Chapter 16 LAWS AND REGULATIONS

Chapter 16

LAWS AND REGULATIONS

Introduction to Chapter

• Career of Insurance Agency is profoundly rewarding career,

• Not only in terms of money but in terms of prestige and satisfaction of having done good to others.

• Agents can earn gratitude of their customers, provided he keeps learning and has thorough knowledge of all that he needs to know.

• As a good professional, he must have brief background of the Laws governing insurance business in India.

Introduction to Chapter (Continued..)

• The Chapter gives a brief overview of various Laws and Regulations relating to Insurance Business in India.

• Agent is expected to have Background of these laws and also keep himself updated with any changes in the provisions of the same, in light of Competition.

• For Example, he must be aware of provisions of Income-Tax laws, as prospect’s investment decision has impact of the same.


• For Example, the agent must be aware of Tax-Saving aspects, or Special concessions to the Guardian of Physically handicapped child and such benefits, that the Policy offers to him, based on his needs.

• He must also have knowledge of laws related to insurance policy, such as Married Women’s Property Act, Wealth Tax Act etc.

• He must have skills of convincing the prospect the important features of insurance over other investment avenues.


• The Chapter covers brief overview of • Insurance Act, 1938• LIC Act, 1956• IRDA Act, 1999• Consumer Protection Act, 1986• Ombudsman• Income Tax Act• Wealth Tax Act• Married Women’s Property Act, 1874,

etc.

Main Acts

• Insurance Act, 1938.• LIC Act, 1956.• IRDA Act, 1999.• Consumer Protection Act, 1986.

• Ombudsman.

Other Acts:-

• Income Tax Act• Wealth Tax Act• Married Women’s Property Act, 1874.

Insurance Act, 1938.• Came into effect from 1st July 1939.• Principal enactment relating to

Insurance Business in India.• Sec. 2 (5A) defines “Chief Agent”.• Sec. 2 (17) defines “Special

Agent”.• Sec. 42A provides for the

registration of Chief Agents and Special Agents.

• Act vests IRDA with various powers.

Insurance Act, 1938 (Continued….)

• Act contains provisions regarding licensing of agents and their remunerations, prohibition of rebates and protection of policyholder’s interests.

• It also places limits on expenses of insurers, use of funds and pattern of investments, maintaining solvency levels and constitution of Insurance Associations and Insurance Councils and the Tariff Advisory Committee for General Insurance.

Chief Agent:- Defined

• Sec 2 (5A) defines ‘Chief Agent’ as under.

• A person who, not being a salaried employee of an insurer, in consideration of commission (i) performs any administrative and organizing functions for the insurer and (ii) procures life insurance business for the insurer by employing or causing to be employed, insurance agents on behalf of the insurer.

Special Agent:- Defined

• Section 2(17) defines ‘Special Agent’ as under.

• He is a person who procures life insurance business, in consideration of commission, employing or causing to be employed insurance agents on behalf of the insurer.

• Only procures business through agent, but does not perform administrative functions like a Chief Agent.

• Special Agent can work in life insurance business, not in general insurance business.

Section 42A:-

• Provides for registration of Chief and Special Agents.

• Certificates to be issued after registration.

• Certificate valid for 12 months and can be renewed.

• Provisions stipulate number of insurance agents that a chief agent / Special agent may employ directly or through special agents, and also the minimum business they have to do.

Section 42A – Continued ….

• The Act vests IRDA with powers to inspect documents, to appoint additional directors, to issue directions, to take over the management of an insurer and to appoint administrators.

• IRDA has powers to adjudicate on disputes

• Maximum amount – Rs.2,000/- , hence not many disputes are likely to be referred to the Authority under this section.

Life Insurance Corporation Act, 1956.

• Basis for establishment of L.I.C. as a body corporate.

• Maximum 16 members, appointed by Central Govt.

• Duty:-Carry on life insurance business to the best advantage of community,

• Sec. 30 gave LIC exclusive privilege to transact Life Insurance in India

• This exclusive privilege ceased after amendments in 1999.

Insurance Regulatory And Development Authority Act, 1999

• Enacted in Dec’ 1999, to protect interests of holders of insurance policies, to regulate promote and ensure orderly growth of insurance industry.

• Sought to amend Insurance Act, 1938, L.I.C Act, 1956 and General Insurance Business (Nationalization) Act, 1972.

IRDA Act – Continued..• Corporate Body• Advised by Insurance Advisory

Committee consisting of not more than 25 members

• It replaces “Controller of Insurance” to administer provisions of Insurance Act, which includes registration, licensing and laying down regulations for proper conduct of business and protection of policyholder’s interests.

