Laws Under Life Insurance Sector

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LAWS UNDER LIFE
INSURANCE SECTOR
AMITY SCHOOL OF INSURANCE,
BANKING AND ACTUARIAL SCIENCES
Submitted to: Submitted By:
Ms. Mamta Sharma Apurva Jha (I&B)
Sujit Bhowmick (I&B)
Rahul Gupta (I&FP)
Rishebh Clement (I&FP)

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LAWS UNDER LIFE INSURANCE SECTOR
GENERAL INDUSTRY BACKGROUND
The Indian insurance industry, valued at ~US$ 41 billion, is considered the fifth largest life
insurance market, and is growing at a rapid pace of 32-34% annually, according to the Life
Insurance Council.1 In India, the insurance sector operates under the aegis of the Ministry of
Finance and is regulated by the Insurance Regulatory and Development Authority ("IRDA"). The
insurance sector plays a critical role in country's economic development. It acts as a mobilizer
of savings, a financial intermediary, a promoter of investment activities, a stabilizer of financial
markets and a risk manager. The insurance industry in India can be mainly classified into
(i) Life Insurance & (ii) Non-life Insurance. Indian insurance sector is open to private
participation from foreign players as well under the Foreign Direct Investment ("FDI") regime
promoted by the Department of Industrial Policy and Promotion. Further, India's insurance
industry is projected to reach USD 350-400 billion in terms of premium income by 2020 making
it among the top 3 life insurance markets and amongst the top 15 general insurance
markets.2 In India, at present, there are nearly 50 public and private sector life/non-life
insurers.
IMPORTANT TRENDS IN THE INDUSTRY
 In 2011, FDI in the Indian insurance sector was USD 1.36 bn, of which life insurance
comprised USD 1.1 bn and general insurance comprised USD 0.2 bn..4
 Life and general insurance companies of India have a total investment of USD 6 bn as of
March 2011.5
 The Mckinsey report on the outlook for the insurance sector in 2012 predicts an
exponential growth for the Indian insurance industry in 2012 due to such contributing
factors as increasing household incomes, higher premiums (as a percentage of the GDP)
and a total market premium growth estimated to be close to $100 billion.6
 The Indian insurance sector is on the verge of a major evolution with the Union Cabinet
approving some of the key amendments proposed by the Insurance Laws (Amendment),
Bill 2008 (proposing to amend the Insurance Act, 1938) including the increase in FDI
limit from 26% to 49%.
 In 2011, IRDA issued regulations7 permitting issue of capital by the life insurance
companies in India.
 IRDA also issued draft IPO norms for general insurance companies in 2012.

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MAJOR PLAYERS IN INDIA
Leading Indian companies
a. Life Insurance
o Life Insurance Corporation of India, Birla Sun Life Insurance Co. Ltd, ICICI Prudential Life
Insurance Co. Ltd, Max Life Insurance Co. Ltd, Canara HSBC Oriental Bank of Commerce Life
Insurance Company Ltd., ING Vysya Life Insurance Company Ltd., HDFC Standard Life
Insurance Co. Ltd.
b. Non-Life Insurance
o Bajaj Allianz General Insurance Co. Ltd., ICICI Lombard General Insurance Co. Ltd., National
Insurance Co. Ltd., The New India Assurance Co. Ltd., The Oriental Insurance Co. Ltd., United
India Insurance Co. Ltd., Tata AIG General Insurance Co. Ltd., Export Credit Guarantee
Corporation of India Ltd., Reliance General Insurance Co. Ltd., SBI General Insurance
Company Limited, Religare Health Insurance Company Limited
Leading MNC Companies in India
 IFFCO Tokio General Insurance Co. Ltd., Edelweiss Tokio Life Insurance Co. Ltd., Future Generali
India Insurance Company Limited, Universal Sompo General Insurance Co. Ltd., Bharti AXA
General Insurance Company Limited, Max Bupa Health Insurance Company Ltd.
Important industry associations
 Insurance Association of India, Insurance Corporation Employees Union (India) (ICEU),
Insurance Brokers Association of India (IBAI), Actuarial Society of India (ASI), Indian Institute of
Insurance Surveyors and Loss Assessors (IIISLA), National Insurance Company Officers'
Association (NICOA), Eastern Zone Insurance Employees' Association (EZIEA), General Insurance
Employees' Union.

