Insurance module v 1 2


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Insurance module v 1 2

  1. 1. The primary law governing contracts of insurance is the Indian Contract Act, 1872. However, there many issues not covered by the said Act. This may relate to torts, consumer rights, transfer of property, agency issues etc.MODULE IV Torts and CrimesLegal Aspects of insurance-Insurance Act1938-Indian Contract Act-ConsumerProtection Act 1986-Insurance ombudsman-Contract of agency-Special principles of Tortsinsurance contracts including reinsurance and double insurance A tort is a private wrong. It occurs whenever someone acts or fails to act in such a manner that an individuals peace of mind or right are jeopardized. It refers to any LEGAL FRAMEWORK OF INSURANCE BUSINESS individuals action that effectively deprives another of his right to security of person, reputation, or property. Torts differ from crimes in that the latter are public wrongs.Insurance is made available to the public through the medium of contracts that detail A crime is any act that the legislature determines to be punishable by law. The samethe rights and duties of the parties to the insurance agreement. These contracts may act may include all of the elements of a particular tort and a particular crime, inrange from implied or oral agreements, to formal written contracts issued by which case there exists a public remedy in the form of punishment prescribed by lawcompanies. and a private remedy that is often in the form of monetary damages.Most of the insurance contracts are expressed in writing even when an oral binder Torts are important in insurance because they are a major source of loss covered byinitiates the transaction. liability insurance. The automobile insurance policy is essential because it provides for payment of judgments awarded by the courts in negligence cases as well as theInsurance contracts are complicated because of the technical nature of the subject costs of litigation or claims settlement. The comprehensive- personal liabilitymatter, the statutory requirement that certain language be employed, and the need to insurance policy covers losses arising from negligent conduct unrelated to the care,avoid terms that may be construed as ambiguous. However, the need for legal clarity custody, or control of the automobile or to business pursuits. The comprehensivemay lead to a contract that is beyond the comprehension of the typical insurance general liability insurance policy covers losses occurring as a direct result ofconsumer. Furthermore, the technical nature of many contracts often distracts from negligence in many business-situations.the mutual understanding of its terms by the parties to the contract. CrimesInsurance contract can broadly be classified into two categories (a) life and (b) non-life insurance. The subject matter of life insurance is life of the assured. In a life Sometimes that are recognized by statute are specific to insurance, while others arepolicy the life is covered for a certain amount which is payable on the maturity of the relevant to insurance law because they are crimes committed to obtain funds illegallypolicy or on the death of policyholder which is earlier. The amount is payable ondeath to the nominee/legal heir of the deceased. from insurance companies. A few example of crimes are:Non-life insurance can again be categorised according to the uncertainties and events a) Rebating : passing of commission/incentives by agents to prospectivecovered by the respective policies. Some examples of non-life insurance policies are insureds to purchase on insurance policy.householders insurance and fire insurance. Personal accident insurance is linked tohuman life hence would not strictly fall in the category1 of non-life insurance though b) Twisting : inducing an individual to terminate are life insurance policy inthe characteristic of uncertainty which attracts to non life insurance is manifested order to buy another to the disadvantage of the insured.even in personal accident and medical insurance policies respectively. c) Filing of false claims : attempt to collect money from an insurance company when there is no loss or the padding or inflation of claims by procuring 1
  2. 2. excessive and fraudulent estimates of damages. Unlicensed insurance e) Possibility of performance etc. activity : d) Unlicensed person engaging in any insurance transaction that requires licensing (guilty of a misdemeanor). Offer and Acceptance e) Defamation : publication of material that might tend to lessen public The offer for entering into insurance contract generally come from the insured confidence in the institution of insurance. (proposer). The insurance company may also propose to make the contract. In order to constitute a valid acceptance, offer and its acceptance must fulfil the requirements f) Asson : felonious burning of property of another to defraud an insurance as prescribed by the Indian Contract Act, 1872. Whether the offer is made by the company. insurer or insured, the moot point is acceptance. g) Homicide : when the beneficiary of a life insurance policy swindles the Any act that precedes it is an offer or a counter-offer. All that precede the offer or insured for the purpose of obtaining the proceeds of the policy or otherwise. counter-offer is an invitation to offer. In insurance, the publication of prospectus, the canvassing of the agents are invitations to oiler. When the proposer proposes to enter h) Breach of trust: agents using or mingling the clients insurance premiums the contract it is an offer and if there is any alteration in the offer that would be a with their own funds. counter-offer. If this alteration or change (counter-offer) is accepted by the proposer, it would be an acceptance. In absence of counter-offer, the acceptance of offer will i) Unfair discrimination: charging of different rates by a single insurance be an acceptance by the insurer. At the moment, the notice of acceptance is given to company to similar risk class. other party, it would be a valid acceptance. j) Conspiracy : dishonest agent conspires with his client to defraud the On acceptance of the proposal by the insurer, a valid and binding contract comes into insurance company by misrepresentation, by filing false claims or falsifying existence. If the insurer indicates a higher premium than the normal as per proposal documents. or conditions of acceptance are different from the standards ones, such indicationINDIAN CONTRACT ACT, 1872 tantamount to a counter-offer which the proposer may or may not accept. It is necessary that in order to make a binding contract of insurance, the parties mustInsurance contracts are agreements between insurance companies and insured for the agree upon every material term affecting the agreement.purpose of transferring from insured to the insurer a part of the risk of loss arisingout of contingent event. Therefore all the provisions of Indian Contract Act, 1872, in In case of Life insurance a valid and binding contract comes into existence upongeneral are applicable to insurance contracts. Under Section 10 of the Indian payment of first premium. When a proposal form duly filled in by the proposer isContract Act, following conditions are necessary to. form a valid contract: accepted by the insurer, the acceptance communicated to the proposer is in reality a counter-offer indicating that the proposal will be accepted on payment of the a) Agreement between two parties premium and communication of the assent of the proposer 10 special terms, if any. Unless the proposer assents to or complies with the terms of insurer no contract b) Lawful object . would come into existence. c) Capacity to contract Every contract of insurance must be in writing and must comply with the provisions of the Indian Stamp Act. An oral or informal contract gives the insured a right to call d) Consideration. 2
