CHAPTER 16

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY

(IRDA) ACT, 1999

The insurance industry requires a high degree of regulation. The Insurance

Act 1938, provides for the institution of the Controller of insurance to act as a strong
and powerful supervisory and regulatory authority with powers to direct, advise,
prohibit, investigate, inspect, search, seize, fine, amalgamate, register and liquidate
insurance companies. However, after the nationalisation of the life insurance in1956
and general insurance in 1972, the role of the controller of insurance in 1956 and
general insurance in 1972, the role of the Controller of insurance diminished in
significance over a period of time. But with the proposal to open up the industry, the
following the policy of liberalisation and globalisation and the likelihood of private
companies being permitted to transact insurance business in India, it became
necessary to establish an authority to regulate insurance corporations.
IRDA Act, 1999
The Government of India inApril 1993 appointed the Committee of Reforms
in insurance sector with R.M. Malhotra, as its Chairman. As per the recommendation
of this committee, the Central Government set up a regulatory body known as the
Insurance Regulatory Development Authority. The insurance bill was passed in both
houses of Parliament and subsequently Government enacted the Act, viz Insurance
Regulatory and Development Authority (IRDA) Act, 1999.
The IRDA Act, 1999, seeks to open up the insurance sector for private
companies with a foreign equity of 26 percent. It also aimed at ending the monopoly
of the Life Insurance Corporation and General Insurance Corporation in the insurance
sector of the country.
This act may be called the Insurance Regulatory and Development Authority
Act, 1999. It extends to the whole of India.
Objectives of the IRDA Act
The main objectives of the IRDA Act are:
1. To take care of the policy holders’ interest.
2. To open the insurance business for private sector.
3. To ensure continued financial soundness and solvency.
4. To regulate insurance and re-insurance companies in the insurance sector.
5. To eliminate dishonesty and unhealthy competitions.
6. To supervise the activities of intermediaries of insurance business.
7. To amend the Insurance Act, 1938, the Life Insurance Act, 1956 and the
General Business Nationalisation Act, 1972.
Duties, Powers and Functions of Authority (Sec.14)
Subject to the provisions of this Act and any other law for the time being in
force, the Authority shall have the duty to regulate, promote and ensure orderly
growth of the insurance business and re-insurance business.
The duties, powers and functions of the Authority shall include –
a. Issue to the applicant a certificate of registration to renew, modify, withdraw,
suspend or cancel such registration;
b. Protection of the interests of the policy-holders in matters concerning assigning
of policy, nomination by policy-holders, insurable interest, settlement of
insurance claim, surrender value of policy, and other terms and conditions of
contracts of insurance;
c. Specifying requisite qualification and practical training for insurance
intermediaries and agents;
d. Specifying the code of conduct for surveyors and loss assessors;
e. Promoting efficiency in the conduct of insurance business;
f. Promoting and regulating professional organisations connected with the
insurance and re-insurance business;
g. Levying fees and other charges for carrying out the purposes of this Act.
h. Calling for information from undertakings, conducting enquiries and
investigations including audit of the insurers, insurance intermediaries and
other organisations connected with the insurance business;
i. Control and regulation of the rates, advantages, terms and conditions that may
be offered by insurers in respect of general insurance business.
j. Specifying the form and manner in which books of account shall be maintained
and statement of accounts will be rendered by insurers and insurance
intermediaries;
k. Regulating investment of funds by insurance companies;
l. Regulating maintenance of margin of solvency;
m. Adjudication of disputes between insurers and intermediaries or insurance
intermediaries;
n. Supervising the function of the Tariff Advisory Committee;
o. Specifying the percentage of premium income of the insurer to finance
schemes for promoting and regulating professional organisations.
p. Specifying percentage of life insurance business and general insurance business
to be undertaken by the insurer in the rural or social sector; and
q. Exercising such other powers as may be prescribed.
The powers and functions mentioned above would enable the Authority to
perform the role of an effective watchdog and regulator for the insurance sector in
India. To enable the Authority to function in a truly independent manner and
discharge its assigned responsibilities effectively, it is proposed to vest the Authority
with statutory status.
Ombudsman for Insurance
Ombudsman is an official appointed to investigate people’s complaints against
public organisations. In insurance also an ombudsman is appointed with different
purposes in view. The ombudsman selected may be drawn from a wider circle
including those who have experience or have been exposed to the industry, civil
service, administrative service etc. in addition to those from judicial service.
An Ombudsman shall be appointed by the governing body of the insurance
council from a panel prepared by the committee consisting of –
a) Chairman of Insurance Regulatory Authority.
b) Two representatives of Insurance Council including one each from Life
Insurance business and from General Insurance business respectively
c) One representative of the Central Government.
The Chairman of the Insurance Regulatory Authority shall be the Chairman of
the appointing committee.
Terms of office of Ombudsman
Term of office of Ombudsman is three years and shall be eligible for
re-appointment. An Ombudsman may be removed from service for his gross
misconduct during his term of office. For the purpose, an enquiry is to be conducted
for which the governing body shall appoint such person as it thinks fit. All enquiries
on misconduct will be sent to Insurance Regulatory Authority which may take a
decision as to the proposed action to be taken against the Ombudsman. On
