Unit 3: Introduction to Insurance:

Insurance - Definition

Insurance is a legal contract between a person and an insurance business in which the insurer
promises to provide financial protection (Sum guaranteed) against unforeseen events for a
certain price (premium). The many types of insurance plans available today may be grouped
into two groups :
 Life Insurance
 General Insurance

Insurance is generally defined as a contract which is also called a policy. An insurance policy
is a contract in which an individual or an organization gets financial protection and
compensation for any damages by the insurer of the insurance company. In simpler words,
one can answer what is an insurance policy as a form of protection from any unexpected loss
or damage. From this paragraph, one can get a clear overview of insurance meaning.

Nature Of Insurance:

 The Insurance is a contract. Thus all the essentials of contract must be fulfilled.
 The Insurance contract should be based on the subject matter which has an Insurable
Interest in it. Like for vehicle owner his vehicle is an insurable interest because in
case of loss or damage to the said vehicle he/she can suffer financial crises/loss. It can
be compensated through the insurance if he/she insured their vehicle.
 The Insurance is for pure risk. The person can't insure the subject matters in which the
probability of risk is not involved in it. So the contract of Insurance compensates for
loss or damages which an insurer will incur due to such risk.
 The Insurance is based on certain principles. The parties to the Insurance contract
must act in accordance with such principles and in-case of non-compliance the
aggrieved party can proceed in accordance with the due procedure of law or in
accordance with term of insurance contract.
 The nature of Insurance is a medium of sharing risk by a massive number of people
amongst the few who are open to risk by some or other reason.
 If a huge number of insured people serve the purpose of compensation for a few
among them exposed to uncertain risk, this nature of insurance is described as a co-
operative device.
 The amount of compensation in an insurance is predefined according to the terms and
condition of the insurance contract.
 Insurance provides aspects of financial help in case of an uncertain event.
  The payment of compensation in an insurance contract primarily depends on the value
of the insurance policy/contract.
 As insurance is contractual in nature, it is regulated under due procedure of law.
Because of which the amount of insurance can either be paid as a gambling or as
charity, it has to be paid according to the terms and condition of the insurance
contract.


SCOPE OF INSURANCE

In an unpredictable world, where unforeseen events can disrupt our lives and livelihoods,
having a safety net becomes crucial. This is where insurance steps in, providing individuals,
businesses, and communities with a shield against potential risks. The scope of insurance has
evolved significantly over time, offering a diverse range of coverage options that span across
various domains. In this blog, we will explore the extensive scope of insurance and its
importance in protecting what matters most to us.
1. Personal Insurance: Personal insurance encompasses a broad spectrum of
coverage options designed to safeguard individuals and families. It includes health
insurance, which ensures access to quality healthcare and mitigates the financial
burden of medical expenses. Life insurance provides financial security to loved
ones in the event of the policyholder’s death, acting as a safety net for dependents.
Disability insurance protects against income loss due to disabilities, while long-
term care insurance covers expenses related to assisted living or nursing care.
Additionally, property insurance shields homeowners and renters from losses
caused by theft, fire, or natural disasters.
2. Auto Insurance: Auto insurance is a mandatory requirement in many countries
and provides financial protection in case of accidents or damage to vehicles. It
covers liability for bodily injury or property damage to others, as well as collision
and comprehensive coverage for the policyholder’s vehicle. Auto insurance helps
alleviate the financial burden associated with repairs, medical expenses, and legal
liabilities arising from accidents.
3. Business Insurance: For businesses, insurance is a vital tool for risk management
and continuity. Commercial property insurance protects physical assets, such as
buildings, inventory, and equipment, against damage or loss due to events like fire,
vandalism, or theft. Liability insurance safeguards businesses from legal liabilities
arising from injuries, accidents, or negligence claims. Additionally, business
interruption insurance compensates for income losses during periods when
operations are disrupted due to unforeseen circumstances, such as natural disasters
or supply chain disruptions.
4. Professional Liability Insurance: Professionals, such as doctors, lawyers,
architects, and consultants, require specialized insurance known as professional
liability insurance or errors and omissions (E&O) insurance. It protects
 professionals against claims of negligence, errors, or omissions that may result in
financial losses for their clients. This coverage is crucial in professions where
advice, expertise, or services can have significant consequences.
5. Cyber Insurance: As our reliance on technology grows, so does the risk of cyber
threats. Cyber insurance has emerged as a vital component of risk management for
individuals and businesses alike. It provides coverage for data breaches, cyber-
attacks, and other cyber-related incidents. Cyber insurance helps mitigate financial
losses resulting from data breaches, business interruption, privacy violations, and
legal expenses related to cyber incidents.

TYPES OF INSURANCE

Insurance policies can take numerous forms, each designed to deal with a particular type of
risk and provide monetary protection against certain dangers. Individuals, corporations, and
organizations must have a solid understanding of the many types of insurance contracts to
choose the best coverage to meet their requirements. The following are some of the most
popular varieties of insurance policies and contracts:
1. Life Insurance
It is a type of financial protection that, upon the insured person's demise, pays a benefit to the
policyholder's beneficiaries. In the circumstance of the insured person's passing, it is intended
to provide the dependents or beneficiaries with the financial support they need. There are
several distinct categories of life insurance, such as term life insurance, whole life insurance,
and universal life insurance. Each of these categories of life insurance has a unique set of
characteristics and advantages.
2. Property Insurance
Insurance on a property protects against loss or damage to tangible possessions and real
estate, including residential and commercial properties as well as private property. It provides
monetary defense against potential dangers such as blazes, burglaries, acts of vandalism, and
natural calamities. Property insurance policies can be altered to cover certain risks, or they
can be made to offer full protection against any and all hazards.
3. Liability Insurance
Liability insurance guards individuals and businesses against legal liabilities stemming from
third-party claims for bodily harm, property damage, or serious personal injury caused by the
insured's conduct or negligence. These claims can be brought about due to the insured's
negligence or activities. This kind of insurance is essential for companies and professionals to
protect themselves from potentially expensive litigation and claims.

BimaKavach provides different types of liability insurance plans. Directors and officers
(D&O) insurance protects a company's directors and officers from personal financial loss
resulting from legal actions filed against them for improper acts or errors made while
performing their duties. Professional liability insurance, often known as errors and omissions
(E&O) insurance, protects professionals such as doctors, lawyers, and architects from
incurring the full expense of defending malpractice claims or being liable to pay damages.

Product liability insurance protects manufacturers and merchants from financial losses caused
by defective items that cause bodily harm or property damage. This form of insurance is
particularly critical for businesses that sell food, medical gadgets, toys, or other consumer
goods. Cyber insurance protects against internet-related risks such as data breaches, cyber
extortion, network disruptions caused by cyber attacks, and liabilities resulting from
noncompliance with privacy regulations. It protects businesses from lawsuits, regulatory
fines, ransom demands, income loss, and other costs related to cyber hazards. BimaKavach's
comprehensive liability insurance coverage protects businesses and people from unexpected
financial difficulties caused by negligence or errors.
4. Health Insurance
Health insurance is a financial arrangement that helps the insured manage the costs associated
with medical care and healthcare services. It provides financial protection against the high
expenses of medical treatments, hospitalization, prescription medications, and other
healthcare services. This can include expenses such as doctor's visits, hospital stays,
surgeries, diagnostic tests, and preventive services. Health insurance aims to provide the
insured with access to necessary medical care without imposing the full burden of healthcare
costs all at once. It plays a crucial role in helping people maintain their health and well-being
while managing the financial challenges that can arise from unexpected medical situations.
5. Fire insurance
Fire insurance typically covers damage or loss to property caused by fire, lightning,
explosions, and other similar perils. It provides protection against any loss or damage caused
by any movable or immovable object that catches fire and explodes. It also covers property
damage caused by a fire, such as damage to furnishings, office buildings, machinery, stock,
and so on. In India, where fire accidents are not uncommon, fire insurance policies provide
financial protection against the perils of fire-related incidents.
6. Marine Cargo Insurance
A Marine Cargo Insurance policy covers losses incurred during the transportation of goods. It
isn't limited to sea transport; it includes air, land (road and rail), and inland waterways as
well. In addition to covering container damage and cargo loss, it also offers liability coverage
for personal injury and property damage to third parties. This insurance policy is required by
companies that ship valuable or fragile goods regularly.
7. Auto Insurance
Auto insurance protects drivers and their vehicles against financial loss in the event of an
accident, theft, or damage to other people's property caused by the insured driver's vehicle. It
often includes liability coverage if the insured causes physical harm or property damage to a
third party, as well as coverage for the insured's vehicle if it is involved in a collision or is
subject to any of the other dangers that are covered.
8. Disability Insurance
This type of insurance provides a substitute source of income if the insured individual
becomes disabled and can't work due to an illness or injury. It ensures that the insured's
normal expenses are taken care of when they cannot work by providing financial support
during their term of disability.
9. Travel Insurance
Insurance for travel protects travellers against unforeseen circumstances and situations that
may arise during their travels, including trip cancellations, lost luggage, unanticipated
medical needs, and accidents related to travelling. It gives the passengers peace of mind,
especially when travelling abroad.

