Module 1 Basics of Inurance

7/29/2019 Module 1 Basics of Inurance

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Acharya Institute Of Graduate Studies

Hesarghatta Road, Soldevanahalli, Bangalore -90

Department of Management,

Nimesh Raval

MFA III sem Insurance and Risk Management

Introduction to life insurance:

Insurance is a form of risk management primarily used to hedge against the risk of a contingent,uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity

to another, in exchange for payment. An insurer, or insurance carrier, is a company selling the

insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The

amount to be charged for a certain amount of insurance coverage is called the premium. Risk

management, the practice of appraising and controlling risk, has evolved as a discrete field of

study and practice.

The earliest known instance of insurance dates back to the Babylonian period circa 2250 BC,

when the Babylonians developed a type of loan insurance for maritime business. Examples can

be found in the Code of Hammurabi. Upon receipt of a loan to fund his shipment, a merchantwould typically pay the lender an additional premium in exchange for the lenders guarantee to

cancel the loan should the shipment be stolen or lost at sea. In effect, the lender assumed the

perils of the goods in transit at a premium rate of interest. The maritime loan therefore cannot be

considered a stand - alone insurance contract, although the practice proved effective enough for

it to later be adopted by the Greeks, Romans, and Italian city - states. Somewhat surprisingly,

codified Roman law gave no recognition of insurance as separate from the maritime loan, but the

precedent of life and health insurance could be recognized in the form of organized burial

societies.

ROLE OF INSURANCE IN ECONOMIC GROWTH AND PROSPERITY

From its early inception as predominantly a maritime instrument until the present day, insurance

has grown significantly in scope, purpose, and availability. Today the insurance industry

contributes to economic growth and national prosperity in various ways. At the macro level, the

industry helps strengthen the efficiency and resilience of the economy by facilitating the transfer

of risk. At the micro level, it bringsbenefits in all areas of day - to - day life. Insurance helps

individualsminimize the financial impact of unexpected and unwelcome future events, and helpthem organize their businesses and their lives with greater certainty. Risk-averse individuals are

able to enjoy greater utility from their most important assets via the purchase of insurance

products. Almost every conceivable asset or activity can be insured through familiar producttypes, such as motor, travel, and home content insurance, and by business through professional

and product liability insurance, cover for business interruption, and many other contingencies.

As a vital tool for the management of risk by both individuals and organizations, whether private

or public, insurance plays an important role in the economic, social, and political life of all

countries. Quantifying the contribution of insurance to economic growth is, however, far from


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simple. One such attempt was made in 1990 by J. Francois Outreville, who investigated the

economic significance of insurance in developing countries. By comparing 45 developed and

developing countries, he was able to show that there is a positive but nonlinear relationshipbetween insurance premiums per capita and gross domestic product per capita, demonstrating

that the development of insurance as a financial instrument clearly plays an important role in

assisting a nations economic growth.

Principles

Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some

may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the

frequency and severity of the event occurring. In order to be insurable, the risk insured against must meet certain

characteristics in order to be an insurable risk. Insurance is a commercial enterprise and a major part of the financial

services industry, but individual entities can also insure through saving money for possible future losses.

Principle of Utmost Good Faith

Insurance is said to be a contract of utmost good faith, in which a higher standard of honesty is imposed on the

parties than is imposed under any other ordinary commercial contract. According to the principle,it is the reciprocal

duty of the insurer and the proposed to disclose all the relevant facts. The insurance contracts are subject to tdoctine

of caveat emptor- buyer or the dealing party be aware.

Principle of Insurable interest

The proposer should give all data about the risk of the subject matter to the insurer. This information includes the

relationship with the person of property i.e., the subject matter of insurance. This relationship is known as insurable

interest which is a legally recognized relationship and may arise out of ownership, tenancy, trusteeship, lease,

mortgage and any other legally recognizable reason. Principle of insurable interest is the fundamental principle that

strongly supports the principle indemnity which holds that an insured must be made good the loss that he has

actually suffered.

Principle of Indemnity

Indemnify means to make good loss. An is related to the payment of an amount on the occurrence of loss due to an

insured peril. The payment in such a case can never be more than the sum insured because that is more than the loss

happened there. Therefore, it has to be as per the percentage of destruction. This principle is applicable to all other

contracts except personal insurance.

Proximate cause

The doctrine of proximate cause is based on the principle of cause and effect. It says that there is no need to go

furtherafter proving the effect of cause. The law doesnt concern itself with the cause of causes. The law provides

that the immediate cause should be regarded first. The nearness of cause does not mean in terms of time or place. It

means nearness to the reality, predominance and efficiency. In other words, it is the cause which is effectual in

producing that result.

Principle of contribution


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This refers to the sharing of loss between co-insurers. Sometimes, one insured takes more than policies against one

loss and one interest in a property. This is quite legal. This principle says that the insurer paying the claim has a right

upon other insurers to pass of transfer part of his burden. Insurers will in this case share the total loss ratably.

