Philosophy and Genesis of Insurance Regulations

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 Regulations are for wise men to follow wisely and for fools to follow blindly.
- B.G. James Turner

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 Insurance Regulations are not carved in stone. They evolve over a period of time. They will undergo change with the requirements and dynamism of the market. Indian market has large potential for insurance business.
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 The Insurance density per capita in India for 2009 was US $ 54.3 (combined Life and NonLife). This compares poorly with the insurance density of Asia which was US $243.1 The worlds density per capita was US $ 595.1. Our Gross Domestic Product in Insurance in 2009 was only 5.2 %. This compares adversely with the GDP of the world in 2009 which stood at 7.0% and that of Asia which was 6.1%.
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 In India, Government has since inception perhaps exercised more control over the business of Insurance than any other business activity. Even when this business was in the hands of Private Players prior to 1956 (in the case of Life Insurance), and 1973 (pertaining to General Insurance) regulatory control was exercised exclusively.at the state level.
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 The Insurance Act of 1938 is a testimony to the conduct of Insurance Business in the country and was followed even after Nationalisation of Insurance sector by the monopoly players. Since Insurance is a Peoples Business it requires extensive legislative, regulatory and ongoing political attention.
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There are Three basic reasons for framing Regulations in Insurance Sector: 1. Number effected : 2. Nature of Insurance : Security via a promise. 3. Imbalance of bargaining power.

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 Insurance has also become a vital element in the economic and social fabric of the nation. It impacts not only the individual but also the functioning of the business community. While the prime focus of Insurance regulations is protection of policy holder, it also fulfills an essential public function and hence the need for regulatory control.

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Goals of Insurance Regulations

Insurance laws and regulations have evolved on an ad-hoc basis with little reference to sophisticated system of Insurance regulatory goals. Nevertheless, over the period of time, the goals of insurance can be discussed. These are as under : 4/20/2012 H. Ansari 9

A. Internal Goals Reliability I.e. sense of security and need for security to the policy holder is a universal phenomena. Hence Insurance has to be reliable. i) Solidity of the insurance enterprise Insurer to be solvent so that they can meet their liability. ii) Guarantee against loss Need to have a guarantee fund legislation for all types of Insurance conducted.
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 Reasonableness, Equity & fairness in the Insurance market i) There should be reasonableness between the Insurer and its policyholders The policyholder should be treated reasonably and should not be charged excessively. ii) Equity among policyholder There should be fair treatment as between policyholders. Premium should not be discriminatory.
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B. External Goals Insurance business should function in an acceptable manner. It should conform to public policy. It should also cover various social sectors, including family units as a means to obtain security. Coverage should be available to those who need and want it. The cover should also be affordable.
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C. Goals from the customers perspective i) Insurance cover be available on as convenient basis as possible. ii) The insurance cover should be reasonably priced. iii) The cover should be good and meet with requirements of policyholder.

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 In other words Insurance should be readily available, reasonably priced and the insurance company should be solid and meet its liability. All the three are interrelated and balance each other.The story of Insurance is probably as old as the story of mankind. Collective cooperation among persons exposed to a particular risk in order to share the risk, is as old as the dawn of human civilization.
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 The Aryans had evolved a system of village and community life which was proof against the ravages of time and gave sustenance to everyone. Other civilized people of the world also had independently conceived the idea of collective protection. The word Yogakshema (meaning well being) is from the Rig Veda. Manu Smriti also supports the system of Collective co-operation.
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 Even Kautilyas Arthashastra refers to taxes being paid to the ruler who can look after the well-being and security of the subjects. We have the classic example of our Joint family system which ensured cooperation, tolerance, thrift and selflessness. The basic concept of Life Insurance viz. taking care of the financial needs of a family in case of untimely death of the bread winner and provision for his old age, was fully taken care of by our joint family system.
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 Life Insurance in its modern form came to India from England as far back as 1818. The first Insurance Company on Indian Soil - namely the Oriental Life Insurance Society was started in Calcutta by Europeans to help the widows of their community. Raja Ram Mohan Roy, Prince Dwarakanath Tagore, Remtanu Lahiri and Rustomji Cowasji were the early Indian pioneers.
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Other Companies : Bombay Life Assurance Company was founded in Bombay in 1823. - Madras Equitable founded in 1829- Madras Widows started in 1834. Universal Life Assurance Company started operation in 1840 and merged with North British in 1901.