CLASSIFICATIONS OF INSURANCE

1. General Insurance
Some of the kinds of general insurance offered in India are as follows :
 Health Care Coverage
 Automobile Insurance
 Homeowners' Insurance
 Insurance against fire
 Insurance for Travel
2. Life Insurance
Life insurance comes in a variety of forms. The most prevalent types of life insurance
policies offered in India are as follows :
 Term Life Insurance
 Unit-Linked Insurance Plans
 Whole Life Insurance
 Endowment Plans
 Child Plans for Educations
 Retirement Plans

GENERAL INSURANCE

General insurance plans are one of the types of policies that provide coverage in the form
of sum assured against damages besides the policyholder's demise. In general, general
insurance refers to a variety of insurance plans that provide financial protection against losses
caused as a result of liabilities such as a bike, automobile, house, or health. The following are
examples of several types of general insurance policies :
Health Care Coverage
Health insurance is a form of insurance policy that covers the costs of medical treatment.
Health insurance policies either cover or repay the cost of treatment for any included disease
or injury. Various forms of health insurance cover a wide range of medical bills.
It typically provides defence against :
Inpatient care
 Critical illness treatment
 post-hospitalization medical bills
 Procedures for day-care
A few types of health insurance policies also cover resident care and pre-hospitalization
costs. The following are some of the several types of health insurance policies available in
India :
1) Individual Health Insurance
Provides coverage to a single person.
2) Family Floater Insurance
This type of insurance allows your complete family to be covered under one policy, which
often includes the husband, wife, and two children.
3) Critical Illness Coverage
A sort of health insurance that covers a variety of life-threatening illnesses such as stroke,
heart attack, renal failure, cancer, and other comparable conditions. When a policyholder is
diagnosed with a serious illness, they get a lump sum payment.
4) Senior Citizen Health Insurance:
These insurance policies are designed for people over the age of 60.
5) Group Health Insurance
This is a type of insurance that a business provides to its employees.
Automobile Insurance
Motor insurances are forms of insurance that provide financial help in the event that your
automobile is involved in a crash. In India, there are several types of motor insurance
coverage available, including :
1) Car Insurance
This plan covers privately owned four-wheelers. There are two kinds of automobile insurance
plans: third-party insurance and extended coverage policies.
2) Bike Insurance
These are forms of automobile insurance that protect privately-owned two-wheelers in the
event of an accident.
3) Commercial Vehicle Insurance :
A sort of automobile insurance that covers any vehicle utilized for commercial purposes.
Homeowners' Insurance
A homeowner’s insurance, as the name implies, provides full coverage for the belongings and
infrastructure of your property against physical destruction or damage. In other words, house
insurance protects you from both natural and man-made disasters such as fire, earthquake,
tornado, burglary, and robbery.

The following are examples of several types of house insurance policies :

1) Home Building Insurance
Serves to protect the house's foundation from destruction in the event of a disaster.
2) Public Liability Coverage
Protects the insured residential property from any harm caused by a visitor or third-party
while on the premises.
3) Standard Fire and Special Perils Policy
Protection against fires, natural disasters (e.g., earthquakes, landslides, and storms, and
floods), and anti-social human-caused activities (e.g., strikes, and riots)
LIFE INSURANCE

Life insurance policies provide protection against unforeseen circumstances such as the
policyholder's death or incapacity. Aside from providing financial security, many types of life
insurance plans enable policyholders to optimize their savings by making recurring payments
to various equity and debt fund alternatives.
You may get a life insurance policy to protect your family's financial future against the ups
and downs of life. The insurance coverage includes a substantial sum that will be paid to your
loved ones if something occurs to you. Based on your financial needs, you may pick the
length of the life insurance policy, the amount of coverage, and the payment choice. The
following are the many types of life insurance policies :
 Term Life Insurance
 Unit-Linked Insurance Plans
 Whole Life Insurance
 Endowment Plans
 Child Plan for Educations
 Retirement Plans
1. Term Life Insurance
Term insurance is the purest and most inexpensive type of life insurance, allowing you to
choose a high level of coverage for a certain period of time. With a low-cost term life
insurance policy, you can protect your family's financial future (term insurance plans
generally do not have any cash value, and thus, are available at lower rates of premium as
compared to other life insurance products.)
If you die within the policy time, your nominees will get the agreed sum Assured, depending
on the payment type you choose (some term insurance plans offer multiple payout options as
well)
2. Whole Life Insurance
Whole life insurance plans, often known as 'conventional' life insurance plans, give
protection for the policyholder individual's complete life (typically till age 100), as opposed
to any other type of life insurance that only provides coverage for a set number of years.
While a whole life insurance policy pays a death benefit, it also has a savings component that
helps the policy accumulate cash value over time. Whole life insurance policies have a 100-
year maturity period. If the insured person survives beyond the maturity age, the entire life
insurance policy becomes a matured endowment.
3. Endowment
Endowment plans fundamentally give financial protection against life's risks while also
allowing policyholders to save consistently over a certain length of time. If the policyholder
survives the policy term, the endowment plan matures, and the policyholder receives a lump
sum payment.
If something occurs to you (as the life insured), the life insurance endowment policy pays
your family (beneficiaries) the whole sum assured.
4. Unit-Linked Insurance Plan (ULIP)
ULIPs are insurance policies that combine investment and insurance advantages into one
contract. A portion of your payment for a Unit Linked Insurance Plan is invested in a range of
market-linked equities and debt instruments.
The leftover premium is used to provide life insurance coverage for the duration of the policy.
ULIPs provide you with the freedom to allocate premiums to different instruments based on
your financial needs and market risk tolerance.
5. Plans for Children
Child plans are life insurance policies that assist you in financially securing your child's life
goals, such as higher education and marriage, even if you are not there. To put it another way,
child plans combine savings and insurance benefits to help you prepare for your child's future
requirements at the appropriate age.

KEY DIFFERENCES BETWEEN A LIFE AND A GENERAL

INSURANCE

Insurance is a contract that is designed to protect the interest of policyholders or beneficiaries

in the face of the various uncertainties of life. There are two broad categories of insurance
contracts in India– life insurance and general insurance. Unfortunately, there is some
confusion regarding the differences between life insurance vs. general insurance in India.
In the following sections we will discuss the key differences between life insurance and
general insurance along with the key features of these common types of insurance in India.

What is Life Insurance?

A life insurance policy is a life cover to put it simply. It is a contract that bounds the
insurance provider to offer financial compensation to the beneficiary in case of the
unfortunate events covered under the policy, like the insured’s untimely demise. In exchange,
the policyholder pays a predetermined amount as regular premiums or single premium.
The life insurance policy covers a certain period, and if the policyholder survives it, they are
eligible for a maturity benefit, as per the terms of the contract. People opt for life insurance
policies to provide financial protection in case of unprecedented circumstances.

TYPES OF LIFE INSURANCE

1. Term Life Insurance

Term life plans are the most basic life insurance plans offering financial protection to the
beneficiary, in case the life insured does not survive the covered period. It is often preferred
as it provides comprehensive coverage at an affordable premium.
Term Insurance with Return of Premium (TROP) is another type of term plan that offers
maturity benefits along with death benefit. It requires a slightly more expensive premium. It
is helpful to understand your specific financial requirements to calculate a suitable premium
amount.

2. Whole Life Insurance

Whole Life Insurance plans provide cover to the insured for their entire life, or as long as the
premiums are paid. It is an ideal choice for people who require extensive life coverage and
want their family to be financially protected at all times.

3. Endowment Plan
Endowment plans are a combination of investment and insurance. A portion of the premium
goes towards securing the sum assured, and the rest is utilized for investment purposes. It
serves the purpose of amassing savings at lower risks and providing financial protection to
loved ones during the policy term. Upon maturity, the insured will receive the sum assured.

4. Unit Linked Insurance Plans (ULIPs)

ULIPs allow the policyholder to invest in mutual funds and ensure life cover at the same
time. It is ideal for long-term financial goals as they help in wealth creation. Depending on
one’s risk appetite portfolio, one can invest into various fund options i.e. equity (high risk),
debt (low risk), or hybrid funds (medium risk).
Along with the death benefit, ULIPs offer partial withdrawal after the lock-in period of five
years is over and also allows switching between funds.

5. Money-Back Policies
Money-Back policies provide the insured with a percentage of the sum assured at predefined
intervals. These pay-outs are known as survival benefits. When the policy matures, the
remaining amount of the sum assured is offered to the insured along with the accumulated
bonus, if any.

6. Child Plans
A policyholder can generate funds for their child with the help of a child plan. It helps build a
corpus that can be utilised in the future for child’s education or marriage. In the unfortunate
case of the policyholder’s early demise, the beneficiary will get the sum assured.

7. Retirement Plans
A retirement plan helps you to plan do financial planning for post-retirement years when one
might not have any source of income. Under such plans, a specific amount is regularly paid to
build up a corpus which is used to provide lifetime income to the insured at regular intervals
after retirement.

GENERAL INSURANCE
 General Insurance is any policy that covers assets and valuables such as a vehicle, home,
travel, and health against damage, loss or theft, and many other liabilities. The critical
difference between life insurance and general insurance is that the latter offers financial
protection against damage or loss other than life.

TYPES OF GENERAL INSURANCE

Some of the types of general insurance policies are:

1. Health Insurance
Health Insurance offers coverage for medical and surgical expenses for the insured. It acts as
a safeguard against medical emergencies. Depending on the terms of a health plan, the
insurance provider either settles the bill directly with the hospital or reimburses the insured
for their expenses.
2. Motor Insurance
Motor Insurance provides financial protection for personal and commercial automobiles
against loss due to damage, theft, accident, fire, natural calamities, etc. Two significant types
of motor insurance policies are:
3. Travel Insurance
If you travel frequently, it is beneficial to invest in a travel insurance policy. It offers security
against loss of baggage, delay or cancellation of flights, accidents, or hospitalization
expenses, during a trip.
4. Home Insurance
A house is a valuable asset in a person’s life. Home insurance provides financial security
against damages due to natural or human-made disasters that can damage the house or its
belongings.

LIFE INSURANCE Vs. GENERAL INSURANCE

Comparison
Life Insurance General Insurance
Criteria

It offers financial cover for valuable

It offers financial cover for the life
Coverage assets such as home, health (excluding
of the insured.
life), travel, automobiles, etc.

Duration It is a long-term plan. Depending General insurance policies are usually

on the contract terms, it can offer effective for a short-term e.g. a year and
coverage up to a specified has to be renewed at regular intervals.
duration, such as 15 to 20 years or
even a lifetime.
 Generally, the policyholder pays a lump
The policyholder is required to
sum amount at the time of purchase or
pay the predefined premium
Premium renewal. It may vary in travel insurance,
amount at regular intervals, such
as required only when a specific trip
as monthly, quarterly, or yearly.
needs to be insured.