Essential s of this principle are:

1. The insured should be the same for all contracts.

2. The policies should be the same for all contracts.

3. The policies should cover the same peril which caused the loss.

4. All protect the same interest of the same insured.

5. All policies should be in force when loss occurs.

Principle of subrogation

Insurance law says that after an insurer has paid acclaim to the insured, he is entitled to all the rights and remedies of

the insured in mitigating the loss. In other words, subrogation means stepping into others shoes. Here, the insurer

will get into the shoes of insured and take over the asset/property for which the claim has been paid. Under this

principle, the insurer who has indemnified anothers loss is entitled to recover compensation for any liable third

party who is responsible. This principle of subrogation is applicable to property insurance only. There are two

purposes behind the principle. They are;

1. Insured may recover his loss but not more than that.

2. The insurer after paying for loss should avail of the ways and means open to the insured to reduce his liability

ESSENTIALS .OF A VALID CONTRACT

Section 10 of the Indian Contract Act, 1872 says, a contract to be valid must have the following.

Agreement ( Offer and Acceptance): The person who wants to take up cover against particular perils

offers his risk through a proposal form to the insurance company. The insurance company may or may not

accept risk. Thus offer for entering into contract may generally come from the insured. The insurer may

also propose to make the contract but whether the offer comes from insurer or insured the main fact is

acceptance.

Legal Consideration: The promise promises to pay fixed sum at a given contingency. So the insurer must

have some return/consideration for his promise. The premium paid is the consideration and on receipt pf

the premium by the insurance company the contract comes into force. Hence, premium being the valuable

consideration must be given for starring the insurance contract. The fact is without payment of premium the

insurance contract will not come into force.

Parties competent to contract: Both the parties must be legally competent to enter into an agreement. An

agreement with a mentally unsound person does not form a valid contract.

Every person is competent to contract:

a) who has attained the age of majority according to the law.

b) who is of a sound mind, and

c) who is not disqualified from contracting by any other law which he is subjected to:


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Free consent: there should be complete and unbiased agreement between the insurer and insured regarding

the terms of contract. The consent will be free whrn it is not caused by any of these:

Coercion Undue influence

Fraud

Misrepresentation

Mistake

Legal object: the purpose for which the agreement is entered into should not be illegal. It should not be

against the public policy. To make a valid contract the object of the agreement should be lawful.

o Not forbidden by law or

o Not immoral

o Which does not defeat the provision of any law

Difference between Life and Non Life

Life Insurance Non Life Insurance

The term Assurance is referred to life insurance

business.

The term Insurance is referred to Non- life

insurance business.

Here, the loss is certain. Death is bound to happen

sooner or later.

Loss due to risk is not certain loss may or may not

happen.

Human life is the subject matter of life insurance Generally, goods or property are the subject matter

of non life insurance.

Insurance contract is a continuing contract. It is mostly for one year.

It is not a contract of indemnity. Since the life cant

be returned.

Fire, marine and other types of insurance are

contracts of indemnity.

Insurable interest must be present at the time of

taking out the policy but need not be present at the

time of maturity of the policy.

Insurable interest must be present both at the time

of affecting the policy and also at the time of

occurrence of loss.

Policy can be surrendered before its maturity. It cant be surrendered before its maturity.

Functions of Insurance:

It provides certainty.

It provides protection.

It helps capital formation.

It shares risk.


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It helps prevention of losses.

Characteristics of Insurance:

It is a co operative device.

It helps risk sharing and risk transfer.

Calculates risk in advance.

Payment is made on the occurrence of contingency.

Number of people insured is large.

It is neither charity nor gambling.

LIFE INSURANCE PRODUCTS

There are various types of insurance policies. They are issued to meet the varying and

special needs of the members of community.

1.Endowment policy: It provides for payment of the sum assured at the end of a specified

term of years or at death should it occur sooner. This is the most popular form of life

insurance.

2. Whole life insurance: Under this policy, premiums are payable throughout of the life

assured. The sum assured becomes payable only on the death. It is the cheapest form of

policy.

3.Limited payment life policy: In this case, premiums are payable for a selected period ofyears or until death if it occurs within this method. The assured knows how much amount

he will be required to pay, no matter how long he lives. This policy resembles

endowment regards of premiums, the term being fixed in both the cases. But here also,

the sum assured will be payable only after the date.

4. Convertible whole life policy: This policy is designed to meet the requirements of

young persons who are on the threshold of their career and have prospects of increase in

income after some years. In the earlier years, the premiums are payable at a lower rate.

Then after the expiry of a certain period, the sum assured is given an option to convert the

policy in to an endowment policy.

5.Joint life policy: The sum assured under a joint life policy (on two or more lives) is

payable at the end of the endowment term or on the first death of any of the lives assured,

if earlier. Partnership firms usually go in for such policies to provide for the capital of the

deceased partner.

6.Anticipated policy: This is a policy which provides for payment of the sum assured at

the end of specified intervals, say 20 percent at the end of first 5 years, 20 percent at the


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end of next 5 years, 20 percent at the end of another 5 years and the remaining at the

time of maturity.

7.Annuity policy: This is a policy under which the amount is payable by the insurer not in

one lumpsum but by monthly, quarterly, half yearly or annual installments after the

assured attains a certain age. The assured may pay the premiums regularly over a certain

period or he may pay a single premium at the outset. The annuity policy is useful to those

who desire to provide a regular income for themselves and their dependants after the

expiry of a specified period.

8. Sinking fund policy: This policy is useful for companies for redeeming their debentures

or paying off their loans. A fixed amount is paid as premium annually It goes on

accumulating at a certain rate of interest. At the end of required period, the amount of the

policy is paid to the company. Out of the amount so received, the company redeems itsdebentures or pays off the loan.

9.Janta policy: It is a policy which covers risk of death by accident for one only. The

premium charged is very nominal and incase of a death by accident a fixed amount is

payable.

