INTRODUCTIONContract of insurance may be looked upon as aspecial type of contract b/w two parties called ‘theinsurer’ & ‘the insured’. In this contract ‘theinsurer’, for a premium, undertakes to pay to the‘insured’ a fixed amount of money on the happeningof certain event.In India, the contract of insurance should complywith provision of the Insurance Act 1938.
INSURANCE ACT, 1938The Insurance Act, 1938 contains important provisionsrelating to insurance sector in country. Importantprovisions are:ELIGIBILITY : a public company a co. registered under the co-operative societies ActREGISTRATION: should obtain a certificate of registration a person who carry on any class of insurance business beforeIRDA Act,1999 shall make an application for such registrationwithin three months from the date of commencement of such Act.
DOCUMENTS TO BE FILED: A certified copy of memorandum & articles of association Name & address of the directors & their occupation A statement of the class of insurance business done or to bedone. A certified copy of published prospectus & standard policyforms of the insurer. The receipt showing payment of fee Rs. 50000.GRANT OF CERTIFICATE:After satisfying the soundness of the management of theapplicant, volume of its business & other requirements, theauthority may register the applicant & grant a certificate ofregistration.
CANCELLATION OF REGISTRETION:The Authority may cancel the registration of an insurer if he failsto comply with requirements of deposits with RBI, TRANSFERHIS BUSINESS, do not pay any claim within 3 months of finalcourt judgement etc.RENEWAL OF REGISTRATION:The insurer has to file an application of renewal before 31stDecember of preceding year along with evidence of payment ofrequisite fee.FEE:1/4th percent of total gross premium or Rs. 5 crore whichever isless, & a minimum of Rs. 50000 for each class of business.CAPITAL REQUIREMENT:The capital of ins. Co. should consist ordinary shares each ofwhich has single face value, paid amt. of all should be same &maintain the register of shareholders with names & address.
FINANCIAL STATEMENTS:Every insurer is required to prepare a balance sheet, a profit &loss a/c, a receipt & payment a/c, a revenue a/c at the end ofeach financial year. Separate fund a/cs of shareholders &policy holders should be maintained.INVESTIGATION BY ACTUARY:Every insurer who is carrying on life insurance businessshould get the investigation, done by an actuary, into financialconditions including a valuation of liabilities.
IRDA, ACTThe Insurance Act, 1938 provided comprehensive regulationof the insurance business in India. It created a powerfulsupervisory authority in the controller of insurance, which hadthe powers to direct, advice, investigate, inspect, search, seize,register & liquidate insurance companies.In 1993, Govt. of India, with a view to examine the structureof the insurance industry & to recommend changes to make itmore competitive & efficient, appointed a committee underthe chairmanship of former Governer of Reserve Bank ofIndia, Sh. R.N.Malhotra. The committee submitted its reportin jan. 1994. In 1999 the bill titled as Insurance Regulatory &Development Authority Bill 1999 was introduced inparliament. After discussion & debate the Bill become an Actknown as Insurance Regulatory & Development Authority(IRDA) Act,1999.
FEATURES OF IRDA, ACTACT TO ESTABLISH THE REGULATORYAUTHORITY:Act is to establish authority which will: Protect the interest of holders of insurance policies; Regulate, promote & ensure orderly growth of insuranceindustry;Section 3 of the Act, provides that the authorities shall be abody corporate with the name “The Insurance RegulatoryAuthority” that have thew perpetual succession & a commonseal.INSURANCE ADVISORY COMMITTEE:Sec.25 of the Act provides that an insurance advisorycommittee consisting of not more than 25 members.
The members will represent the interest of commerce,industry, transport, agriculture, agents etc. the chairperson andthe members of the authority shall be ex officer members ofthe committee.ENDING THE MONOPOLY OF LIC AND GIC:Sec 30, 31of the IRDA Act have amended certain provisionsof Insurance Act 1972. These amendments have ended theexclusive privilege of LIC,GIC and its subsidiaries to carry onlife and general insurance respectively.THE INSURANCE BUSINESS OPENED TOINDIAN COMPANIES ONLY:An Indian insurance company has been defined in sec 2 as aninsurer being a company: Formed and registered under companies act 1956. Aggregate holding of equity shares of foreign companydonot exceed 26% of paid up equity share capital of Isndian
RENEWAL OF REGISTRATION:An insurer who has been granted a certificate shall makeapplication in the form of IRDA/R5 for renewal of certificatebefore the 31st December each year with the evidence ofpayment of fee.CAPITAL ADEQUACY REQUIREMENT: Paid up equity capital of 100 crores in case of personcarrying life insurance and general insurance business. Paid up equity capital of Rs.200 crores in case of companycarrying business as re-insurer.DEPOSITS:keep the deposits with RBI either cash or approved securities Life insurance business- not exceeding 10 crores General insurance business-not exceeding 10 crores Re-insurance business-a sum of Rs.20 crores
INVESTMENT OF ASSETS:Sec. 27 provides that atleast 50% of the funds shall be parked inthe govt. securities & insurer can invest upto 20%of their fundsin corporate debts in addition to 15% in market investment.Infrastructure has been included in the social sector, where thecompanies have to mandatorily invest atleast 15% of theirfunds.POWER OF INVESTIGATION ANDINSPECTION:The authority may by an order direct any person to investigatethe affairs of the insurer and to report to it.it may take theservices of auditor or actuary for the purpose of assisting him inany investigation.
TARIFF ADVISORY COMMITTEE:Tariff advisory committee shall control and regulates therates, advantages, term and conditions that may be offeredby that insurer in respect of general insurance business.LICENSING OF SURVEYORS AND LOSSASSESSORS:It provides that a person shall not act as surveyors or lossassessors in respect of general insurance unless he holds avalid license issued to him by the authority.SUFFICIENCY OF THE ASSETS:An insurer should maintain excess of assets over liabilities.The solvency margin shall be the highest of the following : 50 crore. Sum equivalent to 20% of net premium income. A sum equivalent to 30% of net incurred claims.
NO RISK TO ASSUME UNLESS PREMIUMRECEIVED IN ADVANCE:An insurance company shall not asssume any risk in respect ofany insurance business of which premium payable is receivedby him or is guarrented to be paid by a person within such timeor unless and until deposit of such amount is made in advancein the prescribed manner.REINSURANCE:If the insurers find that they have entered into a contract ofinsurance which is an expensive proposition for them or if theywish to minimise the clesrences of any possible loss, without atthe same time ,giving up the contract resort it to havereinsurance.