India's insurance market is growing enormously but is yet to reach the majority of population. Privatisation is a good mechanism to increase this reach. In most of the sectors, private participation has weakened the incumbent players but in insurance segment, the traditional players still dominate it. Insurance sector is also witnessing growth in other segments like the health insurance, directors' & officers' liability insurance and re-insurance, but they are not explicitly covered in the existing Insurance Act, 1938 ("Act"). There is a need to strengthen the present regulatory as well as the system for adjudication of disputes related to insurance. Though the Insurance (Amendment) Bill, 2008 ("Bill") is being proposed, it is yet to analyze whether it is bringing the much needed respite and the much needed changes.
The present bulletin examines the important development of the comprehensive Bill which includes changes in the Act, the General Insurance Business (Nationalisation) Act, 1972, the Insurance Development and Regulatory Authority Act, 1992.
The major highlights of the Bill are discussed below:
1.0 New Definitions Incorporated in the Bill
The new Bill incorporates two new definitions namely, health insurance and foreign company. The health insurance is a type of general insurance, whose meaning is not defined in the Act so far. However, the business in health insurance has increased over the period and the area has great growth potential. Therefore, the new Bill has inserted the definition of "health insurance business1" separately. The highlight of the definition is that it provides insurance cover for both domestic and international travel. The expanding economy is increasing number of new classes to be introduced to the non-life insurance market and developing demand for specialist products continue to create new insurance and reinsurance opportunities.
The Bill defines "foreign company" as a company or body established under the law of any country outside India. The definition is important for its reference to Lloyds. In India, the Act currently does not define the "foreign company" but defines an "insurer" to include persons in India who have contracts with Lloyd's underwriters. Lloyd's is regulated by the Financial Services Authority, which regulates financial services in the UK. In China, Lloyd's has a licence only for reinsurance and operates through a wholly owned subsidiary, incorporated as a company. In US, Lloyd's is an accredited re-insurer in all states. Thus, the present Bill has defined the "foreign company" keeping in view of the definition of the insurer already in the Act and to give statutory recognition of Lloyd's under the Act within the meaning of foreign companies. This amendment also becomes important as the Bill seeks to provide for entry of foreign companies in insurance market by amending the definition of "insurer".
2.0 New Criteria and Compliances in Insurance Business
The definition of the "insurer" is mentioned in section 2(9) of the Act. In this definition, foreign insurer includes any individual or unincorporated body of individual in the insurance excluding those who are covered under section 2(9)(c) of the Act2. However, the Bill now replaces the existing definition and provides four kinds of entities who can enter into business of insurance namely, (i) public companies; (ii) cooperative societies; (iii) foreign companies operating through a branch and (iv) statutory bodies established by the Acts of the Parliament. These companies are required to maintain minimum equity capital to register themselves as insurance companies under the Insurance Regulatory and Development Authority Act, 1999 ("IRDA Act"). The Bill proposes that the health insurance company is required to maintain an equity capital of Rs. 50 crores.
Since 1999, government intends to address the issue of capital flow in the sector. The general modes of pooling in capital by initial public offering or foreign institutional investors etc. have not been of much help to the insurance sector so far. Further, insurance sector is also required to maintain the solvency margin3 as per law. The solvency margin is an indicator of claim settlement capability of insurers. One of the principal objects for amendment of the Act is to raise foreign equity participation in the insurance companies. Now in a company a foreign investor can hold 49% of the shares whereas this limit is diluted to 26% for cooperative societies. The branch of a foreign company can only be a re-insurer but it does not require an Indian partner. The increase of FDI to 49% will also see increased commitment by the foreign promoter to the Indian insurance company.
The Act provides4 that the promoter can hold up to 26% of the equity capital in an Indian insurance company and anything beyond the prescribed limit was required to be divested in a phased manner within a period of ten years from the date of commencement of such business. The present Bill has done away with the requirement of divesting excess shareholding.