RIDERS

The following are the types of riders.

Critical illness rider

Covers illnesses such as heart attack, stroke, cancer, surgery to coronary arteries. The policyholder is paid the sum

assured if he contracts any of the specified illnesses under the rider. Note that the insured would need to survive the

specified illness at least 30 days from the date of diagnosis to avail of this benefit. The policy along with all the

riders (to the extent of the Rider Sum Assured) is then terminated. But your base policy would continue and you

would have to continue to pay premiums on it.

Accidental death and dismemberment rider

Most insurers pay 100% of the coverage face amount in case of death due to accident. Also, in case of loss of more

than one limb, or sight in both eyes, or loss of one limb and sight in one eye, 100% of the coverage amount is paid.

In case of loss of one limb or sight in one eye 50%, of the coverage face amount is paid. Rider cover terminates once

all or part of the coverage is paid.

Term RiderProvides for payment of the coverage face amount in event of death of the life insured

Critical Illness Plus Rider

Not all insurance companies offer this rider. It covers an additional number of illnesses over and above those

covered by the Critical Illness Rider. Will pay the coverage face amount if the insured is diagnosed with one of the

conditions specified and survives for at least 30 days from the date of diagnosis.


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Critical Illness Woman Rider

This rider covers 29 illnesses in total. Out of these three are pregnancy-related complications.

Waiver of premium rider/ life guardian benefit

Premium is waived if you are unable to pay premiums in the event of unforeseen calamities and the policy continues

to be alive.

Income Benefit Rider

In case of death of the life assured during the term of the policy, 10% of the rider sum assured is paid annually to the

beneficiary, on each policy anniversary till maturity of the rider.

Occupational hazardsOccupational hazards indicate accidents occurred when workers are on job duties or caused on

job-related reasons. That is, determination of occupational hazards has to be based on"performing job duty" and "caused by job duty". Determination of occupational hazards in labor

laws can be found in Labor Safety and Health Law and Labor Insurance Act.

For employers, occupational hazards insurance is a collective social insurance. When

occupational hazards occur, the occupational hazards insurance funds take the majority of the

compensation liabilities, employers only need to supplement a minority of the liabilities to secure

the normal operation of the business.

Types of insur ance payment

Occupational hazard insurance provides four types of payments including medical benefits,injury or disease benefits, disability benefits and death benefits, plus a missing person allowance.

1. Medical benefits

Since the launch of National Health Insurance in 1995, ordinary accident medical benefits are

handled by central health competent authorities, while occupational injury insurance is handled

by Bureau of National Health Insurance consigned by the Bureau of Labor Insurance based on

the instructions of the Executive Yuan and in accordance of the responsibility of employers to

compensate for occupational hazards, and the principles of convenience and procedurestreamlining.

Occupational hazard medical benefits can be categorized as outpatient and inpatient treatment.

The insured upon the occurrence of occupational injury or disease treated in the privileged

medical facilities of National Health Insurance with a outpatient form or a hospitalizationapplication form based on regulations set forth in the Labor Insurance Act are entitled to be


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waived of the co-payment and enjoy half of the ordinary meal allowance and ordinary treatmentmeal allowance within 30 days.

In addition, in order to provide an integrated service of diagnosis, treatment, rehabilitation,

restructuring and return to work assessment, the Council is now providing subsidies to National

Taiwan University Hospital in the north, China Medical University Hospital in central Taiwan,

National Cheng Kung University Hospital and Kaohsiung Medical University Hospital in thesouth, and Tzu Chi Medical Center in the east to establish five occupational hazard treatment

centers to be utilized by the insured.

2. Injury and sickness benefits

Based on Item 1, Article 34 of the labor Insurance Act, "In case an insured person is not

receiving salary payment on account of injury or occupational disease incurred on duty for whichhe is receiving medical treatment, he shall be paid occupational injury or disease compensation

beginning from the fourth day on which he is incapacitated for work."

Based on Article 36 of the same Act, "Occupational injury or disease compensation shall be

payable at the rate of seventy percent of the average monthly insurance salary of an insuredperson and payable every half month. In case the insured person has not recovered from the

injury or disease after one full year, the compensation shall be reduced to fifty percent of the

average monthly insurance salary for the maximum period of one year."

3. Disability benefits

Based on Item 1, Article 54 of the labor Insurance Act, "An insured person shall be paid an

additional fifty percent of disability benefits calculated on the same category and payment

schedule of disability benefits in case he suffers, in the wake of I medical treatment foroccupational injury or disease, any residual physical handicap which conforms to the provisions

of the Disability Benefits Payment Schedule, and the diagnosis by a hospital operated or

specially contracted by the insurer confirms that the insured person will be disabled for the restof his life. Such disability benefits shall be payable on a lu mp sum basis."

Based on Item 2 of the same article, "The provisions refred to in the preceding paragraph shallalso apply to an insured who, on the expiration of the period when he received occupational

injury or sickness benefits, has not recovered and his residual physical handicap conforms to theprovisions of the Disability Benefits Payment Schedule, and the diagnosis by a hospital operated

or specially contracted by the insurer confirms that his occupational injury or sickness will beincurable."

The payment of disability benefits under the existing occupational injury or occupationaldisease standards is based on the disability payment schedule. 15 categories are defined in


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accordance with the impaired conditions of the disability, the minimum benefit is 1.5 months ofthe average insured salary, and the maximum is 60 months of the average insured salary.