The policyholder can decide on

The policy value is influenced by and
the sum assured according to the
Policy Value determined according to the value of the
financial situation and expected
asset being insured.
future needs of the beneficiary .

The beneficiary of policy receives

the sum assured in case of the
policyholder’s demise. Upon The policyholder is eligible to receive the
maturity, the policyholder may assured benefits upon an unfortunate
Insurance
receive the sum assured. In the event like damage or loss of insured asset
Claim case of Money-Back or as per the coverage provided in the
Endowment plans, the contract.
policyholder also gets the interest
earned on investments.

The policyholder must be present during

Insurable The policyholder must be present
the purchase, as well as the pay-out of the
Interest during the purchase of the plan.
policy.

 Comprehensive Insurance – This covers both the parties involved in an accident.

Additionally, it offers protection against the scenarios mentioned earlier as well.
 Third-Party Insurance – This provides coverage for the third-party involved in an
accident. According to the Motor Vehicles Act, all two-wheelers and four-
wheelers must have third-party insurance.

REINSURANCE

Reinsurance is insurance that an insurance company purchases from another insurance

company to insulate itself (at least in part) from the risk of a major claims event. With
reinsurance, the company passes on ("cedes") some part of its own insurance liabilities to the
other insurance company.

Difference Between Insurance and Reinsurance

As mentioned above, insurance and reinsurance differ from each other in several ways.
Following are the main differences between both concepts:

 Risk Transfer
The biggest difference between insurance and reinsurance is the process of risk
transfer and management. In the case of insurance, the insured transfers risk
arising from unforeseen events to the insurer in exchange for premium payment.
On the other hand, reinsurance involves transferring the risk of one insurance
company to another in exchange for premiums paid at regular intervals.
 Cost
Reinsurance policies can sometimes be more expensive than insurance policies.
The reason is simple: insurance policies are designed for individuals, while
reinsurance policies are intended to cover catastrophic losses prone to insurance
companies.
 Premium
The difference between insurance and reinsurance premiums is not significant. In
both cases, premium payments are made at an agreed time period.
 Policyholders
In the case of Insurance, the policyholder refers to an individual or a business that
buys a policy to protect its valuable assets. On the other hand, the policyholder in
the case of reinsurance is an insurance provider or a large insurance firm.
 Regulations
Both insurance and reinsurance plans are regulated by different bodies. While
state authorities regulate insurance, reinsurance is regulated by federal bodies.

Quick Table for Difference Between Insurance and Reinsurance

Parameter Insurance Reinsurance

Transfer of risk from the

policyholder to the insurer on Transfer of risk from one
Risk Transfer
the occurrence of a covered insurer to another insurer
event

Cost Lower than Reinsurance Higher than Insurance

Premium Paid per policy agreement Paid per policy agreement

Individual, businesses, or
Policyholder groups of people like Insurance company
employees of a company

Regulated by federal
Regulations Regulated by state authorities
authorities

FUNDAMENTAL PRINCIPLES OF INSURANCE

The concept of insurance is risk distribution among a group of people. Hence, cooperation
becomes the basic principle of insurance.
To ensure the proper functioning of an insurance contract, the insurer and the insured have to
uphold the 7 principles of Insurances mentioned below:
1. Utmost Good Faith
2. Proximate Cause
3. Insurable Interest
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization
8.
Let us understand each principle of insurance with an example.
 Principle of Utmost Good Faith
The fundamental principle is that both the parties in an insurance contract should act in good
faith towards each other, i.e. they must provide clear and concise information related to the
terms and conditions of the contract.
The Insured should provide all the information related to the subject matter, and the insurer
must give precise details regarding the contract.
Example – Jacob took a health insurance policy. At the time of taking insurance, he was a
smoker and failed to disclose this fact. Later, he got cancer. In such a situation, the Insurance
company will not be liable to bear the financial burden as Jacob concealed important facts.
 Principle of Proximate Cause
This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle
applies when the loss is the result of two or more causes. The insurance company will find
the nearest cause of loss to the property. If the proximate cause is the one in which the
property is insured, then the company must pay compensation. If it is not a cause the property
is insured against, then no payment will be made by the insured.
Example –
Due to fire, a wall of a building was damaged, and the municipal authority ordered it to be
demolished. While demolition the adjoining building was damaged. The owner of the
adjoining building claimed the loss under the fire policy. The court held that fire is the nearest
cause of loss to the adjoining building, and the claim is payable as the falling of the wall is an
inevitable result of the fire.
In the same example, the wall of the building damaged due to fire, fell down due to storm
before it could be repaired and damaged an adjoining building. The owner of the adjoining
building claimed the loss under the fire policy. In this case, the fire was a remote cause, and
the storm was the proximate cause; hence the claim is not payable under the fire policy.
 Principle of Insurable interest
This principle says that the individual (insured) must have an insurable interest in the subject
matter. Insurable interest means that the subject matter for which the individual enters the
insurance contract must provide some financial gain to the insured and also lead to a financial
loss if there is any damage, destruction or loss.
Example – the owner of a vegetable cart has an insurable interest in the cart because he is
earning money from it. However, if he sells the cart, he will no longer have an insurable
interest in it.
To claim the amount of insurance, the insured must be the owner of the subject matter both at
the time of entering the contract and at the time of the accident.
 Principle of Indemnity
This principle says that insurance is done only for the coverage of the loss; hence insured
should not make any profit from the insurance contract. In other words, the insured should be
compensated the amount equal to the actual loss and not the amount exceeding the loss. The
purpose of the indemnity principle is to set back the insured at the same financial position as
he was before the loss occurred. Principle of indemnity is observed strictly for property
insurance and not applicable for the life insurance contract.
Example – The owner of a commercial building enters an insurance contract to recover the
costs for any loss or damage in future. If the building sustains structural damages from fire,
then the insurer will indemnify the owner for the costs to repair the building by way of
reimbursing the owner for the exact amount spent on repair or by reconstructing the damaged
areas using its own authorized contractors.
 Principle of Subrogation
Subrogation means one party stands in for another. As per this principle, after the insured, i.e.
the individual has been compensated for the incurred loss to him on the subject matter that
was insured, the rights of the ownership of that property goes to the insurer, i.e. the company.
Subrogation gives the right to the insurance company to claim the amount of loss from the
third-party responsible for the same.
Example – If Mr A gets injured in a road accident, due to reckless driving of a third party,
the company with which Mr A took the accidental insurance will compensate the loss
occurred to Mr A and will also sue the third party to recover the money paid as claim.
 Principle of Contribution
Contribution principle applies when the insured takes more than one insurance policy for the
same subject matter. It states the same thing as in the principle of indemnity, i.e. the insured
cannot make a profit by claiming the loss of one subject matter from different policies or
companies.
Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and
with company B for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs can
claim the full amount from Company A but then he cannot claim any amount from Company
B. Now, Company A can claim the proportional amount reimbursed value from Company B.
 Principle of Loss Minimisation
This principle says that as an owner, it is obligatory on the part of the insurer to take
necessary steps to minimise the loss to the insured property. The principle does not allow the
owner to be irresponsible or negligent just because the subject matter is insured.
Example – If a fire breaks out in your factory, you should take reasonable steps to put out the
fire. You cannot just stand back and allow the fire to burn down the factory because you
know that the insurance company will compensate for it.

ESSENTIALS OF AN INSURANCE CONTRACT

In order for an insurance contract to be legally binding, the document must meet the essential
elements required of all legally binding contracts, plus a few special elements that are
specific to and required by insurance contracts.
First let us talk about the elements required of legally binding contracts in general:
 Offer and Acceptance – This refers to an offering being made and then being
accepted by the other party. When you fulfill this legal requirement, you are saying
that all of the negotiations have been settled and you’ve come to an agreement. This is
also often called “agreement” or a “meeting of the minds”. In the insurance context,
that means you have made an application to the insurance company, they have
accepted it and you have accepted the policy terms they offered.
 Consideration – This refers to a fair exchange of value. A contract where one party
gets everything while another party contributes nothing does not meet this
requirement. In the example of an insurance policy, you are paying them premiums
while they are providing you with a promise to pay claims in the future.
 Legal Capacity – To satisfy this requirement, everyone that is a party to the contract
must have the legal capacity or competence to enter into a contract. This means you
have to meet certain requirements such as being above the age of majority in your
jurisdiction and have the mental capacity to understand what you are signing and
agreeing to.
 Legal Purpose – Obviously, the courts will not enforce a contract that is not legal.
For example, a contract for the provision of illegal services would not be a legal and
valid contract because the course would not enforce it.

The other elements required are specific to insurance contracts:

 Indemnity.
 Insurable Interest.
 Utmost Good Faith.
  Subrogation.
 Assignment and nomination.
 Warranties.
 Proximate Cause.
 Return of Premium.
Insurance Sector Reforms
o Insurtech companies have begun to leverage microfinance institutions to distribute
small-scale insurance solutions in rural India, thereby increasing insurance
penetration.
o Discussions have been initiated between the finance ministry and India’s Insurance
Regulatory Development Authority(IRDAI) regarding the proposed reforms.
o The government is considering the implementation of the “use and file” method to
facilitate ease of doing business in the sector.
Significant Developments in the Insurance Sector:
o Launch of LIC IPO: The government-owned Life Insurance Corporation of India
(LIC) made headlines with its Rs 21,000-crore initial public offering (IPO), with up to
10 percent of its offer size reserved for its policyholders.
o Emphasis on Guaranteed Return Policies by Life Insurers: Many life insurance
companies introduced traditional endowment policies, marketed as an opportunity for
policyholders to benefit from the increased interest rates introduced by RBI.
o Increase in Health Insurance Premiums and Introduction of New
Products: Health insurance premiums for individuals saw an increase of 8-15 percent
this year, largely due to a significant rise in claims during 2020 and 2021.
o Introduction of Innovative Motor Insurance Riders: The IRDAI has given the
green light for insurance companies to offer innovative motor insurance riders such as
pay-as-you-use, pay-as-you-drive and motor floater policies.
o Implementation of Use-and-File Procedure for Faster Product Launches: The
use-and-file norms allow insurance companies to launch new products without prior
approval from the regulator. This step aligns with IRDAI's objective of promoting
flexibility and improved governance in the sector, and has significantly contributed to
the maturation and increased penetration of the insurance industry.