Regulations framed by IRDA:-

• Regulations called as ‘Insurance Regulatory and Development Authority (Licencing of Insurance Agents) Regulations, 2000.

• Provisions of above are given at the end of the Book (Page number 198 to 207) and agents are expected to go through the same.

• Issue or renewal of licence, Qualifications of applicant, practical training, Examination, Fees, Code of Conduct, Cancellation of licence, Issue of Duplicate Licence etc. may be referred.

Regulations framed by IRDA:-(Continued ….)

• IRDA (Licensing of Corporate Agents) Regulations 2002.• Corporate Agent can be a firm, a

company under Companies Act, a banking company, a co-operative society, a panchayat, a local authority, a non-government organisation, a micro leading finance organisation, a non-banking finance company or any organisation approved by IRDA.

IRDA (Licensing of Corporate Agents) Regulations 2002 –

(Continued ….)• Document stating the objectives of

person wanting to be the Corporate Agent, must state that soliciting and procuring insurance business is one of its objective.

• Corporate Agent has to nominate somebody (e.g. Partner, Director, officer, employee as the case may be) as ‘corporate insurance executive’

• Issue of licence is subject to insurance executives satisfying requisite qualifications as in case of an individual agents.


(Continued ….)• The Corporate agent has to nominate

somebody as “Specified Persons”, who will be responsible for soliciting insurance business on behalf of Corporate Agent.

• Specified Person also must have minimum qualifications on same lines as individual agents, and must also not suffer from any disqualifications.

• After undergoing training and passing exam, he has to obtain certificate, which is valid for 3 years and can be renewed.


(Continued ….)

• Both Corporate Insurance Executives and Specified persons are bound by code of conduct for agents, as applicable for individual agents.

• A violation of the code can result in the cancellation of the licence of Corporate agent, the corporate insurance executives or certification of the specified persons.

IRDA (Insurance Brokers) Regulations 2002

• 3 Kinds of Brokers viz. ‘Direct Broker’, Reinsurance Broker and ‘Composite Broker’

• Broker has to obtain licence from IRDA, which is valid for 3 years. IRDA issues licence subject to applicant having fulfilling certain requirements such as infrastructure, at least 2 employees with necessary qualifications, satisfying requirements like capital and deposit.

IRDA (Insurance Brokers) Regulations 2002(Continued ….)

• Application for renewal has to be made more than 30 days before expiry of the licence. Applications made thereafter are liable for extra fees.

Fees for Licence

Fee for renewal

Ceiling for Renewal fee

Direct Broker Rs.25,000 0.50% of remuneration (Minimum = fee for first licence)

Rs.1 lac

Reinsurance Broker

Rs.75,000 ---- do ---- Rs.3 lac

Composite Broker

Rs.1,25,000 ---- do ---- Rs.5 lac

IRDA (Insurance Brokers) Regulations 2002:- (Continued

….)• Capital Required:-

• Direct Broker:- Rs.50 lacs• Reinsurance Broker:- Rs.200 Lacs• Composite Broker:- Rs.250 lacs.

• There should not be interest of Non-Indian in the capital

• 20% of Capital to be kept as Fixed Deposit with Scheduled Bank, but IRDA may ask for higher amount (Maximum Rs.100 lacs)


….)• Every Broker has to appoint

“Principal Officer” who would be responsible for business of insurance broking.

• There should also be a ‘Chief Executive Officer’, who would be appointed exclusively for insurance business.

• He must satisfy certain qualifications such as educational qualifications, training, passing of exam etc.

The Broker’s functions:-• Getting information about client and risk

management philosophy• Advice to client on cover and terms• Maintaining detailed information about

available insurance markets• Submission of quotations received from

insurers• Providing underwriting information• Acting promptly on instructions from clients

and providing progress report• Assisting in settlement of claims• Maintaining records of insurance business

and claims

Reinsurance Broker is expected also to

• Advice on technical data on reinsurance covers available internationally

• Maintain database of reinsurance markets• To Select / Recommend reinsurer• Assist in commutation of reinsurance

contracts and settlement of claims• Collect and remit premiums and claims• Exercise due diligence at the time of

selection of reinsurers and international insurance brokers, having regard to their security rating

• Render consultancy and risk management services

IRDA (Insurance Brokers) Regulations 2002:- (Continued ….)• Remuneration can be paid by insurers

to Brokers. (e.g. for direct brokers in life business, commission is 30% of first years premium and 5% of renewal premium, 2% of Single premium for annuity cases, etc.)

