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Regulatory Framework

Historical Perspective
• The history of life insurance in India dates back to 1818 when it was
conceived as a means to provide for English Widows.
• Interestingly in those days a higher premium was charged for Indian
lives than the non-Indian lives as Indian lives were considered more
riskier for coverage.
• The Bombay Mutual Life Insurance Society started its business in
1870. It was the first company to charge same premium for both
Indian and non-Indian lives.
• The Oriental Assurance Company was established in 1880.
• The General insurance business in India, on the other hand, can
trace its roots to the Triton (Tital) Insurance Company Limited, the
first general insurance company established in the year 1850 in
Calcutta by the British.
Important milestones in the life
insurance business in India
• 1912: The Indian Life Assurance Companies Act
enacted as the first statute to regulate the life insurance
• 1928: The Indian Insurance Companies Act enacted to
enable the government to collect statistical information
about both life and non-life insurance businesses.
• 1938: Earlier legislation consolidated and amended to by
the Insurance Act with the objective of protecting the
interests of the insuring public.
• 1956: 245 Indian and foreign insurers and provident
societies taken over by the central government and
nationalised. LIC formed by an Act of Parliament- LIC
Act 1956- with a capital contribution of Rs. 5 crore from
the Government of India.
Important milestones in the general
insurance business in India
• 1907: The Indian Mercantile Insurance Ltd. set up- the first company
to transact all classes of general insurance business.
• 1957: General Insurance Council, a wing of the Insurance
Association of India, frames a code of conduct for ensuring fair
conduct and sound business practices.
• 1968: The Insurance Act amended to regulate investments and set
minimum solvency margins and the Tariff Advisory Committee set
• 1972: The general insurance business in India nationalised through
The General Insurance Business (Nationalisation) Act, 1972 with
effect from 1st January 1973. 107 insurers amalgamated and
grouped into four companies- the National Insurance Company
Limited, the New India Assurance Company Limited, the Oriental
Insurance Company Ltd. and the United India Insurance Company
Ltd. GIC incorporated as a company.
The Need for Regulation
• Better distribution of social benefits.
• To shape and monitor the market.
• To check mismanagement, deception, fraud etc.
• To ensure that the insurance company has
adequate professional capability, is financially
sound, holds adequate reserves and invests its
funds adequately.
• To check reckless rate wars, undercutting,
unhealthy links with industrial houses and
disregard for prudential norms.
Objectives of Regulation
• Regulations are general set of principles
covering minimal requirements for best practices
in the areas of licensing, prudential regulations
and requirements, supervisory powers,
managing asset quality and loss provisioning
and most importantly, enhancing corporate
governance in insurance organisations.
• All regulatory arrangements try to create
systems whereby alarm signals are triggered in
good time in respect of insurance institutions
drifting towards insolvency and mismanagement
so that timely corrective ness can be applied.
Reasons for failure of insurance
• Internal factors
• Inadequate pricing
• Improper method of reserving
• Poor/inappropriate investment strategy
• Failure to maintain adequate solvency margin
• Poor underwriting and claims control
• Uncontrolled growth of the company’s business
• Inadequate control system and efficiency.
• External factors
• Bad claims experience
• High inflation in claims and expences
• Business losses and lapses in policies
• Failure of third parties such as reinsurers, brokers/agents.
• Adverse movements in asset values
• Catastrophes
• Adverse market situations
• Legislative changes
• Taxation policies
Regulation in India
• Introduced with Indian Life Assurance Companies
• The Insurance Act,1938 created a strong and powerful
regulatory authority- Controller of Insurance.
• Nationalisation of the life insurance business and
creation of LIC in 1956 and nationalisation of the general
insurance business and creation of GIC and its
subsidiaries in 1973.
• The powers of Controller of Insurance were diluted on
the belief that the nationalised industry doesnot require
any supervision and that its accountability to the
government through the Insurance Division of the
Finance Ministry would be adequate.