INSURANCE SECTOR IN INDIA / INDIAN

INSURANCE INDUSTRY

The Insurance Sector in India is a vital part of the country’s financial industry, offering a
diverse range of insurance products and services to mitigate risks and provide financial
protection. It is regulated by the Insurance Regulatory and Development Authority of India
(IRDAI) to ensure fairness and stability.

India’s insurance sector has grown significantly, covering life, health, motor, and property
insurance, among others. Life insurance, particularly, is prominent and caters to long-term
savings and protection needs. Other major insurance Public Sector Undertakings (PSUs) in
India include New India Assurance Company Limited, Oriental Insurance Company Limited,
National Insurance Company Limited, and United India Insurance Company Limited.

Public and private insurers operate in India, with private companies gaining market share
through innovation and customer-centric approaches alongside traditional public sector
companies like LIC. Regulatory reforms have enhanced transparency, customer protection,
and competition, while digital platforms have improved accessibility and streamlined claims
processes.

The insurance sector contributes to economic development by channelling funds into

infrastructure projects and other investments, and it provides crucial financial security during
uncertain times for individuals and families.

GROWTH OF INSURANCE SECTOR IN INDIA

The evolution of the Insurance Sector in India can be traced back to the early 19th century
when British colonial rulers introduced insurance practices in the country. Here is a precise
timeline of the key milestones in the history of the insurance sector in India:

Year Important Milestones

1818 Oriental Life Insurance Company, the first life insurance company in India, was
established in Kolkata (then Calcutta) by Anita Bhavsar and others. It primarily catered to
European customers.
1850 Triton Insurance Company, the first general insurance company, was set up in
Kolkata to provide non-life insurance services.
1870 The Bombay Mutual Life Assurance Society, the first Indian-owned life insurance
company, was founded in Mumbai (then Bombay).
1907 The Indian Mercantile Insurance Company and the United India Insurance
Company were established, marking the entry of Indian companies into the insurance
market.
1912 The Indian Life Assurance Companies Act was passed, which laid the foundation
for the regulation and supervision of insurance companies in India.
1928 The Indian Insurance Companies Act was enacted, introducing comprehensive
regulations for insurance companies operating in India.
1938 The Insurance Act was passed, leading to the nationalization of life insurance in
India. The government established the Life Insurance Corporation of India (LIC) as a
statutory body to take over and consolidate various life insurance companies.
1956 The General Insurance Business (Nationalization) Act was enacted, leading to the
nationalization of the general insurance sector. The government established the General
Insurance Corporation (GIC) and four subsidiary companies to handle different classes of
general insurance.
1991 The government initiated economic reforms, including liberalization and opening
up of the insurance sector to private players. The Insurance Regulatory and Development
Authority of India (IRDAI) was established as the regulatory authority for the insurance
sector.

2000 Private insurance companies were allowed to operate in India, leading to the entry of
various domestic and foreign players. This brought increased competition, product
innovation, and improved customer services.

2002 The IRDAI issued guidelines for the introduction of unit-linked insurance plans
(ULIPs), a type of life insurance policy linked to the performance of investment funds. ULIPs
gained popularity due to their investment and insurance benefits.

2013 The Insurance Laws (Amendment) Act was passed, increasing the foreign direct
investment (FDI) limit in the insurance sector from 26% to 49%. This allowed foreign
insurance companies to have a higher stake in Indian insurance ventures.

2020 The government increased the FDI limit in the insurance sector to 74%, further
opening up the sector to foreign investors.

These milestones reflect the progressive development of the insurance sector in India, from
its early beginnings as a colonial institution to a diverse market with a mix of public and
private players, catering to the evolving needs of the Indian population.

REGULATOR OF INSURANCE SECTOR IN INDIA

The Insurance Regulatory and Development Authority of India (IRDAI) is the regulatory
body responsible for overseeing and regulating the insurance sector in India. Here is a precise
description of the IRDAI, including its formation, the committee that recommended its
establishment, and its significant achievements over the years:

 Formation and Reason for Formation

The IRDAI was formed in 1999 following the recommendations of the Malhotra Committee,
which was established in 1993 to examine and propose reforms for the Indian insurance
sector. The committee emphasized the need for an autonomous and independent regulatory
authority to protect the interests of policyholders, ensure fair practices, promote competition,
and foster the growth of the insurance industry sustainably.

REFORMS IN INSURANCE SECTOR IN INDIA

Several reforms have been undertaken in the Indian insurance sector to promote growth,
enhance transparency, and improve customer protection. Here are some key reforms along
with the years they were implemented:
 1999 Formation of the Insurance Regulatory and Development
Authority of India (IRDAI)
 The IRDAI was established as an autonomous regulatory body in 1999
to oversee and regulate the insurance sector in India. Its primary role is to
protect the interests of policyholders and ensure the orderly growth of the
insurance industry.
 2000 Introduction of Unit-Linked Insurance Plans (ULIPs) In
2000, the IRDAI issued guidelines for ULIPs, which combined investment
and insurance benefits. ULIPs allowed policyholders to invest in various
funds and participate in the market’s ups and downs while providing life
insurance coverage.
 2002 Bancassurance Guidelines The IRDAI introduced guidelines
for bancassurance, which enabled banks to sell insurance products. This
partnership between banks and insurance companies expanded the
distribution network, making insurance products more accessible to
customers.
 2005 Compulsory Listing of Insurance Companies In 2005,
the IRDAI made it mandatory for insurance companies to be listed on the
stock exchanges. This move aimed to increase transparency, improve
corporate governance, and enhance market discipline within the insurance
sector.
 2007 Introduction of Health Insurance Portability Health
insurance portability was introduced, allowing policyholders to switch
between insurance companies without losing the benefits earned under
their existing policies. This reform increased competition among insurers
and provided greater choice and flexibility to policyholders.
 2010 Introduction of Point of Sales (POS) Products The IRDAI
introduced POS products in 2010, allowing insurance policies to be sold
through authorized intermediaries at designated points of sale. POS
products simplified the sales process and made insurance more accessible
to customers.
 2013 Increase in Foreign Direct Investment (FDI) Limit The
Insurance Laws (Amendment) Act was passed in 2013, increasing the FDI
limit in the insurance sector from 26% to 49%. This reform aimed to
attract foreign investment, bring in expertise, and promote the growth of
the insurance industry.
 2016 Introduction of E-insurance PoliciesThe IRDAI mandated the
issuance of electronic insurance policies in 2016. E-insurance policies
eliminated the need for physical documents, reduced paperwork, and
provided convenience to policyholders.
  2017 Standardization of Health Insurance Products The IRDAI
introduced guidelines for standardization of health insurance products in
2017. This reform aimed to simplify policy comparisons, increase
transparency, and facilitate informed decision-making for customers.
 2020 Increase in FDI Limit to 74% In 2020, the government
raised the FDI limit in the insurance sector from 49% to 74%. This move
was intended to attract more foreign investment, enhance capital inflow,
and foster growth in the insurance industry.... Read more at:
https://www.studyiq.com/articles/insurance-sector-in-india/

INSURANCE REGULATIONS IN INDIA

Identify the regulatory agencies responsible for regulating insurance and reinsurance
companies.

Insurance and reinsurance companies and insurance intermediaries in India are governed by
the Insurance Regulatory and Development Authority of India (IRDAI). The primary
legislation regulating the Indian insurance sector comprises the Insurance Act
1938 (Insurance Act) and the Insurance Regulatory and Development Authority Act
1999 (IRDA Act). Under the powers granted to the IRDAI under the IRDA Act, the IRDAI
has issued various regulations governing the licensing and functioning of insurance and
reinsurance companies and insurance intermediaries.

An Indian or overseas insurance or reinsurance company may establish a presence in the

International Financial Services Centre (IFSC) and obtain registration as an IFSC insurance
office (IIO) for carrying on insurance or reinsurance business. These entities are then
governed by the International Financial Services Centres Authority (IFSCA) and the various
regulations and guidelines issued by the IFSCA.

Appeals from orders issued and decisions made by the IRDAI may be referred before the
Securities Appellate Tribunal under the specified procedural rules for filing appeals from
IRDAI orders.

The Reserve Bank of India (RBI)’s ‘Master Direction – Insurance’ of 1 January 2016 (as
amended) consolidates the foreign exchange regulations applicable to insurance businesses
and provides guidance on various issues, including the manner and extent to which an Indian
insurance company can issue and settle claims in respect of overseas residents. Separately,
the Foreign Exchange Management (Insurance) Regulations 2015 regulate the manner and
extent to which a person resident in India can take or continue to hold a general, life or health
insurance policy issued by an overseas insurance company.

1. FORMATION AND LICENSING:

What are the requirements for formation and licensing of new insurance and
reinsurance companies?

Under the Insurance Act, an Indian insurance company is permitted to carry out insurance
business in India. An Indian insurance company is a public limited company formed under
the Companies Act 2013 (Companies Act) that exclusively carries out life insurance, general
insurance, health insurance or reinsurance business. Pursuant to the Insurance (Amendment)
Act 2021 (Amendment Act 2021), the foreign direct investment limit in Indian insurance
companies has been increased from 49 per cent to 74 per cent, and the norms issued earlier by
the IRDAI, which required an Indian insurance company to be Indian owned and controlled,
were withdrawn.