4. Death benefits

Based on Article 64 of Labor Insurance Act, "In case an insured person dies from anoccupational injury or disease, not only shall a five-month burial subsidy be paide on the basis ofhis average monthly insurance salary, but forty-month survivors' benefits shall also be paid to

his/her survivors, in case the survivors include his grandparents, parents, spouse, child,

grandchild, siblings, irrespective of the length of his insurance coverage period."

5. Missing person allowance

Based on Item 3, Article 19 of Labor Insurance Act, "In case an insured person is a full-timefisherman, aviation or navigation worker, or a mine-worker, and is declared missing as a result ofan accident which occurred in the course of fishing, aviation, navigation, or mining as the case

may be, in addition to the insurance benefit claims under this Act, a special missing-person

allowance equivalent to seventy percent (70%) of the person's average monthly insurance salary

shall be payable at the end of every three-month period from the day the insured person isdeclared missing in the census registry until the day prior to (1) his return alive, (2) the

expiration of one year after he was declared missing, or (3) he is declared dead by law,

whichever happens first."

Based on Item 4 of the same article, "In case an insured person has been missing for one year or

has been declared dead by law, a claim for survivors' benefits may be made in pursuance to the

provisions of Article 64."

NUMERICAL RATING METHOD

The Numerical Rating Method is a systematic procedure for assessing the value of risk, which is based ontwopractical rules, described earlier viz., the hypothesis of unchanging extra mortality and addition of

specific rates of extra mortality for various impairments/factors.For this purpose a sub-standard life may be described as on, which presents a special hazard in respect ofone or more of the following factors of insurability.

1. Family medical history

2. Personal medical history

3. Present condition of health and habits including build

4. Occupation


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MFA III sem Insurance and Risk ManagementIn addition to the above, the assurance plan and amount of insurance also have a bearing on the value of

the risk, in view of the possibility of adverse selection. Further, the place of residence, race and

nationality of the life to be assured play a role in selection of risk. The question of moral hazard has alsoto be given due weightage.

Under the numerical rating procedure the value of any special hazard in respect of each of the abovefactors is measured in terms of an appropriate extra mortality ratings and the extra mortality rating for

various factor are then combined to arrive at the value of the risk as an extra mortality.The extra mortality ratings for various common impairments are obtained on the basis of the results oflarge-scale Medical Actuarial investigations, which have been carried out in Europe and United States of

America. The statistics have to be interpreted and adopted for the use of insurance underwriters aftertaking into account the condition in which the investigation was made and allied medical anddemographical statistics and clinical experience of medical practitioners dealing with insurance, etc. Theextra mortality ratings so modified are incorporated in comprehensive handbooks prepared by each large

reinsurer, which are known as the Rating manuals. These rating manuals have to be updated frequently inthe light of most recent statistics and progress in medicine and surgery and of each companys individualexperience.The next stage is to translate the extra mortality into an extra premium necessary to compensate there of.For this purpose regularly scaled extra mortality classes are used. The classes, defined by the range of

extra mortality, are as follows:

Generally, the extra mortality rating is rounded of to the nearest 5% point and overall extra mortalityrating of less than 20% is ignored. After determining the extra mortality class the extra premiums required

for that particular mortality class can be read from the Tables of Extra Premiums Prepared for each planof assurance.

2. ADVANTAGES OF THE METHODThe main advantage of the method lies in the manner in which it enables us the use to be made directly of

the results of the various Medico-Actuarial investigations and reduced the operation of the subjectivefactor in the underwriting of risk to a minimum. In its turn, by helping the assurers to evolve a uniform

underwriting procedure and classify the risk in identical groups, it facilitates the work of building up ofnew statistics. The basic ratings are continuously reviewed in the light of up-to-date trends in insurancemedicine. The method ensures that no factor is overlooked. It makes possible uniform assessment

either by several underwriters or by the same underwriter at different times. Difficult and doubtful casescan be analyzed more carefully and with greater confidence. It enables business to be handled with agreater speed. In reviewing a case we may easily see how the decision was arrived at.It is important to realize that contrary to the criticism that has been leveled against it, the numerical ratingmethod is far from being mechanical in its application. The individual judgement, knowledge, experience

of the medical officer and the actuary has considerable scope at the stage when the statistical data areinterpreted to build up the rating manual. In many cases the rating manual gives only a range of debits(e.g. 25-50%) against certain impairments, and the actual rating depends on the underwriters judgementsregarding the several of impairment and other correlated aspects of the risk. Ratings have often to be


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MFA III sem Insurance and Risk Managementmodified by taking into account the interaction of various aspects of the risk, and in particular, the

probable influence on the risk of the occupation, habits, mode of living, socioeconomic status, moral

hazard etc., Due weightage may also have to be given to factors likethe conscientiousness and the competence of the medical examiner and the agent. The numerical ratings

arrived at can be only be regarded as a guide, and the selection of risk depends to a considerable extent onthe individual judgement and skill of the underwriter.

3. LIMITATIONS

The numerical rating method will not be extended to assess the occupational hazard and the extra riskresulting from certain standard impairments such as the following:

1. Defects and deformities such as amputated arms and legs, partial or total blindness and deafness,mutism, undescended testes, cleft palate, clubfoot etc.