recommendations of the Insurance Regulatory Authority, if the governing body is of
the opinion that the Ombudsman is guilty of misconduct, it may terminate his service.
Powers of Ombudsman
1. The Ombudsman may receive and consider complaints on:
a. Any partial or total repudiation of claims by an insurer.
b. Any dispute in regard to premium paid or payable in terms of the policy.
c. Any dispute on the legal construction of the policies in so far as such
disputes relate to claims.
d. Delay in settlement of claims.
e. Non-issue of any insurance document to customers after receipt of
premium.
2. The Ombudsman shall act as counsellor and mediator in matters which are
within his terms of reference and, if requested to do so in writing by mutual
agreement by the insured person and insurance company.
3. The Ombudsman’s decision whether the complaint is fit and proper for being
considered by it or not shall be final.
Recommendations made by Ombudsman
 After studying about the complaints received from policy holders, insurers etc.
Ombudsman makes recommendations.
1. When a complaint is settled through mediation of the Ombudsman, the
Ombudsman shall make a recommendation which he thinks proper in the
circumstances of the case. The copies of the recommendation shall be sent to
the complainant and the insurance company concerned. Such recommendation
shall be made not later than one month from the date of the receipt of
complaint.
2. If the complainant accepts the recommendation of the Ombudsman, he will
send a communication in writing within 15 days of the date of receipt of
recommendation. He will confirm his acceptance to Ombudsman and state
clearly that the settlement reached is acceptable to him.
3. The Ombudsman shall send to the Insurance company a copy of the
recommendation along with the acceptance letter received from the
complainant. The insurer shall thereon comply with the terms of
recommendations immediately not later than 15 days of the receipt of such
recommendation and the insurer shall inform the Ombudsman of its
compliance.
Passing of Award by Ombudsman
When a complaint is not settled through mediation, the Ombudsman pass an
award which he considers fair in the facts and circumstances of the case. The
following may be noted in this regard.
1. The award shall be passed within a period of 3 months from the date of receipts
of the complaints.
2. An award shall be in writing and shall state the amount awarded to the
complainant.
3. A copy of the award shall be sent to the complainant and the insurer named in
the complaint.
4. The complainant shall furnish to the insurer within a period of one month from
the date of receipt f the award, a letter of acceptance that the award is in full
and in final settlement of the claim.
5. The insurer shall comply with the award within 15 days of the receipt of the
acceptance letter. The complainant does not intimate the acceptance, the
award may not be implemented by the insurance company.
Insurance Legislations
The following are the important insurance legislations in India.
1. Indian Insurance Act, 1938: It is an insurance legislation incorporating the
important provisions to control the operation of all types of insurance business
conducted in India. The provisions of the Act are applicable to General
Insurance, which includes Marine Insurance, Fire Insurance and other
 miscellaneous insurance businesses. The main provisions of the Act are in
regard to-
a. Registration of Insurance Companies.
b. Duties and obligations of Insurance Companies.
c. Rights and duties of Insurance Controllers.
d. Rules relating to Insurance Agents.
e. Rules relating to the formation and organisation of insurance companies
etc.
2. Employees State Insurance Act, 1948: This is an important step in the field of
social insurance of the country. The Act provides for the special contribution
of employers for the benefit of the employees in the organised sector.
3. Life Insurance Act, 1956: In the year 1956, life insurance business was
nationalised and consequently Life Insurance Act, 1956 was introduced under
which the Life Insurance Corporation of India was established. The corporation
was granted monopoly rights for conducting Life Insurance business to India.
4. Deposit Insurance and Credit Guarantee Act, 1961: In order to provide
insurance facilities on bank deposits and credit facility guarantee, the Deposit
Insurance and Credit Guarantee Act was passed in 1961.
5. Marine Insurance Act, 1963: The Act was introduced with a view to lay down
provisions for the conduct of Marine Insurance business in India.
6. General Insurance Business Nationalisation Act. 1972: As a result of the Act,
the General Insurance Business was nationalised and the General Insurance
Corporation of India was established under this Act, with authority to conduct
the whole General Insurance business in India along with its subsidiaries
namely Oriental Insurance Corporation of India, National Insurance
Corporation of India, New India Insurance Corporation of India and United
India Insurance Corporation.
7. Insurance Regulatory and Development Authority Act, 1999: The Insurance
Regulatory and Development Authority Act received the assent of the Indian
President on 29th December 1999. As a result of the Act Insurance Regulatory
and Development Authority was set up to regulate and develop insurance
business.
QUESTIONS
Short answer questions (2 marks)
1. Expand IRDA.
2. Who is an Ombudsman in Insurance?
3. What do you mean by Indian Insurance Act, 1938?
Short answer questions (5 marks)
1. What is IRDA?
2. What are the administrative powers of the Chairperson of the IRDA?
3. Explain the composition of the IRDA.
 4. Explain the provisions of IRDA Act relating to the tenure of office of
Chairperson of the IRDA.
5. Explain the powers of IRDA to make rules and regulations.
Essay Questions (20 marks)
1. What are the objectives of the IRDA Act?
2. Explain the provisions of the IRDA Act regarding the constitution of the
Insurance Regulatory and Development Authority Fund.
3. Explain the provisions of the IRDA Act relating to the establishment of
Insurance Advisory Committee.
4. Explain briefly the duties, powers and functions of the Insurance Regulatory
and Development Authority.
5. What are the powers of Ombudsman? What recommendations can he make?
6. Explain the important insurance legislations in India.