  3. 3. for a stamped policy, even after the loss insured against has occurred in view of theIndian Stamp Act, 1899.An issuance of a policy may some time takes time after acceptance of risk in view ofunderwriting and administrative procedures. The issuers may issue a cover note for a Considerationstipulated period which is also a valid evidence of contract. For insurance contracts, consideration is in the form of premium to be paid by theLegal Object insured and a promise to pay, compensate or indemnify in accordance with the terms and conditions incorporated in the policy, on the part of the insurer! A premium isFor a valid contract, the object of the agreement should be lawful and must not be the price for the risk undertaken by the insurers. It is the consideration receivable byprohibiled by any law. Any subject matter of contract that is (fj not forbidden by law, the insurers from the insured in exchange for their undertaking lo pay the sumor (11) is not immoral, or (hi) opposed lo public policy, or (in) which does not defeat insured in ease the event insured against takes place.the provisions of any law, is lawful. The subject matter of insurance in the proposalform and also the consideration should be legal. If there is any contract to defraud Amount of premium is not the criteria, but a contract without payment of premium isthe insurer rather than based on round principles of indemnity, the contract is void. void.Mistake and Misrepresentation Free ConsentA contract of insurance is a contract uberrimae fidei, i.e., is based on the principle of Parties entering into the contract should enter into the contract by their free andutmost good faith. If utmost good faith is not observed by either party insurer or genuine consent. The consent shall be free with it is not caused by : (i) coercion, (2)insured the contract may be avoided by the other. undue influence, (3) fraud, or (4) misrepresentation, or (5) mistake. When there is no free consent except fraud the contract becomes voidable at the option of the partyCapacity to Contract whose consent was so obtained. In ease of fraud, the contract would be void. The proposal for free consent, must sign a declaration to this effect, the person explainingThe rules laid down under the Indian Contract Act, 1872, defining the contractual the subject-matter of the proposal to the proposer must also accordingly make acapacity of the parties apply generally to insurance contracts in the same manner as written declaration on the proposal.they apply to other types of contracts. The proposer must full disclose all material information and sign a declaration in theEvery person is competent to contract (a) who is of the age of majority according to proposal. Also, the insurer must full disclose the product details to the proposer.the law, (6) who is of sound mind, and (e) who is not disqualified from contractingby any law to which he is subject. Examples of Material Circumstances in Marine InsuranceThe capacity of an insurer to enter into contracts of insurance depends upon its 1. Concealing the nationality of the insured when such nationality is ofconstitution. importance [Associated Oil Carriers Ltd. v. Union Ins. Society of Canton (1917) 2 K.B. 184].A minor is, therefore, incompetent to contract, and a contract with a minor is anullity; but under certain circumstances, an insurer may issue a policy on the life of a 2. The fact that the ship had developed a leak before the insurance wasminor. Under the system of deferred assurance policies, the insurance contract is effected [Russel v. Thorton 1859 20 L.R. Ex. 9].with a parent or legal guardian, who is competent to contract. 3. The fact that the goods carried on the ship arc grossly over-valued when the ship is insured. [Ionidies v. fender (1874) L.R. 7. Q.B. 531]. 3
  4. 4. Discharge of Contract Insurance Act, 1938A contract terminates in the following situations : Insurance Act, 1938 is the primary law that governs the insurance business in India. It provides for the registration and licensing of insurers, payment of premiums, 1. Performance : When all the terms of the contract in terms of performance alteration and other policy matters, powers of governments, accounts, audit and other have been carried out. Payment of premium and payment of claim by reporting requirements, mode of deposits and investments, constitution of claim respective parties. settlement authorities. 2. Release : When one party to the contract agrees to excuse performance by Insurance Regulatory and Development Authority Act, 1999 the other party after breach of the contract by the latters. Denial of a claim by insured on account of fraud. The Insurance Regulatory and Development Authority Act, 1999 provides for the establishment of an Authority to protect the interests of holders of insurance policies, 3. Discharge : (a) Discharge by implied consent or impossibility of to regulate, promote and ensure orderly growth of the insurance industry and for performance: The law does not compel a man to do the impossible thing. matters connected therewith or incidental thereto and further to amend the Insurance Contract is discharged when performance becomes impossible: Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalisation) Act, 1972. i. Due to destruction of the subject-matter; ii. Due to death or incapacity of the promisor in a contract for personal CONSUMER PROTECTION ACT 1986 (COPA) services; 1. Under this Act, a consumer, as an individual or along with other individuals, iii. Due to subsequent change of legislation; or through a consumer organisation, can approach the various forums iv. Due to non-existence or cessation of a state of affairs, the existence or prescribed under the Act for redress, in case he is not satisned with the goods continuance of which formed the basis of the contract; and or service .provided. He has to allege a defect m goods or service. A defect or deficiency is a fault, imperfection shortcoming or inadequacy in the quality, v. Due to such an alternation of circumstances as to bring about complete nature or manner of performance, which is required to be maintained by or frustration of the commercial object. under any law or in pursuance of a contract or undertaking in relation to that (b) Discharge by tender :Where on party is ready and williny to perform his service.promise and has offered lo do so at the right time and place, hut the other party does 2. In order to attend to complaints under this Act, consumer dispute redressalnot accept performance, Ihe contract is discharged by lender or attempted forums are established in each district and for each State. The forum at theperformance. district level will hear complaints up to the value of Rs.20,00,000 and the forum at the State level will hear complaints up to the value of Rs.4. Void Contracts : When an agreement is discovered to be void. 1,00,00,000. The National Commission will attend to matters beyond the5. Breach of Contract : When a contract has been broken. Where the insured has jurisdiction of the State forums and also appeals against the decisions of acommitted such a breach the insurer can terminate the contract of insurance. State forum. 3. The COPA applies to the insurance business as well. Policyholders . have the6. Novation : If the parties to a contract for it or rescind or later it, the original right to seek redress against unfair practices or unsatisfactory service fromcontract need not be performed. insurers and from agents. The majority of disputes relating to insurance arise out of repudiation and delays in claims. On all these matters, agents can help a 4