An entity seeking to carry out insurance business is required to apply for a certificate of
registration from the IRDAI following a three-stage process set out under the IRDAI
(Registration of Indian Insurance Companies) Regulations 2022 (Registration Regulations).
A certificate for registration is required for each category of insurance business (ie, life,
general, stand-alone health and reinsurance). Also, the Registration Regulations set out the
essential requirements that an applicant applying for registration is required to fulfil,
including, but not limited to:
 permissible foreign investment limits;
 minimum capitalisation requirements;
 minimum qualifications of the directors and persons in management of the promoters,
investors and the applicant;
 planned infrastructure;
 proposed business expansion plan; and
 general track record of conduct and performance of each of the Indian promoters and
foreign investors in the business or profession they are engaged in.

In addition, the applicant must also provide adequate documentation in support of its
application as prescribed under the Registration Regulations.

The Insurance Act was significantly amended through the Insurance Laws (Amendment) Act
2015 (Amendment Act 2015) and is now perhaps set to undergo another round of significant
amendments. The Central Government recently issued the Insurance Laws (Amendment) Bill
2022 (Draft Insurance Bill), which has proposed significant amendments to various
provisions under the Insurance Act and the IRDA Act. The Draft Insurance Bill is yet to be
taken up for discussion before Parliament, but, if brought into force in its present form, it
would result in significant changes in terms of the norms and procedures for registering
entities in the insurance sector, permitted forms of business and various operational matters.
In addition, several existing regulations would need to be amended or new guidance
introduced to implement the changes.
Apart from registering an Indian reinsurance company, reinsurance companies have the
following options for writing reinsurance of Indian risks:
 Establish a foreign reinsurer branch under IRDAI (Registration and Operations of
Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations 2015 (Branch
Office Regulations). The Branch Office Regulations specify the eligibility criteria for
a foreign reinsurer, such as credit rating, infusion of minimum assigned capital into
the foreign reinsurer branch, in-principle clearance from the home country regulator
and a commitment to meet all liabilities of the foreign reinsurer branch.
 Syndicates of Lloyd’s may participate under the Lloyd’s India framework through a
service company set up in India under the IRDAI (Lloyd’s India) Regulations 2016.

 Set up a presence in the IFSC and obtain registration as an IIO for carrying on
reinsurance business. The IFSCA (Registration of Insurance Business) Regulations
2021 and the IFSCA (Operation of International Financial Services Centres Insurance
Office) Guidelines 2021 set out the registration requirements for an entity seeking to
undertake insurance or reinsurance business in the IFSC

 Write reinsurance of Indian risks from overseas offices by registering as cross-border

reinsurers with the IRDAI under the IRDAI’s recently updated Guidelines on issuance
of File Reference Numbers (FRN) to Cross Border Reinsurers of 3 January 2023
(CBR Guidelines). The process comprises a single-stage application for the allotment
of an FRN, made through Indian cedants who wish to cede insurance business with
such cross-border reinsurers (CBRs). The CBR Guidelines specify the eligibility
criteria for CBRs such as authorisation from the home country regulator, credit rating,
solvency margin and claims settlement experience. Further, the CBR Guidelines now
allow automatic renewal of FRNs for CBRs who meet the specified criteria.

The IRDAI has also recently updated the guidelines for overseas insurance companies to
open liaison offices in India. The IRDAI’s Guidelines on Establishment and Closure of
Liaison Office in India by an Insurance Company registered outside India of 17 October 2022
prescribe a single-stage application process to the IRDAI and the documentation required for
opening a liaison office in India.

2.Other licences, authorisations and qualifications:

What licences, authorisations or qualifications are required for insurance and

reinsurance companies to conduct business?

3.Officers and directors

What are the minimum qualification requirements for officers and directors of
insurance and reinsurance companies?
The Registration Regulations prescribe that the IRDAI will examine the following
considerations for officers and directors of insurance and reinsurance companies while
granting registration to an insurance or reinsurance company:
 the performance record of the directors and persons in the management of the
promoters, investors of the applicant and the applicant;
 the level of actuarial and other professional expertise within the management of the
applicant company; and
 the academic and professional qualifications, professional experience, reputation and
character of the directors and key persons, and whether any censure or disciplinary
actions, dismissals and litigations have been instituted against them.

Further, the application process for the registration of insurance or reinsurance companies
requires various details in terms of the qualifications and professional background of the key
management personnel (KMP) of the applicant. With the increase in foreign direct investment
in insurance companies, the Registration Regulations require an insurance company having
foreign investment to maintain, at the minimum, the following personnel who are resident
Indian citizens: (1) the majority of directors; (2) the majority of KMP; and (3) at least one
among the chairpersons of its board, its managing director and its chief executive officer.
Additionally, the IRDAI’s Guidelines for Corporate Governance for Insurers in India of 18
May 2016 requires all directors and KMP of an insurance company to be compliant with the
‘fit and proper’ criteria stipulated by the IRDAI.

For reinsurance companies having branch offices in India, the Branch Office Regulations
prescribe similar registration requirements as above, and require the KMP of the foreign
reinsurer branch to be appointed with the prior approval of the IRDAI. Apart from the said
registration requirements, the Branch Office Regulations further prescribe that an executive
committee of the foreign reinsurer branch must be constituted by the board of directors of the
foreign reinsurer to perform the functions of the board with a clearly defined delegation from
the board of the foreign reinsurance company.

4.Capital and surplus requirements

What are the capital and surplus requirements for insurance and reinsurance
companies?
The insurance regulatory framework prescribes varying capital and surplus requirements for
different insurance and reinsurance companies:
 insurance companies are required to have a minimum paid-up equity capital of 1
billion rupees;
 reinsurance companies are required to have a minimum paid-up capital of 2 billion
rupees;
 a foreign reinsurance company seeking to set up a branch o ce in India is required to
have a minimum net owned funds of 50 billion rupees and is further required to infuse
a minimum assigned capital of 1 billion rupees into the branch o ce;
  an IIO set up by an Indian or foreign insurance or reinsurance company or other
permissible entities is required to have a minimum net owned funds of 10 billion
rupees and maintain a minimum assigned capital of 122 million rupees;
 a Lloyd’s India branch is required to have a minimum assigned capital of 1 billion
rupees; and
 syndicates of Lloyd’s India are required to maintain an assigned capital of 50 million
rupees through their service companies in India.

Further, various amendments in terms of minimum capital and surplus requirements have
been proposed for different insurance and reinsurance companies:
 the Draft Insurance Bill proposes to remove the minimum paid-up equity capital
requirements and specifies that the determination of minimum paid-up equity capital
will be in accordance with the regulations specified by the IRDAI, depending on the
‘size and scale of operations, class or sub-class of insurance business and the category
or type of insurer’;
 the minimum net owned funds requirement for registering a foreign reinsurer branch
o ce in India is proposed to be reduced from 50 billion rupees to 5 billion rupees; and
 The IRDAI has issued an exposure draft on the IRDAI (Re-Insurance) (Amendment)
Regulations 2022 (Reinsurance Exposure Draft), which proposes to reduce the
minimum assigned capital requirement from 1 billion rupees to 500 million rupees in
respect of the opening of new foreign reinsurer branch o ces in India.

If the abovementioned drafts are brought into force as presently proposed, the applicable
capital requirements would change accordingly.

5.Reserves

What are the requirements with respect to reserves maintained by insurance and
reinsurance companies?
Insurance and reinsurance companies are required to maintain, at all times, a solvency margin
of assets over the number of liabilities of not less than 50 per cent of the amount of the
minimum capital requirements of such insurance or reinsurance company. The required
solvency margin is calculated by insurance companies based on their mathematical reserves
and the sum at risk. The IRDAI periodically specifies the factors that must be considered in
the calculation of the required solvency margin.
Further, the Amendment Act 2021 and the Indian Insurance Companies (Foreign Investment)
Amendment Rules 2021 (Amendment Rules) stipulate conditions where foreign investment
in an insurance company exceeds 49 per cent, such as:
 at least 50 per cent of the net profit is required to be retained in general reserves, for a
financial year in which dividend is paid on equity shares and at any time the solvency
margin is less than 1.2 times the control level of solvency; and
  at least 50 per cent of its directors are required to be independent directors, unless the
chairperson of the board is an independent director, in which case at least one-third of
its board shall comprise independent directors.

In terms of foreign entities transacting insurance or reinsurance business in India, the

following requirements have been prescribed:
 the Branch Office Regulations prescribe that the foreign reinsurer setting up a foreign
reinsurer branch shall fully comply with the solvency margin requirements under the
home country’s regulatory requirements;
 the foreign reinsurer branch and the service companies registered under the Lloyd’s
India framework are also required to maintain their solvency margin in accordance
with the applicable regulations issued by the IRDAI;
 an IIO is required to maintain such solvency margin as is specified by its home
country regulatory or supervisory authority; and
 the CBR Guidelines require a CBR, while filing an application for allotment of FRN,
to confirm whether such CBR complies with the solvency margin and capital
adequacy prescribed by the respective home regulator.

