by an underlying housing loan which satisfies the above condition, such a Security would
also qualify under this category.
If a Central or State Government Security is issued to specifically meet the needs of a sector
falling under infrastructure facility, such a security shall qualify for the purpose of investments in
Housing and Infrastructure investment category.
All investments in Approved investments and Other Investments shall be subject to Exposure
and Prudential norms, including housing and infrastructure investments.
(v) Investment Controls Based on Rating of Instruments
A credit rating evaluates the credit worthiness of a debtor, especially a business (company) or a
government. It is an evaluation made by a credit rating agency of the debtor's ability to pay back
the debt and the likelihood of default.
As a general rule, no investment can be in an instrument which is capable of being rated, but is
not rated for some reason. Also, the rating must be done by an authorised Credit Rating agency
under the SEBI Regulations.
Classification as Approved Investments Based on Rating
The following investments shall be classified as Approved investments based on Credit rating
as follows:
Sr.
No.
55
Nature of Security
Credit rating
Type
investment/
Category
recognised
of Remarks
1.
Corporate bonds or Minimum AA or Approved

debentures
equivalent
investments
Nil
2.
Short term bonds, Minimum P1 or Approved

debentures,
equivalent
investments
Certificate
of
deposits,
Commercial papers
Nil
3.
Debt
instruments Minimum AA or Approved
issued by All India equivalent rating
investments
financial institutions
If investments in
AA not allowed,
A+ allowed with
Investment
Committee approval
Minimum and maximum investments based on Credit rating

(a) Minimum investments in AAA, Sovereign or P1 rating for Debt instruments A minimum
of 75% (65% in the case of non-life) of Debt instruments (including Government and Approved
Securities) shall be invested in instruments with sovereign rating or AAA or equivalent for long
term and sovereign debt and P1 or equivalent for short term instruments. For unit linked
business, at each segregated fund level, the above condition must be satisfied. Investments in
Reverse repo backed with underlying corporate bonds, Fixed Deposits, Promoter group Mutual
Funds and unrated Mutual Funds must not be considered while calculating the above percentage.
(b) Maximum investments in A or below for Debt instruments
A maximum of 5% (8% in the case of non-life) of Debt instruments (including Government
Securities and Approved Securities) can be invested in instruments having a rating of A or
below or equivalent for the long term, out of life insurance fund and unit linked fund for a life
insurer (and overall funds of a non-life insurer). However, no part of the Pension and Annuity
Fund of a life insurer can be invested in such instruments.
In other words, while investments in long term debt instruments in AAA rated shall be 75% in
each category of investments, investments in debt instruments rated A or below cannot be more
than 5%, which means the remaining 20% is required at the minimum to be rated between AA+
to A+. The rating of the remaining 20% has to be decided keeping in mind the overall limit of
15% for investments in Other investments out of Life insurance funds.
In respect of short term debt securities, not less than 75% shall be invested in securities rated
P1+ and above while short term corporate bonds and debentures rated P1 and above shall be
56
rated as Approved investments. This would mean that short term debt securities rated less than
P1 cannot exceed 15% (limit for Other investments).
(vi)Investment controls based on Exposure norms
These norms aim to control the investment risk by limiting the exposure to the Company where
the funds are invested, limiting the exposure to a Group of companies to which the Investee
company belongs to and also limits the exposure to one industry. This follows the golden
principle do not put all your eggs in one basket.
Exposure norms are applicable to all the three investment categories based on the types of
business given above and shall be calculated for the following types of investments:
(a) Approved investments
(b) Other investments
(c) Housing & infrastructure investments
(vii)Investee Company limits
There are 2 limits for calculation of exposure norms to an Investee company:
(a) Overall exposure limit of all the funds of the insurer in all types of Securities in a Single
Company
(b) Security-wise exposure limit for each Investee company for each type of investment category
The lower of (a) or (b) above determines the exposure limit for an Investee Company
(a) Overall exposure limit: The overall exposure limit is calculated as follows:
Aggregate all types of investments, viz., equity, debt etc. in a Single investee company
Aggregate investment assets of the insurer (i.e. addition of unit reserves, pension and
annuity including Group and Life insurance funds)
(i) divided by (ii) shall not exceed 10%.
In the case of non-life insurers the limit is 10% of their total funds
(b) Exposure limit based on nature of security for each type of fund
For investment in equity, preference shares and convertible debentures
The limit is calculated as 10% of the outstanding face value of equity shares of the Investee
company or 10% of assets belonging to each investment category based on type of business (unit
reserves, Pension and Annuity including Group and Life insurance business). For non-life, total
investment assets (policyholders funds and shareholders funds) are considered.
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The lower of (a)(iii) and (b)(i) is the Investee company limit.
For investments in Debentures, loans and other permitted investments (other than
mentioned in (i) above)
The limit is calculated as 10% of the Capital, Free reserves, Debentures and Bonds of the
investee company or 10% of each investment category based on type of business, as mentioned
in (i) above.
The lower of (a)(iii) and (b)(ii) is the Investee company limit.
Increase in the Limit of 10% Based on the Size of Investment Assets
If the size of investment assets for an insurer touches INR 50,000 Crores, the investee company
limit (on outstanding face value of equity shares for equity and Paidup capital, free reserves,
debentures and bonds for Debt, loans and other permitted investments) stands increased to 12%
and if the amount touches INR 2,50,000 Crores, the limit stands further enhanced to 15%.
Therefore, even though as per one rule, a limit of 10% for equity shares and 10% for debentures
for each investment asset category is allowed, the overall exposure limit under (a) above, would
bring down the exposure to 10% of all the funds. On the other hand, eventhough an insurance
company is within 10% on the overall exposure limit under (a) above, it still will have to be
within the limit of 10% for equity shares and 10% for debentures separately for each investment
asset category.
Thus, the investee company limits aims to achieve two objectives:
Limiting the investment in each type of security, viz., equity, debt in each investee
company to 10% of each type of investment category, i.e. unit reserves, pension &
annuity and life insurance business
Limiting the overall exposure (all investments put together) to one investee company to
10% of overall investment assets.
The above 2 limits are subject to a further limit of 10% (of 12% or 15% in some cases as
explained above) of outstanding face value of equity shares of the investee company (for equity
investments) or Share capital, free reserves, bonds, debentures (for Debentures, loans and other
permitted investments), as the case may be.
(viii)Special dispensation for Infrastructure Related Investments
Exposure to a Public Limited Infrastructure investment company can be increased to 20% of the
Equity capital at face value for equity investments and 20% of equity plus free reserve plus
debentures and bonds in the case of debt. However, this is subject to the overall exposure (all
investments put together) at 10% of overall investment assets.
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A special dispensation has also been given to Public Sector Special Purpose Vehicle engaged in
infrastructure sector by allowing an investment upto 20% of the project cost, which is
categorised as Approved investments, subject to the limit of 10% of overall investment assets.
(ix)Investment in Immovable Properties
The limit for investments in immovable property is 5% of the aggregate of life funds, pension
and annuity funds and group funds in the case of life insurers and 5% of investment assets in the
case of general insurer
(x)Investments in Promoter Group Companies of Insurer
The overall limit for investments in all the Promoter Group companies of the insurer is set at 5%
of the aggregate funds of the insurer. Investments in Private equities prohibited. However
investments in subsidiary companies allowed in terms of the provisions of Section 27A or 27B of
the Insurance Act, 1938.
(xi)Exposure to Financial and Insurance Activities
The exposure to these activities under the Industry exposure norms cannot exceed 25% of
investment assets. However, this limit excludes Bank deposits in terms of Section 27A or 27B
Limits for Group to which Investee Company belongs to

