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The Insurance Laws (Amendment) Bill, 2008 - Legislative Brief [2008] INPRSLS 11 (22 December 2008)

Legislative Brief

The Insurance Laws (Amendment) Bill, 2008


The Bill was introduced in the Rajya Sabha on 22nd December, 2008 and was referred to the Standing Committee on Finance (Chairperson: Shri Ananth Kumar).


The Standing Committee is yet to submit its report.

Highlights of the Bill

Key Issues and Analysis


Recent Briefs:

The Companies Bill, 2008

February 18, 2009


The Right of Children to Free and Compulsory Education Bill, 2008

February 11, 2009


Avinash Celestine

avinash@prsindia.org


May 12, 2009


PRS Legislative ResearchCentre for Policy Research Dharma Marg Chanakyapuri New Delhi – 110021

Tel: (011) 2611 5273-76, Fax: 2687 2746

PART A: HIGHLIGHTS OF THE BILL1

Context

There are a number of laws which govern the insurance business in India. The Insurance Act, 1938 provides the main legal framework within which insurance businesses function and regulates the relationship between an insurer, its policyholders, its shareholders, and the regulator. The life insurance business was nationalised in 1956 with the establishment of the Life Insurance Corporation under the LIC Act, 1956. The general insurance business in India was nationalised in 1972 with the enactment of the General Insurance Business (Nationalisation) Act, 1972.

The IRDA Act, 1999 provided for the setting up of the Insurance Regulatory and Development Authority, which regulates the industry. It also provided for the re-entry of the private sector into the insurance business. In 2007-08, the total premium income of life and non-life insurers in India was about Rs 2,30,000 crore, or 5.3% of GDP (Table 1).

Table 1: Insurance Market in India (2007-08)


Life Insurance

Non-life Insurance

Premium income (Rs crore)

2,01,351

27,823

Market Share (%)

Public Sector

Private Sector

74%

26%

60%

40%

No. of Insurers

Public Sector

Private Sector

1

20

7

14

Sources: IRDA Annual Report (2007-08), PRS


In 2004, the Law Commission recommended comprehensive reforms to the Insurance Act, 1938 which included changes to rights enjoyed by policyholders and the setting up of an independent grievance redressal mechanism and an insurance appellate tribunal.2 The Report of the Committee on Provisions of the Insurance Act, 1938 (Chairman: Shri K.P. Narasimhan), released in 2005, made further recommendations for changes to the Act with respect to investment and accounting norms for insurance companies.3

The Bill incorporates some recommendations of the Law Commission as well as the K.P. Narasimhan Committee. It amends the Insurance Act, 1938, the General Insurance Business (Nationalisation) Act, 1972, and the IRDA Act, 1999.

Key Features

The Bill redefines certain types of insurance and allows for foreign investors to hold up to 49% of the capital in an insurance company. It provides for nationalised general insurance companies to raise funds from capital markets with the permission of the central government. The Bill changes norms governing the rights of policyholders and insurers with respect to insurance policies. It enhances penalties for a range of offences and prescribes a procedure for appeals against decisions by IRDA. It allows for a number of issues, currently specified in the Act, to be specified in the rules.

Definitions

Solvency and Investments

Penalties and Adjudication Mechanism

PART B: KEY ISSUES AND ANALYSIS

Entry into the Insurance Business

L

Clause 3(iv), Statement of Objects and Reasons

loyd’s of London

The Bill provides for Lloyd’s, covered by the Lloyd’s Act, 1871 of the UK, to be treated as a foreign company. The Statement of Objects and Reasons specifies one of the aims of the Bill as being to “facilitate entry of Lloyd’s of London in insurance business in India…”

Lloyd’s is not a company but an insurance market, established as a society and comprised of members, who are distinct legal entities in their own right. It is the members, rather than Lloyd’s itself, who bear the risks of any policies written. While the Bill allows for the entry of Lloyd’s, it is unclear as to whether the individual members will also be allowed to practice in the country.

In India, the Insurance Act, 1938 currently defines an ‘insurer’ to include persons in India who have contracts with Lloyd’s underwriters.4 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.5 In the US, Lloyd’s is an accredited reinsurer in all states.

Capital Structure

Capital Requirements specified in the Bill

T

Clause 3

he Bill requires life and general insurers to have a minimum capital of Rs 100 crore. Health insurers are required to have a minimum capital of Rs 50 crore. The Bill does not give any flexibility to the regulator to revise capital requirements upward over time. This regulatory structure for insurers differs from that for banks.


The Banking Regulation Act, 1949 allows the RBI to licence banks who fulfil conditions imposed on them by the central bank.6 The Act gives broad guidelines as to what those conditions should be but leaves it to the central bank to impose specific conditions, including minimum capital norms, without needing to seek parliamentary approval.