2. Standard impairments such as hydrocele, bleeding piles, caesarean section etc.The total extra to be charged for a given case will be obtained by adding together the extra premium(wherever applicable) for the health/ physical impairment to which the numerical

IRDA FUNCTIONS AND RESPONSIBILITIESSection 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA..

Subject to the provisions of this Act and any other law for the time being in force, the Authority

shall have the duty to regulate, promote and ensure orderly growth of the insurance business and

re-insurance business.

1. Without prejudice to the generality of the provisions contained in sub-section (1), thepowers and functions of the Authority shall include, -

o issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or

cancel such registration;

o protection of the interests of the policy holders in matters concerning assigning of policy,

nomination by policy holders, insurable interest, settlement of insurance claim, surrender valueof policy and other terms and conditions of contracts of insurance;

o specifying requisite qualifications, code of conduct and practical training for intermediary

or insurance intermediaries and agents

o specifying the code of conduct for surveyors and loss assessors;

o promoting efficiency in the conduct of insurance business;

o promoting and regulating professional organisations connected with the insurance and re-

insurance business;


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o levying fees and other charges for carrying out the purposes of this Act;

o calling for information from, undertaking inspection of, conducting enquiries andinvestigations including audit of the insurers, intermediaries, insurance intermediaries and other

organisations connected with the insurance business;

o control and regulation of the rates, advantages, terms and conditions that may be offeredby 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 (4 of 1938);

o specifying the form and manner in which books of account shall be maintained and

statement of accounts shall be rendered by insurers and other insurance intermediaries;

o regulating investment of funds by insurance companies;

regulating maintenance of margin of solvency;

o adjudication of disputes between insurers and intermediaries or insurance intermediaries;

o supervising the functioning of the Tariff Advisory Committee;

o specifying the percentage of premium income of the insurer to finance schemes for

promoting and regulating professional organisations referred to in clause (f);

o specifying the percentage of life insurance business and general insurance business to beundertaken by the insurer in the rural or social sector; and

exercising such other powers as may be prescribed.

The Insurance Act, 1932.

Short title, extent and commencement.

1. (1)) This Act may be called Insurance Act, 1938..

(2) It extends to the whole of India.

(3) It shall come into force on such date3 as the Central Government may, by Notification in theOfficial Gazette, appoint in this behalf.

Definitions.


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2. In this Act, unless there is anything repugnant in the subject or context, -

(1) actuary means an actuary possessing such 3a[qualifications as may be specified by theregulations made by the Authority];

4[(1A) Authority means the Insurance Regulatory and Development Authority establishedunder sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act,1999;]

(2) policy-holder includes a person to whom the whole of the interest of the policy-holder in

the policy is assigned once and for all, but does not include an assignee thereof whose interest in

the policy is defeasible or is for the time being subject to any condition;

(3) approved securities, means-

(i) Government securities and other securities charged on the revenue of the Central Government

or of the Government of a State or guaranteed fully as regards principal and interest by the

Central Government or the Government of any State;

(ii) debentures or other securities for money issued under the authority of any Central Act or Act

of a State Legislature by or on behalf of a port trust or municipal corporation or cityimprovement trust in any Presidency-town;

(iii) shares of a corporation established by law and guaranteed fully by the Central Government

or the Government of a State as to the repayment of the principal and the payment of the divided;

(iv) securities issued or guaranteed fully as regards principal and interest by the Government ofany Part B State and specified as approved securities for the purposes of this Act by the Central

Government by notification in the Official Gazette;

Indian insurance company means any insurer being a company-

(a) which is formed and registered under the Companies Act, 1956 (1 of 1956);

(b) in which the aggregate holdings of equity shares by a foreign company, either by itself or

through its subsidiary companies or its nominees, do not exceed twenty-six percent paid-upequity capital of such Indian insurance company;

(c) whose sole purpose is to carry on life insurance business or general insurance business or re-insurance business.

Registration


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3. (1) No person shall, after commencement of this Act, being to carry on any class of insurancebusiness in India and no insurer carrying on any class of insurance business in India shall, after

the expiry of three months from the commencement of this Act, continue to carry on any suchbusiness, unless he has obtained from the Authority a certificate of registration for the particularclass of insurance business:

Provided that in case of an insurer who was carrying on any class of insurance business in Indiaat the commencement of this Act, failure to obtain a certificate of registration in accordance with

the requirements of this sub-clause shall not operate to invalidate any contract of insurance

entered into by him if before such date as may be fixed in this behalf by the Central Government

by notification in the official Gazette, he has obtained that certificate:

Provided further that a person or insurer, as the case may be, carrying on any class of insurance

business in India, on or before the commencement of the Insurance Regulatory and DevelopmentAuthority Act, 1999, for which no registration certificate was necessary prior to such

commencement, may continue to do so for a period of three months from such commencement

or, if he had made an application for such registration within the said period of three months, tillthe disposal of such application:

Provided also that any certificate of registration, obtained immediately before the

commencement of the Insurance Regulatory and Development Authority Act, 1999, shall be

deemed to have been obtained from the Authority in accordance with the provisions of this Act

(2) Every application for registration shall be made in such manner as may be determined by the

regulations made by the Authority and shall be accompanied by-

(a) a certified copy of the memorandum and articles of association, where the applicant is a

company and incorporated under the Indian Companies Act, 1913 (7 of 1913), or under the

Indian Companies Act, 1882 (6 of 1882), or under the Indian Companies Act, 1866 (10 of 1866);or under any Act repealed thereby,] or, in the case of any other insurer specified in sub-clause (a)

