Regulatory Framework
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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 business. • 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 up. 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 companies • • • • • • • • • • • • • • • • • •
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 Act,1912 • 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 nonobligatory 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 body; 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 nontraditional 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 reinsurers, – manner of divesting of excess shareholding by promoters – manner and conditions of investment, – maintenance of required solvency margin at all times by the insurers; – 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 returns • 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, 1999. 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.
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 business. • 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 up. 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 companies • • • • • • • • • • • • • • • • • •
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 Act,1912 • 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 nonobligatory 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 body; 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 nontraditional 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 reinsurers, – manner of divesting of excess shareholding by promoters – manner and conditions of investment, – maintenance of required solvency margin at all times by the insurers; – 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 returns • 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, 1999. 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.
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