  5. 5. great deal to mitigate the complaint or grievance. A written presentation is a entered into and the acts done by the principal in person". A contract of agency may sure method of ensuring that the correct information is given. Delays in office be made in writing or verbally. When it is in writing, it is in the form of power of procedures can be avoided through the agents personal intervention. Such attorney. Following provisions are worth noting: delays occur often due to non-compliance with requirements or ambiguity in title. If due care is taken -at the time of proposal and all material information An agent cannot lawfully employ another to perform acts, which he has supplied, there cannot be a repudiation of a claim. expressly or implied undertaken to perform personally, unless by ordinary custom of trade or from the nature of the agency, a sub-agent must beThe Consumer Protection Act, 1986 employed. This involves the general maxim of law that a delegatee cannot further sub-delegate. A "sub-agent" is a person employed by, and actingThe Act applies to all goods and services unless specifically exempted by Cenlral under the control of, the original agent in the business of the agency.Government. The provisions of the Act are compensatory in nature. Where a sub agent is properly appointed, the principal is, represented by theIt enshrines the following rights of the consumers: sub-agent and is bound by and responsible for his acts as if he were an agent originally appointed by the principal. i. The right to be protected against the marketing of goods which are hazardous of life and properly; The agent is responsible to the principal for the acts of the sub-agent. ii. The right to be informed about the quality, quantity, potency, purity, The sub-agent is responsible for his acts to the agent, but not to the standard and price of goods so as to protect the consumer against unfair principal, except in cases of fraud of wilful wrong. trade practices; If an agent does something on behalf of the principal but without his iii. The right to be heard and to be assured that consumers interest will receive knowledge or authority, the principal may elect to ratify the action or to due consideration at appropriable forum: disown it. A principal ratifying any unauthorized act done on his behalf iv. The right to seek redressal against unfair trade practices or unscrupulous ratifies the whole of the transaction of which such act formed part. exploitation of consumers; In an agent deals on his own account in the business of the agency, without first v. The right to consumer education. obtaining the consent of his principal and acquainting him with all material circumstances which have come on his own knowledge on the abject, the principalUnder Section 2(e) of the Act, the insurance is recognised as services. Chapter 32 of may repudiate the transaction, if the case shows either that any material fact has beenthe Act elaborates various" consumer rights. is honestly concealed from him by the agent or that the dealings of the agent have been disadvantageous to him.Agency If an agent does a criminal act, the principal is not liable to the agent, either upon anThe law relating to agency is part of the Indian Contract Act. An agent is defined as express or an implied promise, to indemnify him against the consequence of that act."a person employed lo do any act for another, or lo represent in dealings with thirdpersons." Where an agent does more than he is authorized to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is notThe person for whom such an act is done or who is so represented is called the bound to recognise the transaction.Principal. Section 226 of the Contract Act states that "Contracts entered into throughan agent, an obligation arising from acts done by an agent, may be enforced in thesame manner, and will have the same legal consequences as if the contracts has been 5
  6. 6. In the absence of any contract to that effect, an agent cannot personally enforce (c) Unilateral : After the insured pays Ihe premiums the performance is obligatorycontracts entered into by him on behalf of his principal nor is he personally bound by on one fiarty, i.e. the insurer.them. (d) Aleatory : performance is conditioned upon an event that may or may notTermination of Agency : An agency is terminated by the principal revoking his happenauthority; or by the agent renouncing the business of the agency; or by the businessof the agency being completed; or on the death of either the principal or the agent. Elements of Insurance ContractAgents Duty : An agent is bound to conduct the business of his principal according The four basic elements to every insurance contract are:to the directions given by the principal, or in the absence of any such directions, A. Application : An application is required for every contract of insurance. Inaccording to the custom which prevails in doing business of the same kind at the the application, which is an offer to enter into a contract, the prospectiveplace where the agent conducts such business. When the agent acts otherwise and insured sols forth the facts and figures required by the insurance carrier1!,any loss is caused, he must make it good to his principal, and if any profit accrues, he underwriting department. The application may be brief and oral, or of anymust account for it. length and in written form. In life insurance, the application itself becomesMisrepresentations made or frauds committed by agents acting in the course of their a part of life for their principals have the same effect on agreement made by such agents B. Binders : A binder is a memorandum specifying some of the details of theas if such misrepresentations or frauds has been made or committed by the property or liability policy to be issued by the company. It is memorandumprincipals; but misrepresentations made or frauds committed by agents in matters of insurance issued pending delivery of the formal policy. The binder maywhich do not fall within their authority, do not affect their principals. be oral or written and may be given either by an agent or a company. AINSURANCE CONTRACTS - IMPORTANT FEATURES broker, not being an agent of an insurance company, cannot issue binders. The binder is usually a temporary document and ordinarily would remain inThe principal functions of an insurance contract are : force no more than ten days. For example, in automobile insurance a car buyer wants immediate coverage. By binding the insurance company to the(1) to define the risk that is to be transferred risk, the agent need not wait for the insurance to become effective.(2) to state the conditions under which the contract applies and Binders are not used in life insurance. Given the long term nature of the(3) to explain the procedure for settling losses. contract and the insurers inability to cancel a life insurance policy, the life insurer requires an opportunity to examine the application (and possible theNature of Contract applicant) before being bound to a lifetime contract. However, in place of binders the life insurance agent can provide the applicant with a receiptAn insurance contract as four attributes: (assuming the first premium installment is paid) that will provide varying insurance benefits depending on the nature of the receipt.(a) Entirety : all the terms and conditions are to be found in the policy document. Ifthe terms and conditions are oral or not stated explicitly they are difficult for parties C. Policy Forms : are formal written contract of insurance that sets forth all ofto prove. the terms of the agreement. The policy had two parts:(b) Personal : the contact follows the person, the insured, rather than property. 6
