India: New Amendment Bill In Insurance Sector

Last Updated: 8 January 2014
Article by Jyoti Srivastava

INTRODUCTION

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.

CONCLUSION

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.

Footnotes

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Singh & Associates
Khaitan & Co
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Singh & Associates
Khaitan & Co
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions