MODULE II - INSURANCE LAWS AND REGULATIONS
Insurance Laws and Regulations. Contract Act, Insurance Act, LIC Act, GIC Act, IRDA Act, Consumer protection Act. Ombudsman. Life Insurance – selection of Risk and Policy conditions. Risk Management, Selection of Risks – Computation of Premium.
CONTRACT ACT
Contract Act refers to the legal principles and rules that govern the formation, interpretation, and enforcement of insurance contracts. Insurance contracts are essentially agreements between an insurance company and a policyholder, where the policyholder agrees to pay a premium in exchange for the insurer's promise to provide coverage for certain types of losses or damages. Under the Contract Act, insurance contracts are subject to certain legal requirements, including:
Offer and Acceptance: The insurer must make an offer to insure the policyholder, which the policyholder must accept to form a legally binding contract.
Consideration: Both parties must provide something of value in exchange for the contract. The policyholder pays a premium, while the insurer promises to provide coverage for certain types of losses.
Capacity: Both parties must have the legal capacity to enter into a contract. For example, minors or individuals lacking mental capacity may not be able to enter into a binding contract.
Legal Purpose: The contract must have a legal purpose, meaning that it cannot be for illegal or fraudulent activities.
Consensus ad idem: This refers to a meeting of the minds between both parties, where both parties understand and agree to the terms of the contract.
Uberrimae Fidei: This principle requires the parties to disclose all relevant information related to the insurance contract, including any potential risks, to ensure that both parties enter into the contract with full knowledge and understanding.
The Contract Act also governs the interpretation and enforcement of insurance contracts, including how the terms of the contract are enforced, how disputes are resolved, and what remedies are available in case of a breach of contract.
INSURANCE ACT, 1938
This Act was passed in 1938 and was brought into force from 1st July, 1939. This act applies to the GIC and the four subsidiaries. The act was amended several times in the years 1950, 1968, 1988, 1999,2015. This Act specifies the restrictions and limitations applicable as specified by the Central Government under powers conferred by section 35 of the General Insurance Business (Nationalization) Act. The important provisions of the Act relate to:
Registration: Every insurer is required to obtain a Certificate of Registration from the Controller of Insurance, by making the payment of requisite fees. Registration should be renewed annually and required to pay annual fees.
Accounts and audit: An insurer is required to maintain separate accounts of the receipts and payments in each class of insurance viz. Fire, Marine and Miscellaneous Insurance. The insurance company is also required to maintain separate accounts relating to the funds of shareholders and policyholders. Apart from the regular financial statements, the companies are required to maintain the following documents in respect of each class of insurance:
• Record of Cover notes specifying the details of the risk covered
• Record of policies
• Record of premiums
• Record of endorsements
• Record of Bank guarantees
• Record of claims
• Register of agency force and business procured by each with details of commission
• Register of employees
• Cash Books
• Reinsurance details
• Claims register
Investments: Investments of insurance companies are usually made in approved investments under the provisions of the Act. The guidelines and limitations are issued by the Central Government from time to time.
Limitation on management expenses: The Act prescribes the maximum limits of expenses of management including commission that may be incurred by an insurer. The percentages are prescribed in relation to the total gross direct business written by the insurer in India. The insurance company is also required to furnish to the Authority the details of expenses of management in such manner and form as may be specified by the regulations made under this Act.
Prohibition of Rebates: The Act prohibits any person from offering any rebate of commission or a rebate of premium to any person to take insurance. Any person found guilty would be punished with a fine up to five hundred rupees.
Powers of Investigation: The Central Government may at any time direct the Controller or any other person by order, to investigate the affairs of any insurer and report to the central government.
Other Provisions: Other provisions of the Act deal with the licensing of agents, surveyors, advance payment of premium and Tariff Advisory Committee (TAC).
• Prohibition of rebates
• Powers of investigation
• Licensing of agents
• Advance payments of premiums
• Tariff Advisory Committee
LIC ACT, 1956
The LIC Act refers to the Life Insurance Corporation Act, 1956, which established the Life Insurance Corporation of India (LIC). LIC is the largest insurance company in India, with a wide range of life insurance products and services.
The LIC Act was passed by the Parliament of India on June 18, 1956, and came into effect on September 1, 1956. The Act provides for the incorporation, constitution, and regulation of the Life Insurance Corporation of India, and it defines the powers and functions of the corporation.
Under the LIC Act, the Life Insurance Corporation of India has the exclusive privilege to carry on life insurance business in India, except in the case of certain special schemes approved by the Central Government. The Act also specifies the conditions under which other insurance companies may be permitted to carry on life insurance business in India.
The LIC Act has been amended several times over the years to keep pace with changing business and regulatory environments. Today, the LIC Act continues to provide the legal framework for the operations of the Life Insurance Corporation of India, which is a major player in the Indian insurance market.
GENERAL INSURANCE BUSINESS NATIONALIZATION ACT, 1972
This Act came into force on 1st January, 1973. This Act gave effect to clause (c) of Article 39 of the constitution of India. Article 39 (c) read as follows:
“The State shall direct its policy towards ensuring that the operation of the economic system does not result in concentration of wealth and means of production so as to prove harmful to the common interest of the community”.
Under this Act, there were no longer private insurers in the country. As a result, the general insurance business became the domain of the State. The General Insurance Corporation of India (GIC) became the holding company with four subsidiaries, namely United India Insurance Company with Head Office in Chennai (Madras) , Oriental Insurance Company with Head Office in New Delhi, National Insurance Company with Head Office in Kolkata (Calcutta) and New India Assurance Company with Head Office in Mumbai (Bombay).
The ownership of all shares of both the Indian insurance companies and the foreign insurers from then on vested in the Central Government with effect from 1.1.1973. The services of all the personnel in the private sector were also transferred to the holding company and subsidiaries based on factors such as qualification, seniority, position and location.
Objectives of the Act
The object of the Act was primarily,
To serve the needs of the economy by development of general insurance business .
To establish the GIC by the central government under the provisions of the Companies Act of 1956, with an initial authorized share capital of seventy five crores.
To aid, assist, and advise the companies in the matter of setting up of standards in the conduct of the general insurance business .
To encourage healthy competition amongst the companies as much as possible .
To ensure that the operation of the economic system does not result in the concentration of wealth to the common detriment.
To ensure that no person shall take insurance in respect of any property in India with an insurer whose principal registered office is outside India .
To carry on any part of the general insurance business if it thinks it desirable to do so .
To advise the companies in the matter of controlling their experience and investment of funds.
Mission of GIC
To provide need-based and low cost general insurance covers to the rural population.
To administer a crop insurance scheme for the benefit of the farmers.
To develop and introduce covers with social security benefits.
To develop a marketing network throughout the country including areas with low premium potential.
Promote balanced regional development irrespective of cost considerations.
To make benefits of insurance available to the masses.
IRDA ACT, 1999
The IRDA Act refers to the Insurance Regulatory and Development Authority Act, which is a legislative act passed by the Indian parliament in 1999. The purpose of the IRDA Act is to create an independent regulatory body to oversee and regulate the insurance industry in India. Under the IRDA Act, the Insurance Regulatory and Development Authority (IRDA) was established as an independent statutory body to regulate and promote the insurance industry in India. The IRDA is responsible for issuing licenses to insurance companies, setting guidelines and regulations for the insurance industry, and ensuring that insurance companies comply with the rules and regulations.
The main objectives of the IRDA Act include promoting competition and innovation in the insurance industry, protecting the interests of policyholders, and ensuring the financial stability of insurance companies. The act also mandates that all insurance companies operating in India must be registered with the IRDA. Overall, the IRDA Act has played a significant role in transforming the insurance industry in India by creating a regulatory framework that promotes transparency, accountability, and stability in the sector.
POWERS AND FUNCTIONS OF IRDA ACT
The Insurance Regulatory and Development Authority (IRDA) Act is a legislation passed by the Indian Parliament in 1999 to regulate and promote the insurance sector in India. The powers of IRDA Act are as follows:
Licensing of Insurance Companies: IRDA has the power to grant licenses to insurance companies for carrying out insurance business in India. It can also renew, modify, or cancel such licenses.