  7. 7. i. Heading : It is the declaration page and identifies the risk by specifying the that Act and is paid by way of commission or otherwise, in consideration of name of the issued, the address location of the risk, period covered by the his soliciting or procuring insurance business, including business relating to policy, description of the subject being insured, the amount of insurance the continuance, renewal or revival of policies of insurance. He is, for all the amount of the premium, and any warranties of representations made by purposes, an authorized salesman for insurance and needs a licence.. the insured, 2. As stated above, an agent is one who acts on behalf of another. The another ii. Body : It is the contract itself containing the various clauses pertaining to on whose behalf the agent acts, is called the principal. The insurance agreements exclusion and condition. company is the principal in this case. The lawyer is the agent of the client, when he argues the case in court. An ambassador is an agent of his country. iii. Back : It specifies the rights of the insured and the duties of the insurer. The agent represents the principal and acts on his behalf. Some insurers The condition, and .stipulations define the rights and duties of the parties designate their agents as advisors, consultants etc., as if they are aside from injury agreement. independent persons. It is the nature of the function, which determines the Standardization of policy forms is an ongoing process, and most insurance relationship of agency, not the designation. An independent advisor or contracts have uniform language for the greater part of their terms. Such consultant would not be appointed by an insurance company. He would be standardisation makes possible economies of operation, statistical knowledgeable enough as a person to be approached for advice or uniformity, and better communication between the insured, his agent, and consultation. Some insurance agents may ll insurance agents should strive the insurance company. Where language has been standardised, to attain that acquire status. determination of the meaning of the words and phrases by the courts AGENTS’ REGULATIONS reduces the chance a misunderstanding. iv. Endorsement : An endorsement is a form that is used to modify the policy 3. The Insurance Act requires that an insurance agent must have a licence. The contract Endorsements may extend or restrict coverage, permit transfers of authority to implement the provisions of the Insurance Act, including interest in properly, transfer coverage, transfer coverage from one place to matters relating to the issue of licences to agents, is the 1RDA, constituted another, increases or decreases limits of coverage, provide tor assignment by the IRDA Act of 1999. The IRDA had issued the IRDA (Licensing of of policies or changes in beneficiary designations, provide for changes in Insurance Agents) Regulations, 2000, dealing with the issue of licences and settlement options elected, or in any other legal manner permit other matters relating to agents. The Regulations are reproduced in full at amendments to the contract. the end of this course and form part of the study material. The various forms, which are part of the Regulations, have been omitted. The can be Endorsement are usually done by party forms or by embossing through obtained from the insurers offices as and when required. rubber stamps of the desired alteration.INSURANCE AGENCY 4. By another notification in October 2002, the IRDA (Licensin Corporate Agents) Regulations, 2002 were issued. These Regulaf deal with the issueDEFINITION OF AN AGENT of licences and other matters relating to corporate agents, like companies, firms, banks, cooperative societies, etc., are not individuals and can also 1. According to Section 182 of the Indian Contracts Act, an agent is a person become agents. As per the guidelin issued by the IRDA on 14.7.2005, a employed to do any act for another or to represent another in dealing with a corporate agent should normal! be a company whose principal business third person. In the insurance industry, the term agent is ordinarily applied should be something other than distribution of insurance products, the latter to a person engaged by the insurer to procure new business. The Insurance being a subsidiary activity Exceptions to the above requirement may be Act defines an insurance agent as one who is licensed under Section 42 of considered by insurers if (i) the corporate agent is a public limited company 7
  8. 8. with a share capital of Rs. 15 lakhs, to be kept in the form of a deposit with knowingly participating in or conniving at any fraud, dishonesty or a bank, to be used with the approval of the insurer (ii) it is set up misrepresentation against an insurer or an insured (e) not possessing the exclusively for this purpose and is owned by insurance professionals and requisite qualifications and specified training (f) yet to pass such (iii) agency business is transacted only by full time employees. examinations as are specified by the regulations (g) found violating the code of conduct as specified in the regulations.5. Insurance products should be canvassed with the help of insurance professionals and not through other modes like introducers, finders or sub- 10. The fee for a licence is Rs.250 for individual as well as corporate agents. A agents. Ordinarily, only one licence will be granted to one group, provided licence is granted for 3 years. It may be renewed after 3 years. The fee for the group does not have any other insurance activity, such as broker, the certification of the specified person is Rs. 500. This is also valid for 3 insurer, etc Exceptions may be considered by the IRDA. At least one of the years. persons designated to canvass, must have insurance qualifications. 11. A licence issued by the IRDA may be to act as an agent for a life insurer,6. If a corporate agent terminates its arrangement with one insurer, it must for a general insurer or as a composite insurance agent working for a life have the written approval of the IRDA, before it can represent another insurer as well as a general insurer. No agent is allowed to work for more insurer. Corporate agents are required to submit periodical returns to the than one life insurer or more than one general insurer. insurer and also file its audited accounts, along with other specified statements, with the IRDA. 12. The qualifications necessary before a licence can be given are that the person (individual or corporate insurance executive) must7. Every corporate agent is required to designate one or more individuals who would be called corporate insurance executive and would solicit insurance  not be a minor business on their behalf Such corporate insurance executives have to obtain  have passed at least the 12th standard or equivalent examination, if he is to licences for themselves. Others who may also work for the corporate agent, be appointed in a place with a population of 5000 or more, or 10th standard will be called specified persons" and they will be required to obtain otherwise certificates. The essential provisions of these regulations are reproduced at the end of this course and form part or the study material.  have undergone practical training for at least 100 hours in life or general insurance business, as the case may be, from an institution, approved andPROCEDURE FOR BECOMING AN AGENT notified by the IRDA. In the case of a person wanting to become a8. The Insurance Act, 1938 lays down that an insurance agent must possess a composite insurance agent, the applicant should have completed at least 150 licence under Section 42 of that Act The licence is to be issued by the hours practical training in life and general insurance business, which may IRDA. The IRDA has authorized designated persons, in each insurance be spread over six to eight weeks. company, to issue the licences on behalf of the IRDA. The fee for the  have passed the pre-recruitment examination conducted by the F Insurance licence, the manner of making an application, etc., have been specified in Institute of India or any other examination body authorized by the IRDA. the regulations issued by the IRDA. In 2007, the IRDA has reduced the requirement of training hours from 1009. In terms of the Insurance Act, a licence will not be given if the person is (a) to 50 and from 150 to 75 a minor, (b) found to be of unsound mind (c) found guilty of criminal misappropriation or criminal breach of trust or cheating or forgery or an abetment of or attempt to commit any such offence (d) found guilty of or 8