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IMPORTANT LAWS AFFECTING THE INDUSTRY
Insurance Act, 1938
 The basic law relating to insurance which consolidates the law relating to business of insurance.
 Prescribes the procedures and requirements to comply with by insurance companies while
doing the business of insurance and re-insurance.
 Prescribes provisions relating to insurance associations, councils and committees.
 Prescribes provisions relating to licensing and payment of commission to insurance agents.
Insurance Regulatory and Development Authority (IRDA) Act, 1999 and Rules & Regulations
there under
 Appointment of the insurance sector regulator – "IRDA" to set, promote, monitor and enforce
high standards of integrity, financial soundness, fair dealing and competence of those it
regulates.
 Provisions relating to protection of the interest of and secure fair treatment to policyholders.
 Provisions for taking action where such standards are inadequate or ineffectively enforced.
 Code of conduct for insurance intermediaries.
The Motor Vehicles Act, 1988
 Prescribes provisions relating to third party insurances to be obtained by the owners of motor
vehicles.
 Prescribes the duties of the insurers towards third parties in cases of accidents.
The Insurance Rules, 1939
 Provides for licensing of various intermediaries and appointment of various committees.
 Provisions relating to compliances to be observed by insurance companies while operating
insurance business.
The Redressal of Public Grievances Rules, 1998
 Provides for constitution of grievance redressal machinery for the redressal of grievances of
policyholders against the insurance companies.
 States the procedure for the redressal of grievances.

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The General Insurance Business (Nationalization) Act, 1972
 Nationalized the general insurance business in India.
 107 insurers were amalgamated and grouped into four companies which were owned by the
Government.
Foreign Exchange Management (Insurance) Regulations, 2000
 Permits a person resident in India to take or continue to hold a life insurance policy issued by an
insurer outside India, provided that, the policy is held, under a specific or general permission of
the RBI.
 Permit a person resident in India to continue to hold any life insurance policy by an insurer
outside India when such person was resident outside India, without any permission of the RBI.

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TAX LAWS AFFECTING INSURANCE INDUSTRY
Income Tax Act, 1961
 It is tax on income imposed by Central Government.
 Residents in India are taxed on their worldwide income.
 Non- residents are taxed on Indian source of income.
 The Indian tax rates applicable to non-residents could be up to 40% (excluding applicable
surcharge).
 If the tax payable by any company, including a foreign company taxable in India, is less than
18.5% of its book profits, it will be required to pay Minimum Alternate Tax.
 Interest received by a non-resident from India on foreign currency denominated loans may be
taxable.
 Payments towards royalty and fees for technical services are taxable.
 u/s. 10(10D) of the Income Tax Act, 1961 any sum received under a life insurance policy,
including the sum allocated by way of bonus on such policies is exempted from income tax.
Therefore any claims or maturity proceeds received by the resident policy holder will not be
taxable as income.
 Section 80C of the Act provides for deduction in respect of payments for life insurance premium
in computing the total income of an individual or a Hindu Undivided Family. The amount of
deduction is subject to the maximum of Rupees one lakh being the aggregate of sums referred
to in sub-section (2) of Section 80C.
 Section 88 of the Act provides for a rebate on life insurance premium paid on the policy to the
policyholder.
Service Tax
 Under the current service tax regime, service tax leviable on service provided by an insurance
agent is not to be paid by the insurance agent himself but by the insurance company.
 Life Insurance premium is taxable as per the provisions of Service Tax.
REGULATORY AGENCY
Insurance Regulatory and Development Authority (IRDA)
 Established under the Insurance Regulatory and Development Authority Act, 1999.
 Responsible for- regulating the insurance companies and insurance intermediaries operating in
India by prescribing code of conduct; protection of the interest of and secure fair treatment to
policyholders; set, promote, monitor and enforce high standards of integrity, financial
soundness, fair dealing and competence of those it regulates.
 Arm of Ministry of Finance.