The limit to a Group to which the Investee company belongs shall be the least of the following:
(a) 15% of each of the investment asset categories
(b) 15% of investment assets in all Companies belonging to the Group
Industry exposure limits

The limit to the industry to which the investee company belongs to shall be the least of the
following:
(a) 15% of each of the investment asset categories
(b) 15% of investment assets
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6.6 MAJOR HIGHLIGHTS OF THE INSURANCE LAWS (AMENDMENT) ACT, 201574

The long overdue Insurance Laws (Amendment) Act, 2015 was enacted on 23 March, 2015, in
one of the first legislative actions of Indias new government led by Narendra Modi. The
amendment was first presented before parliament as far back as 2008, but failed to get traction
because of the legislative log-jam in the intervening years. The amendment also underwent a few
material changes since it was first introduced, such as the prescription for Indian control over
insurance joint ventures. However, the head-line objective of increasing the ceiling on foreign
investment from 26% to 49% has been achieved.
Insurance Act, 1938
The General Insurance Business (Nationalization) Act, 1972
The Insurance Regulatory and Development Authority (IRDA) Act, 1999.
The major highlights of the changes that the amendment are

1. . The Insurance Laws (Amendment) Act 2015 to has replaced the Insurance Laws
(Amendment) Ordinance, 2014.
2. The amendment Act has removed archaic and redundant provisions in the legislations and
incorporate certain provisions to provide Insurance Regulatory and Development Authority of
India (IRDAI) with the flexibility to discharge its functions more effectively and efficiently.
3. Provides for enhancement of the foreign investment cap in an Indian Insurance Company
from 26% to an explicitly composite limit of 49% with the safeguard of Indian ownership and
control. The act will also raise the foreign investment cap in the pension sector since it was
linked to the ceiling in the insurance sector at the time of the passage of the Pension Fund
Regulatory and Development Authority bill in 2013.
4. Capital Availability: It will enable capital raising through new and innovative instruments
under the regulatory supervision of IRDAI. Greater availability of capital for the capital intensive
insurance sector would lead to greater distribution reach to under / un-served areas, more
innovative product formulations to meet diverse insurance needs of citizens, efficient service
delivery through improved distribution technology and enhanced customer service standards. . It
would also boost infrastructure funding since only an insurance corpus can fund long-gestation
public works projects.
5. Four public sector general insurance companies had to be 100 % government owned as per
The General Insurance Business (Nationalisation) Act, 1972 (GIBNA, 1972). They are now
allowed to raise capital. This is due to the need for expansion of the business in the rural and
60
social sectors, meeting the solvency margin for this purpose and achieving enhanced
competitiveness. But government equity will not be less than 51% at any point of time.
6. Consumer Welfare: It will enable the interests of consumers to be better served through
provisions like those
Enabling high penalties on intermediaries / insurance companies for misconduct, misselling and misrepresentation by agents / insurance companies
Disallowing multilevel marketing of insurance products in order to curtail the practice of

mis-selling.
This could act as a deterrent against the rampant mis-selling menace which has resulted in many
policyholders being duped into buying unsuitable products.
7. Empowerment of IRDAI: The Act has entrusted responsibility of appointing insurance
agents to insurers and provides for IRDAI to regulate their eligibility, qualifications and other
aspects. It enables agents to work more broadly across companies in various business categories.
The safeguard being that conflict of interest would not be allowed by IRDAI through suitable
regulations.
IRDAI is empowered to regulate key aspects of Insurance Company operations in areas like
solvency, investments, expenses and commissions and to formulate regulations for payment of
commission and control of management expenses.
It empowers the Authority to regulate the functions, code of conduct, etc., of surveyors and loss
assessors. It also expands the scope of insurance intermediaries to include insurance brokers, reinsurance brokers, insurance consultants, corporate agents, third party administrators, surveyors
and loss assessors and such other entities.
Further, properties in India can now be insured with a foreign insurer with prior permission of
IRDAI, which was earlier to be done with the approval of the Central Government.
8. Health Insurance: The amendment Act defines health insurance business inclusive of travel
and personal accident cover and discourages non-serious players by retaining capital
requirements for health insurers at the level of Rs. 100 Crore, thereby paving the way for
promotion of health insurance as a separate vertical.
9. Promoting Reinsurance Business in India: The amended law enables foreign re-insurers to
set up branches in India and defines re-insurance to mean the insurance of part of one
insurers risk by another insurer who accepts the risk for a mutually acceptable premium. It
excludes the possibility of 100% ceding of risk to a re-insurer, which could lead to companies
acting as front companies for other insurers. Entry of reinsurance companies into the Indian
market will bring in knowledge and expertise together with underwriting capacities. Must be
61
wondering what re-insurance is Re-insurance means that multiple insurance companies share risk
by purchasing insurance policies from other insurers to limit the total loss the original insurer
would experience in case of a disaster. By spreading risk, an individual insurance company can
take on clients whose coverage would be too great of a burden for the single insurance company
to handle alone.
10. Strengthening of Industry Councils: The Life Insurance Council and General Insurance
Council have now been made self-regulating bodies by empowering them to frame bye-laws for
elections, meetings and levy and collect fees etc from its members. Inclusion of representatives
of self-help groups and insurance cooperative societies in insurance councils has also been
enabled to broad base the representation on these Councils.
11. Robust Appellate Process: Appeals against the orders of IRDAI are to be preferred to SAT
as the amended Law provides for any insurer or insurance intermediary aggrieved by any order
made by IRDAI to prefer an appeal to the Securities Appellate Tribunal (SAT).
Thus, the amendments are in tune with the evolving insurance sector scenario and regulatory
practices across the globe. The amendments will enable IRDAI to create an operational
framework for greater innovation, competition and transparency, to meet the insurance needs of
citizens in a more complete and subscriber friendly manner. The amendments are expected to
enable the sector to achieve its full growth potential and contribute towards the overall growth of
the economy and job creation.
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6.7 GOVERNANCE RELATED CONTROLS75