  9. 9. 13. The licence once issued, can be cancelled whenever the person acquires a • Ensure that nominations are made or changed according to changing disqualification. circumstances14. Applications for renewal have to made at least thirty days before the expiry • Assist in settlement of the claim, by helping the claimants to complete of the licence, along with the renewal fee of Rs. 250. If the application is the necessary formalities and requirements. not made at least thirty days before the expiry, but i made before the date of REINSURANCE AND DOUBLE INSURANCE expiry of licence, an additional fee of Rs.100 is payable. If the application is made after the date of expiry, it would be normally be refused. Reinsurnce15. Prior to renewal of the licence, the agent should have completed at least 25 "The practice whereby one party called the Reinsurer in consideration of a premium hours practical training in life or general insurance business or at least 50 paid to him agrees to indemnify another party, called the Reinsured, for part or all of hours practical training in life and general insurance business in the case of the liability assumed by the latter party under a policy or policies of insurance which a composite insurance agent. it has issued."16. Insurers who select agents for appointment, make arrangements for training, Reinsurance as the term itself suggests, is insuring again. It is the transfer of for appearing in the prescribed examinations, and obtaining the licence. The insurance business from one insurer to another. Under reinsurance, the original procedures have been streamlined and there is little loss of time for any step insurer who has insured a risk, insures a part of that risk with another insurer. That is in the process. to say, that he reinsures a part of the risk in order to reduce/diminish his own liability. The insurer transferring the business is called the "Principal or Direct orRESPONSIBILITIES OF AN AGENT Ceding or Original Office" and the office to which the business is transferred is called the "Reinsurer or Assuming or Guaranteeing Office." The reinsurer gives this17. An agent, individual or corporate, is the main component of the distribution facility of risk coverage for a premium which is called reinsurance premium. channel for the life insurance business. He would be required to solicit and Reinsurance premium is an income to the reinsurer and an expense to the insurer. procure new life insurance business, in a manner that is consistent with the interests of the policyholders and of the insurance company. For this Reinsurance is also a contract of indemnity. The original company must disclose all purpose, he would have to do the following. the material facts to the reinsurer. In the event of loss, the reinsurer indemnifies the loss subject to amount of reinsurance cover taken. The rest will be borne by the• Contact prospects for life insurance, study their needs and persuade , them principal. This is called risk retention by the ceding company. to buy.• Complete all related formalities, including filling up proposal forms, An insurance company transfers all or a portion of its risk exposure under a collecting premium, arranging medical examination, collecting proofs (of insurance policy to another company. Under reinsurance system, an insurer who has age or income), reports and other information required by the underwriter. accepted a risk, lays off (or reinsures) part of the risk with another insurer.18. After having sold a new insurance policy, the agent has to ensure that the Reinsurance is rightly called an indirect business. It is in contrast to direct insurance policy continues, without a lapse, till it becomes a claim. The conservation business, which is received by an insurer directly from the applicant. of the policy is in the interests of all the three persons concerned, the insurer, the policyholder and the agent. For this purpose, he has to Recently, the Government of India made the four non-life insurance companies which were previously under General Insurance Corporation(GIC) Of India as • Keep in touch with the policyholder to make sure that renewal independent and autonomous bodies and converted the GIG of India into a premiums are paid in time. 9
  10. 10. Reinsurance Company. The IRDA has also laid down the procedure to be followed based on average result of the treaty account. The provision for profit commissionin reinsurance agreements. also promotes healthy underwriting on the part of the direct insurer and works to the advantage of both parties.Reinsurance is an entirely new contract distinct from the original insurance contractentered into by the ceding company and the re-insurer. The original insured is not a With a view to compensating the loss of premium involved through reinsurance andparty to the reinsurance contract and hence, has no rights against the reinsurer. to maintain the premium income at a steady level, the ceding companies demand a nearly equivalent amount of profit commission from the reinsurers. This is termedThe general principles of the law of contracts and the special principles that govern insurance contracts also apply to reinsurance contracts. The principle ofutmost good faith demands from the ceding company to make full disclosure of Under certain circumstances the reinsurers also further reinsure their acceptance inmaterial facts. Material alternations if made are also required to be specifically stated order to protect their overall portfolio. This transaction is called retrocession, andto the reinsurers. follows the same process as reinsurance.The ceding company acquires insurable interest in the risk underwritten in direct Let us take an example to understand the reinsurance mechanismbusiness accepted by it. An occurrence of a loss will result in financial loss. Hence, itis legally entitled to reinsure the risk. However, the insurable interest is limited to the Lets say that an insurance company has accepted the risk on a proposal for Rs. 50extent of liability arising under the original contract of insurance. If the ceding lakh and its retention limit is Rs. 30 lakh. The company will issue the policy for fullcompany is not liable for a certain thing under the original policy, the reinsurer is Rs. 50 lakh to the applicant and then reinsure (or cede) Rs. 20 lakh which is thealso not liable under the reinsurance contract. Just as direct policies are contracts of amount in excess of its (retention limit.indemnity against pecuniary losses, same is the case with reinsurance contracts. Suppose the policy becomes a claim in the second year, the ceding company will payA company which accepts business from public may also accept reinsurance Rs.50 lakh i.e. the full claim to the claimant (primary client), and the reinsurancebusiness from other insurance companies if allowed by the statutes of the country. company will give Rs. 20 lakh to the insurance company.Professional reinsurers, however, do not accept direct insurance from the public but Need for reinsuranceonly reinsurance business from the insurance companies. The Swiss Reinsurance(Swiss re) and Munich Reinsurance(Munich re) are among the leading reinsurance  Every insurance company, whether life or non-life requires reinsurance tocompanies in the world. diversify and distribute risk. ,Under reinsurance arrangements, the ceding company receives commissions from  Even large sized insurance companies need reinsurance facility becausethe reinsurer at a rate higher than the original commissions paid by the ceding there are many risks which are too huge for any one company to bear on itscompany. This is so because the cost of acquiring direct business is higher than the own.cost of obtaining business by way of reinsurance. Also the underwriting and  Reinsurance of desired proportions of large risks enables a better spread ofadministrative expenses of the ceding company are far more than those of the risks. It even enables geographical spread of risks i.e., placement of riskreinsurers. over the retention level with reinsurers operating in various countries.PROFIT COMMISSION  Helps to accommodate a valuable client by accepting a big business(risk) which the insurer could not otherwise entertain.Besides commission, the ceding company also receives a share in the profits earnedby the re-insurers under the treaties. This is termed as profit commission and is 10