(ii) or sub-clause (b) of clause (9) of section 2, a certified copy of the deed of partnership or of

the deed of constitution of the company, as the case may be, or, in the case of an insurer havinghis principal place of business or domicile outside India, the document specified in Clause (a) of

Section 63;

(b) the name, address and the occupation, if any, of the directors where insurer is a companyincorporated under the Indian Companies Act, 1913 (7 of 1913), or under the Indian Companies

Act, 1882 (6 of 1882), or under the Indian Companies Act, 1866 (10 of 1866), or under any Act

repealed thereby, and in the case of an insurer specified in sub-clause (a) (ii) of clause (9) ofsection 2 the names and addresses of the proprietors and of the manager in India, and in any

other case the full address of the principal office of the insurer in India, and the names of the

directors and the manager at such office and the name and address of someone or more personsresident in India, authorised to accept any notice required to be served on the insurer;


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(c) a statement of the class or classes of insurance business done or to be done, and a

statement that the amount required to be deposited by section 7 or section 98 before applicationfor registration is made has been deposited together with a certificate from the Reserve Bank of

India showing the amount deposited;

(d) where the provisions of section 6 or section 97 apply, a declaration verified by an affidavitmade by the principal officer of the insurer authorised in that behalf that the provisions of those

sections as to paid-up equity capital or working capital have been complied with;

(e) in the case of an insurer having his principal place of business or domicile outside India, a

statement verified by an affidavit made by the principal officer of the insurer setting forth the

requirements (if any) not applicable to nationals of the country in which such insurer is

constituted, incorporated or domiciled which are imposed by the laws or practice of that countryupon Indian nationals as a condition of carrying on insurance business in that country;

(f) a certified copy of the published prospectus, if any, and of the standard policy forms of the

insurer and statements of the assured rates, advantages, terms and conditions to be offered in

connection with insurance policies together with a certificate in connection with life insurancebusiness by an actuary that such rates, advantages, terms and conditions are workable and sound:

Provided that in the case of marine accident and miscellaneous insurance business other thanworkmen's compensation and motor car insurance the above requirements regarding prospectus,

forms and statements shall be complied with only insofar as the prospectus, forms and statements

may be available;

Requirements as to capital

6. No insurer carrying on the business of life insurance, general insurance or re-insurance in

India on or after the commencement of the Insurance Regulatory and Development authorityAct, 199, shall be registered unless he has,-

(i) a paid-up equity capital of rupees one hundred crores, in case of a person carrying on thebusiness of life insurance or general insurance; or

(ii) a paid-up equity capital of rupees two hundred crores, in case of a person carrying onexclusively the business as a reinsurer :

Provided that in determining the paid-up equity capital specified under clause (i) or clause (ii),the deposit to be made under section 7 and any preliminary expenses incurred in the formation

and registration of the company shall be excluded:


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Provided further that an insurer carrying on business of life insurance, general insurance or re-insurance in India before the commencement of the Insurance Regulatory and Development

Authority Act, 1999 and who is required to be registered under this Act, shall have a paid-upequity capital in accordance with clause (i) and clause (ii), as the case may be, within sex monthsof the commencement of that Act.

Requirements as to capital structure and voting rights and maintenance of registers of

beneficial owners of shares

6A. (1) No public company limited by shares having its registered office in India, shall carry nolife insurance business, unless it satisfies all the following conditions, namely:

(i) that the capital of the company consists only of ordinary shares each of which have a single

face value;

(ii) that, except during any period not exceeding one year allowed by the company for payment

of calls on shares, the paid-up amount is the same for all shares, whether existing or new:

Provided that the conditions specified in this sub-section shall not apply to a public company

which has, before the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950),

issued any shares other than ordinary shares each of which has a single face value or any shares

paid-up amount whereof is not the same for all of them for a period of three years from suchcommencement.

(2) Notwithstanding anything to the contrary contained in any law for the time being in force orin the memorandum or articles of association but subject to the other provisions contained in this

section the voting right of every shareholder of any public company as aforesaid shall in all cases

be strictly proportionate to the paid-up amount of the shares held by him.

(3) No public company as aforesaid which carries on life insurance business shall, after thecommencement of the Insurance (Amendment) Act, 1950 (47 of 1950), issue any shares other

than ordinary shares of the nature specified in sub-section (l).

(4) A public company as aforesaid which carries on life insurance business-

(a) shall maintain, in addition to the register of members to be maintained under the IndianCompanies Act, 1913 (7 of 1913~3 a register of shares in which shall be entered the name,occupation and address of the beneficial owner of each share, and shall incorporate therein any

change of beneficial owner declared to it within fourteen days from the receipt of such

declaration;

(b) shall not register any transfer of its shares


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(i) unless, in addition to compliance being made with the provisions of section 34 of the IndianCompanies Act, 1913 (7 of 1913), the transferee furnishes a declaration in the prescribed form as

to whether he proposes to hold the shares for his own benefit or as a nominee, whether jointly orseverally, on behalf of others and in the latter case giving the name, occupation and

address of the beneficial owner or owners, and the extent of the beneficial interest of each;

(ii) where, after the transfer, the total paid-up holding of the transferee in the shares of the

company is likely to exceed five per cent. of its paid-up capital or where the transferee is a

banking or an investment company, is likely to exceed two and a half per cent of such paid-upcapital, unless the previous 2[approval of the Authority] has been obtained to the transfer;

(iii) where, the nominal value of the shares intended to be transferred by any individual, firm,

group, constituents of a group, or body corporate under the same management, jointly orseverally exceeds one per cent of the paid-up equity capital of the insurer, unless the previous

approval of the Authority has been obtained for the transfer.