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 The period of fifty years commencing with 1818 was one in which sincere efforts were made to find ways and means to write life business scientifically. The British Parliament enacted the Insurance Act of 1870 which was not applicable to India. Indian Insurance Companies were only governed by Indian Companies Act of 1866.
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 First Indian Insurance Company was formed in 1870 the Bombay Mutual Life Assurance Society to cover Indian lives at normal rates. Earlier, the Indian lives invited a loading of 1520%.

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The Swadeshi Movement of 1905, the Non-Cooperation Movement of 1919 and the civil disobedience movement of 1929 were milestones in the history of Indian Insurance as these movements were primarily responsible for generating the spirit of Indianess.

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 Life Insurance Companies Act was passed in 1912 requiring that the rate tables and periodic valuations should be certified by an Actuary. The law also required Indian Insurers to make deposits with the Government, but foreign Companies were exempted from this provision. The Act thus introduced discrimination between foreign and Indian Companies and gave further impetus to growth of Indian Insurers
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It is the duty of every Indian to support only Indian Insurance. The keynote of our Swaraj is in placing all our insurance with our Indian Companies Mahatma Gandhi A stop gap legislation was passed in 1928 to amend the Insurance Companies Act 1912

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 The main features of the new Act were that it provided for collection of statistics, including those from Foreign Companies. It also provided for disposal of surplus assets in the event of liquidation of an Insurance Company in the same proportion amongst policyholders and shareholders as profits were distributed
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All Indian Life Offices Association was established in 1928 (AILOA) If performed a yeoman service to the cause of Indian Insurance. The Association made material contribution to the enactments of 1938 and 1950 and put forward useful suggestions 44 companies business in force in 1914 Rs. 22.44 crores. 176 companies business in force 1938 Rs. 298 crore.
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In 1934 Mr. S.C. Sen the well known solicitor was appointed as officer on special duty in the Department of commerce to study and report on the subject of amendments to insurance law. The AILOA also formed a committee for this purpose in 1936. The committee in their draft bill recommended the following
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A separate Deptt. Of Insurance be set up to supervise the working of all Companies operating in India so as to protect the interest of policy holders Every Insurance Company be required to obtain a licence from the Government to enable it to commence and carry on insurance business in India Substantial deposits should be obtained from Indian and foreign companies in respect of each class of business
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 There should be provisions for registration of Agents and prevention of re bating There should be provision for annual returns, submission of Actuarial reports, investigation, amalgamation and transfer of business and winding up To protect the interest of Indian Policyholders, the companies should keep sufficient assets by way of reserves to enable them to meet their outstanding risks and should invest their surplus funds in securities authorized by Section 20 & 20-A of Indian Trust Act. 4/20/2012 H. Ansari 28

 The above finally led to the appointment of an informal Committee under the Chairmanship of the then Law Member Mr. N.N. Sarcar to examine the report of Mr. S.C.Sen with regard to amendment in Insurance Law and pilot the same in the legislature assembly in January 1937, which resulted in the Insurance Act 1938

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The Insurance Act 1938

The Insurance Act 1938 a comprehensive legislation governing not only Life but also Non-Life branches of Insurance to provide State Control over Insurance business.

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Salient Features Of Insurance Act 1938

A.Constitution of a Department of Insurance under a superintendent vested with wide powers of supervision and control over all kinds of Insurance companies.

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B. Regulations introduced for the compulsory registration of Insurance Companies and for filing of Returns of Investment and Financial conditions.

C.Provisions for Deposits to prevent Insurance Inadequate financial resources or speculative concerns from commencing business
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D.Provision that 55% of the net life fund of an Indian or Non-Indian Insurance should be vested in Government and approved securities with at least 25% in Indian Government rupee securities. All other companies i.e. Foreign Companies must invest 100% of their Indian Liabilities in Indian Government and approved securities, with at least 33.3% in Indian Government Securities
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E. Provision of rebating, restriction of commission were fixed at 40% of the first years premium and 5% of the renewal premium in respect of Life Insurance business. The agent must be licensed, to improve the status of the profession.