(a)Investment Committee
Every insurer is required to form an Investment Committee which consists of a minimum of 2
non executive directors, Chief Investment Officer, Chief Financial Officer and Appointed
Actuary to oversee the performance of the Investment function.
Investment Policy
The Board, on the basis of approval of Investment Committee, has to approve an Investment
Policy for the Company on an yearly basis, with a half yearly review mechanism. The policy
shall address the issues relating to Prudential norms, liquidity, management of assets and
liabilities, scope of internal and concurrent audit and all other internal control of investment
operations. It shall ensure adequate return on policyholders funds and shareholders funds.
Board shall review fund wise and product wise investment performance on a quarterly basis. The
Board shall also lay down the norms for investing in Other investments category.
5.7 OPERATIONAL LEVEL CONTROLS76
Segregation of Front office, Mid office and Back office

Every insurer is required to segregate Front office, Mid office and Back office and clearly lay
down the roles and responsibilities. The Chief Investment Officer shall report to the Chief
Executive Officer. No function falling under any of these three sub units can be outsourced.
Further data servers for the investment management system shall be within India.
Risk Management Systems Review

The Board shall implement a Investment Risk Management Systems and Process which shall be
certified by a Chartered Accountant as per the Technical guide issued by the Institute of
Chartered Accountants of India. This shall be reviewed once in 2 years by the Chartered
Accountant and the Report be filed with IRDA.
Further a quarterly internal/concurrent audit is mandated (if Assets under management crosses
`1,000 crores concurrent audit by external auditor required).
Qualifications and experience for Risk Management Auditors as well as Concurrent Auditors
prescribed. Necessary certification shall be taken from them before appointment and filed with
IRDA.
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6.6 IRDA (SCHEME OF AMALGAMATION AND TRANSFER OF LIFE INSURANCE

BUSINESS) REGULATIONS, 2013 AND IRDA (SCHEME OF AMALGAMATION AND
TRANSFER OF GENERAL INSURANCE BUSINESS REGULATIONS, 2011) 77
Under the provisions of the Act, a Scheme of amalgamation or transfer is possible only between
two life insurance companies or two general insurance companies, It is not possible for a life
insurance company to be acquired by a general insurance company or vice versa, since separate
insurance companies are required to be formed for transacting life and general insurance
businesses.
The Regulations require submission of every proposal for implementation of proposed
amalgamation to be submitted to IRDA for a prior approval alongwith the draft Scheme of
amalgamation.
However, before submission of the application, notice of intention to submit the application shall
be submitted one month before filing the application for approval for every proposal for
implementation as above alongwith a statement on the nature of amalgamation or transfer
alongwith the following documents:
(a) Draft of the agreement for the proposed amalgamation or transfer
(b) Balance Sheets of both the target insurance company and the acquiring insurance company
(c) Financial Condition Report. Solvency Statements and Incurred but not Reported (IBNR)
Report of both the insurance companies
(d) Report by an Independent Actuary (who has not been connected with any of the two
insurance companies during the past 3 years) on the proposed amalgamation or transfer
(e) Executive summary of the proposed amalgamation or transfer along with the terms on which
the transaction has been contemplated
(f) Report on the manner in which the interests of Policyholders will be protected and the
compliance with the applicable laws including the Competition Act, 2002.
The financial statements shall be prepared as on the appointed date, i.e. date fixed for the
purpose of giving effect to the scheme of amalgamation or transfer and IRDA may cause an
independent actuarial valuation of the insurance businesses of the transacting parties.
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Regulations, 2013 And Irda (Scheme Of Amalgamation And Transfer Of General
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IRDA would then consider issue of an in-principle approval for the proposed amalgamation or
transfer. Upon receipt of the in-principle approval, the transacting parties shall inform their
respective Policyholders about the proposed Scheme of amalgamation or transfer as follows:
(a) Keeping the Scheme open for inspection for Policyholders at the Head office;
(b) Uploading the Scheme in the website of the transacting parties;
(c) Statement on nature and terms of amalgamation to be published in one leading National and
one vernacular Newspaper and filing copies with IRDA;
(d) Informing all the Policyholders individually giving notice about the application for the
proposed amalgamation or transfer.
Upon receipt of the in-principle approval from IRDA, the transacting parties would seek other
legal clearances or regulatory approvals, including the following:
(a) Filing of the Scheme of arrangement, alongwith the in-principle approval of IRDA, before the
relevant Court or Tribunal for confirmation of the Scheme of arrangement under Sections 391 to
394 of the Companies Act, 1956;
(b) Filing applications before the Foreign Investments Promotion Board or Reserve Bank of
India for seeking necessary approvals;
(c) If the insurance companies have a foreign insurance company as a promoter who is regulated
in their country of origin, necessary regulatory approvals for the proposed Scheme from the
concerned regulator.
(d) Such other approvals, including the approval of Securities and Exchange Board of India or
the Competition Commission of India.
Upon receipt of all the legal clearances or other regulatory approvals, the transacting parties shall
submit all the other approvals to IRDA for seeking their final approval. A final approval is then
considered by IRDA keeping in mind the stipulations laid down by the Court/Tribunal and other
regulatory authorities and the following considerations:
(a) compliance with the solvency margin requirements after the proposed transfer
(b) compliance with other applicable laws; and
(c) protection of interests of Policyholders; and
(d) orderly growth of the insurance industry;
and shall accordingly grant the final approval.
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Upon receipt of final approval from IRDA, the following are the consequences:
(a) The scheme of amalgamation and transfer shall take effect from such date as may be specified
by IRDA while granting the final approval;
(b) The final approval shall be binding on all Policyholders, Creditors or employees of both the
transacting parties;
(c) The assets and liabilities of the transferor insurer shall vest with the transferee insurer from
the effective date of transfer;
(d) Publication in one national and one vernacular newspaper confirming completion of the
process of amalgamation or transfer.
In respect of amalgamation or transfer completed between two life insurance companies, the
transferee insurer shall file a certified true copy of the scheme, deed or agreement under which
the amalgamation or transfer has been effected alongwith a declaration from the Chairman and
the Principal Officer listing down the various payments made or to be made to any person on
account of the amalgamation or transfer effected
5.7 IRDAI (Surrender Value) REGULATIONS, 201578
DEFINITIONS
Sum assured on death means an absolute amount of benefit which is guaranteed
to become payable on death of the life assured in accordance with the terms and
conditions of the policy
c. Sum Assured on maturity means an absolute amount of benefit which is
guaranteed to become payable on maturity of the policy in accordance with the
terms and conditions of the policy
d. "Surrender" means complete withdrawal or termination of the entire policy
e. "Surrender Value" means an amount, if any, that becomes payable in case of
surrender in accordance with the terms and conditions of the policy
Surrender value under insurance policies offered by Life insurers:
Every policy offered by life insurer under a linked platform
(i)
shall provide surrender value in accordance with Insurance Regulatory and

