Insurance: Concept and importanceInsurance is pooling of risks. In a contract of insurance, the insurer (insurance company) agrees/undertakes, in consideration of a sum of money (premium), to make good the loss suffered by the insured against a specified risk such as fire and any other similar contingency or compensate the insured/beneficiaries on the happening of specified event such as accident or death.

Parties to Insurance Contract

• Two parties to an insurance contract:• (i) insurer/assurer/underwriter and • (ii) insured/assured/beneficiary• Insurance Policy: The document laying down the

terms of the contract is called insurance policy.• The property which is insured is the subject matter of

insurance.

Subject matter of insurance

• It may be insured against loss arising from uncertain events/casualties/perils in the form of destruction of, or damage to, the property or death/disablement of a person.

• The interest which the insured has in the subject-matter of insurance is known as insurable interest.

Types of insurance

• Depending on the subject-matter, the types of insurance are the following:

• Life Insurance, under which a specified amount becomes payable on the death of the insured or upon the expiry of a specified period of time, whichever is earlier.

• General Insurance, which covers losses caused by fire, accident and marine adventures and so on.

Meaning of Life Insurance business

• Life business means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death or the happening of any contingency dependent on human life, and should be deemed to include

(a) grant of disability and double/triple indemnity accident benefits,(b) grant of annuities upon human life and

• C. Grant of superannuation allowance/ annuities payable out of any fund applicable solely to the relief and maintenance of person engaged; or who have been engaged in any particular profession/trade/employment; or of the dependents of such persons.

General Insurance business

• is defined to mean fire, marine/miscellaneous insurance business whether carried on singly or in combination with one/more of them.

• Fire insurance business means the business of effecting, other than incidental, to some other class of insurance business, contracts of insurance against loss by or incidental to fire or other occurrence customarily included among the risks insured against in fire insurance policies.

Marine insurance business means

• the business of effecting contracts of insurance upon vessels of any description including cargos, freights and other interests which may be legally insured in or in relations to such vessels, cargos and freights, goods/wares/merchandise/property of what-ever description insured for any transit by land or water or both and whether or not including warehouse risks or similar risks in addition or

• As incidental to such transit, and includes any other risks customarily included among the risks insured in marine insurance policies.

• Miscellaneous insurance business means the business of effecting contracts of insurance which is not principally or wholly of any kind/ kinds included in fire, life, and marine insurance.

Insurance business prior to IRDA

• Both Life and General Insurance business is carried out by public sector enterprises:

• Business of life is controlled and managed by the Life Insurance Corporation of India (LIC)

• Business of general insurance is controlled and managed by General Insurance Corporation of India (GIC) and its four subsidiaries.

Need for reforms in insurance sector

• To improve the quality insurance services in the country, the Malhotra Committee was formed and recommended a comprehensive frame work of reform in the insurance sector.

• The main elements of frame work are the Insurance Act,1938,

• Insurance Regulatory and Development Authority Act,1999, and regulations framed

• under it by the Insurance Regulatory and Development Authority (IRDA).

• Apart from public sector enterprises those are doing business of insurance in our country, the private sector was also allowed to enter in the business of insurance subject to compliance of the provision of relevant acts.

Insurance Act,1938

• This Act provides the broad framework for the insurance sector in the country. Vital aspects:

• Eligibility: Any class of insurance business in India can be carried out only by (i) a public company , (ii) a co-operative society, (iii) an insurance co-operative society, having paid-up capital of Rs. 100 crore, in which no body corporate holds more than 26 per cent of its paid-up capital and whose sole purpose is to carry on insurance business in India

• iv) a body corporate other than a private company incorporated in any country outside India.

• After the enactment of the IRDA Act,1999, only Indian insurance companies are permitted to carry out any class of insurance business.

Indian Insurance Company

• is defined as a company formed/registered under the Companies Act, in which the aggregate holding of equity shares by a foreign company, either by itself or through subsidiaries/nominees, does not exceed 26 per cent paid-up equity capital and whose sole purpose to carry on life/general/reinsurance business.