6.Product regulation

What are the regulatory requirements with respect to insurance products offered for
sale? Are some products regulated by multiple agencies?
All insurance products are required to be filed with the IRDAI, in accordance with the
applicable product filing procedures issued by the IRDAI.
Until recently, products across lines of insurance business had to be filed under a ‘file and
use’ procedure (whereby products required the IRDAI's prior approval before they could be
launched) and a few products (such as commercial products in general insurance) could be
filed under a ‘use and file’ procedure (whereby products can be launched immediately after
the insurer’s internal committee’s approval subject to certain conditions such as the
submission of quarterly reports to the IRDAI, and the completion of use and file documents).
Following a series of recent circulars issued by the IRDAI, insurers are now permitted to file
most of their insurance products under the use and file procedure, whereby the product is
approved and certified by the insurer’s internal committees.
The construction of health insurance products is regulated under the IRDAI-specified general
terms and conditions, and defined terms and certain terms and conditions specified under
various standardisation guidelines and the IRDAI (Health Insurance) Regulations 2016. Life
insurance products are regulated by the IRDAI (Non-Linked Insurance Products) Regulations
2019 and the IRDAI (Unit Linked Insurance Products) Regulations 2019.
Further, the IRDAI (Protection of Policyholders’ Interests Regulations) 2017 (Policyholders
Regulations) prescribe certain matters to be mandatorily incorporated in life insurance,
general insurance and health insurance policies. Some of the key requirements are as follows:
 the name and unique identification number allotted by the IRDAI to the product, its
terms and conditions, and details of the salesperson;
  benefits payable and the contingencies upon which these are payable and the other
terms and conditions of the insurance contract, including any riders or endorsements;
 details of the nominee;
 the premiums payable, frequency of payment, grace period allowed and the
implication of discontinuing the payment of an instalment of the premium;
 any special clauses, exclusions or conditions imposed on the policy;
 the address and email of the insurance company to which all communications in
respect of the policy must be sent;
 details of the insurance company’s internal grievance redressal mechanism, along
with the right of the insured to approach the insurance ombudsman with requisite
territorial jurisdiction; and
 the list of documents that are normally required to be submitted in case of a claim.

Where exclusions are to be stipulated in the policy, the Policyholders Regulations require
that, wherever possible, insurance companies must endeavour to classify the exclusions into
the following:
 standard exclusions applicable in all policies;
 exclusions specific to the policy that cannot be waived; and
 exclusions specific to the policy that can be waived on payment of an additional
premium.

Similarly, to give clarity and understanding of the conditions to the policyholder, insurance
companies are required to endeavour to broadly categorise policy conditions into the
following:
 conditions precedent to the contract;
 conditions applicable during the contract;
 conditions when a claim arises; and
 conditions for renewal of the contract.

A number of regulations and guidelines issued by the IRDAI specify that, broadly, product
literature must be in simple language and easily understandable to the public at large, and
technical terms used in the policy wording must be clarified to the insured.
The terms and conditions of property and engineering insurance covers are currently
governed by the policy wording specified by the former Tariff Advisory Committee. Very
few modifications to this policy wording have been permitted.
The IRDAI has over the past few years notified standardised or tariff products such as
individual health insurance products, standard non-linked non-participating individual pure
risk life insurance products, standard products for fire and allied perils for dwellings, small
and micro businesses, personal accident, and domestic travel, and standard individual
immediate annuity products, which are mandatorily required to be offered by all insurers.
Recently, the IRDAI has also introduced a model product for persons with disabilities,
persons afflicted with HIV/AIDS, and those with mental illness whereby the IRDAI has made
it mandatory for every general and stand-alone health insurance company to offer their
respective products to the foregoing categories.
In furtherance of the IRDAI’s standard products for fire and allied perils for dwellings and
small and micro businesses, the IRDAI has recently permitted general insurers to design and
file alternative products covering fire and allied perils for dwellings and small and micro
businesses. In addition, the IRDAI has issued draft features for long-term fire insurance
products and long-term motor products.
The IRDAI has also issued specific additional guidance for certain forms of insurance
contracts such as life, health, trade credit and surety insurance contracts. As an illustration,
for health insurance, the IRDAI has issued standardised wordings for general clauses for
indemnity-based health insurance policies (excluding personal accident and domestic or
overseas travel) and for certain standard exclusions used under health insurance contracts.
The IRDAI has also specified a standard set of definitions, a standard nomenclature for
certain critical illnesses, a standard list of non-medical expenses that are permitted to be
excluded, a list of exclusions that are not allowed and certain existing diseases that may be
permanently excluded. It has also specified several other conditions for health insurance
policies, making these policies highly regulated.

7.Regulatory examinations

What are the frequency, types and scope of financial, market conduct or other periodic
examinations of insurance and reinsurance companies?
Insurance companies, reinsurance companies and insurance intermediaries are amenable to
inspections and investigations by the IRDAI. No specific frequency has been prescribed for
these investigations and inspections.
Even service providers and contractors to insurance companies or insurance intermediaries
are obliged to furnish to the IRDAI, if required, during any investigation or inspection, all
books of accounts, registers, and other documents and databases in their custody or power
that relate to the affairs of the insurance company or the insurance intermediary. Directors
and other officers of such service providers or contractors may also be called on by the
IRDAI to furnish statements on oath.

8.Investments;

What are the rules on the kinds and amounts of investments that insurance and
reinsurance companies may make?
Investments made by insurance and reinsurance companies are governed by:
 the Insurance Act;
 the IRDAI (Investment) Regulations 2016 (Investment Regulations); and
 the Investments – Master Circular – IRDAI (Investment) Regulations 2016 version
3 of 27 October 2022 and various other circulars issued by the IRDAI.

The Insurance Act mandates that:

 life insurance companies should invest assets of at least 25 per cent in government
securities, a further sum equal to not less than 25 per cent in government securities or
 approved securities and the balance in any other approved investment under the
Investment Regulations;
 general insurance companies are required to invest 20 per cent of the assets in
government securities, a further sum equal to not less than 10 per cent of the assets in
government securities or approved securities and the balance in any other approved
investment under the Investment Regulations; and
 reinsurance companies and foreign reinsurer branches are required to invest and keep
invested at all times 20 per cent of the assets in government securities, a further sum
equal to not less than 10 per cent of the assets in government securities or approved
securities and the balance in any other approved investment under the Investment
Regulations.

The Investment Regulations, which contain the exposure or prudential norms, set out, inter
alia, the limits on investments to be made by insurance or reinsurance companies based on
the investee company, group or industry. Also, subject to the Investment Regulations,
insurance companies cannot invest more than 5 per cent of their assets in companies
belonging to promoters. Moreover, insurance companies are also prohibited from investing
the funds of policyholders, directly or indirectly, outside India.

9.Change of control

What are the regulatory requirements on a change of control of insurance and

reinsurance companies? Are officers, directors and controlling persons of the acquirer
subject to background investigations?

Under section 6A of the Insurance Act, read with the Registration Regulations, prior approval
from the IRDAI must be obtained in the event of a change in shareholding of an insurance or
reinsurance company where, after the transfer, the total shareholding of the transferee is
likely to exceed 5 per cent of the total paid-up capital of the company.
Also, prior approval of the IRDAI must be obtained if the nominal value of the shares
intended to be transferred by any individual, firm, group, constituents of a group or body
corporate under the same management, jointly or severally, exceeds 1 per cent of the total
paid-up equity capital of the insurance or reinsurance company.
There are no express provisions mandating background investigations of officers and
directors of acquirers. However, while seeking the IRDAI’s approval for the transaction,
information may need to be submitted regarding whether the directors of the transferee have
ever been refused a licence or authorisation in the past to carry out regulated financial
business, or whether any company, firm or organisation with which such directors have been
associated as directors, officers or managers has been investigated by a regulatory or
professional body.

10.Financing of an acquisition
What are the requirements and restrictions regarding financing of the acquisition of an
insurance or reinsurance company?
The Indian insurance regulatory framework does not expressly regulate the financing of the
acquisition of an Indian insurance or reinsurance company.

11.Minority interest

What are the regulatory requirements and restrictions on investors acquiring a

minority interest in an insurance or reinsurance company?
There are no specific provisions or requirements under the Indian insurance regulatory
framework on the acquisition of a minority interest in an insurance company or reinsurance
company.

12.Foreign ownership

What are the regulatory requirements and restrictions concerning the investment in an
insurance or reinsurance company by foreign citizens, companies or governments?
The Amendment Act 2021 has increased the foreign direct investment limit in insurance and
reinsurance companies from 49 per cent to 74 per cent.
Further, the IRDAI has notified the Registration Regulations, which repealed the earlier
IRDAI (Registration of Indian Insurance Companies) Regulations 2000 and IRDAI (Transfer
of Equity Shares of Insurance Companies) Regulations 2015 and which broadly set out the
various requirements for investment in an insurance company, namely:
 a lock-in period for investment in the form of equity shares either in the capacity of a
promoter or an investor. The minimum lock-in period has been classified in
accordance with the time at which the investment is being made; and
 the maximum investment that may be made by a single investor or collectively by all
the investors in insurance companies that are not listed on an Indian stock exchange.

Private equity or alternative investment funds are permitted to invest in Indian insurance
companies as either investors or promoters in accordance with the IRDAI (Investment by
Private Equity Funds in Indian Insurance Companies) Guidelines 2017 of 5 December 2017
and the Registration Regulations.

13.Group supervision and capital requirements

What is the supervisory framework for groups of companies containing an insurer or

reinsurer in a holding company system? What are the enterprise risk assessment and
reporting requirements for an insurer or reinsurer and its holding company? What
holding company or group capital requirements exist in addition to individual legal
entity capital requirements for insurers and reinsurers?

The IRDAI directly regulates only those insurance companies, reinsurance companies and
insurance intermediaries operating in the Indian insurance sector, and currently does not
regulate the operations of the group entities of such insurance companies or insurance
intermediaries. However, there are some restrictions on insurance companies and insurance
intermediaries operating in the same group, where the IRDAI has discretion (in some cases)
to determine the scope of ‘group’:
 an Indian corporate group can have an insurance company and an insurance broker or
corporate agent within the same group, subject to certain conditions being fulfilled;
 typically, within a group, the IRDAI will grant one certificate of registration to only
one entity for insurance intermediation, unless a case on merits and with no conflict of
interest is made before the IRDAI;
 a web aggregator cannot be a related party of an insurance company;
 there is no express restriction on insurance companies and surveyors operating in the
same group, but the IRDAI is likely to view this as an inherent conflict of interest;
 there is no express restriction on insurance companies and TPAs operating in the same
group; and
 an insurance agent or insurance intermediary is not permitted to be a director of an
insurance company.