• Restrictions on business from Single client (Not to exceed 50% in first year, 40% in 2nd year and 30% in subsequent years.)

Code of Conduct for Brokers:-• Utmost good faith, care and diligence in

dealing with clients• Convey quotations, explain degree of choice

available, explain reasons for recommendation, explain claim procedure, etc.

• Keeping information about client as confidential avoiding conflict of interest

• Becoming a member of the Insurance Brokers’ Association of India or such other body as may be approved by IRDA

• Not to employ agents or canvassers to bring business

• Not to criticise other insurers or members of the Association.


….)• Brokers should obtain insurance policies covering professional indemnity, against any omission or commission or negligence, loss because of fraudulent or dishonest acts, loss of documents, on part of broker or his employees.

• Cover should be for the period of licence

• Limit should be 3 times annual remuneration. (Minimum:- Direct Brokers:- 50 lacs, Reinsurance Brokers Rs.250 lacs and Composite Broker Rs.500 Lacs)


….)• Reinsurance Broker allowed to receive

premium from clients or claim amount from reinsurers.

• Should be managed as trust funds.• All brokers should prepare Balance

Sheet, Profit & Loss Account and Cash Flow statements every year.

• Submission to IRDA half yearly.• Should have Internal Audit.


….)• Licence to Broker can be cancelled at any

time • for violation of the code of conduct• When he acquires any of the

disqualifications• Violation of provisions of the Act or

Regulations.• Once, licence is cancelled, he is not

permitted to transact any fresh business, but may continue to service existing business.

• IRDA has right to look into complaints from clients of the Brokers.

Consumer Protection Act, 1986. (COPA)

• To safeguard the interests of Customers.

• Four Basic Consumer rights…• The Right to Safety• The Right to be informed• The Right to Choose• The Right to be heard (Redress)

COPA :- Continued …• Consumer can approach various

forums for redress, in case he is not satisfied with goods / services provided.

• Has to allege a defect in the goods or service

• Fault, imperfection, shortcoming or inadequacy in quality, nature or manner of performance, which is required to be maintained

COPA :- Continued….• Consumer dispute redressal forums

are to be established in each district and each state.

• District Level :- complaints up to value of Rs.5 lac

• State Level :- Complaints up to value of Rs.20 lac.

• Also, provision for constitution of National Commission, for attending matters beyond jurisdiction of State Forum or appeals against State Forum’s decisions.

COPA :- To Insurance Business

• COPA applies to Insurance business also.

• Majority disputes on repudiation and delays in claims

• Various reasons for delays – may be minimised by intervention of Agents

• If agent takes proper care at the time of submitting the proposal, there can not be repudiation, if all material information is supplied.

OMBUDSMAN• Section 114 (1) of Insurance Act

empowers Central Govt. to frame rules known as “Redressal of Public Grievances Rules, 1998, whereby Ombudsmen are appointed.

• Appointed by Governing body of the Insurance Council.

• Resolves complaints regarding disputes between Policyholders and Insurers

Ombudsman – Continued ….

• Complaints may relate to• Partial or total repudiation of claims• Dispute relating to payment of

premium• Dispute on legal construction of the

policy relating to claims• Delay in settlement of claims• Non-issue of insurance document to

customers

Ombudsman – Continued ….• Not a judicial authority

• Acts as counsel and mediator• No right to summon witnesses• Lawyers not permitted to argue case –

Parties are allowed to make personal submissions.

• Entertained only if a) Complaint rejected by insurer or b) reply not received within 1 month or c) Unsatisfactory Reply by insurer

Ombudsman – Continued ….• Complaint to be made within 1 year after

rejection of representation by insurer• The matter should not be before any

court or consumer forum or arbitration.• Ombudsman makes recommendations

within 1 month, and insurer has to comply within 15 days and inform Ombudsman.

• If unacceptable to complainant, it passes award in writing, within 3 months

Ombudsman – Continued ….

• The complainant has to intimate his acceptance of the award within one month, and insurer has to comply within 15 days and inform Ombudsman.

• If complainant does not intimate acceptance, award can not be implemented.

Other Acts

• Income Tax Act• Married Women’s Property Act,

1874.• Wealth Tax Act

Income Tax Act• Income Tax Act provisions keep on

changing every year, hence one has to update himself with the prevailing Tax laws and amendments made therein from time to time.

• So far, Tax laws encourage people to save in various instruments, including Life Insurance, by providing relief from tax liabilities.

• Knowledge of tax provisions is essential to Agents, as it affects benefits under the policy.