  11. 11.  Reinsurers even provide technical assistance and rating assistance of the Double insurance means insuring a risk with two or more insurers and the total sum original risks. insured also exceeds the actual value of the subject matter.  Reinsurer provides insurance knowledge to a new insurer and even shares If the actual value of the subject matter is more than or equal to the total sum its experiences to meet different needs of its clients. insured, it is not treated as double insurance. In the case of life insurance, double  Reinsurance is of special importance in high risk areas like Marine/Aviation insurance is allowed since nobody can place a value on human life. One can take life classes under cargo/hull risks. insurance covers from many insurance companies and on maturity or death, the insurer will have to pay the full sum assured.  Reinsurance under life insurance occurs very sparingly except for very large single risk covers especially like the key man insurance -life insurance of a But in case of non-life insurance, a property can always be valued and it cannot be companies vital executives/employees. insured at a higher sum whether with one insurer or more. If a property is insured  The insured would like to get the insurance needed with one insurer instead with insurers for a sum more than its value it is termed double insurance. If the total of taking policies from different insurers to cover the total risk. The insurer sum assured with all the insurers is less than the value of property, it does not accepts the total risk and in turn reinsures part or whole of the risk with amount to double insurance. other companies (which is called co-insurance), or professional reinsurance For example, if a house worth Rs. 20,00,000 is insured with ABC INSURANCE companies (which is called reinsurance). CO.LTD for Rs. 12,00,000 and with XYZ INSURANCE CO.LTD for Rs.Thus, we can say that reinsurance plays an essential role in the insurance world. 18,00,000, it is treated 3$ double insurance because the total value of the subject matter i.e., total of all the policies exceeds the actual value of the house.Reinsurers get into agreements with different insurers on the basis of their status Consequentially if there is a claim then the insurers will contribute proportionally injudged on the following grounds: ratio 8:12 i.e. Rs. 8,00,000 and Rs. 12,00,000. Suppose if it was insured with two insurers for Rs. 700,000 each, there is no double insurance. i. Age and financial position of the ceding insurers. ii. Management standards. Difference between Reinsurance and Double Insurance iii. General underwriting policy. Reinsurance Double Insurance iv. Total premium income. When the risk is high, the When the same risk and subject v. Areas of operation. . insurers get a part reinsured with matter is insured with more than 1) another insurance company 1) one insurer, it is termed double vi. Claims experience. insurance. called the reinsurer. vii. Anticipated premium income from the reinsurance agreement. The insurer has an insurable Here, the insured has insurableviii. Previous reinsurance arrangements, if any. 2) interest in the risk which he may 2) interest.Some people confuse reinsurance with double insurance. Both are different concepts the following facts depicts. Reinsurance does not affect the Total sum amount assured of all position of the original insured. the policies is more than the actual 3) The reinsured has to pay 3) value of the subject matter.Double Insurance reinsurance premium for the risk shifted. 11
  12. 12. The original insurer is able to Here, insurers can adjust their 2. Delay in covering the risk. 4) transfer a part of the risk to the 4) risks and contribution among re-insurer. themselves when the claim arises. Once the insurer has decided upon his own retention, it is necessary to submit the Reinsurance contract terminates In the case of double insurance, it details of the risk, for balance amount for reinsurance, to each proposed reinsurer. once the original insurance does not happen. If one insurer has There is an uncertainty of acceptance of risk. The amount of acceptance is entirely 5 5) lapses for any reason. paid, he can ask others for within the discretion reinsurer. contribution. In the event of loss, the original Assured cannot recover more than For example, if the ceding company has issued a policy for Rs. 10 lakh on a risk on insurer has to pay the assured the amount of actual loss. If loss which retention is Rs. 2 lakh, Rs. 8 lakh is surplus and has to be reinsured (ceded) sum to the insured. occurs, the assured may claim payment from the insurers in such to a reinsurer. This surplus may be ultimately reinsured with one or more reinsurers. 6) 6) an order as he chooses and the insurers will adjust the amounts The reinsurers cannot be forced to accept the risk. They have the option or facility among themselves in proportion to to reject or accept the reinsurance for any amount they decide. Hence, this method of the insurance cover granted by reinsurance is called facultative reinsurance. them. Original insurer will recover The assured can recover the full Claim settlement 7) from the reinsurer, the amount 7) value on the original policies till above retentiony. his total loss is made up. Re-insurers pay claims in proportion to the amounts reinsured by them. Take for example, on a policy of Rs. 10 lakh issued by the ceding company, twoMETHODS/KINDS OF REINSURANCE reinsurers A and B have accepted Rs. 3 lakh each and another two reinsurers C and D have accepted Rs. 1 lakh each then a loss of Rs. 6 lakh will be paid as follows:There are three main methods of reinsurance. The insurers can choose among theseas per their need and desire. These three methods are (A) facultative (B) treaties and Reinsurer A Rs. 180000(C) pools. These methods have been discussed in detail: Reinsurer B Rs. 180000Facultative Reinsurer C Rs. 60000This is the oldest method of reinsurance. Under this method, the insurer offers eachrisk for reinsurance and it may be accepted or declined by the reinsurer. The Reinsurer D Rs. 60000procedure is to submit brief details of the risk to each reinsurer who will indicate the Rs. 480000proportion that he would accept. Ceding company bears Rs. 120000The direct insurer (the ceding company) sends a copy of the original policy to thereinsurer who will then issue the reinsurance policy. Total amount of loss Rs. 600000Reinsurer considers each risk separately and then reinsures the unretained risk. This Drawbacks of Facultative Reinsurance Methodmethod has two drawbacks:  This method involves considerable amount of routine work.1. Involves a lot of documentation.  Reinsurance cover is not automatic. 12