14.Reinsurance agreements

What are the regulatory requirements with respect to reinsurance agreements between
insurance and reinsurance companies domiciled in your jurisdiction?
The IRDAI (Reinsurance) Regulations 2018 (Reinsurance Regulations) issued by the IRDAI
define a reinsurance contract as a commercial agreement that is legally binding on all the
parties and that is evidenced by a reinsurance slip, cover note or another such document.
Reinsurance arrangements need not be pre-approved by the IRDAI, but they must be
documented and filed with the IRDAI within the stipulated time frame.

The overarching regulatory framework for the reinsurance of all insurance risks in India is set
out in the Reinsurance Regulations. The guiding principle is maximising retentions within
India, so each Indian insurance company must maintain the maximum possible retention
commensurate with its financial strength, quality of risks and volume of business. Regarding
addition, both Indian reinsurance companies and foreign reinsurer branches are required to
maintain a minimum retention of 50 per cent of their Indian business. An Indian insurance
company is also strictly prohibited from fronting for a foreign insurance company or
reinsurance company. ‘Fronting’ is defined as a process of transferring risk in which an
Indian insurance company cedes or retrocedes most or all of the assumed risk to a reinsurance
company or a retrocessionaire.

Further, Indian insurance companies are required to mandatorily cede a certain percentage of
the sum assured on each policy for different classes of insurance written in India to Indian
reinsurance companies as defined under the provisions of the Insurance Act. Apportionment
of obligatory cession for the financial year 2023-24 has remained consistent with the previous
year’s requirement of 4 per cent. The requirement to place the entire obligatory cession only
with the General Insurance Corporation of India also continues to be applicable.
Subject to the retention limit and the obligatory cession to the Indian reinsurance company
for other cessions, every cedent, is required to comply with the ‘order of preference for
cessions’ set out in the Reinsurance Regulations, where ‘cedent’ is defined under the
Reinsurance Regulations as an Indian insurance company writing ‘direct’ insurance business
that contractually cedes a portion of the risk. A cedent is required to first offer its facultative
and treaty surpluses to Indian reinsurance companies transacting reinsurance business during
the immediate past three continuous financial years, and thereafter to other Indian reinsurance
companies and foreign reinsurer branches. The Indian insurance company may then proceed
to offer the surplus to IIOs and overseas reinsurance companies that meet the required credit
rating criteria, followed by other IIOs, and then other overseas reinsurance companies and
Indian insurance companies (only for facultative placements).

The IRDAI has recently issued the Reinsurance Exposure Draft, which proposes to amend the
‘order of preference’ by placing Indian reinsurance companies, foreign reinsurer branches
and IIOs in the highest category, and thereafter CBRs that meet the required credit rating
criteria, followed by other Indian insurance companies (only in respect of per-risk facultative
placements) and other cross-border reinsurers.

Although the order of preference does not apply to Indian insurance companies transacting
life insurance business, the Reinsurance Regulations require them to endeavour to utilise the
Indian domestic capacity before offering reinsurance placements to CBRs. Life insurance
companies are also required to obtain the prior approval of the IRDAI before entering into
reinsurance arrangements with their promoter company, or associate or group companies,
except where the arrangements are on commercially competitive terms and an arm’s-length
basis.

Indian insurance companies are also required to comply with various requirements set out in
the Reinsurance Regulations, including filing requirements for the reinsurance programme,
and the wordings of each reinsurance contract, as well as details of their shares in the
reinsurance arrangements entered into.

Further, proposals for alternative risk transfer – namely non-traditionally structured

reinsurance solutions tailored to the specific needs and profile of an insurance or reinsurance
company – are also required to be submitted to the IRDAI.

15.Ceded reinsurance and retention of risk

What requirements and restrictions govern the amount of ceded reinsurance and
retention of risk by insurers?
Indian insurers are mandated to retain risk proportionate to their financial strength, quality of
risks and business volume. The IRDAI has issued no specific guidance on the appropriate
minimum amount to be retained by non-life insurers. However, life insurers are required to
maintain a minimum retention of 25 per cent of the sum at risk for pure protection life
insurance business portfolios and 50 per cent otherwise. Further, Indian insurers are also
required to mandatorily cede the prescribed percentage of the sum assured on each policy for
different classes of insurance written in India to the Indian reinsurer.

For cedents transacting other than the life insurance business, the surplus over the domestic
reinsurance arrangements shall be placed outside India with only those CBRs that satisfy the
prescribed criteria and have the details filed with the IRDAI.

Specifically, the Reinsurance Regulations stipulate the maximum limits on reinsurance

cession that can be made by an Indian insurer to a particular CBR under any insurance
segment, and are as follows:
 if Standard and Poor’s (S&P) rating of the CBR is BBB or BBB+, up to 10 per cent
cession is allowed;
 if S&P’s rating of the CBR is greater than BBB+ and up to and including A+, up to 15
per cent cession is allowed; and
 if S&P’s rating of the CBR is greater than A+, up to 20 per cent cession is allowed.

The percentages of the cession limits are calculated on the total reinsurance premium ceded
outside India. Any cession to a CBR that does not satisfy the eligibility criteria, or where the
cession is above the prescribed limit, requires the prior approval of the IRDAI for placement.
The Reinsurance Exposure Draft has proposed various changes to maximum limits on
reinsurance cession that can be made by an Indian insurance company to a particular CBR
under any insurance segment. If the Reinsurance Exposure Draft is brought into force in its
present form, it would change the present prescribed maximum limits on reinsurance cession
as follows:

 if S&Ps rating of the CBR is BBB or BBB+, up to 10 per cent cession;

 if S&P’s rating of the CBR is greater than BBB+ and up to and including A+, up to 20
per cent cession; and
 if S&P’s rating of the CBR is greater than A+, up to 30 per cent cession or such
amount as may be specified by the IRDAI (at present 2 billion rupees), whichever is
higher.

The percentages of the cession limits are proposed to be calculated on the total reinsurance
premium ceded outside India to all CBRs.

16.Collateral

What are the collateral requirements for reinsurers in a reinsurance transaction?

The Indian insurance regulatory framework does not specify any collateral requirements for
reinsurers in a reinsurance transaction.

17.Credit for reinsurance

What are the regulatory requirements for cedents to obtain credit for reinsurance on
their financial statements?
Presently, the Indian insurance regulatory framework does not expressly regulate
requirements for cedents to obtain credit for reinsurance on their financial statements.

18.Insolvent and financially troubled companies

What laws govern insolvent or financially troubled insurance and reinsurance

companies?
Insolvency and bankruptcy law in India was overhauled by way of the Insolvency and
Bankruptcy Code 2016 (Insolvency and Bankruptcy Code). It provides the insolvency and
liquidation process for corporate persons. However, insurers have been excluded from the
scope of ‘corporate debtor’ as defined under the Insolvency and Bankruptcy Code.
The Insurance Act specifically provides that the winding-up of an insurance company shall
be under the procedure laid out in the Companies Act. Also, the Insurance Act specifies
certain other conditions under which the court may order the winding-up of an insurance
company.
The process for winding up involves compliance with various procedural requirements set out
in the Companies Act. The process includes:
 the appointment of a company liquidator;
 the realisation of the assets of the company;
 repayment of all the outstanding creditors and any other statutory dues owed by the
company; and
 dissolution of the company.

Concerning repayment of the creditors and outstanding dues of the company, the Companies
Act provides that certain dues are required to be paid on priority, including dues to employees
of the company, and the statutory dues owed to governmental authorities.

Further, the Insurance Act provides that the voluntary winding-up of an insurance company is
subject to certain restrictions. An insurance company cannot be wound up voluntarily except
to effect an amalgamation or a reconstruction of the company, or on the ground that because
of its liabilities it cannot continue its business.

An insurance company may also be partially wound up, whereby a class of its business is
wound up but another class either continues to operate or is transferred to another insurance
company. In this scenario, a scheme may be prepared and submitted in court that should
provide for the following: the allocation and distribution of the assets and liabilities of the
company between any classes of business affected (including the allocation of any surplus
assets that may arise on the proposed winding-up) for any future rights of every class of
policyholders in respect of their policies; and the manner of winding up any of the affairs of
the company that are proposed to be wound up. The scheme may also include provisions for
altering the memorandum of association of the company concerning its objects and such
further provisions as may be expedient for giving effect to the scheme.
Moreover, the Insurance Act also authorises the IRDAI, after allowing being heard, to
appoint an administrator to manage the affairs of the insurer (under the direction and control
of IRDAI), if at any time the IRDAI has reason to believe that the insurer carrying out life
insurance business is acting in a manner likely to be prejudicial to the interests of holders of
life insurance policies. In June 2017, the IRDAI, in the exercise of this authority, appointed
an administrator for Sahara Life Insurance Company.

19.Claim priority in insolvency

What is the priority of claims (insurance and otherwise) against an insurance or

reinsurance company in an insolvency proceeding?
The Indian insurance regulatory framework does not specifically regulate the priority of
claims against an insurance or reinsurance company in an insolvency proceeding. However,
because the winding-up of an insurance company would be under the Companies Act and the
Insolvency and Bankruptcy Code, the priority of claims prescribed thereunder would apply to
an insurance and a reinsurance company as well.

20.INTERMEDIARIES

What are the licensing requirements for intermediaries representing insurance and
reinsurance companies?

The IRDAI has issued various specific regulations to govern individuals and entities that can
represent insurance and reinsurance companies and are permitted to offer and distribute
insurance products on their behalf. Broadly, an individual can be registered as an insurance
agent, and entities may be registered as insurance intermediaries through one of the
following:
 corporate agents;
 insurance brokers;
 insurance marketing firms (IMFs);
 third-party administrators;
 surveyors and loss assessors; and
 web aggregators.

