Assignment: Banking Law

PAPER VI
Harish Keluskar-TYLLB

==================================================================================
Insurance Law:

Assignment 1 : Discuss the state control of Insurance business in India.

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings
talk in terms of pooling of resources that could be re-distributed in times of calamities such as
fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance.
Ancient Indian history has preserved the earliest traces of insurance in the form of marine
trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing
from other countries, England in particular. 

   1818 saw the advent of life insurance business in India with the establishment of the
Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In
1829, the Madras Equitable had begun transacting life insurance business in the Madras
Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades
of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India
(1897) were started in the Bombay Residency. This era, however, was dominated by foreign
insurance offices which did good business in India, namely Albert Life Assurance, Royal
Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard
competition from the foreign companies. 

     In 1914, the Government of India started publishing returns of Insurance Companies in
India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to
regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the
Government to collect statistical information about both life and non-life business transacted
in India by Indian and foreign insurers including provident insurance societies. In 1938, with
a view to protecting the interest of the Insurance public, the earlier legislation was
consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for
effective control over the activities of insurers. 

   The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were
a large number of insurance companies and the level of competition was high. There were

==================================================================================
Page | 1 of 11
Assignment: Banking Law
PAPER VI
Harish Keluskar-TYLLB

==================================================================================
also allegations of unfair trade practices. The Government of India, therefore, decided to
nationalize insurance business. 

      An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector
and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154
Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign
insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector. 

     The history of general insurance dates back to the Industrial Revolution in the west and
the consequent growth of sea-faring trade and commerce in the 17th century. It came to India
as a legacy of British occupation. General Insurance in India has its roots in the establishment
of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the
Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes
of general insurance business.

1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton
of India. The General Insurance Council framed a code of conduct for ensuring fair conduct
and sound business practices. 

    In 1968, the Insurance Act was amended to regulate investments and set minimum
solvency margins. The Tariff Advisory Committee was also set up then. 

    In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general
insurance business was nationalized with effect from 1st January, 1973. 107 insurers were
amalgamated and grouped into four companies, namely National Insurance Company Ltd.,
the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United
India Insurance Company Ltd. The General Insurance Corporation of India was incorporated
as a company in 1971 and it commence business on January 1sst 1973. 

     This millennium has seen insurance come a full circle in a journey extending to nearly 200
years. The process of re-opening of the sector had begun in the early 1990s and the last
decade and more has seen it been opened up substantially. In 1993, the Government set up a
committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose
recommendations for reforms in the insurance sector.The objective was to complement the
==================================================================================
Page | 2 of 11
Assignment: Banking Law
PAPER VI
Harish Keluskar-TYLLB

==================================================================================
reforms initiated in the financial sector. The committee submitted its report in 1994 wherein ,
among other things, it recommended that the private sector be permitted to enter the
insurance industry. They stated that foreign companies be allowed to enter by floating Indian
companies, preferably a joint venture with Indian partners. 

     Following the recommendations of the Malhotra Committee report, in 1999, the Insurance
Regulatory and Development Authority (IRDA) was constituted as an autonomous body to
regulate and develop the insurance industry. The IRDA was incorporated as a statutory body
in April, 2000. The key objectives of the IRDA include promotion of competition so as to
enhance customer satisfaction through increased consumer choice and lower premiums, while
ensuring the financial security of the insurance market. 

     The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority has
the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from
2000 onwards framed various regulations ranging from registration of companies for carrying
on insurance business to protection of policyholders’ interests. 

    In December, 2000, the subsidiaries of the General Insurance Corporation of India were
restructured as independent companies and at the same time GIC was converted into a
national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July,
2002. 

     Today there are 34 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and 24 life insurance companies operating in the country. 

     The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together
with banking services, insurance services add about 7% to the country’s GDP. A well-
developed and evolved insurance sector is a boon for economic development as it provides
long- term funds for infrastructure development at the same time strengthening the risk taking
ability of the country

==================================================================================
Page | 3 of 11
Assignment: Banking Law
PAPER VI
Harish Keluskar-TYLLB

==================================================================================

The life insurance business in India was done by the Life Insurance Corporation of India as a
statutory corporation and as a monopoly in life insurance business till 1991. After the new
economic policy the life insurance business in India was liberlized so much so that even
foreign companies can do life insurance business in India but subject to Government
governance. As a result the TIC of India has become one of the companies doing life
insurance business in India. An attempt has been made in this chapter to summarize to a
possible extent the regulation of insurance business by the Government of India. The
regulation of insurance business in India is being summarized under the following heads.