The other relevant amendments proposed include that the agents, insurance brokers or other insurance intermediaries cannot be directors of an insurance company. Regarding the transfer of shares, IRDA must approve any transfer of shares which results in a single investor owning more than 5% of the equity of an insurance company. The regulator must also approve a transfer of more than 1% of the equity of an insurance company by an individual or firm or group under the same management.
3.0 The Rights of a Policy Holder
The Bill provides for rights of transfer or assignment of an insurance policy, wholly or in part, whether with or without consideration to third parties by the policy holders. The validity of such transfer would be always open to challenge. Many foreign countries allow such practices including US and Canada.
The issue whether the life insurance policy can be traded or not came for adjudication before the Mumbai High Court5. In 2007, the division bench of the Bombay High Court held that an insurance policy is also regarded as policy under the law. Even the credit institutions lend money against these policies up to certain percentage of their cash value. The creditors have right to attach this property. The right to assign is also a right attached to the property. The Bombay High Court gave a ruling that the life insurance is a tradable commodity wherein third party with no insurable interest in life of the policy holder will get the benefits of the policy. The matter is currently pending for adjudication before Supreme Court.
The Act provides that an insurer can cancel a life insurance policy within two years on the ground that the policy was issued on the basis that the material facts which were provided for issue of policy were inaccurate or false. Beyond the period of two years, the policy can be cancelled only on grounds of fraud. But by way of the new Bill, it has been provided that the policy can be cancelled up to a period of five years and the policy can be challenged on any ground after a period of five years. If the insurer cancels the policy on ground of misstatement or suppression of facts, premium collected must be refunded by them within the period of 90 days. The amendment, therefore, seeks to better protect the interest of the policy holders.
4.0 The Securities Appellate Tribunal
The existing machinery for addressing the grievance of the policy holders is not satisfactory. A policy holder has remedy of approaching the consumer courts or Insurance Ombudsman. The remedy provided by way of approaching an Insurance Ombudsman under the Redressal of Public Grievance Rules, 1998 and under the Consumer Protection Act was found to be dissatisfactory. This creates the possibility of conflict of interest as often consumer approach multiple forums for relief. The committee examining the capacity of these bodies to handle dispute resolution found that Ombudsman is not a satisfactory mechanism for dispute resolution and consumer fora has huge backlog of cases. The suggestion for independent grievance redressal authority was ruled out but it was suggested to strengthen the existing mechanism. The Bill provides that appeals against decisions by IRDA would lay to the Securities Appellate Tribunal (SAT), set up under the SEBI Act, 1992. Thus, SAT has been made competent to hear an appeal against the order of the IRDA and such an appeal should be filed within a period of forty five days from the date on which a copy of the order made by the Authority is received by the aggrieved person.
The passage of the Bill is important for it talks about certain key aspects necessary to provide momentum to growth of the insurance sector. The important development includes FDI and health insurance. The banking sector allows FDI to the extent of 74%, therefore, there is no point depriving the insurance sector with parallel increment of FDI limit. The amendments suggested in FDI are meant to increase the cash flow in the sector. The other important aspect of the Bill is the health insurance business which is in growing phase in India. As the 70% of the medical expenses are still borne by individuals, health insurance business has huge potential. The new Bill seeks to put in place the compliances for the companies willing to venture into this growing sector. The Bill is yet to be approved by the Rajya Sabha. Until the Bill is enacted and brought into effect, any significant change in the insurance sector is further delayed.
1 Health insurance includes policies issued to cover medical, surgical, and hospitalisation costs related to in-patient and out-patient treatment. Such policies can include assured benefits, cover long term care, and provide overseas travel or personal accident cover.
2 Any person who in India has a standing contract with underwriters who are members of Society of Lloyd's whereby any such person is authorised within the terms of contract to issue protection notes, cover notes or other documents granting insurance cover to others on behalf of underwriters.
3 The amount by which an insurance company's capital exceeds its projected liabilities is effectively a measure of its financial health. Insurance companies are sometimes required by law to maintain a minimum solvency margin, which is sometimes referred to as resilience test.
4 Section 6AAb of the Act.
5 Writ petition no. 2159 of 2004, Insurance Policy Plus Service and Others vs. LIC and Others.
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