Development Authority (Linked Insurance products) Regulations, 2013, as
amended from time to time.
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(ii)
shall comply with all the provisions related to surrender or discontinuance

of the Insurance Regulatory and Development Authority (Linked Insurance
products) Regulations, 2013 ,as amended from time to time
Every policy offered by life insurer under a non-linked platform
(i) shall provide surrender value in accordance with Insurance Regulatory and
Development Authority ( Non Linked Insurance products) Regulations, 2013,
as amended from time to time
(ii) shall comply with all the provisions related to surrender and discontinuance
of the Insurance Regulatory and Development Authority (non Linked
Insurance products) Regulations, 2013, as amended from time to time by way
of circulars or otherwise
(iii)which has acquired a surrender value shall not lapse by reason of
nonpayment of further premiums but shall be kept in force to the extent of
paid up sum assured, calculated by means of a formula as approved by the
Authority, and contained in the terms and conditions of the policy, and the
reversionary bonuses or the guaranteed additions, if any, that have already
been attached to the policy.
(iv)
the paid up sum assured under regulation 3(b)(iii)

o on death shall not be less than ratio of period for which premiums
have already been paid bears to the maximum period for which
premiums were originally payable multiplied by the sum assured on
death.
o
on maturity shall not be less than ratio of period for which
premiums have already been paid bears to the maximum period for
which premiums were originally payable multiplied by the sum
assured on maturity
o on any other contingencies covered under the policy such as health
cover, vesting in deferred annuity products shall not be less than
ratio of period for which premiums have already been paid bears to
the maximum period for which premiums were originally payable
multiplied by sum insured/sum assured payable upon such
contingency
(v) shall be kept alive to the extent of the paid-up sum assured referred under
regulation 3(b)(iii) and shall not be entitled by virtue of that sub-section to
Page 3 of 3 participate in any profits declared distributable after the
conversion of the policy into a paid-up policy.
(vi)
the sub-section 3(b)(iii) above shall not apply, where the paid up sum
insured of the policy is less than one hundred rupees inclusive of attached
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bonuses or the guaranteed additions, if any, or takes the form of an annuity

of less than twenty five rupees per annum
A policy of life insurance may be terminated by paying the surrender value if
the paid up sum insured of the policy is less than one hundred rupees
inclusive of attached bonuses or the guaranteed additions, if any, or take the
form of an annuity of less than twenty five rupees per annum. 4. Action in
case of Default: The Authority may initiate action against the said insurer, in
accordance with Section 102 of Insurance Act 1938, in case of default.
CHAPTER 7
7.1 IRDA GUIDELINES FOR GRIEVANCE REDRESSAL 79
In order to enforce timely redressal of Customer grievance, the Insurance Regulatory and
Development Authority (IRDA) has issued guidelines for grievance redressal by insurance
companies.
A Grievance80 is defined as an expression of dissatisfaction by a customer on the action or
inaction on the standard of service or deficiency of service of an insurance company or
any intermediary and asks for remedial action. It is distinguished from inquiry or a
request which is seeking information or requesting for a service and are not considered as
Grievances.
Every insurance company shall have a designated senior officer at the level of CEO or
Compliance Officer of the Company as the Grievance Officer. Further every office of the insurer
shall also have a designated Grievance officer for such office.
The process for handing a Grievance is as follows:

(a) Every grievance shall be acknowledged within 3 working days of receipt of grievance,
containing the name and designation of the person who will deal with the grievance
(b) The Grievance redressal procedure including the time taken for resolution of disputes shall
be mentioned in the acknowledgement
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(c) Normally a Grievance shall be resolved within 3 days. However, where it is not possible to
resolve within 3 days, the insurer shall resolve the complaint within 2 weeks and shall send a
final letter of resolution (d) Where a complaint is rejected, the reasons shall be clearly stated
alongwith the recourse available if the customer is still dissatisfied
(e) Further if the insurer shall inform the customer that if the customer does not come back
within 8 weeks from the date of providing resolution, the grievance shall be treated as closed
(f) A grievance can be closed only if the following conditions are satisfied:
o Where the insurance company has acceded to customers grievance, upon
acceding to the request of the customer
o Where the insurance company rejects the customers grievance, upon receipt of a
communication from customer accepting the companys resolution
o Where the insurance company rejects the customers grievance and the customer
does not respond within 8 weeks of receipt of resolution, upon completion of the
8 weeks
o In all the above instances, the Grievance Redressal Officer shall certify that the
Insurance company has discharged its contractual, statutory or regulatory
obligations
Every insurance company shall publish the Grievance Redressal Procedure in the website of the
insurance company. The Policyholders Protection Committee of the Insurance Company shall
receive reports concerning Grievances and shall monitor the process of handling grievances.
7.2 IRDA (OBLIGATIONS OF INSURERS TO RURAL AND SOCIAL SECTORS)

REGULATIONS, 2000 (AS AMENDED FROM TIME TO TIME)81
IRDA (Obligations of Insurers to Rural and Social Sectors) Regulations, 2000 provides
that every insurance company is required to undertake a minimum percentage of business
providing insurance coverage to persons residing in rural areas and providing coverage to
persons who are engaged in social sector.
Rural areas have been defined as those places which have been classified as rural areas as
per the latest census. The obligations of insurers under Rural Sector is calculated as a
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percentage of the total number of policies sold by an insurance company and is dependent
on the age of the insurance company as follows:
For a life insurance company, the percentage with 7% (2%) in the first financial year of
operations, increases to 12% (5%) in third financial year and 16%(5%) in the fifth
financial year and 20% (7%) in the tenth financial year.
Note: figures in brackets indicate obligations of general insurance companies.
In respect of Social sector, the obligation is in terms of number of Lives assured covered
under an Insurance policy belonging to social sector occupations as defined in the
Regulations.
The number of lives required to be covered under this sector is also dependent on the age
of the insurance company as follows:
For both Life and General insurance companies, the number of lives to be covered
increases from 5,000 lives in the first financial year to 20,000 lives in the fifth financial
year and 55,000 lives in the tenth financial year
Social Sector is defined unorganised sector, informal sector, economically vulnerable or
backward classes and other categories of persons, both in rural and urban areas.
7.3 IRDA (Micro Insurance) Regulations, 200582
A micro insurance product is designed to meet the needs of persons, especially residing in
rural areas, 82 PP-IL&P whose primary requirement is basic insurance coverages in life,
such as payment of insurance benefit upon death of the bread winner, to the family or
Health insurance etc. The intention is provide a low cost product to such persons.
A life micro insurance product is therefore a pure term insurance product, or an
endowment assurance product or a health insurance product with or without accident
benefit. A general micro insurance product includes health insurance, insurance coverage
on huts, livestock, tools or instruments or any personal accident contract.
Minimum and maximum amount of sum assured have been prescribed for each product
category under Schedule I and Schedule II to the Regulations. For any of the product
categories the sum assured cannot be less than INR 5,000 or more than INR 50,000.
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A Non Governmental Organisation or a Self Help Group or a Micro Finance Institution or