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F. Periodical valuation for Indian Business of foreign companies and the business of Indian Companies. G. G. Provision for Policyholders Directors, making it possible for the representatives of Policyholders to be on the Board

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H. Standardization of Policy Conditions required all companies to file standard forms and tables of Premium approved by an Actuary under this requirement, the initial deposit for Life Insurance business was raised from Rs. 25,000/- in government Securities to Rs. 50,000 in cash or approved securities, which was subsequently to be raised by installments to Rs. 2 lac within a specified time limit.

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 Thus for the first time in the history of Insurance in India, the whole business was brought under a unified system of control and its structure strengthened by statutory regulations. Weaker elements were weeded out, indiscriminate promotion was checked and speculative Insurance was eliminated. The best proof of the soundness of law was the effective check on large scale liquidations which had marred the name of Insurance in the Ansari thirties. 4/20/2012 H. 37

 Various amending Acts to 1938 Act were passed in 1939, 1940, 1941, 1944, 1945 and 1946 on issues like control on deposits, creation of an office of Superintendent of Insurance with wide powers of Supervision of Control, Investments, rebating, Policyholders Directors, Returns and Managing Agencies Further amendments were brought about in 1950, 1956 and 1968 to make the act more comprehensive and meaningful.
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INSURANCE REGULATORY AND DEVELOPMENT ACT 1999

Insurance in India is not new. It has a history of 0ver 192 years. Insurance Companies enjoyed rating freedom. Life prior to 1956 Non life prior to 1973
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 Nationalisation enabled mobilisation and deployment of massive financial resources Committee on Reforms in Insurance Sector Malhotra Committee IRDA Act 1999

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Recommendations of CRIS
Insurance Sector should be gradually opened for private participation both life and non-life separately. No composite insurers allowed. Foreign Companies be allowed through Joint Ventures established in India with Indian partners.
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 The minimum paid up capital of the new Insurance Companies should not be less than Rs. 100 Crores I.e. approximately US $25 Million Capital adequacy should be backed by very defined solvency standards Brokers may be allowed to operate for direct business subject to adequate controls and safeguards
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 Promoters shareholding should not exceed 40 percent of the paid up capital. This was subsequently modified to 26% by the Parliamentary Committee which was appointed subsequently and was later on incorporated in the IRDA Bill which was passed by both Houses of Parliament in December 1999.
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IRDAs AIMS :
The IRDAs aims are : To protect customers of Insurance companies IRDA will : set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates, in order to protect and to secure fair treatment for insurance policyholders;
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IRDAs AIMS :
aim to ensure that insurance customers receive precise, clear and correct information about the services, products and risks; recognise insurance customers responsibility for their own decisions, while aiming to ensure that they are not exposed to risks that they should not reasonably by expected to assume.
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IRDAs AIMS :
(ii) To promote clean and orderly markets. IRDA will : promote fairness, transparency and orderly conduct in financial markets dealing with insurance and enforce high standards in this area; take action where such standards are inadequate or ineffectively enforced
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IRDAs AIMS :

(iii) IRDA will pursue these aims in an efficient way and will aim to ensure that the costs of regulation are proportionate to the benefits.

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DUTIES, POWERS AND FUNCTIONS OF IRDA

(1) Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and reinsurance business.

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(2) Without prejudice to the generality of the provisions contained in sub-section (1), the powers and functions of the Authority shall include : (a) to issue to the applicant a certificate of registration, to renew, modify, withdraw, or cancel such registration

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DUTIES, POWERS AND FUNCTIONS OF IRDA

(b) protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy, and other terms and conditions of contracts of insurance
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DUTIES, POWERS AND FUNCTIONS OF IRDA

(c) specifying requisite qualifications and practical training for intermediary or insurance intermediaries and agents (d)specifying the code of conduct for surveyors and loss assessors (e) promoting efficiency in the conduct of insurance business
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DUTIES, POWERS AND FUNCTIONS OF IRDA

(f)promoting and regulating professional organisations connected with the insurance and reinsurance business (g) levying fees and other charges for carrying out the purposes of the Act (h)calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organisations connected with the 4/20/2012 52 insurance business H. Ansari

DUTIES, POWERS AND FUNCTIONS OF IRDA

(i) control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the TAC under section 64U of the Insurance Act, 1938. (J)prescribing the form and manner in which books of account shall be maintained and statement of accounts will be rendered by insurers and other insurance intermediaries
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DUTIES, POWERS AND FUNCTIONS OF IRDA