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 AMMENDMENTS UNDER LIFEINSURANCESECTOR
The Insurance Laws (Amendment) Bill, 2015 was passed by the Lok Sabha on 4th March, 2015
and by the Rajya Sabha yesterday i.e. on 12th March, 2015.The passage of the Bill thus paved
the way for major reform related amendments in the Insurance Act, 1938, the General
Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development
Authority (IRDA) Act, 1999. The Insurance Laws (Amendment) Act 2015 to be so enacted, will
seamlessly replace the Insurance Laws (Amendment) Ordinance, 2014, which came into force
on 26th December 2014.
The amendment Act will remove archaic and redundant provisions in the legislations and
incorporates certain provisions to provide Insurance Regulatory and Development Authority of
India (IRDAI) with the flexibility to discharge its functions more effectively and efficiently. It also
provides for enhancement of the foreign investment cap in an Indian Insurance Company from
26% to an explicitly composite limit of 49% with the safeguard of Indian ownership and control.
Capital Availability: In addition to the provisions for enhanced foreign equity, the amended law
will enable capital raising through new and innovative instruments under the regulatory
supervision of IRDAI. Greater availability of capital for the capital intensive insurance sector
would lead to greater distribution reach to under / un-served areas, more innovative product
formulations to meet diverse insurance needs of citizens, efficient service delivery through
improved distribution technology and enhanced customer service standards. The Rules to
operationalize the new provisions in the Law related to foreign equity investors have already
been notified on 19th Feb 2015 under powers accorded by the ordinance.
The four public sector general insurance companies, presently required as per the General
Insurance Business (Nationalisation) Act, 1972 (GIBNA, 1972) to be 100% government owned,
are now allowed to raise capital, keeping in view the need for expansion of the business in the
rural and social sectors, meeting the solvency margin for this purpose and achieving enhanced
competitiveness subject to the Government equity not being less than 51% at any point of
time.
Consumer Welfare: Further, the amendments to the laws will enable the interests of consumers
to be better served through provisions like those enabling penalties on intermediaries /
insurance companies for misconduct and disallowing multilevel marketing of insurance
products in order to curtail the practice of mis-selling. The amended Law has several provisions
for levying higher penalties ranging from up to Rs.1 Crore to Rs. 25 Crore for various violations
including mis-selling and misrepresentation by agents / insurance companies. With a view to
serve the interest of the policy holders better, the period during which a policy can be
repudiated on any ground, including mis-statement of facts etc., will be confined to three years
from the commencement of the policy and no policy would be called in question on any ground
after three years.
The amendments provide for an easier process for payment to the nominee of the policy
holder, as the insurer would be discharged of its legal liabilities once the payment is made to
the nominee.

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It is now obligatory in the law for insurance companies to underwrite third party motor vehicle
insurance as per IRDAI regulations. Rural and Social sector obligations for insurers are retained
in the amended laws.
Empowerment of IRDAI: The Act will entrust responsibility of appointing insurance agents to
insurers and provides for IRDAI to regulate their eligibility, qualifications and other aspects. It
enables agents to work more broadly across companies in various business categories; with the
safeguard that conflict of interest would not be allowed by IRDAI through suitable regulations.
IRDAI is empowered to regulate key aspects of Insurance Company operations in areas like
solvency, investments, expenses and commissions and to formulate regulations for payment of
commission and control of management expenses.
It empowers the Authority to regulate the functions, code of conduct, etc., of surveyors and
loss assessors. It also expands the scope of insurance intermediaries to include insurance
brokers, reinsurance brokers, insurance consultants, corporate agents, third party
administrators, surveyors and loss assessors and such other entities, as may be notified by the
Authority from time to time.
Further, properties in India can now be insured with a foreign insurer with prior permission of
IRDAI; which was earlier to be done with the approval of the Central Government.
Health Insurance: The amendment Act defines `health insurance business` inclusive of travel
and personal accident cover and discourages non-serious players by retaining capital
requirements for health insurers at the level of Rs. 100 Crore, thereby paving the way for
promotion of health insurance as a separate vertical.
Promoting Reinsurance Business in India: The amended law enables foreign reinsurers to set up
branches in India and defines‘re-insurance’ to mean “the insurance of part of one insurer’s risk
by another insurer who accepts the risk for a mutually acceptable premium”, and thereby
excludes the possibility of 100% ceding of risk to a re-insurer, which could lead to companies
acting as front companies for other insurers. Further, it enables Lloyds and its members to
operate in India through setting up of branches for the purpose of reinsurance business or as
investors in an Indian Insurance Company within the 49% cap.
Strengthening of Industry Councils: The Life Insurance Council and General Insurance Council
have now been made self-regulating bodies by empowering them to frame bye - laws for
elections, meetings and levy and collect fees etc. from its members. Inclusion of
representatives of self-help groups and insurance cooperative societies in insurance councils
has also been enabled to broad base the representation on these Councils.
Robust Appellate Process: Appeals against the orders of IRDAI are to be preferred to SAT as the
amended Law provides for any insurer or insurance intermediary aggrieved by any order made
by IRDAI to prefer an appeal to the Securities Appellate Tribunal (SAT).
Thus, the amendments incorporate enhancements in the Insurance Laws in keeping with the
evolving insurance sector scenario and regulatory practices across the globe. The amendments
will enable the Regulator to create an operational framework for greater innovation,
competition and transparency, to meet the insurance needs of citizens in a more complete and
subscriber friendly manner. The amendments are expected to enable the sector to achieve its
full growth potential and contribute towards the overall growth of the economy and job
creation.