a Non-profit organisation (Companies registered under Section 25 of the Companies Act,
1956) can be appointed by an insurer to act as a Micro Insurance Agent.
The Regulations provide for a tie up between a Life insurance company and a General
insurance company for offering both life and general micro insurance products together
to a customer.
A micro insurance product may be distributed by a licensed agent or an insurance broker,
but a Micro insurance agent is prohibited from distributing any insurance product other
than micro insurance products. A micro insurance agent is allowed to act as an agent for
micro insurance products of one life insurance company and one general insurance
company at a time by entering into an agreement with them. The insurers concerned shall
impart 25 hours training on micro insurance products, customer service, claims etc. to the
Micro insurance agents.
A micro insurance agent shall appoint Specified persons who are authorised to sell on
behalf of the Micro insurance agent (who can be a NGO or SHG or MFI as above).
All insurance companies are expected to issue polices in vernacular language to facilitate
customer understanding of the policy terms and conditions. Where it is not possible a
write up in vernacular language must be attached with the policy document.
A micro insurance agent may be paid a remuneration not exceeding 10% for single
premiums received, 20% (15% for general insurance companies) for the premiums
received during all policy years. All micro insurance products sold shall be reckoned for
the purpose of social sector obligations of an insurance company. Where the micro
insurance product is also sold in a rural area, it shall be counted both for rural and social
sector obligations separately.
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7.4 IRDA GUIDELINES TO FINANCIAL INCLUSION

Insurance Regulatory & Development Authority (IRDA) has been making immense efforts to
educate and empower the common citizens about insurance industry in India and their rights &
responsibilities. IRDA has been at the forefront of insurance sector deepening, protecting the
rights of policyholders, regulating insurance companies & advisors and bringing about insurance
inclusion in India for all segments esp. the poor. Some of the steps taken by IRDA for financial
inclusion include:
1. National Strategy for Financial Education
The Insurance Regulatory and Development Authority (IRDA) has released the draft National
Strategy for Financial Education for comments and feedback in Year 2012. The final strategy is
yet to be notified by the IRDA.
The National Strategy recognises that financial literacy and financial education play a vital role
in financial inclusion and inclusive growth and envisages ways towards creating awareness and
educating consumers on access to financial services, availability of various types of products and
their features; changing attitudes to translate knowledge into responsible financial behaviour; and
making consumers of financial services understand their rights and obligations.
The National Strategy seeks to create a financially aware and empowered India. It aims at
undertaking a massive Financial Education campaign to help people manage money more
effectively to achieve financial well being by accessing appropriate financial products and
services through regulated entities with fair and transparent machinery for consumer protection
and grievance redressal.
2. Website on Insurance Education
72
In an attempt to increase insurance awareness levels across the country, the authority has taken a
number of consumer education initiatives and has recently launched an exclusive insurance
education website www.policyholder.gov.in.
This website has self-explanatory menus and gives information in simple language on topics
such as:
Buying insurance
Making a claim
Policyholder Protection and Grievance Redressal
Handbooks in 13 languages
Dos and Donts for a policyholder
Comic series
Consumer Affairs Annual Booklets
3. Grant of Corporate Agency license to Department of Postal
To promote financial inclusion, insurance regulator Insurance Regulatory and Development
Authority (IRDA) has granted corporate agency license to the Department of Post for
distributing insurance products.
4. Emphasis on educating insurance agents to weed out mis-selling
Indias Insurance Regulatory and Development Authority (IRDA) has been chalking out an
ambitious plan to combat mis-selling, a menace that has been haunting the industry for about a
decade now, especially after the emergence of equity-oriented insurance products.
During fiscal year 2012, the regulator received 1 lakh complaints on mis-selling. IRDA has been
emphasizing specialized training to the countrys 2.5 million insurance agents after they clear the
basic examination to qualify as a licensed agent to sell insurance products.
The training, aimed at instilling seriousness among insurance agents about sales as a career and
stop unfairly selling insurance schemes just to earn commissions.
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CHAPTER 8 INSURANCE FRAUD

8.1 DEFINITION OF INSURANCE FRAUD
Fraud is the crime of using dishonest methods to take something valuable from
another person83
The legal definition of fraud defines it as means misappropriating assets or by
deliberately misrepresenting or concealing material facts relevant to some financial
decisions or by abusing responsibility, a position of trust.84
incidence of frauds in the country. Insurance fraud encompasses a wide range of illicit practices
and illegal acts involving intentional deception or misrepresentation.
The industry has witnessed an increase in the number of fraud cases in the last one year.
Organizations are waking up to the fact that frauds are driving up the overall costs of insurers
and premiums for policyholders, which may threaten their viability and also have a bearing on
83Definition of Fraud as given in Merriam Webster
84 Section 17 of Indian Contract Act, 1872
74
their profitability. Hence, companies need a more vigorous fraud management framework. The
sophistication of fraudsters in the area of commercial insurance claims and third-part claims
makes it all the more difficult for organizations to detect and control fraud in time.
Fraud impacts organizations in several areas including financially, operationally and
psychologically. While the monetary loss due to fraud is significant, its full impact of fraud on an
organization can be staggering. Its loss of reputation, goodwill and customer relations can be
devastating. As fraud can be perpetrated by any employee within an organization or by those
outside it, it is important for companies to have an effective fraud management program in place
to safeguard their assets and reputation.
8.2 TYPES OF INSURANCE FRAUD
There are three types of insurance fraud as given in the chart below:
Definition
75
Internal Fraud
Intermediary Fraud
Customer Fraud
Fraud against the insurer

by its Director, Manager
and/or any other officer,
staff member
Fraud against the

insurer or policy
holders by any agent or
any third party
adminstrator
Fraud against the insurer

in the purchase or
execution of an
insurance product
Examples
Misappropriating
funds
Fraudulent financial
reporting
Forging signatures
and stealing money
from customers
Control
Internal audit teams
Framework
Independently examine the

processes and report
weakness in control
mechanisms
76
Non-disclosure
or
misrepresentatio
n of risk to
reduce
premiums
Commission
fraud-insuring
non-existent
policy holders
while paying
premium to the
insurer
Having documented
policy for appointment
of new intermediaries,
appropriate sanction
policy in case of noncompliance by the
intermediary
1. Soft Fraud:
Exaggerating
damages/loss
Deliberate or
subtle lagging of
claims resolution
2. Hard fraud:
Staging the
occurrence of
incidents
Medical claims
fraud
Adequate client
acceptance policy, client
should be identified and
identity verified.
Professional judgment
based on experience
8.3 INSURANCE FRAUD IN INDIA85

incidence of frauds in the country. Insurance fraud encompasses a wide range of illicit practices
and illegal acts involving intentional deception or misrepresentation.
As Indias insurance industry matures, fraud risk management is going to be a major concern for
insurers and business leaders. Insurers will need to continuously reassess their processes and
policies to manage and mitigate the risk of fraud. Fraud risk in the insurance value chain can
emanate from internal and external factors.
As per a survey by, Ernst & Young, a global leader in assurance, tax, transaction and
advisory services, insurance fraud in india has increased at a high rate and there
are chances that it would increame at much higher rate, if strict cognizance was not
taken.
85 Fraud in insurance on rise Survey 201011 by Ernest & young.