(k) regulating investment of funds by insurance companies; regulating maintenance of margin of solvency; adjudication of disputes between insurers and intermediaries or insurance intermediaries along with supervising the functioning of Tariff Advisory Committee
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DUTIES, POWERS AND FUNCTIONS OF IRDA

(n)to specify the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organisations (o) specify percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural sector or social sector. (p) exercising such other powers as may be prescribed.
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EXPECTATIONS FROM LIBERALISATION

Market expansion Focused penetration Up-dation and internationalization of technology and skills Improved customer focus Operational efficiency Information transparency
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MAJOR FEARS
Financial soundness Insolvency of insurer Market indiscipline Agents misinforming customers Discrimination in underwriting and payment of claims Non payment of claims
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ROLE OF REGULATIONS
Promoting operational efficiency strengthening investment function rationalizing insurance premium rates enlarging scope of insurance business Maintaining market order safe and stable insurance market ensuring solvency & exploring criteria for capital adequacy Professional Conduct Standards/ Good insurance practice development of legislation/ public policy
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ROLE OF REGULATIONS
Protecting rights and benefits of insured enforcing public disclosure of Information secure the rights of insured Healthy development of insurance business and to secure sound competition

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ROLE OF REGULATOR
Securing benefits covered by insurance and policyholders interests Realization of sound development in insurance business through competition Setting limits for risk taking Striking right balance between governmental regulation and self

regulation

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TASKS OF A REGULATOR
1. Insurance companies must be kept solvent so that they can pay claims developing and encouraging self regulation interactions with players and intermediaries solvency regulations Capital Adequacy; Pricing and products; Return on Investments; Reserving; Asset liability matching; Reinsurance Publishing Watch-list and monitoring of Intermediaries
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TASKS OF A REGULATOR
2. No discrimination in price or availability between policy holders who present the same general degree of risk fair and realistic price non discrimination in claims settlement checking unfair selling/market practices product based regulations market conduct examinations responding to consumer complaints
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TASKS OF A REGULATOR
3. Insurance relationship must be fair, balanced and non deceptive contracts must be fair and balanced policies be approved/ scrutinized by regulator standardized and popular policies may be written in simple language
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TASKS OF A REGULATOR
4. Process of marketing insurance and of settling claims should be honest, fair and prompt monitor conduct of surveyors, loss assessors, investigators, and lawyers evolving codes of conduct check unfair claims management ensure timely claim settlements
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TASKS OF A REGULATOR
5. Insurance should be available to those who need and want it encourage widespread availability of insurance, especially individuals ensure private participation in selling insurance to unprotected develop spread and growth of insurance
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TASKS OF A REGULATOR
6. Establishment of professional conduct standards and acceptable industry practices publicize acceptable practices identifying insurers deviating from set standards Licensing of intermediaries and setting up of professional competency/ conduct standards
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STRATEGIC OBJECTIVES

Public Confidence Safeguards from undue loss Cost effectiveness Competition Quality
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STRATEGIES
Refining regulatory and supervisory framework to focus more clearly on major risk areas Continuously testing new and existing initiatives Encouraging rule setting and adoption of sound business and financial practices Development of legislation, regulation, and guidelines in tune with industry and professional practices
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CHALLENGES

Realistic understanding of role of regulation and supervision

mandatory supervision of key financial variables regulations on norms for disclosure co-operation with international regulators role of Appointed Actuary
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CHALLENGES

Information Technology
electronic data base systems streamlining information gathering requirements examination of key financial information feedback on competitive impact of regulation
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CHALLENGES Voluntary compliance by insurance companies

sharing of highly confidential information by senior executives would not lead to damaging public evaluations

Confidentiality of Information
where information is not otherwise publicly available
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Important sub-sections of the IRDA Act, 1999

The provision of this Act shall be in addition to, and not in derogation of, the provision of any other law for the time being in force.