Insurance Regulatory and Development Authority (IRDA) Act,1999

• The IRDA Act was enacted in 1999 to provide for the establishment of the IRDA to protect the interests of policy holders, to regulate, promote and ensure proper growth of the insurance sector and for matters connected therewith/incidental thereto and also amend the Insurance Act,1938, the LIC Act,1956 and the General Insurance Business (Nationalization) Act,1972.

Composition of IRDA

• The IRDA would consist of a chairperson and not more than nine members amongst persons of ability, integrity and standing who have knowledge/experience of life insurance/ general insurance/actuarial service, finance/ economics/law/accountancy/administration/any other discipline which in the opinion of the government would be useful to it. Among the chairperson and the full-time directors, at least one person each is required to have knowledge/experience of life, general insurance or actuarial science respectively.

Duties/Powers/Functions of IRDARegulate, promote and ensure proper growth of the insurance and reinsurance businesses.Powers & Functions are furnished hereunder:• Issue to the applicant a certificate of registration; to renew, modify, withdraw, suspend or

cancel such registration; preference in registration to be given to companies providing with health insurance

• Protection of the interests of 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 & conditions of contracts of insurance

• Specifying requisite qualifications and practical training for insurance agents and intermediaries

• Specifying the code of conduct for surveyors and loss assessors• Promoting efficiency in the conduct of insurance business• Promoting and regulating professional organizations connected with the insurance and

reinsurance business, levying fees and other charges for carrying out the purposes of the IRDA Act

• Calling for information from, undertaking inspection of conducting enquiries and investigations, including audit of insurers, insurance intermediaries and other organizations connected with the insurance business

• Control and regulations of rates, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act,1938

Power and Functions of IRDA

• Specifying the form and manner in which books of account would be maintained and statement of accounts rendered by insurers and insurer intermediaries

• Regulating investment of funds by insurance companies; regulating of margin of solvency

• Adjudication of disputes between insurers and intermediaries or insurance intermediaries

Powers and Functions of IRDA

• Supervising the functioning of the Tariff Advisory Committee

• Specifying the premium income of the insurer to finance schemes for promoting and regulating professional organization referred to above

• Specifying the percentage of life insurance and general insurance business to be under-taken by the insurer in the rural & social sector

• Exercising such other powers as may be prescribed

Powers & Functions of IRDA

• The powers and functions mentioned at earlier slides would enable the IRDA to perform the role of an effective watch dog and regulator for the insurance sector in India.

• Issue of directions The IRDA would be bound by the directions of the Government on questions of policy, other than those relating to technical and administrative matters, in writing from time to time. The decision of the Government, whether a question is one of the policy or not would be final

• Registration Every application for registration to carry on insurance business should be made in such manner as may be determined by regulations made by the IRDA; preference in registration would be given to the companies providing health insurance.

• The registration fee would be determined • by the IRDA regulations not exceeding Rs

50000 for each class of business.

Renewal of Registration • An insurer, who has been granted a certificate of registration

should have the registration renewed annually with each year ending on March 31 after the commencement of the IRDA Act.

• Capital The minimum paid up equity capital would be Rs 100 crore to carry on life/general insurance business and Rs 200 crore to exclusive do reinsurance business Deposit Every Insurer in India has to keep a deposit in respect of insurance business with the RBI for and on behalf of the government in cash/approved securities estimated at the market value on the day of deposit. This is 1 per cent and 3 per cent of his total gross premium written in India in any financial year but not exceeding Rs 10 crore in case of life insurance and general insurance businesses respectively. In case of reinsurance business the deposit requirement is Rs 20 crore.

Investment

• In the interest of policy holders specify the time, manner and other conditions of investment of assets held by an insurer for the purpose of the Insurance Act. Talking into account the nature of business and to protect the interest of the policy holders, the IRDA may also issue directions to insurers relating to the time, manner and other conditions of investment of assets held by them.