Regulation of Insurance Business: IRDA is responsible for regulating the conduct of insurance business in India. It lays down the guidelines for the functioning of insurance companies, agents, and brokers, and ensures that they comply with the regulations.
Protection of Policyholders: IRDA has the power to protect the interests of policyholders in India. It can ensure that the insurance companies adhere to fair practices and provide good customer service.
Adjudication of Disputes: IRDA has the power to adjudicate disputes between insurers and policyholders. It has the authority to investigate complaints and take action against insurance companies that violate the regulations.
Promotion of Insurance Awareness: IRDA is responsible for promoting insurance awareness in India. It undertakes initiatives to educate the public about the benefits of insurance and the need for insurance protection.
Development of Insurance Market: IRDA has the power to develop the insurance market in India. It can introduce new products, encourage innovation, and promote competition among insurance companies.
Supervision of Insurance Companies: IRDA supervises the functioning of insurance companies in India. It monitors their financial stability and solvency, and ensures that they maintain adequate reserves to meet their obligations.
Overall, the IRDA Act provides a comprehensive framework for the regulation and development of the insurance sector in India.
CONSUMER PROTECTION ACT, 1986
Consumer Protection Act is an act of Parliament enacted in 1986 to protect the interests of consumers in India. It is a comprehensive legislation that aims to promote and protect the rights of consumers in relation to goods and services. The Consumer Protection Act sets out various rights and responsibilities of consumers and manufacturers, suppliers, and service providers. It covers areas such as product safety, misleading advertising, unfair contract terms, and the provision of accurate and truthful information about products and services. The key provisions of the Consumer Protection Act include the following:
Definition of consumer: The Act defines a consumer as any person who buys goods or services for personal use or for use by any other person.
Consumer rights: The Act provides for six consumer rights, which include the right to safety, right to be informed, right to choose, right to be heard, right to seek redressal and right to consumer education.
Unfair trade practices: The Act prohibits unfair trade practices such as false representation, misleading advertisements, and charging excess price.
Consumer Protection Councils: The Act provides for the establishment of Consumer Protection Councils at the national, state, and district levels to promote consumer awareness and protection.
Consumer Disputes Redressal Forums: The Act provides for the establishment of Consumer Disputes Redressal Forums at the district, state, and national levels to resolve consumer disputes.
Product Liability: The Act introduced the concept of product liability, which makes manufacturers, sellers, and service providers liable for any harm caused to consumers as a result of defective products or services.
The Consumer Protection Act is a significant law in India that helps protect the interests of consumers and promotes fair trade practices.
Complainant
The word complainant means:
(a) a Consumer
(b) a voluntary consumer association
(c) Central Government or State Government
(d) One or more consumers where there are numerous consumers having the same interest
In the case of death of a consumer, his or her legal heir or representative.
Consumer
Consumer means any person who:
(a) Buys any goods for a consideration which has been paid or promised or partly pai and partly promised or under any system of deferred payment
(b) Any user of the such goods other than the person who buys such goods as above if such use is
made with the approval of the person who has bought it
(c) Hires or avails of any services for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment and includes any beneficiary of such services other than the person who hires or avails of the services for consideration paid or promised or partly paid and partly promised or under any system of deferred payment with the approval of the first mentioned person. It does not include a person who avails of such services for any commercial purposes.
What is a Complaint
Complaint means any allegation in writing made by a complainant that:
(a) an unfair trade practice or a restrictive trade practice has been adopted by any trader or service provider
(b) the goods bought by him or agreed to be bought by him suffer from one or more defects
(c) the services hired or availed of or agreed to be hired or availed off by him suffer from deficiency in any respect
(d) A trader or service provider as the case may be has charged for the goods or for the services
mentioned in the complaint, a price in excess of the price fixed by or under any law for the time
being in force displayed on the goods or any package containing such goods, displayed on the price list exhibited by him by or under any law for the time being in force, agreed between the parties.
(e) Goods which will be hazardous to life and safety when used are being offered for sale to the public – In contravention of any standards relating to safety of such goods as required to be compiled with, by or under any law for the time being in force; If the trader could have known with due diligence that the goods so offered are unsafe to the public;
(f) Services which are hazardous or likely to be hazardous to the life and safety of the public when used, are being offered by the service provider which such person could have known with due diligence to be injurious to life and safety.