1994: Malhotra Committee
Report-Major Recommendations
• The establishment of an independent regulatory authority
• allowing private sector to enter the insurance field;
• improvement of the commission structure for agents to make it effective
instrument for procuring business specially rural, personal and non-
obligatory lines of business;
• insurance plans for economically backward sections;
• setting up of an institution of professional surveyors/loss assessors;
• functioning of Tariff Advisory Committee (TAC) as a separate statutory
• investment on the pattern laid down in s.27;
• marketing of life insurance to relatively weaker sections of the society and
specified proportion of business in rural areas;
• requirement of specified proportion of the general business as rural non-
traditional business to be undertaken by the new entrants;
• technology driven operation of General Insurance Corporation of India
(GICI); GIC to exclusively function as a reinsurer and to cease to be the
holding company;
• introduction of unlinked pension plans by the insurance companies.
Insurance Regulatory and
Development Authority Act,
(IRDA) 1999
• to open the insurance sector in India to private and foreign players
• to grant statutory status to the interim Insurance Regulatory
Authority and amend the 1938 Insurance Act, the 1956 Life
Insurance Corporation Act and the 1972 General Insurance
Business (Nationalization) Act to end the public sector monopoly
• to regulate, promote and ensure orderly growth of the insurance
industry and provides for solvency norms and specifies that the
funds of policyholders would be retained within the country.
• The minimum capital requirement for life and general insurance
retained at Rs 100 crore and for reinsurance firms at Rs 200 crore
• It has been stipulated that the aggregate foreign holding in an Indian
insurance company shall not exceed 26 per cent of the paid-up
equity. Moreover, to provide a level playing field, It has been
proposed that the Indian promoters would also be required to bring
down their equity holding to 26 percent after a period of 10 years
from the commencement of business.
Amendments to
the Insurance Act, 1938
• Amendments provided for-
– requirements as to paid-up equity capital for both insurers and
– manner of divesting of excess shareholding by promoters
– manner and conditions of investment,
– maintenance of required solvency margin at all times by the
– issue of licence to insurance agents, intermediary or insurance
intermediary and surveyors by the Authority as also suspension
and cancellation thereof;
– obligations of insurers to compulsorily undertake specified
percentage of insurance business in rural and social sector;
– enhanced penalties for contravention of and failure to comply
with, the provisions of the Act and offences by companies; and
– powers of Authority make regulations as required by the Act.
Functions and Duties of Regulator
• Issue, withdraw, modify, suspend or cancel certificate of
registration to applicants
• Protection of interests of policyholders
• Specifying requisite qualifications, code of conduct and
practical training for intermediaries and agents.
• Regulating investment of funds
• Regulating maintenance of margin of solvency
• Adjudication of disputes
• Supervising the functioning of Tariff Advisory Committee
• Specifying the percentage of business to be taken up in
rural and social sector.
Limits of Regulation
• Regulation is not a guarantee of the
solvency and financial strength of
insurance companies.
• It only reduces the risk of failure and
mismanagement to the minimum.
• Effectiveness of information in periodical
• Timelag in analysis of periodical returns
Regulation through Profession
• Actuarial services for life insurance and
pension industry
• Hong Kong Federation of Insurers
Influence of other legislations
• Some other existing legislations in the field are – the Life Insurance
Corporation (LIC) Act, 1956, the Public Liability Insurance Act,1991,
the Marine Insurance Act, 1964, the Motor Vehicles Act,1988, the
General Insurance Business (GIB) (Nationalization) Act, 1972 and
the Insurance Regulatory and Development Authority (IRDA) Act,
• The provisions of the Indian Contract Act, 1872 are applicable to the
contracts of insurance, whether for life or non-life. Similarly, the
provisions of the Companies Act, 1956 are applicable to the
companies carrying on insurance business.
• The subordinate legislation includes Insurance Rules, 1939, and the
Ombudsman Rules, 1998 framed by the Central Government under
s.114 of the principal Act as also 27 regulations made by the IRDA
under s.114 A of the principal Act and s.26 of the IRDA Act.