Insurance intermediaries need to obtain registration from the IRDAI under the provisions of
the specific regulations that apply to them given the nature of the business proposed to be
undertaken by them, which include details of eligibility criteria, capital and net worth
requirements, qualification requirements for the principal officer and directors or partners of
the concerned entity. Registration is typically granted for three years and may be renewed
thereafter.
In 2019, the Amendment Rules were notified, which effectively increased the permissible
limit of foreign direct investment in insurance intermediaries to 100 per cent. However,
where an entity whose primary business is outside the insurance sector, is allowed by the
IRDAI to function as an insurance intermediary, the foreign equity investment caps
applicable in that sector (if any) shall continue to apply to such intermediary, subject to the
condition that the revenues of such entities from the primary (non-insurance related) business
remain above 50 per cent of their total revenues in any financial year.

Insurance agents
An individual may be appointed as an insurance agent by an insurance company on
complying with the conditions provided under the regulations notified by the IRDAI in this
regard. An insurance agent is required to have passed the relevant examination and is also
required to possess the requisite knowledge for soliciting insurance business and providing
necessary services to policyholders. An insurance agent is permitted to solicit insurance
business for only:
 one life insurance company;
 one general insurance company;
 one health insurance company; and
 one each of the monoline insurance companies.

Corporate agents
Entities eligible to operate as corporate agents include:
 firms;
 banks;
 non-banking financial companies;
 cooperative societies;
 non-governmental organisations; and
 companies.

An entity registered as a corporate agent may either exclusively carry out the business of
insurance distribution or engage in any business other than insurance distribution as its main
business. Where a corporate agent has a main business other than insurance distribution, that
agent is not permitted to make the sale of its products contingent on the sale of an insurance
product, or vice versa. The IRDAI has also notified the IRDAI (Insurance Intermediaries)
(Amendment) Regulations 2022 (Intermediaries Amendment Regulations), which amended
the maximum number of arrangements that a corporate agent is permitted to enter into with
life, general and health insurance companies. A corporate agent is now permitted to enter into
a maximum of nine arrangements with each category of insurance companies, from the
earlier limit of three.

Insurance brokers
Insurance brokers are required to exclusively carry out the distribution of insurance products.
Any company, limited liability partnership or cooperative society may apply to the IRDAI for
the grant of an insurance broker certificate of registration. Applicants may register as a direct
broker (life, general, or life and general), a reinsurance broker or a composite broker
(involved in both direct and reinsurance broking). The minimum capital for a direct broker is
7.5 million rupees; a reinsurance broker, 40 million rupees; and a composite broker, 50
million rupees. All insurance brokers are required to be members of the Insurance Brokers
Association of India.

IMFs
Entities such as companies, limited liability partnerships or cooperative societies that are
registered as IMFs are permitted to distribute insurance products along with mutual funds,
pension products and certain other financial products, provided that permissions from the
respective regulator are in place to distribute these financial products. IMFs are now
permitted to distribute the insurance products of only six life insurance companies, six
general insurance companies and six health insurance companies at any one time from the
earlier limit of two, per the Intermediaries Amendment Regulations, and a change in the
insurance company whose products are to be distributed may take place only on the prior
approval of the IRDAI. Further, the Intermediaries Amendment Regulations also increased
the area of operation of IMFs to the entire state territory, which was earlier restricted to a
maximum of three districts. IMFs are required to have a net worth of 500,000 rupees, if the
IMF is operating out of only one district (aspirational district), and a net worth of 1 million
rupees in all other cases. IMFs are also permitted to undertake survey functions through
licensed surveyors employed on its rolls, policy servicing activities and other activities that
are permissible to be outsourced by insurance companies under the applicable regulatory
framework.
INSURANCE OMBUDSMAN
The Insurance Ombudsman scheme was created by the Government of India for individual
policyholders to have their complaints settled out of the courts system in a cost-effective,
efficient and impartial way.
Who is the Ombudsman?
An ombudsman is someone appointed to investigate complaints against an institution and
seek resolutions to those complaints.

What Is an Ombudsman?
An ombudsman is an official, usually appointed by the government, who investigates
complaints (usually lodged by private citizens) against businesses, financial institutions,
universities, government departments, or other public entities, and attempts to resolve the
conflicts or concerns raised, either by mediation or by making recommendations.
Ombudsmen may be called by different names in some countries, including titles such as a
public advocate or national defender.

KEY TAKEAWAYS
 An ombudsman investigates complaints leveled against businesses and other
organizations, including the government.
 Depending on the jurisdiction, an ombudsman's decision may or may not be legally
binding.
 However, even if not binding, the decision typically carries considerable weight.
 In the U.S., members of Congress serve as ombudsmen.
 The processing time for a complaint can be between 90 days and nine months,
depending on the type and complexity of the complaint.

How an Ombudsman Works

An ombudsman typically has a broad mandate that allows them to address overarching
concerns in the public, and sometimes the private, sector. That said, sometimes an
ombudsman’s mandate extends over only a specific sector of society—for example, a
children’s ombudsman may be tasked with protecting the rights of the young people of a
nation, while, in Belgium, the various linguistic and regional communities have their own
ombudsmen.

In the United States, members of the United States Congress serve as ombudsmen at the
national level, representing the interests of their constituents and maintaining staff tasked
with advocating for constituents faced with administrative difficulties, especially those
caused by maladministration.

An ombudsman is free for consumers to use and is typically paid via levies and case fees.
Ombudsmen are in place across a wide variety of countries and organizations within those
countries. They may be appointed at a national or local level, and are often found within
large organizations, too. Ombudsmen may focus exclusively on and deal with complaints
regarding a particular organization or public office, or they may have wider ranges.
Depending on the jurisdiction, an ombudsman's decision may or may not be legally binding.
However, even if not binding, the decision typically carries considerable weight.

TYPES OF OMBUDSMEN
While the general duty of the ombudsman is the same, the types of grievances they handle
and resolution services they provide may differ according to their appointment. Ombudsmen
can be found in organizations, governments, schools, and other institutions.

1.Industry Ombudsman
An industry ombudsman, such as a telecommunications or insurance ombudsman, may deal
with consumer complaints about unfair treatment the consumer received from a company
that operates within that industry. Often—and especially at the government level—an
ombudsman will seek to identify systemic issues that can lead to widespread rights
violations or poor quality of service to the public by the government or institution in
question.

2.Organizational Ombudsman
A large public entity or other organization may have its own ombudsman—an example
being the California Department of Health Care Services. Depending on the appointment, an
ombudsman may investigate specific complaints about the services or other interaction a
consumer has had with the entity concerned.

An ombudsman within an organization may also have a primary function of dealing with
internal issues, such as complaints by employees, or, if an educational institution, complaints
by its students.

3.Classical Ombudsman
Ombudsmen duties may be more wide-ranging nationally. For example, some countries have
ombudsmen in place to deal with issues such as corruption or abuses of power by public
officials. Furthermore, some countries have ombudsmen whose main function is to protect
human rights within those countries.

While an ombudsman is usually publicly appointed, they will typically have a large degree
of independence and autonomy in fulfilling their function. This is to enable the official to act
in a fair and impartial way to all parties involved in a complaint.

4.Advocate Ombudsman
An advocate ombudsman, just as the name suggests, advocates for people who have filed
grievances or for those with whom the grievances concern.1 They can be found in the
private or public sectors but are typically found championing for long-term care residents,
aging adults, the underserved, and those who cannot advocate for themselves.
5.Media Ombudsman
A media or news ombudsman who receives complaints about news reporting. The media
ombudsman promotes accurate and transparent news reporting in an environment that
fosters trust with the general public. Having a media ombudsman can help media outlets
avoid lengthy and costly litigation involving false reporting and claims of defamation.
Media ombudsmen work with journalists, editors, and other media professionals to
investigate and respond to complaints. Often, to promote transparency in operations, they
publish their response to a broader audience.
People may complain to a media ombudsmen if they feel that a broadcast is particularly
lewd or offensive.

ADVANTAGES AND DISADVANTAGES OF AN OMBUDSMAN

Ombudsmen provide a channel for people to submit complaints against institutions (e.g.,
governments, businesses, organizations, news outlets, and schools) without influence from
the accused. They conduct fair and unbiased investigations at no cost to the complainant,
providing resolutions or mediation services.
Where corruption is present, ombudsmen can investigate, expose, and help correct illegal
behaviors. Ombudsmen help prevent governments from abusing their power, such as
imposing unfair laws and exerting controls over their citizens without constraints. They also
help restore confidence in the system and its ability to fairly address issues.

In addition to investigating and providing resolutions, ombudsmen serve as a source of

information about policies and procedures. Serving as an unbiased party, they are able to
promote communication between parties and clarify issues that stifle progress.

On the other hand, an ombudsman offers no benefit when their work produces lackluster or
no results. A lack of dedication and service erodes the trust of the complainant and the
audience they are appointed to serve. If the claim is complex, receiving a quick resolution is
unlikely. Investigations take time and may require additional resources. Despite the
recommendation or resolution, the institution has the final say on how to resolve the issue.

Unlike lawyers, ombudsmen are impartial—except in cases where they advocate for the
rights of others. Some are familiar with or have legal training; however, they cannot provide
legal advice.2 If the complainant disapproves of the resolution, they may pursue other
actions, such as suing the institution. An ombudsman cannot, however, investigate a case
after it is submitted to a court.

PROS AND CONS OF OMBUDSMEN

Pros
 Facilitates customer or public complaints
 Unbiased and objective
 Can restore and maintain confidence in organizations or institutions
Cons
 Poor performance can erode trust
 Cannot provide legal advice
 Complex issues can take a lot of time to resolve

If legal action is later pursued for the same complaint, the ombudsman's suggested remedy
can influence judicial decisions.

ROLE OF AN OMBUDSMAN

An ombudsman is someone appointed to investigate complaints against an institution and

seek resolutions to those complaints. Some have full authority to investigate and resolve
issues, and some have limited capacity to only investigate and provide suggested resolutions
to a governing authority or the institution subject to the complaint.

What Powers Does an Ombudsman Have?

An ombudsman has the power to investigate and file complaints against otherwise
influential organizations or high-ranking officials. They often have the power to request key
documents, interview individuals, and order a legal investigation if necessary. If agreed to,
ombudsmen rulings are legally binding.