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Advantages of Amendments
 No claim can be repudiated after three years
The Bill seeks to amend Clause 45 of the Insurance Act. Currently, insurance companies
cannot reject a life insurance claimafter two years. But if it is proved that the claimis a
fraud, then the company is not liable to pay. The Bill seeks to amend this clause to the
effect that no claim can be repudiated (rejected) after three years of the policy issuance
under any circumstances.
A report by Espirito Santo Securities says the government's' move could be driven by the
need to protect customers but it could be a case of good intentions leading to
unintended consequences.
"Implementation of this could lead to anti-selection and increase the cost of policy for
good policyholders, as they will have to subsidise fraudulent practices. We expect
term insurance policiesto be the most impacted, as the pay-off in those could be as high
as 1,000 times the annualised premiums. Regular policies with a savings component are
not likely to be impacted, as the payoff is around 10x of annualised premiums,'' the
report says.
 Assignment and transfer of policies
One proposal in the Bill is that the policyholder can transfer or assign his life insurance
policy, either wholly or partly, to a third party. It has to be signed by the person
transferring the policy and attested by his agent; the terms and conditions of the
transfer have to be clearly stated. However, the insurance company has the right to
accept or decline such a transfer if it is convinced that this is not in the interest of the
policyholder or in the public interest. The reason for rejection has to be conveyed to the
policyholder within a month. The person to whom the policy is being transferred to will
have all right over the policy once transferred and can obtain a loan under the policy or
surrender the policy. Many foreign countries allow such practices.
 More distribution points
The Bill seeks to have more channels for distribution, in addition to the existing ones
such as agents and bancassurance. These could be the Citizen Service Centres or other
government delivery centres such as Public Delivery Systems. This is expected to
improve the reach in rural areas. Customers will have more points of sale to buy policies
from.
Online distribution channels will bring more transparency and the focus will be on
customer education. "The aim is to reduce the dependence on agents,'' said an official
with a private insurance company.

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 Flexibility in premiums
The Bill proposes to give insurance companies the freedom to collect premiums in
instalments for more products. Currently, general insurance companies can collect
premiums in the form of instalments only in health insurance. But if they are given the
freedom to collect premiums for products like motor and fire, this will help them in
product diversification and also give flexibility to customers.
 Grievance redressal
To strengthen redressal of policyholders' complaints, the Bill proposes an independent
grievance redressal authority, with powers similar to a civil court. The authority should
be composed of judicial and technical members. The current ombudsman scheme is
held to be insufficient to tackle the large number of complaints against companies.
 Electronic issuance of policies to help claims processing
The Bill also stresses on technology to increase electronic issuance of policies. This will
help improve claims payout. Since electronic issuance and dematerialising of policies
can facilitate data sharing between companies, any cases of fraud can be detected
faster. "Today, if a customer has committed fraud in his motor insurance, the life
insurance company has no way of knowing it. That is why companies take longer for
due-diligence before paying the claims and this leads to delay in processing,'' says an
official with a private life insurance company. Once companies are able to share data,
such instances will reduce.
 Agents' commissions, additional remuneration capped
As an added precaution to prevent mis-selling, the Bill proposes that insurance
companies not pay any agent commission in excess of what is prescribed in the
regulation. Currently there are cases where companies reward agents through gifts such
as cars or foreign trips. In the absence of such incentives, there are less of chances that
agents would try and push policies that are not suited for customers. Apart from this,
the proposed cap on agents' commission structure is also likely to help prevent mis-
selling.

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CONCLUSION
The Indian Insurance Industry has grown steadily in the past decade. Insurance companies,
owing to high competition in the relevant market, are focusing on higher satisfaction of the
policyholders. This has improved the quality of service of the insurers. The Indian insurance
industry has also been able to attract high FDI. However, there are still some serious issues
which plague this sector. One of them is the low penetration of the insurance services in India.
For life insurance, the penetration is 4.4% and for non-life business, it is a mere 0.76%11. Also,
the insurance companies in India are facing the problem of the lack of capital which is affecting
their growth opportunities. An attempt has been made by the Government to address these
issues by way of the Insurance Laws (Amendment), Bill 2008 (proposing to amend the Insurance
Act, 1938), which proposes to raise the foreign equity cap on Indian insurance companies, by
way of FDI, from 26% to 49%. This shall ensure greater capital flow in the Indian insurance
sector.

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