Explanation.- For the purposes of this sub-clause, the expressions group and same

management shall have the same meanings respectively assigned to them in the Monopolies andRestrictive Trade Practices Act, 1969 (54 of 1969);

(5) Every person who has any interest in any share of a company referred to in sub-section (4)which stands in the name of another person in the register of members of the company, shall,

within thirty days from the commencement of the Insurance (Amendment) Act, 1950 (47 of

l950), or from the date on which he acquires such interest, whichever is later, make a declarationin the prescribed form (which shall be countersigned by the person in whose name the share is

registered) to the company declaring his interest in such share, and notwithstanding anything

contained in any other law or in any contract to the contrary, a person who fails to make a

declaration as aforesaid in respect of any share shall be deemed to have no right or titlewhatsoever in that share:

Provided that nothing in this sub-section shall affect the right of a person who has an interest in

any such share to establish in a court his right thereto, if the person, in whose name the share is

registered, refuses to countersign the declaration as required by this sub-section:

Provided further that where any share, belonging to an individual who has made any suchdeclaration as is referred to in this sub-section, is held by a company in its name in pursuance of

any trust or for the purpose of safe custody or collection or realization of dividend, suchindividual shall, notwithstanding anything contained in the Indian Companies Act, 1913 (7 of

1913), or in the memorandum or articles of association of the company which has issued the

share, be deemed to be the holder of the said share for the purpose of exercising any voting rightsunder this section to the exclusion of any other person.


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(6) If the total paid-up holding of any person in the shares of a company referred to in sub-section (1) on the commencement of the Insurance (Amendment) Act 1950 (47 of 1950), exceeds

two and a half per cent of its paid-up capital where that person is a banking company or aninvestment company, or five per cent of its paid-up capital in any other case, he shall not beentitled to any vote as a shareholder of the company in respect of such excess holding of shares.

(7) Where the total paid-up holding of any person in the shares of a company referred to sub-section (1) on the date of the commencement of the Insurance (Amendment) Act, 1950 (47 of

1950), exceeds five per cent of its paid-up capital where that person is a banking company or an

investment company, or ten per cent of its paid-up capital in any other case, he shall dispose of

the excess holding of shares within three years from such commencement or such further periodnot exceeding two years as may be allowed to him by the Central Government.

(8) If, after the expiry of three years or of such further period as may be allowed to any personunder sub-section (7), the total paid up holding of any such person has not been reduced to the

limits specified in that sub-section, any shares in excess of the limits specified in that sub-section

shall vest in the Administrator-General of the State in which the registered office of the companyconcerned is situate and the Administrator-General shall take such steps as may be necessary for

taking charge of any property which has so vested in him and shall dispose of the said shares and

the proceeds thereof in such manner as may be prescribed.

(9) Subject to the other provisions contained in this section, but notwithstanding anything

contained in the Indian Companies Act, 1913 (7 of 1913), or in the memorandum or articles ofassociation of any such company as is referred to in sub-section (1), no such company shall

refuse to register the transfer of any shares where the transfer is for the purpose of securingcompliance with the provisions of sub-sections (7) and (8).

Investment, Loans and Management

Investment of assets

27. (1) Every insurer shall invest and at all times keep invested assets equivalent to not less than

the sum of-

(a) the amount of his liabilities to holders of life insurance policies in India on account of

matured claims, and

(b) the amount required to meet the liability on policies of life insurance maturing for payment in

India,

less-


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(i) the amount of premiums which have fallen due to the insurer on such policies but have notbeen paid and the days of grace for payment of which have not expired, and

(ii) any amount due to the insurer for loans granted on and within the surrender values of policies

of life insurance maturing for payment in India issued by him or by an insurer whose business he

has acquired and in respect of which he has assumed liability,

in the manner following, namely, twenty-five per cent of the said sum in Government securities,

a further sum equal to not less than twenty-five per cent of the said sum in Government securities

or other approved securities and the balance in any of the approved investments specified in sub-section (1) of section 27A or, subject to the limitations, conditions and restrictions specified in

sub-section (2) of that section, in any over investment.

(2) For the purposes of subsection (1),

(a) the amount of any deposit made under section 7 or section 98 by the insurer in respect of his

life insurance business shall be deemed to be assets invested or kept invested Government

securities;

(b) the securities of, or guaranteed as to principal and interest by, the Government of the United

Kingdom shall be regarded as approved securities other than Government securities for a period

of four years from the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), inthe manner and to the extent hereinafter specified, namely:

(i) during the first year, to the extent of twenty-five per cent in value of the sum referred to insub-section (1);

(ii) during the second year, to the extent of eighteen and three fourths per cent in value of the

said sum;

(iii) during the third year, to the extent of twelve and a half per cent in value of the said sum; and

(iv) during the fourth year, to the extent of six and a quarter per cent in value of the said sum:

Provided that, if the Authority so directs in any case, the securities specified in clause (b) shall be

regarded as approved securities other than Government securities for a longer period than fouryears, but not exceeding six years in all and the manner in which and the extent to which the

securities shall be so regarded shall be as specified in the direction;

(c) any prescribed assets shall, subject to such conditions, if any, as may be prescribed, be

deemed to be assets invested or kept invested in approved investments specified in sub-section

(1) of section 27A.