1 Insurance Sector Reforms

2 Insurance Regulatory and Development Authority Act, 1999

3 Insurance Regulatory and Development Authority

4 The Insurance Act 1938 as amended in 2002

5 The competition Act

6 Valuation of Life policies

1 INSURANCE SECTOR REFORMS In 1993, Malhotra Committee, headed by former

Finance Secretary and RBI Governor R.N. Malhotra was formed to evaluate the Indian
insurance industry and recommend its future direction. The Malhotra committee was set up
with the objective of complementing the reforms initiated in the financial sector. The reforms
were aimed at creating a 43 more efficient and competitive financial system suitable for the
requirements of the economy keeping in mind the structural changes currently underway and
recognizing that insurance is an important part of the overall financial system where it was
necessary to address the need for similar reforms. In 1994, the committee submitted its report
and some of the key recommendations are as follows

I) STRUCTURE
==================================================================================
Page | 4 of 11
Assignment: Banking Law
PAPER VI
Harish Keluskar-TYLLB

==================================================================================
Government stake in the insurance companies to be brought down to 50 percentage.
Government should take over the holdings of General Insurance Corporation (GIC) and its
subsidiaries so that these subsidiaries can act as independent corporations. All the insurance
companies should be given greater freedom to operate.

II) COMPETITION

Private companies with a minimum paid up capital of Rs. 100 crores should be allowed to
enter the sector. No company should deal in both life and general insurance through a single
entity. Foreign companies may be allowed to enter the industry to enter the industry in
collaboration with the domestic companies. Postal life insurance should be allowed to operate
in the rural market. Only one state level life insurance company should be allowed to operate
in each state.

III) REGULATORY BODY

The insurance act should be changed. An insurance regulatory body should be set up.
Controller of insurance — a part of the finance ministry — should be made independent. 44

IV) INVESTMENTS Mandatory Investments of LIC life fund in government securities to be

reduced from 75 percentage to 50 percentage. General Insurance Corporation (GIC) and its
subsidiaries are not to hold more than 5 percentage in any company (there current holdings to
be brought down to this level over a period of time).

V) CUSTOMER SERVICE

LIC should pay interest on delays in payments beyond 30 days. Insurance companies must be
encouraged to set up unit linked pension plans. Computerization of operations and updating
of technology to be carried out in the insurance industry. The committee emphasised that in
order to improve the customer services and increase the coverage of insurance policies,
industry should be opened up to competition. But the same time, the committee felt the need
to exercise caution as any failure on the part of new player could ruin the public confidence
in the industry. Hence, it was decided to allow competition in a limited way by stipulating the
minimum capital requirement of Rs. 100 crores. The committee felt the need to provide
greater autonomy to insurance companies in order to improve their performance and enable
them to act as independent companies with economic motives. For this purpose, it had
==================================================================================
Page | 5 of 11
Assignment: Banking Law
PAPER VI
Harish Keluskar-TYLLB

==================================================================================
proposed setting up an independent regulatory body. The Insurance Regulatory and
Development Authority. 45 Reforms in the Insurance sector were initiated with the passage
of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a
statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and
registering the private sector insurance companies. Since being set up as an independent
statutory body the IRDA has put in a framework of globally compatible regulations. The
other decision taken simultaneously to provide the supporting systems to the insurance sector
and in particular the life insurance companies was the launch of the IRDA online service for
issue and renewal of licenses to agents. The approval of institutions for imparting training to
agents has also ensured that the insurance companies would have a trained workforce of
insurance agents in place to sell their products.

2 INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA) ACT 1999

To provide for the establishment of an authority to protect an interest of holders insurance
policies, to regulate, promote and ensure orderly growth of insurance industry and for matters
corrected therewith the IRDA Act 1999 was passed. The Act was intended to create an
authority called the insurance regulatory and development authority. The authority
considered of a body of individuals appointed by the central Government from person ability,
integrity and stability we have knowledge or experience in life insurance, general insurance,
Actuation science, finance, economy, law, agricultural any other discipline which option of
central government useful could the authority.