Who is a Consumer
Any person who buys goods or avails services for consideration. Consideration may be fully paid, partially paid or fully promised to be paid or partially promised to be paid. Consumer also include anybody who uses the goods or services with the consent of the consumer
What is a defect
Fault, imperfection or a shortcoming in the quality, quantity, potency, purity or standards which is required to be maintained by or under any law for the time being in force.
SELECTION OF RISK AND POLICY CONDITIONS
When selecting a life insurance policy, there are several important factors to consider, including the level of risk involved and the policy conditions. Here are some key considerations to keep in mind:
Level of risk: Life insurance companies evaluate risk based on a variety of factors, including age, health, occupation, lifestyle, and hobbies. The higher the level of risk associated with the insured, the higher the premiums will be. It's important to be honest and upfront about any potential risks to avoid any issues with coverage in the future.
Type of policy: There are several types of life insurance policies, including term life insurance, whole life insurance, and universal life insurance. Each type has its own advantages and disadvantages, so it's important to carefully evaluate the features of each policy and choose the one that best meets your needs.
Policy conditions: Policy conditions can vary widely between insurance providers, so it's important to carefully review the terms of the policy before signing up. Some important conditions to consider include the length of the policy, the payout amount, and any exclusions or limitations on coverage.
Premiums: The cost of premiums will depend on several factors, including the level of risk associated with the insured and the type of policy chosen. It's important to compare prices from several different providers to ensure you're getting the best value for your money.
Company reputation: It's important to choose a reputable life insurance company that has a strong track record of paying out claims. Research the company's financial stability and customer satisfaction ratings before making a decision.
Ultimately, selecting the right life insurance policy involves carefully evaluating the risks involved, comparing different policy options, and choosing a reputable provider that meets your needs and budget.
RISK MANAGEMENT AND SELECTION OF RISKS
Risk management is the process of identifying, assessing, and prioritizing risks to minimize, monitor, and control the probability and impact of adverse events or situations. Selecting the right risks to manage is critical for effective risk management. Here are some steps for selecting risks:
Identify potential risks: Begin by brainstorming potential risks that could affect your organization. This could include risks related to your operations, employees, customers, suppliers, technology, finances, regulations, or the environment.
Assess the risks: Evaluate the likelihood and potential impact of each risk. Use a risk assessment matrix to help prioritize risks based on their probability and impact.
Determine risk tolerance: Determine the level of risk your organization is willing to accept. This will help you decide which risks to focus on and which risks to accept.
Prioritize risks: Prioritize risks based on their potential impact on your organization's objectives and goals. This will help you focus on the risks that are most important to your organization.
Develop risk management strategies: Develop strategies to manage the identified risks. This could include risk avoidance, risk reduction, risk transfer, or risk acceptance.
Monitor and review: Monitor the risks and the effectiveness of your risk management strategies. Review your risk management plan regularly to ensure it remains relevant and effective.
Remember that risk management is an ongoing process, and it is essential to continuously assess and manage risks to protect your organization from potential harm.
COMPUTATION OF PREMIUM
Premium is a term used in insurance to refer to the amount of money an individual or business pays for an insurance policy. The premium is typically calculated based on a number of factors, including the type and amount of coverage being purchased, the age and health of the insured, the risk associated with the insured, and the claims history of the insured. The premium calculation process involves several steps, including:
Determining the level of risk: Insurance companies assess the level of risk associated with the individual or business seeking coverage. This involves analyzing factors such as age, health, occupation, lifestyle, and claims history.
Identifying the type and amount of coverage needed: Based on the level of risk, the insurance company will determine the type and amount of coverage needed by the insured. This may include liability coverage, property coverage, health coverage, or other types of coverage.
Calculating the premium: Once the level of risk and coverage needs have been identified, the insurance company will calculate the premium. The premium is typically calculated as a percentage of the coverage amount, and may also include additional fees and charges.
Adjusting the premium: In some cases, the premium may be adjusted based on additional factors such as the insured's credit score, location, or the level of risk associated with the insured.
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