The Insurance Act and LIC

The state-owned LIC is incorporated under the LIC Act, 1956 and is the country’s largest life insurer. The IRDA Act, 1999 did away with LICs exclusive privilege to carry on life insurance in the country and applied all the provisions of the Insurance Act, 1938 to LIC.7 However, unlike other life insurers in the country, all policies issued by LIC are guaranteed by the government.

LIC currently does not meet the minimum capital requirement of Rs 100 crore specified in the Insurance Act as its paid up equity capital is Rs 5 crore. The Life Insurance Corporation (Amendment) Bill, 2008, introduced in December last year in the Lok Sabha provided for an increase in LICs capital to Rs 100 crore. It also allowed for the government to specify the extent to which it guarantees policies issued by LIC. However the Bill will lapse with the dissolution of the 14th Lok Sabha.

Divestment by Indian Promoters

T

Clause 14

he IRDA Act, 1999 amended the Insurance Act, requiring Indian promoters to reduce their stake to 26% within ten years. The Bill does away with this requirement.



The Reserve Bank of India requires promoters of private sector banks to reduce their stake to 40% within one year.8 The RBI, at its discretion, can allow promoters to dilute their stake over a longer period.

Insurance Policies

Assignment and Transfer of Policies

T

Clause 48

he Bill provides for a policyholder to assign or transfer their rights under a policy, either completely or only partly, to a third party.

A basic requirement for any policy of life insurance to be issued is that of ‘insurable interest’ i.e. whether the person who enjoys all rights under the policy also has an interest in the insured person remaining alive. If a policyholder sells the policy, it is unclear whether the new buyer is also required to have insurable interest. The Mumbai High Court has ruled that while insurable interest must exist when the policy is first taken, it is not necessary for such interest to exist when rights in the policy are subsequently transferred to a third party. It ruled that such assignments are legal in India.9 The case is currently facing appeal in the Supreme Court.10

Internationally, the ability to completely assign all rights under a policy to a third party has led to a secondary market for life insurance policies. Policies can be sold for a price which is lower than the face value of the policy but higher than the surrender value. The buyer pays the remaining premiums on the policy and is entitled to the sum paid by the insurer when the insured person dies or the policy matures. In the US, the market for such policies was estimated at about $13 billion in 2005.11

In the US, such secondary market transactions in life policies are regulated in 28 states. Thirty-eight states regulate such transactions in cases where the insured person has a short life expectancy (2-3 years).12 In Canada, such transactions are illegal in 9 provinces.13

India does not have laws which specifically regulate the secondary market in insurance policies. The Bill allows an insurer to decline to recognise the transfer of rights of a life policy to a third party. While this is in line with recommendations made by the Law Commission, it could deter the growth of a secondary market in such policies. The K.P. Narasimhan Committee had suggested that IRDA be given the power to regulate such transfers of rights.

Reports of the Law Commission and the K.P. Narasimhan Committee

Grievance Redressal

Policyholders with complaints can approach the consumer courts or insurance ombudsmen. Such ombudsmen are appointed based on recommendations made by a committee consisting of the chairpersons of IRDA, LIC, General Insurance Corporation and a representative of the central government. This creates the possibility of a conflict of interest. In comparison, ombudsmen in the banking sector are appointed by a committee comprising the deputy governors of the Reserve Bank of India and a representative of the finance ministry.

The Law Commission found the ombudsmen system in insurance unsatisfactory and said that alternative fora such as the Consumer Courts were also ineffective given the large backlog of cases still pending. It proposed that amendments be made to the Insurance Act to put in place an independent grievance redressal authority (GRA) with all powers and functions of a civil court and composed of judicial and technical members. It proposed that existing cases in consumer courts be transferred to the GRA.

The K.P. Narasimhan Committee disagreed, saying that consumer courts were more easily accessible than a GRA would be. Further, it was not clear whether consumer courts were so overburdened as to be unable to handle complaints by policyholders. It suggested instead that the existing system be continued with some changes. The Bill does not provide for an independent GRA.

Appeals Process

The Bill provides for appeals against decisions by IRDA to lie with the Securities Appellate Tribunal, set up under the SEBI Act, 1992. This is in line with recommendations made by the K.P. Narasimhan Committee. Since SAT currently deals with issues related to the capital markets only, its expertise in dealing with matters of insurance law may be limited. The committee had suggested that amendments be made to the SEBI Act to provide for the appointment of a member with a background in insurance. This recommendation has not been implemented.

The Law Commission had suggested a separate appellate authority for the insurance industry, which would hear appeals against decisions by IRDA or the GRA (see above). Appeals against decisions by the proposed insurance appellate authority (IAT) would lie directly with the Supreme Court.

Other Recommendations

Table 4: Status of Other Recommendations made by Law Commission

Topic

Recommendation

Status

Simplification of laws

Suggested the merger of a number of key provisions of IRDA Act with Insurance Act.