==================================================================================
Page | 6 of 11
Assignment: Banking Law
PAPER VI
Harish Keluskar-TYLLB

==================================================================================

Assignment 2 : What is premium ? What is the effect of non payment of premium on

the policy? What reliefs are provided against the forfeiture of the policy for non
payment of premium

What is premium ?

Prof. K.S.N Murthy in his ‘Modern Law of Insurance’ quotes the axiomatic truth “yat
bhavati tat nashyati”, it means whatever is created will be destroyed. However, a person
desires to preserve the subject matter for an indefinite length of time and wishes to be
free from the clutches of the destruction and hence, he prefers to safeguard/preserve the
subject matter from the risk of destruction. Such a desire to preserve forms the basis for
the emergence of insurance. The main object of insurance businesses is the coverage of
risk by undertaking to indemnify the insured against the loss or damage.

Insurance is an intangible contractual periodical service obtainable/purchasable for price

called ‘premium’

Premium is an amount paid periodically to the insurer by the insured for covering his risk.

Description: In an insurance contract, the risk is transferred from the insured to the insurer.
For taking this risk, the insurer charges an amount called the premium. The premium is a
function of a number of variables like age, type of employment, income, lifestyle details,
travel history,medical conditions, etc. The actuaries are entrusted with the responsibility of
ascertaining the correct premium of an insured. The premium paying frequency can be
different. It can be paid in monthly, quarterly, semi-annually, annually or in a single
premium.

Insurance is a Contract, there are two parties in the contract of Insurance, Insurer and Insured.
The insured gives premium as a consideration in return of which insurer undertakes to pay a
certain amount at a specified contingency.  There is no precise definition of the Insurance

==================================================================================
Page | 7 of 11
Assignment: Banking Law
PAPER VI
Harish Keluskar-TYLLB

==================================================================================
Contract, Several Jurists tried to define it. Some of the Important Definitions are given here.

Meaning of Premium  -   

 Premium is a price that insurer charges from the insured, either lumpsum of or in
installments assured for covering some certain or ascertainable perils or risks. The price
varies from insurer to insurer, as with any product or service.

Different types of insurance cover require different premiums based on the degree of risks.

Illustration -

    A policy insuring a house valued at 50,00,000 rupees for fire requires a higher premium
that one insuring a bike valued 25,000 rupees.

    Although the degree of risk insured might be similar, the cost of repairing the house is
much higher than the bike and this difference is also seen in the premium paid by the insured.

Definitions of Premium - 

       According to the MacMillan Dictionary, " regular payment made to an insurance

company so that you are protected by the insurance."

       National Insurance Company Limited defines premium as, "premium is fixed amount

of sum paid over the period by ensured to the insurer in order to secure an insurance policy
and to complete the  contract of insurance

       In Lucena Vs Crawford, Lawrence J defined premium as "a price paid adequate to the
risk".

        Generally, the premium is paid in cash. But it is up to the insurer to accept the payment
in any other modes such as cheque, promissory note, bill of exchange, credit card, post, etc.

==================================================================================
Page | 8 of 11
Assignment: Banking Law
PAPER VI
Harish Keluskar-TYLLB

==================================================================================

What is the effect of non payment of premium on the policy

In case of Regular Premium policies, if the premium has not been paid in respect of this
policy and any subsequent premium be not duly paid, all the benefits shall cease after the
expiry of grace period from the date of first unpaid premium and nothing shall be payable,
and the premiums paid till then are also not refundable.

Forfeiture in Certain Other Events: In case any condition herein contained or endorsed hereon
be contravened or in case it is found that any untrue or incorrect statement is contained in the
proposal, personal statement, declaration and connected documents or any material
information is withheld, then and in every such case this policy shall be void and all claims to
any benefit by virtue hereof shall be subject to the provisions of Section 45 of the Insurance
Act , 1938, as amended from time to time.

After you buy any kind of insurance, you have to pay a certain amount of premium every
year till the term of the insurance ends. For some reason, if you are unable to pay the
premium due even within the grace period provided by the insurer, your policy will be
terminated.