  13. 13.  Reinsurers have the faculty (i.e., option) to decline any risk offered to them.  There is a decision to pay losses beyond a certain limit.  The method is time consuming, as each risk necessitates individual There are two main types of proportional reinsurance treaties viz., Quota Share and submission to reinsurers. Surplus. Non-proportional reinsurance treaties are of excess of loss or stop loss types. All are discussed below one by one.Auto-facultative or facultative-obligatory Quota Share TreatyUnder this method, the professionally, highly reputed insurer company has the optionto offer the risk reinsurance but the re-insurer has the obligation to accept the This is quiet simple to understand and administer.reinsurance. Thus reinsurance becomes semi-obligatory. A fixed proportion of a given class of insurance as a whole is ceded. If, for example,Although many other methods are available for reinsurance, the facultative method is reinsurance is arranged on a 50 percent basis, the reinsurer accepts half of each risk.the most widely used. He obtains half the premium (less commission) and bears half the claim.Treaties This treaty, involves unnecessary loss of substantial premium on small risks as well as good s which could be retained in full by the ceding company (original insurer).Treaty is a written agreement between the insured and the reinsurers in terms ofwhich reinsurance offer and acceptance are automatic on the part of both the parties. This method of reinsurance is especially for an insurer who isIt is applicable to all classes of insurance. a) Newly established and has a small premium income, or,There is an agreement between the direct insurer and the reinsurer (either onecompany or several) that the reinsurer company will accept all insurances which may b) Entering a new class of business for which it is inexperienced or,be offered within the limits of the treaty. c) Is into covering hazardous class of insurance where selective ceding is difficult. For example, it may be used for reinsurance in specialized classesTreaties fall into two broad categories-proportional and non-proportional. of business such as Live stock, Engineering, Bankers, Blanket, etc,Proportional Treaties d) Compelled as per statutory provisions. For example, each of the four non- life insurers in India have to reinsure 20% of every risk accepted by them  A percentage of the sum insured is ceded to the reinsurers for all risks. For with the General Insurance Corporation of India. example, if the total sum insured on any one risk is Rs. 1,00,000 and the retention is Rs. 10,000, the balance Rs. 90,000 is reinsured. From the reinsurers point of view the treaty has advantage as their acceptance is restricted to a fixed share of the business, on all types and sizes of risk without the  Premiums are also paid to the re-insurers (out of what has been received risk of adverse selection against them. from the original client ) in the same proportion.  In the event of loss, insurers also pay the losses in the same proportion. Surplus TreatyNon-proportional Treaties  Under this method of reinsurance the direct insurer merely places on the treaty, part of the risk i.e. the surplus, which it does not desire to retain.  In case of loss there is no proportionate sharing of the sum insured.  If, therefore, a certain risk is wholly retained there is no surplus to place on  Neither the payment of premium by the reinsured nor the payment of losses treaty. by the re-insurers is on a proportionate basis. 13
  14. 14.  The surplus is the difference between ceding insurers retention and gross  The treaty may be terminated by either party on giving due notice. acceptance(total sum assured).  Provision is made for settlement of disputes through negotiation and  Surplus treaties are arranged on the basis of lines or geographical area or arbitration. class of business. Excess of Loss Treaties  A line is equivalent to the ceding insurers retention. For example, a treaty may be arranged on a ten line basis. Under this arrangement, the re-insurer a) This is a non-proportional method of reinsurance. will accept automatically upto ten times the retention of ceding insurer. The b) The reinsurance protection comes into operation when the ceding following illustration will make this clear: companys loss to any one cause or event exceeds a pre-agreed amount. Gross Acceptance Retention Surplus Reinsurance c) The insurer decides the maximum amount which he is prepared to retain on any one • loss and seeks reinsurance under a treaty in which the Rs. 100000 Rs. 100000 Nil reinsurer will pay for any Ion j over and above the amount retained by the Rs. 200000 Rs. 100000 Rs. 100000 direct insurer, d) The excess of loss to be met by the re-insurer does have an overlying limit. Rs. 1100000 Rs. 100000 Rs. 1000000 Loss above j the overlying limit of the reinsurer will again be met by the ceding company or be j transferred to another reinsurer under another excess of loss treaty.If the gross acceptance is more than Rs. 11 lakh, then the surplus treaty will absorb e) This method is used mainly to protect large catastrophic losses such asonly Rs. 10 lakh and the balance will have to be reinsured facultatively or under asecond surplus treaty to take care of such excess amount. i. Those caused by special perils i.e., storm, flood, earthquake, etc. ii. Where there is possibility of conflagration in large storage areas,  Liability of the insurer commences compulsorily and simultaneously with that of the ceding insurer as soon as the retention of the ceding insurer is iii. Where large marine acceptances are involved in a ship. exceeded. iv. Where in legal liability classes, i.e., motor third party, public liability,  The ceding insurer is required to record particulars of all amounts ceded to products liability and workmens compensation risks. For example, a the reinsurer since the re-insurer is entitled to inspect such records. severe mining accident may result in hundreds of fatalities to workmen, resulting in a catastrophic loss.  Special Provision is made for payment of commission. (f) In this arrangement, there is no proportionate sharing of sum insured,  All settlements, adjustment and compromise of claims including ex-gratia premium and loss as under quota share or surplus treaties. payments made by the ceding insurer are a binding on the reinsurer, (g) The premium is paid to the reinsurers by several methods depending upon provided, the cause of loss is within the scope of the cover. the circumstances. Most common among these is the burning cost  The ceding insurer has the right to demand immediate payment from the method. reinsurer of the latters share of any loss exceeding the agreed figure. This method is explained below through an example:  The ceding insurer retains an agreed percentage of the annual premium as a premium reserve which is adjusted subsequently in the account. 14
  15. 15. Suppose the underlying limit (limit of the ceding company) is Rs. 20 lakh and the e) Treaty reinsurance involves very less clerical labour and general costs,ceding companys loss due to one event is Rs. 30 lakh the excess of loss that the re- because the acceptances are dealt with in bulk, with only periodicalinsurer has to pay is Rs.10 lakh, submission of limited information.This treaty also incorporates an upper limit called overlying limit which restricts the f) Procedures in treaty reinsurance are less cumbersome.liability of reinsurer. Thus, if the overlying limit is Rs. 40 lacs and a single loss g) The rights and obligations of each party are clearly defined in the treatyamount to Rs. 44 lakh, the reinsurer will pay Rs. 20 lakh and the excess of Rs. 4 lakh agreement, hence there is more clarity and less ambiguity and disputes arewill have to be borne by the ceding company or it will have to arrange a second less.excess of loss treaty to protect losses exceeding Rs. 40 lakh but again subject to an h) From the reinsurers point of view also, treaty ensures a constant andoverlying limit of may be Rs. 80 lakh. . ; regular flow of business.Stop Loss or Excess of Loss Ratio Treaties Pools  This method is a variation of the excess of loss reinsurance. Large number of insurance companies join hands to handle huge risks which tend to  It can operate in addition to the surplus and also excess of loss treaties. give rise to huge loss to property and human lives. Particular types of risks are underwritten with premiums, losses, and expenses shared in agreed ratios.  This treaty protects the overall results of a class of insurance business.  Under the treaty, the re-insurer agrees to pay, say, 90% of the amount by  It is a proportional method of reinsurance. which the losses in any one year exceed, say 80% of the premium income.  