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 After Sub-section (2A), insert (2AA) The Authority shall give preference to register the applicant and grant him a certificate of registration if such applicant agrees, in the form and manners as may be specified by the regulations made by the Authority, to carry on the life insurance business or general insurance business for providing health cover to individuals or group of individuals
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 6 Requirement as to capital No insurer carrying on the basis of life insurance, general insurance or reinsurance in India on or after the commencement of the Insurance Regulatory and Development Authority Act 1999, shall be registered unless he has

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i) A paid-up equity capital of rupees one hundred crores in, case of a person carrying on the business of life insurance or general insurance or; ii) A paid-up equity capital of rupees two hundred crores, in case of a person carrying on exclusively the business as a reinsurer

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 6AA Manner of divesting excess shareholding by promoter in certain cases 1. No promoter shall at any time hold more than twenty-six per cent or such other percentage as may be prescribed, of the paid-up equity capital in an Indian insurance company.
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 Provided that in a case where a Indian insurance company begins the business of life insurance, general insurance or re-insurance in which the promoters hold more than twenty-six per cent of the paid-up equity capital or such other excess percentage as may be prescribed, the promoters shall divest in

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a phased manner the share capital in excess of the twenty-six per cent of the paid up equity capital or such excess paid-up equity capital as may be prescribed, after a period of ten years from the date of the commencement of the said business by such Indian insurance company or within such period as may be prescribed by the Central Government.
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 27C. Prohibition for investment of funds outside India No insurer shall directly or indirectly invest outside India the funds of policy-holders. 27D. Manner and conditions of investment 1) Without prejudice to anything contained in sections 27, 27A and 27B, the Authority may, in the interests of the policy-holders, specify by the regulations made by it, the time, manner and other conditions of investment of assets to be held by an insurer for the purposes of this Act.
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2) the Authority may give specific directions for the time, manner and other conditions subject to which the funds of policy holders shall be invested in the infrastructure and social sector as may be specified by regulations made by the Authority and such regulations shall apply uniformly to all the insurers carrying on the business of life insurance,
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general insurance, or re-insurance in India on or after the commencement of the Insurance Regulatory and Development Authority Act, 1999. 3)The Authority may, after taking into account the nature of business and to protect the interests of the policy-holders, issue to an insurer the directions relating to the time, manner and other conditions of investment of assets to be held by him.
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 32B Insurance business in rural or social sector Every insurer shall, after the commencement of the Insurance Regulatory and Development Authority, Act, 1999, undertake such percentages of life insurance business and general insurance business in rural or social sector, as may be specified, in the Official Gazette by the Authority, in this behalf.
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 32 C. Obligations of insurer in respect of rural or unorganised sector and backward classes Every insurer shall, after the commencement of the Insurance Regulatory and Development Authority Act, 1999 discharge the obligations specified under section 32B to provided life insurance or general insurance policies to the persons residing in the rural sector,
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 workers in the unorganized or informal

sector or for economically vulnerable or backward classes of the society and other categories of persons as may be specified by regulations made by the Authority and such insurance policies shall include insurance for crops. The Sections 32-B & 32-C narrated above have to be read with Sections 105-B & 105-C which are penalty provisions.

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 42 D. Issue of licence to intermediary or insurance intermediary 1) The Authority or an officer authorised by it in this behalf shall in the manner determined by the regulations made by the Authority and on payment of the fees determined by the regulations made by the Authority, issue to any person
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making an applications in the manner determined by the regulations, and not suffering from any of the disqualifications herein mentioned, a licence to act as an intermediary or an insurance intermediary under this Act :
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114A . Power of Authority to make regulations 1) The Authority may, by notification in the Official Gazette, make regulations consistent with this Act and the rules made there under, to carry out the purposes of this Act.

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 Every regulation made under this Act, shall be laid, as soon as it is made, before each House of Parliament for a total period of 30 days.

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Conclusion
Insurance in India was liberalized nearly 10 years back. So far, 48 licences to Direct Insurers have been issued by the IRDA 23 for Life, 25 for Non-Life GIC has been designated as the Indian ReInsurer under the Act. By the end of 2011, it is expected that a few more licences will be granted by the Authority.
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 In the Liberalized set-up, the Insurers can help in growth and deepening of the Insurance market including Niche marketing and together with innovative covers, can substantially increase Insurance penetration in the country which is the need of the hour. The Nationalized Insurance Companies given their size and reach can be the trend setters in this Liberalized scenario and should get their act together so as to ensure long term survival in the market with growth and profitability.
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