77
Insurance Fraud(%), According to a survey conducted by Ernst & Young (2012), key fraud risks faced by Insurance Companies are:
Vendor/third party
related(13.6%)
Claims/surrender
related(27.30%)
Premium related(21.2%)
Employee related(20.5%)
Application related(17.5%)
In its quest to restrict unfair practices, IRDA has formulated the Insurance Regulatory and
Development Authority (Protection of Policyholders Interests) Regulations, 2002. To counter the
increase in the number and complexity of frauds, IRDA has announced draft regulations for open
market consultation, to reduce unfair practices and the information gap in domestic
insurance.
Some of the proposed regulations:
An amendment of IRDAs regulations to protect policyholders interests and issuance of key
feature documents for insurance products
Guidelines on distance marketing and sale process verification of insurance products
Standardization of terms and conditions on unit-linked insurance products
IRDAs acquisition of a database for the distribution of insurance products In its bid to check
financial fraud, IRDA has made it mandatory for all insurers to obtain a recent photograph of
new customers.
Indias insurance sector is heavily affected by fraudulent claims or surrender. According to one of
the studies conducted in the country, its insurance sector incurs a loss of more than 8% of its total
revenue collection in a fiscal year.
According to the survey by Ernest & Young, the key motive for all insurance crimes is
financial profit. Insurance contracts provide the insured and the insurer with
opportunities for exploitation.
78
According to the survey

40% of the respondents felt that fraud cases in insurance companies have gone
up substantially in the last one year.
Furthermore, among the respondents who felt there has been a rise in fraud
cases, almost 56% were of the opinion that they had gone up by up to 20% during
this period.
Another 22% of the respondents indicated that fraud cases have increased by 31
40% during the last one year.
The findings of the survey were supported by increasing reports of fraud in the media. Some
examples of employee related fraud are:
The CBI registered a case against the Divisional Manager of the company for allegedly
collecting money from customers and issuing cover notes to them, but neither the money nor the
cover note was deposited with the Insurance company86.
A former employee of one of the biggest private life insurance companies allegedly cheated the
companys customers by issuing fake receipts87.
Some recommendations to allay mounting concerns relating to money laundering include:
a unique identification code for the insurance industry,
a risk-based approach, and
the use of intelligent software for transaction monitoring and screening against negative lists
and third party databases.
Now let us examis the judicial pronouncement on this topic.
86 CBI registers a case against Divisional Manager of United India Insurance Co.
Ltd., : Huge Assets Recovered, http://www.presstrust.com/ node/458283, accessed
24 December 2010
87 Employee held for cheating company,
http://articles.timesofindia.indiatimes.com/2010/may/26, accessed 24 December
2010
79
8.4 CASE LAWS ON INSURANCE FRAUD

Lazarus Estate Ltd. Vs. Beasley 1956(1) QB 702.
In the above case, the Lord Denning had made remarkable observation regarding fraud:
. . .Fraud and justice never dwell together.(Frans et jus nunquam cohabitant) is a pristine maxim
which has never lost its temper over all these centuries. Lord Denning observed in a language
without equivocation that no judgment of a Court, no order of a Minister can be allowed to stand
if it has been obtained by fraud, for, fraud unravels everything. . .
Duchess of Kingstone, Smith's Leading Cases, 13th Edn., p.644,
In this case, explaining the nature of fraud, de Grey, C.J. stated that though a judgment would be
res judicata and not impeachable from within, it might be impeachable from without. In other
words, though it is not permissible to show that the court was 'mistaken', it might be shown that
it was 'misled'. There is an essential distinction between mistake and trickery. The clear
implication of the distinction is that an action to set aside a judgment cannot be brought on the
80
ground that it has been decided wrongly, namely, that on the merits, the decision was one which
should not have been rendered, but it can be set aside, if the court was imposed upon or tricked
into giving the judgment.
The Oriental Insurance Company ... vs Harapriya Nayak And Ors. 1994 I OLR 88
Factual Backdrop
An accident took place on 6-9-1988, wherein a vehicle bearing registration No. ORP 5510 was
involved. The registered owner of the vehicle was Brajabandhu Senapati (hereinafter referred to
as the 'owner/ insured')- One Govind Chandra Naik (hereinafter referred to as the "deceased') lost
his life in the accident. His widow Harapriya and parents Bhikari Charan Naik and Musi Dei
lodged a claim for compensation on 28-11-1988 claiming compensation of Rs. 3 lakhs Under
the Motor Vehicles Act, 1939 (in short, the 'Old Act').
The learned counsel for the insurer urged the that The claimants have not placed their claim with
clean hands and that the policy was taken after the death of the deceased.
The court observed:
Sub-section (6) of Section 149 of the Act, and Sub-section (5) of Section 96 of old Act define
what will be a material fact or a material particular. The ambit of the clause is wide enough to
cover a plea that the cover-note and the insurance policy was obtained by fraud and therefore, the
policy was void. If a person has died much prior to the date on which insurance is intended to be
obtained and a proposal in his name is submitted, fraud can reasonably be inferred. Insurer's plea
is that this is a crystal clear of fraud. Whether fraud was really practised or not normally needs
factual adjudication.
And the court held
"A further question arises whether the Court is helpless when it finds in an appeal that the award
is unreasonable, yet insurer is the appellant, and quantum is in issue? Our answer to the question
is an emphatic no. Court cannot remain a mute spectator when the course of justice is deflected
by latent collusion, a shadow-boxing. It cannot stand in the side lines watching helplessly the
games played by the parties which put off a show of contest while really shaking hands of
friendship aimed at making a fortune out of a misfortune. That itself is collusion. There may be
cases where the Tribunal itself acts without application of mind.
A distinction has to be made between a compensation which at one hand is not to be
positive nor on the other a source of profit in whose favour it is awarded, and it should not be a
windfall to make fortune out of a misfortune Therefore, the sum of Rs. 25,000/- is
awarded against the insurer. When the entitlement of the claimants is adjudicated, this shall be
noted by the Tribunal. Even if no amount is awarded against the insurer, the amount shall not be
recovered by the insurer from the claimants.
81
In S.P. Chengalvaraya Naidu v. Jagannath AIR 1994 SC 853