Is usually used to handle large or extra hazardous risk.Suppose the premium income is Rs. 30 lakh and the losses are Rs. 40 lakh the stop  Total claims upon an insurer will be considerable.loss reinsurer will pay 90% of the excess amount viz. Rs.l4.4 lakh (i.e. 90% of the  Covers the risks which require the combined capacity of the entiredifference between Rs. 24 lakh which is 80% of premium and Rs. 40 lakh which is insurance market.the actual loss).  All claims (and all losses) may be proved, for the surplus above a fixedAdvantages of a Treaty retention or an agreed excess of loss method may be applied. a) The reinsurer cannot decline to accept any cession coming within the  Pools are being used both in developed as well as in developing countries. scope of the treaty.  By combining the underwriting capacity of the entire market, the retention b) This facilitates direct underwriting and enables the ceding insurer to give levels could be increased to retain substantial premium within the insurance cover for large amounts immediately. companies. c) The risk of the reinsurer commences, simultaneously with that of the Operation of Market Pool ceding insurer. The insurance companies have to make obligatory cessions of 20% (quota share) of d) There may be a time lag between the original acceptance of the risk by the all India gross direct business in each class of business. ceding insurer and the reinsurance acceptance in case of facultative insurance and in the meanwhile there could be a loss. Under treaty, this risk is not theirs. 15
  16. 16. The Market Pool is managed by the GIC. The business ceded to the pool is retained The insurance ombudsman may consider or receives the complaints regarding : ...entirely within the country. And it is protected by excess of loss treaty. The poolbusiness is retroceded to the companies in proportion to their cessions to the pool. • Partial or total repudiation of claimsOn larger risks where there is further surplus in excess of obligatory cession, net • Delay in settlement of claims retention, and cession to the pool, it is cede to surplus treaties and if, necessary, • Legal construction of policy(policy wordings)reinsured facultative. • Premium paid or payableOMBUDSMAN • Non-issue of insurance documents to customers after receipt of premium.Ombudsman traces its history to Sweden way back in 19th century and it literallymeans an authority that is empowered to investigate individual complaints against An insurance ombudsman cannot act on :public authorities, departments etc. Later it has been adopted in many countriesincluding UK, Australia etc. • Any complaint which falls outside the territorial limits of the ombudsmanIn India the idea of insurance ombudsman was first mooted in the year 1998. Central • Any complaint where the claims amount is more than 20 lakhs.government by the powers conferred on it by sub section (i) section 114 of insuranceact 1938 has set up an ombudsman specifically for Insurance sector. Main objective • Any dispute/issue/complaint which is under trial in any other judicial or quasi-of insurance ombudsman is redressal and settlement of disputes arising between judicial body.insured and insurer. Insurance ombudsman is a quasi-judicial body established for • Where the complaint is not regarding personal lines of business.speedy settlement of disputes in fair, impartial and judicial manner. • Where the complaint is filed by any artificial judicial personAny individual policyholder (including a sole proprietor but not partnerships orcompanies) or his legal heir can approach the Insurance Ombudsman for complaints • Any complaint which is lodged after one year from the date of issue of first replyin respect of policies on personal lines of business. by the insurer.Personal lines of business include coverage under Personal Accident policies, Procedure for RedresselMediclaim, insurance of property of the individual such as motor vehicles, householdarticles etc. There is no fee or charge required to be paid and there is no requirement 1) The insured has to apply in writing to the IO under whose jurisdiction theto approach the Ombudsman through a lawyer. However, before approaching insurer falls. A complaint may be filed cither by the insured or his legal heirsOmbudsman, a representation should be made to the insurance Company. If no reply and should clearly stale the name and address of the insurer against whom theis received within one month or the reply is not satisfactory, the Ombudsman can be complaint is made, nature and circumstances giving rise to dispute, nature ofapproached. The maximum limit for the amount under dispute for which the loss sustained by the complainant and relief sought from IO.Ombudsman can entertain is Rs.2O lakhs and Complaints can be made to 2) The complainant has to substantiate his claim with all the documentaryOmbudsman within one year of the rejection by insurer of the representation of the evidences.complainant or the insurers final reply to the Complainants representation. 3) The IO would first act as a mediator to settle the grievance on a mutuallyTypes of Complaints agreeable basis. This mediation process would be for a maximum of one month. After hearing both the parties IO may pass an award, which if 16
  17. 17. acceptable to the complainant, is sent to insurer for final execution. Insurer has to comply with the award within 15 days and it has to be informed to the IO. 4) If the grievance is not settled on a mutually agreeable basis, IO gives a speaking award within a period not exceeding three months. If the complainant is not satisfied with the award, he can appeal in any other forum or court, however such facility is not available to the insurer. MODULE V 5) An award passed by the IO has to be complied with, by the insurer within the INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 15 days. However, no action lies if the insurer opts for non-compliance of the 1999 award because he no judicial powers for the execution of award compared to other judicial systems like consumer forums, civil courts etc. The Insurance Regulatory and Development Authority Act, 1999 provides for the establishment of an Authority In protect the interests of holders of insurance policies,No advocates are allowed to represent insurer/complainant to argue their respective to regulate, promote and ensure orderly growth of the insurance industry and forcases. Further IO being a non-judicial authority, does not have the powers of matters connected therewith or incidental thereto and further to amend the Insurancesummoning particular persons/witness and examining them on oath. Another specificfeature of IO is that it can pass award for ex-gratia settlement of disputes, while such Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalisation) Act,1972.powers of exgratia settlement are not vested with other redressa.1 mechanisms suchas consumer courts etc. The Statement of Objects and Reasons of the Act provides that the insurance industry requires a high degree of regulation. The Insurance Act, 1938 provided for the institution of the Controller of Insurance to act as a strong and powerful supervisory and regulatory authority with powers to direct, advise, caution, prohibit, investigate, inspect, prosecute, search, seize, amalgamate, authorise, register and liquidate insurance companies. However, after the nationalisation of Life Insurance in 1956 and the General Insurance in 1972, the role of Controller of Insurance diminished in significance over a period of time. Constitution of the Authority Section 2(h) of the IRDA Act, 1999 defines the Authority as the Insurance Regulatory and Development Authority [established under Section 3 of the Act. The Section 3 lays down the procedure for establishing the Authority, it is established by a notification by the Central Government in the Official Gazettee. The date of operation of the Authority is also notified by the Central Government by a notification. The other important characteristics of the Authority are as follows: It is a body corporate with perpetual succession and common seal. It has the powers to acquire, hold and dispose the property in its name. The property may be a movable or immovable. 17