Not implemented.

Cancellation of Policy

Insurer should be allowed to challenge a policy on grounds of misstatements/suppression of facts or fraud within 5 years. No challenge to be allowed on any grounds after 5 years.

As recommended.

Nomination of policies

Allow policyholders to distinguish between beneficiary and collector nominees.

As recommended.

Penalties

Increase penalties for violation of investment norms, or obligations towards rural /social sectors or vulnerable sections.

As recommended.

Sources: Insurance Laws (Amendment) Bill, 2008; PRS; Law Commission Report.


Table 5: Status of Other Recommendations made by K.P. Narasimhan Committee

Topic

Recommendation

Status

Definitions

Define ‘Contract of Insurance’ as any contract effected by an insurer by which he assumes a degree of risk of loss or assured benefit as may be specified by regulations made by the Authority.

Not implemented.

Investments

Minimum of 25% of investible funds in government securities and a further 25% in government/approved securities.

Types of approved investments to be specified in regulations. Specify limits on non-approved investments in regulations.

As recommended.

Types of approved investments to be specified in regulations. Act specifies a maximum limit of 15% on non-approved investments.

Capital Requirements

Minimum capital of Rs 100 crore prescribed for life and general insurers and Rs 200 crore for general insurers. Minimum capital for health/agricultural insurance to be specified in regulations.

As recommended. Act prescribes minimum capital of Rs 50 crore for health insurers.

Solvency

Specify valuation norms for assets/ liabilities in regulations.

Every insurer to maintain an excess of assets over liabilities of 50% of minimum capital.

As recommended.

Actuaries

Insert provision in the Insurance Act which makes it mandatory for every insurer to appoint an actuary.

Not implemented. Currently required by IRDA regulations.

Powers of Statutory Councils

Shift power to set rates and terms from Tariff Advisory Council to General Insurance Council. Bring TAC under the General Insurance Council.

TAC done away with. Powers of General Insurance Council left unchanged.

Insurance Agents

Do away with licensing of insurance agents while allowing IRDA to specify minimum qualifications. Entrust insurers with the power to appoint agents.

As recommended.

Cancellation of Policy

No change to Act.

Window within which policy can be cancelled on grounds of misstatement/suppression of facts or fraud expanded to five years from two. However, policy cannot be challenged on any grounds after five years.

Sources: Insurance Laws (Amendment) Bill, 2008; K.P. Narasimhan Committee; PRS



1Notes

. This Brief has been written on the basis of the Insurance Laws (Amendment) Bill, 2008, which was introduced in the Lok Sabha on December 22nd, 2008 and referred to the Standing Committee on Finance (Chairperson: Shri Anant Kumar). The Standing Committee is yet to submit its report.

2. Law Commission of India, “The Revision of the Insurance Act, 1938 and the IRDA Act, 1999”, 190th Report.

3. Report of the K.P. Narasimhan Committee on Provisions of the Insurance Act, 1938 (Chairperson: Shri K.P. Narasimhan). Report submitted in July 2005.

4.The Insurance Act, 1938, Clause 2(9)(c).

5. See Lloyd’s Annual Report, 2008, p. 27: http://www.lloyds.com/Lloyds_Market/Financial_performance/Financial_reports/2008_Annual_Report.htm

6. Banking Regulation Act, 1949, Section 22.

7. See LIC Act, 1956, Section 30A.

8. See RBI website: http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=4350

9.Writ Petition No. 2159 of 2004, Insure Policy Plus Services and others vs. The Life Insurance Corporation of India and others.

10. Special Leave Petition (Civil) No. 10783 of 2007, LIC of India vs. Insure Policy Plus Services and others.

11. Blake, David and Debbie Harrison, “And death shall have no dominion: Life settlements and the ethics of profiting from mortality”, July 2008, Pensions Institute, p. 5. Available at :

http://www.pensions-institute.org/DeathShallHaveNoDominion_Final_3July08.pdf

12. See ‘Life Settlement ABS Developments’, DBRS, June 2008, p. 11.

http://www.dbrs.com/research/221027/select-commentaries-life-settlement-abs-developments.pdf

13. Study Paper on Viatical Settlements, Canadian Centre for Elder Law Studies, May 2006, p. 11.

DISCLAIMER: This document is being furnished to you for your information. You may choose to reproduce or redistribute this report for non-commercial purposes in part or in full to any other person with due acknowledgement of PRS Legislative Research (“PRS”). The opinions expressed herein are entirely those of the author(s). PRS makes every effort to use reliable and comprehensive information, but PRS does not represent that the contents of the report are accurate or complete. PRS is an independent, not-for-profit group. This document has been prepared without regard to the objectives or opinions of those who may receive it.


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