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(3) In computing the assets referred to in subsection (1),

(a) any investment made with reference to any currency other than the Indian rupee which is inexcess of the amount required to meet the liabilities of the insurer in India with reference to that

currency, to the extent of such excess; and

(b) any investment made in the purchase of any immoveable property outside India or on thesecurity of any such property,

shall not be taken into account:

Provided that nothing contained in this sub-section shall affect the operation of sub-section (2):

Provided further that the Authority may, either generally or in any particular case, direct that anyinvestment, whether made before or after the commencement of the Insurance (Amendment)Act, 1950 (47 of 1950), and whether made in or outside India, shall, subject to such conditions as

may be imposed, be taken into account, in such manner as may be specified in computing the

assets referred to in sub-section (1) and where any direction has been issued under this provisocopies thereof shall be laid before Parliament as soon as may be after it is issued.

(4) Where an insurer has accepted reassurance in respect of any policies of life insurance issuedby another insurer and maturing for payment in India or has ceded reassurance to another insurer

in respect of any such policies issued by himself, the sum referred to in subsection (1) shall be

increased by the amount of the liability involved in such acceptance and decreased by the

amount of the liability involved in such cession.

(5) The Government securities and other approved securities in which assets are under sub-section (1) to be invested and kept invested shall be held by the insurer free of any encumbrance,

charge, hypothecation or lien.

(6) The assets required by this section to be held invested by an insurer incorporated or

domiciled outside India shall, except to the extent of any part thereof which consists of foreign

assets held outside India, be held in India and all such assets shall be held in trust for thedischarge of the liabilities of the nature referred to in sub-section (1) and shall be vested in

trustees resident in India and approved by the Authority, and the instrument of trust under this

sub-section shall be executed by the insurer with the approval of the Authority and shall definethe manner in which alone the subject-matter of the trust shall be dealt with.


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The Life Insurance Corporation Act, 1956

1. Short title and commencement. -

(1) This Act may be called the Life Insurance Corporation Act, 1956.

(2) It shall come into force on such date

Establishment and incorporation of Life Insurance Corporation of India. -

(1) With effect from such date1

as the Central Government may, by notification in the Official

Gazette, appoint, there shall be established a Corporation called the Life Insurance Corporation

of India.

(2) The Corporation shall be a body corporate having perpetual succession and a common seal

with power subject to the provisions of this Act, to acquire, hold and dispose of property, and

may by its name sue and be sued. as the Central Government may, by notifications in the OfficialGazette, appoint.

4. Constitution of the Corporation. -

(1) The Corporation shall consist of such number of person not exceeding [sixteen] as theCentral Government may think fit to appoint thereto and one of them shall be appointed by theCentral Government to be the Chairman thereof.

(2) Before appointing a person to be a member, the Central Government shall satisfy itself thatthe person will have no such financial or other interest as is likely to affect prejudicially the

exercise of performance by him of his functions as a member, and the Central Government shall

also satisfy itself from time to time with respect to every member that he has no such interest;and any person who is, or whom the Central Government proposes to appoint and who has

consented to be, a member shall, whenever required by the Central Government so to do, furnish

to it such information as the Central Government considers necessary for the performance of its

duties under this sub-section.

(3) A member who is in any way directly or indirectly interested in a contract made or proposed

to be made by the Corporation shall, as soon as possible after the relevant circumstances havecome to his knowledge, disclose the nature of his interest to the Corporation; and the member

shall not take part in any deliberation or discussion of the Corporation with respect to that

contract.


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5. Capital of the Corporation -

(1) The original capital of the Corporation shall be five crores of rupees provided by the CentralGovernment after due appropriation made by Parliament by law for the purpose, and the terms

and conditions relating to the provision of such capital shall be such as may be determined by the

Central Government.

(2) The Central Government may, on the recommendation of the Corporation, reduce the capital

of the Corporation to such extent and in such manner as the Central Government may determine.

6A. Power to impose conditions etc. -

(1) In entering into any arrangement, under Section 6, with any concern, the Corporation

may impose such conditions as it may think necessary or expedient for protecting the

interest of the Corporation and for securing that the accommodations granted by it is put

to the best use by the concern.

(2) Where any arrangement entered into by the Corporation under Section 6 with any

concern provides for the appointment by the Corporation of one or more directors of such

concern, such provision and any appointment of directors made in pursuance thereof shall

be valid and effective notwithstanding anything to the contrary contained in the

Companies Act, 1956( 1 of 1956), or in any other law for the time being in force or in thememorandum, articles of association or any other instrument relating to the concern, and

any provision regarding share qualification, age limit, number of director-ships, removal

from office of directors and such like conditions contained in any such law or instrument

aforesaid, shall not apply to any director appointed by the Corporation in pursuance of

the arrangement as aforesaid.

(3) Any director appointed as aforesaid shall-

(a) hold office during the pleasure of the Corporation and may be removed or substituted

by any person by order in writing by the Corporation;

(b) not incur any obligation or liability by reason only of his being a director or for

anything done or omitted to be done in good faith in the discharge of his duties as a

director or anything in relation thereto;


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(c) not be liable to retirement by rotation and shall not be taken into account for

computing the number of directors liable to such retirement.

Module 1 Basics of Inurance

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