This Court had an occasion to consider the doctrine of fraud and the effect thereof on the
judgment obtained by a party.
In that case, one A by a registered deed, relinquished all his rights in the suit property in favour
of C who sold the property to B. Without disclosing that fact, A filed a suit for possession against
B and obtained preliminary decree.
During the pendency of an application for final decree, B came to know about the fact of release
deed by A in favour of C. He, therefore, contended that the decree was obtained by playing fraud
on the court and was a nullity. The trial court upheld the contention and dismissed the
application. The High Court, however, set aside the order of the trial court, observing that "there
is no legal duty cast upon the plaintiff to come to court with a true case and prove it by true
evidence". B approached Supreme Court.
Allowing the appeal, setting aside the judgment of the High Court and describing the
observations of the High Court as "wholly perverse", Kuldip Singh, J. stated: (SCC p. 5, para 5)
"The courts of law are meant for imparting justice between the parties. One who comes to the
court, must come with clean hands. We are constrained to say that more often than not, process
of the court is being abused. Property grabbers, tax-evaders, bank-loan- dodgers and other
unscrupulous persons from all walks of life find the court process a convenient lever to retain the
illegal gains indefinitely. We have no hesitation to say that a person, whose case is based on
falsehood, has no right to approach the court. He can be summarily thrown out at any stage of the
litigation."
United India Insurance Co. Ltd vs Rajendra Singh & Ors Special Leave Petition (civil)
8479 of 1999
Eactual Background
The appellant-Insurance Company now had contended that a rank fraud had been played by two
claimants and wangled two separate Awards from a Motor Accident Claims Tribunal for a bulk
sum. But neither the Tribunal nor the High Court of Allahabad , before which the Insurance
Company approached for annulling the awards, opened the door but expressed helplessness even
to look into the matter and hence the Insurance Company has filed these appeals by Special
leave.
In this case the Supreme court held that:
Therefore, we have no doubt that the remedy to move for recalling the order
on the basis of the newly discovered facts amounting to fraud of high degree, cannot be
82
foreclosed in such a situation. No court or tribunal can be regarded as powerless to recall its own
order if it is convinced that the order was wangled through fraud or misrepresentation of such a
dimension as would affect the very basis of the claim....... In the result, we allow these appeals,
set aside the impugned orders and quash the awards passed by the Tribunal in favour of the
claimants..
A.V. Papayya Sastry & Ors vs Government Of A.P. & Ors Appeal (civil) 5097-5099 of 2004
In this case the Court held that:
Therefore, we have no doubt that the remedy to move for recalling the order on the basis of
the newly discovered facts amounting to fraud of high degree, cannot be foreclosed in such a
situation. No Court or tribunal can be regarded as powerless to recall its own order if it is
convinced that the order was wangled through fraud or misrepresentation of such a dimension as
would affect the very basis of the claim.
The allegation made by the appellant Insurance Company, that claimants were not involved in
the accident which they described in the claim petitions, cannot be brushed aside without further
probe into the matter, for, the said allegation has not been specifically denied by the claimants
when they were called upon to file objections to the applications for recalling of the awards.
Claimants then confined their resistance to the plea that the application for recall is not legally
maintainable. Therefore, we strongly feel that the claim must be allowed to be resisted, on the
ground of fraud now alleged by the Insurance Company. If we fail to afford to the Insurance
Company an opportunity to substantiate their contentions it might certainly lead to serious
miscarriage of justice".
Meghmala v G. Narasimha Reddy reported in (2010) 8 SCC 383
The expression 'fraud' has been succinctly explained by the Supreme Court in this case, in the
following words:
Fraud is an intrinsic, collateral act, and fraud of an egregious nature would vitiate the most
solemn proceedings of courts of justice. Fraud is an act of deliberate deception with a design to
secure something, which is otherwise not due. The expression "fraud" involves two elements,
deceit and injury to the person deceived. It is a cheating intended to get an advantage
Baskar vs The National Insurance Co Ltd Civil Miscellaneous Appeal No.2065 of 2012
and M.P.No.1 of 2012
Factual Background
On 4.4.2006, around 4.00 a.m, he was proceeding as a pillion rider in TVS Suzuki Motorcylce,
bearing registration No.TN-34-B-6816, from his office on the Baramkela-Lodhia Main Road.
The motorcycle was driven by one Saravanan and owned by the second respondent. As they were
83
negotiating a turn near Kanchanpur, the said Saravanan drove the vehicle in a rash and negligent
manner and there was a sudden jerk and in that jerk, the claimant was thrown out and sustained
grievous injuries on the backbone. He was taken to nearby Government Hospital and later shifted
to Gokulam Hospital, Salem. The Baramkela police registered a case in Cr.No.42 of 2006 against
the rider of the motorcycle.
The claimant had undergone treatment for 25 days and there was a fracture in the spinal cord and
his lower part of the body is affected. The limbs cannot be moved and there is no control of his
urinary bladder and rectum and he is bedridden. The disability was assessed at 100%. He has
claimed Rs.10,00,000/- against the owner of the vehicle and the Insurance Company.
The owner of the vehicle filed a counter admitting the accident but denied negligence and would
state that there is a valid coverage of Insurance Policy.
The second respondent Insurance Company opposed the claim stating that they are not liable and
according to them there is a collusion between the owner and the injured and the vehicle was not
involved in the accident. The Insurance company also took a plea that the pillion rider is not
covered under the policy.
The first respondent Insurance Company immediately filed a review petition before the same
Court to review the award. One of the grounds was that During an investigation of the accident
by the Insurance Company, it was found to be a false claim and the owner as well as the claimant
have colluded with each other as if the accident had occurred involving the insured vehicle.
According to the Insurance Company, the claimant had received the injury in different
circumstances at a different place and there is no accident injury.
The court observed that
.The reliance on the newly discovered piece of evidence viz., wound
certificate Ex.P.1, would also reveal that it is a medico legal case and it is an alleged
case of RTA and the claimant has suffered an injury on the Dorso Lumbar region and
was in a state of complete paralysis and the opinion would show that such injury
was caused by hard blunt object. Naturally, a bruise at Dorso Lumbar region could have
been caused when the claimant was thrown out and landed on his back on a hard blunt object. It
is not a case of criminal assault to rely on such opinion as to whether it has been caused by the
blunt object or sharp object. Both Ex.P.14 and present Ex.P.1 would show that it is a case of
Road Traffic Accident
The court held that
..Therefore, the alleged discovery of the wound certificate and the final report does not
substantiate that a fraud has been played on the court and there is no proof that the claimant has
sustained injuries in different circumstances in different place contrary to what has been alleged
by him.
84
the review order was set aside

Adhir Ranjan Kar vs Atanu Kumar Mondal & Anr on 2 March, 2015 (W.
P.C.R.C. 340 (W) of 2013)
Factual Background
The writ petition being W.P. No. 18415 (w) of 2011 was filed by Assistant Primary
Teacher challenging the decision of the Director of Pension, Provident Fund and
Group Insurance, West Bengal in deducting a sum of Rs. 1,45,844/- from the retiral
benefits unilaterally. In the backdrop of the aforesaid facts, the respondents sought
for recalling the order dated 15th June, 2012 having obtained by suppressing the
facts amounting to fraud.
The court held that;