It also depends on many factors, the most important being the type of insurance policy you
own. In term insurance, failure to pay the premium before the due date results in the policy
lapsing, which forfeits your insurance benefits and the premiums paid so far. In case of ULIP
(unit-linked insurance plan), if you skip paying the premium in the first five years or during
the lock-in period, the policy is considered lapsed. Your benefits move to a discontinuance
fund and is payable only after the lock-in period.

In India, as per the guidelines set forth by the Insurance Regulatory and Development
Authority of India (IRDAI), all life insurance policies are legally required to honour a grace
period, typically 30 days from the due date of payment. Insurance companies understand that
the insured might not always be able to pay the premium every time before the due date. This
is the reason that almost every insurance policy offers a grace period.

The policy is still in force during the grace period, and if anything happens to the insured, the
nominee would still be eligible for the benefits. However, once the grace period is over, the
==================================================================================
Page | 9 of 11
Assignment: Banking Law
PAPER VI
Harish Keluskar-TYLLB

==================================================================================
policy is considered lapsed and the death benefit will not be paid. Grace period payments are
almost always higher than standard premium payments.

What reliefs are provided against the forfeiture of the policy for non payment of
premium

Insurance is a type of risk management that is primarily used to protect against the risk of a
speculative and unpredictable loss. To compensate for any loss, an insurance contract is quite
useful. Since Insurance is a contract, certain sections of the Contract Act are applicable. It is
also known as an indemnity contract, in which the insurer indemnifies the loss experienced as
a result of the occurrence or non-occurrence of any event, depending on the contingency. In
India, insurance law is governed by the Insurance Act, 1938 and Insurance Regulatory and
Development Authority (IRDA) Act, 1999. An insurer is a company providing the insurance
and an insured or policyholder is the person or entity purchasing the insurance. The insured is
given a document, known as an insurance policy, that outlines the terms and conditions under
which he or she would be financially reimbursed. The premium is the amount of money
charged by the insurer to the insured for the coverage specified in the insurance policy.

Grace Period

Grace period is the extra days provided by the insurer after the expiry of the stipulated period
of insurance during which the insured can pay the premium to continue with the policy. In
India, IRDAI is legally bound to provide a grace period typically 30 days from the due date
of payment. The policy is in force during the grace period. The nominee would be eligible for
the benefits if something happens to the insured. Policy lapses once the grace period is over.

Forfeiture

The term “forfeiture” refers to the loss of property, money, or assets for which there is no
consideration or compensation. It occurs when a party fails to meet its contractual payment
obligations. In insurance, forfeiture occurs when a policyholder fails to pay their premiums,
which is also known as an insurance policy lapse. As a result, the policy is no longer in
effect, and the insurer forfeits any premiums already paid. When a policy is forfeited, the
insurer is no longer liable under the terms of the policy. The premiums that have already been
paid need not be reimbursed. The sum already deposited by the insured could be forfeited by
==================================================================================
Page | 10 of 11
Assignment: Banking Law
PAPER VI
Harish Keluskar-TYLLB

==================================================================================
the insurance company according to the terms and circumstances of the policy. For example,
before entering into a life insurance contract, the insured must tell the truth about his past and
current health issues. If the insured is proven to have lied about a substantial fact, the
insurance company may enact a forfeiture of the policy. If the insurance contract contains a
non-forfeiture clause, the insured may still be eligible for benefits, at a reduced or limited
level, or the insurer may offer a partial return of premiums paid. Forfeiture means the insurer
is not liable under the policy. The insurer is not required to refund the premiums.

Reserve Bank of India Vs Peerless General Finance and Investment Co. Ltd and others

In the above case, Supreme Court has observed that the forfeiture of the amount of poor
persons by the Life Insurance Corporation is arbitrary. It stated that the forfeiture clause was
in violation of Articles 14 and 21 of the Indian constitution and it also opposes the directive
principle of state policy. Under section 50 of the Insurance Act, 1938, the insurer shall give
notice of options available within 3 months to the insured in case of the policy lapsing. If it is
added to the insurance clause then no notice is required.

Reviving of Policy

Several insurance companies provide an option of reviving the lapsed policy. Proof of
continued insurability will have to be submitted. The revival of the policy depends on the
period for which the policy has remained lapsed. Also, the insured might have to undergo a
medical examination. Reviving a policy is similar to purchasing a new insurance policy. The
insurance company may impose new terms and conditions after the revival of the policy.

==================================================================================
Page | 11 of 11