Income Tax – with Regard to Life Insurance

• Any sum received under life insurance policy is exempt from income tax. Sec 10(10D)

• Sec. 80 C – Deduction from taxable income, (Maximum Rs.150,000/-)

Tax Rebates – A brief overview

• Section 80 C – Investments in Life Insurance Premiums, contribution to Provident Fund, Public Provident Fund, approved Superannuation Fund, National Saving Certificates, Approved Infrastructure Bonds etc. are eligible for rebate under Section 80 C.

Wealth Tax Act:-

• The Wealth Tax Act exempts life insurance policies totally provided premiums are payable for a period of 10 years or more. If the policy term is less than 10 years, proportionate value will be exempted.

Married Women’s Property Act, 1874.

• Sec. 6 of the MWP Act provides that a policy of insurance effected by any married man on his own life and expressed on the face of it for the benefit of his wife and children shall be deemed to be a trust for the benefit of his wife and children and shall not be subject to control of Life Assured or his creditors or form part of his estate.

Saving Plan is good when ….

• It is safe• It is flexible• It has incentive to help save

continuously without default.• It helps in saving Tax• It fulfils the financial objectives,

even if one dies.

An Ideal Saving scheme provides ..

• Safety• Liquidity (Capable of converting

into cash easily)• High rate of interest yield• Capital Growth• Beneficial to save Tax.

But……• No investment is “Most Perfect”

having all these attributes.• A sacrifice has to be made for sake

of one or the other attribute• Hence look for those investments

which offer the best solutions to his personal needs, under his own set of circumstances.

High Returns… High Risk!!!!

• Highest Returns and Best Returns are not the same.

• High Returns may be offset by risk to capital.

• Best Return is determined by advantages an investment offers to achieve one’s financial objectives under his given circumstances.

Basics about Banking….Type of Account

Interest Liquidity

Current Account

No Interest No restriction on withdrawals

Saving Accounts

Relatively low interest

Some restriction on number of withdrawals, exist

Term Deposit Offers varying interest rates, depending on Term

Wait till maturity to get money, else be prepared to suffer some loss of interest

Mutual Funds

• Large number of individuals pool their moneys collectively in a single fund.

• Amount so collected is invested in shares/securities of large number of companies under professional management.

• Investments are divided into segments called “units”, which normally have Face Value of Rs.10/-.

• Units can be traded at market price.

Mutual Funds(Continued….)

• Different Tax Benefits for different schemes

• Sometimes, income distributed is tax free.

• Contributions to specified mutual funds aggregated with insurance premia are entitled for tax rebates.

• Value of unit is not protected• Net Asset Value can vary and may

also go below face value.

Shares• Most Popular But person should

lave adequate savings before investing in Shares.

• Motive is Capital Appreciation• Earnings not Guaranteed• Dividends may not be declared,

although Company has made profits.

• As Dividends are declared on Face Value, the Yield may be insignificant, if purchased from market at higher price.

Shares – Continued ….• No tax advantages• Chances of losses are as GREAT as

chances of making profits – Uncertainty is the key to bear in mind.

• Share prices fluctuate and sensitive to many factors ranging from Changes in US economy to State level politics.

• Liquidity exists, but has to be sold at prevailing market conditions, hence capital appreciation can not be guaranteed

Comparison of various Investments on Safety, Liquidity

and ReturnsType of Investment

Safety

Liquidity Returns

Saving Bank Account

High High Low

Fixed Deposits with Banks

High Moderate / High

Moderate

Life Insurance

High Low Moderate

Shares Low High Moderate / Low

Provident Fund / PPF

High Low Moderate

Comparison Between Insurance Plans

• Comparisons are often unfair• While comparing 2 different plans of

same insurer , it would be wrong to compare only premiums.

• Choice of plan must depend on requirement of Prospect. e.g. Whole-life plan should not be offered against Endowment, just because it is cheap.

• If plan identified for needs of prospects is unaffordable to him, it is better to consider reduction in Sum Assured, rather than going for a cheaper plan.

Plan Comparison – Continued….

• While comparing the plans, one must consider• The manner in which benefits are

payable• Ease with which Death claims can be

settled• Ease of alteration• Availability of Loans (Liquidity) e.g.

Money back plans – liquidity is there, but money is paid only on scheduled dates, but in case of Endowment plans, Loan can be raised as per needs of individual, after completion of stipulated period.

THANK YOU

M. J. MALIKS.B.A.

836 B.O.AHMEDABAD D.O.

[email protected]

Chapter 16 LAWS AND REGULATIONS

Documents

Transcript of Chapter 16 LAWS AND REGULATIONS