..it is evident that even in judicial proceedings, once a fraud is proved, all advantages
gained by playing fraud can be taken away. In such an eventuality the questions of non-executing
of the statutory remedies or statutory bars like doctrine of res judicata are not attracted.
Suppression of any material fact/document amounts to a fraud on the court. Every court has an
inherent power to recall its own order obtained by fraud as the order so obtained is non est."
It is, thus, clear that once the fraud is alleged, there should be a categorical statements that there
is a willful and deliberate suppression of the material facts with an intend to gain something
which could not otherwise be gained if those facts are brought before the Court.
This Court does not find that there was any conscious and deliberate attempt on the part of the
writ petitioner in suppressing the material facts with an intent to achieve something in his
favour
CHAPTER 9
CONCLUSION
At present, the insurance industry is in a nascent stage. With the liberalization and entry of
private companies in insurance, the Indian insurance sector has started showing signs of
significant change. Within a short span of time, private insurance has acquired 13 per cent of the
life insurance market. However, there is still a huge untapped demand for insurance. The
penetration of insurance still remains at low levels and a lot needs to be done to develop this
sector.
The insurance sector is undergoing fundamental transformation and has an important part in the
buildup of the countrys economic infrastructure. The insurance regulator will play a key role in
laying down the ground rules and paving the way for the sectors growth and development. But
the challenge clearly rests with the insurers to take the industry to its next level of evolution. In
85
India, the ratio of assets of insurance companies to those of banks is 3 per cent while the ratio in
the US is 10 per cent. This serves as another indicator of the potential that the industry must live
up to.
Today, when Indias insurance industry is working toward reducing costs, one of its main focus
areas to control or reduce costs is by proactively arresting fraud, which can be achieved through
an effective fraud risk assessment (FRA) program.
Some of the essential characteristics of a FRA program include:
Effective policy holder and vendor due diligence process
Effective claims validation
Mystery shopping, i.e., gathering market intelligence relating to tied and corporate agents,
brokers, etc.
Channel reviews pertaining to tied agency, bancassurance and tele calling
Contract compliance reviews including review of advertising expenses, intellectual property
(IP) compliance, etc.
Effective fraud analytics and electronic dashboards
9.1 BIBLIOGRAPHY
PRIMARY SOURCES
Pal, Tripathey & Parava, Nalini, Insurance Theory and practice, New Delhi, Prentice
Hall of India private limited, 2005.
Saxena, Rajan. Marketing Management,Tata McGraw-Hill Education, 1 Edition,2005.
Taxmann, Insurance Laws Manual (As Amendment by Insurance laws (Amendment) Act
2015, 16th edition, April 2015
Singh , Dr. Avtar. Law of INSURANCE, 2nd edition, 2010.
STATUTES
86
INSURANCE ACT, 1938

IRDA ACT, 1999
INSURANCE AMENDMENT ACT, 2002
IRDA (INVESTMENT) REGULATIONS, 2013
IRDA (SCHEME OF AMALGAMATION AND TRANSFER OF LIFE INSURANCE
BUSINESS) REGULATIONS, 2013 AND IRDA (SCHEME OF AMALGAMATION
AND TRANSFER OF GENERAL INSURANCE BUSINESS REGULATIONS, 2011)

INSURANCE LAWS (AMENDMENT) ACT, 2015
SECONDARY SOURCES
ONLINE ARTICLES/E-JOURNALS/ WEBSITES
https://www.niapune.com
https://www.pgportal.gov.in
https://www.irdaonline.org
https://www.policyholder.gov.in
https://www.economictimes.indiatimes.com
https://www.irda.gov.in
Irda (Scheme Of Amalgamation And Transfer Of Life Insurance Business) Regulations,
2013 And Irda (Scheme Of Amalgamation And Transfer Of General Insurance Business
87
Regulations, 2011) https://www.irda.gov.in

https://www.financialservices.gov.in
https://www.policyholder.gov.in
https://www.irda.gov.in
https://www.irdaonline.org%

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ASSIGNMENT

1.2 TABLE OF CONTENT

6.1 CONSTITUTION OF INSURANCE REGULATORY AND DEVELOPMENT

1.4 LIST OF ABBREVIATIONS

IPA-Indian Ports (Major Ports) Act

1.6 TABLE OF CASES

Lazarus Estate Ltd. Vs. Beasley 1956(1) QB 702.

1.5 STATEMENT OF PROBLEM

1.7 OBJECTIVE OF THE STUDY

1.8 SCOPE OF THE STUDY

2.1 RESEARCH METHODOLOGY

2.2 CHAPTERIZATION SCHEME

It includes the methodology used in the research work comprising

The chapter includes the introduction part of the research work

The Fourth Chapter covers the nature of insurance contract

The Fifth Chapter titled Regulatory Environment Specific

Sixth Chapter titled Insurance Regulatory And Development

2 Insurance Laws of India, CA Rajkumar S. Adukia, http://taxguru.in/wpcontent/uploads/2012/11/insurance-hb-1101.pdf

3.3 NEED FOR INSURANCE

3.4 GENERAL PRINCIPLES AND CONCEPTS OF INSURANCE

Principle of Utmost good faith

1. PRINCIPLE OF UBERRIMAE FIDEI (UTMOST GOOD FAITH9)

9 Doctrine of Utmost goodfaith, http://bassedinsurance.blogspot.in/2011/10/normal-0-false-false-false-en-us-x-none_8731.html

12 Principles of Insurance - 7 Basic General Insurance Principles, p://kalyancity.blogspot.in/2011/03/principles-of-insurance-7-basic-general.html

13Subrogation Principles and Practice, http://www.cila.co.uk/files/Property/Principles

Principle of Contribution is a corollary of the principle of indemnity. It applies to all contracts of

15 Insurance: Causa Proxima,

In a contract of Guarantee there are three

Contract of Guarantee is Non-Cancellable

Insurance premium is based on the probability In contract of business, loss cannot be

An insurance contract transfers the Risk

There is No Transfer of Risk in a contract of

3.6 INSURANCE AND WAGER 18

3.8 MATERIAL FACTS20

(h) Warranties and Representations35

(i) Misrepresentations and Concealments36

5.1 HISTORY OF INSURANCE IN INDIA

5.2 LIFE INSURANCE40

5.5 ACTS/REGULATIONS COMMON TO GENERAL AND LIFE INSURANCE

Insurance Co-op Society

5.6 REGULATIONS GOVERNING/ AFFECTING LIFE INSURANCE BUSINESS IN

Carriage by Air Act, 1972

6.1 CONSTITUTION OF INSURANCE REGULATORY AND DEVELOPMENT

46 Section 14 of the IRDA Act, IRDA

(a) Insurers (Section 2 C to Section 26)

(a) Incorporation of insurance companies, issue of licence and renewal of licence 49

(h) Formation Of Subsidiary Companies For Doing Insurance Business57

Encumbrance, charge or hypothecation of Assets forming part of Controlled fund

Minimum insurance business under Rural and Social Sectors59

59 Section 32B and 32C of Insurance Act,1938

63 Section 52H of Insurance Act, 1938

(l) Insurance Association of India, Insurance Councils and Committees thereof

70 Section 64VC of the Insurance Act, 1938

72 Section 105B of Insurance Act, 1938

6.5 RECENT CHANGES IN THE REGULATION LAWS OF INSURANCE INDUSTRY

(i). upto 50% allowed in Approved investments

Corporate bonds or Minimum AA or Approved

Short term bonds, Minimum P1 or Approved

Minimum and maximum investments based on Credit rating