A Q&A guide to insurance and reinsurance law in India.
The Q&A gives a high level overview of the market trends and regulatory framework in the insurance and reinsurance market; the definitions for a contract of insurance and a contract of reinsurance; the regulation of insurance and reinsurance contracts; the forms of corporate organisation an insurer can take; and the regulation of insurers and reinsurers, including regulation of the transfer of risk. It also covers: operating restrictions for insurance and reinsurance entities; reinsurance monitoring and disclosure requirements; content requirements for policies and implied terms; insurance and reinsurance claims; remedies; insolvency of insurance and reinsurance providers; taxation; dispute resolution; and proposals for reform. Finally, it provides websites and brief details for the main insurance/reinsurance trade organisations in India.
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This Q&A is part of the PLC multi-jurisdictional guide to insurance and reinsurance. For a full list of jurisdictional Q&As visit www.practicallaw.com/insurance-mjg.
The Indian insurance sector has significantly developed after the government opened it to private participation in 1999, particularly after the enactment of the Insurance Regulatory and Development Act 1999 (IRDA Act) and the setting up of the Insurance Regulatory and Development Authority (IRDA) (see Question 2).
However, the Indian insurance industry continues to be in a developing stage with low penetration and high potential. Currently, there are 24 life insurance companies, 24 general insurance companies (including three stand-alone health insurance companies) and one reinsurance company (General Insurance Corporation of India) registered in India. Despite privatisation, the public sector life insurer (Life Insurance Corporation of India), and the four public sector general insurers (National Insurance Company, United Insurance Company, Oriental Insurance Company and New India Assurance Company) still control a major portion of the life and general insurance business in India, although private players are steadily acquiring a larger portion of the market share and have been making significant progress over the last ten years.
Significant legislative amendments are currently proposed, and the IRDA has been making several changes to the regulatory framework and introducing reforms to streamline the Indian insurance sector (see Question 36).
Insurance and reinsurance activities are highly regulated in India. They are primarily governed by the legal framework provided under the:
Insurance Act 1938 (Insurance Act).
Regulations issued by the IRDA under these statutes (see below).
The Life Insurance Corporation Act 1956 governs the Life Insurance Corporation. Unlike other Indian life insurers, the government guarantees all policies issued by the Life Insurance Corporation. The General Insurance Business (Nationalization) Act 1982 governs the four public sector general insurance companies. Finally, the Marine Insurance Act 1963 and the Motor Vehicles Act 1988 also regulate insurance business in India.
The IRDA has issued numerous regulations, guidelines and instructions to regulate and promote the insurance industry and to protect the interests of policyholders, including:
Regulations applicable to life insurance, general insurance, and health insurance companies (including but not limited to):
IRDA (Registration of Indian Insurance Companies) Regulations 2000;
IRDA (Insurance Advertisements and Disclosure) Regulations 2000;
IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations 2000;
IRDA (Investment) Regulations 2000;
IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations 2002;
IRDA (Protection of Policyholders' Interests) Regulations 2002;
IRDA Guidelines on Advertisement, Promotion & Publicity of Insurance Companies, and Insurance Intermediaries 2007;
IRDA Corporate Governance Guidelines for Insurance Companies 2009;
IRDA Guidelines for Grievance Redressal by Insurance Companies 2010;
IRDA (Sharing of Database for Distribution of Insurance Products) Regulations 2010;
IRDA (Issuance of Capital by Life Insurance Companies) Regulations 2011;
IRDA (Scheme for Amalgamation and Transfer of General Insurance Business) Regulations 2011;
IRDA Guidelines on Distance Marketing of Insurance Products 2011;
IRDA Guidelines on Outsourcing of Activities by Insurance Companies 2011.
Regulations applicable to reinsurance activities:
IRDA (General Insurance-Reinsurance) Regulations 2000;
IRDA (Life Insurance-Reinsurance) Regulations 2000;
IRDA Guidelines on Insurance and Reinsurance of General Insurance Risks 2006;
IRDA Guidelines on Cross Border Reinsurers 2012.
The Reserve Bank of India (RBI) has also issued the following regulations to control foreign exchange transactions in Indian insurance activities:
RBI Memorandum of Exchange Control Regulations relating to Life Insurance in India 2003.
RBI Memorandum of Exchange Control Regulations relating to General Insurance in India 2002.
The IRDA is responsible for regulatory enforcement in the insurance sector.
A contract of insurance has not been specifically defined by any statute. Indian courts have relied on common law principles to set down the following principles governing a contract of insurance:
A contract of insurance is a contract under which one party (insurer) promises in return for money consideration (premium) to pay to the other party (insured) money or money's worth on the happening of an uncertain event more or less adverse to the interest of the insured (Prudential Ins. Co. v. Inland Revenue Commrs. (1904) 2 KB 658, relied on by the Bombay High Court in the case of Babulal Kanji v. Commissioner of Income Tax, Bombay. AIR 1947 Bom 59).
The insured must have an insurable interest in the property, life or liability which is the subject of the insurance (M.Swaminathan v. C.K. Jayalakshmi Amma and Ors.  66 CompCas 503(Ker)).
The four essentials of a contract of insurance are (Vikram Greentech (I) Ltd. v. New India Assurance Co. Ltd. (2009) 4 MLJ 811 (SC)):
definition of the risk;
duration of the risk;
amount of insurance.
Reinsurance is used where the loss likely to be sustained under any contract of insurance will make heavy inroads on the insurer's funds, or generally as a way of spreading the excess of risk over what the insurer is capable of retaining (see Question 8).
A contract of reinsurance is currently not defined under any statute, although it is proposed to be defined under the Insurance Bill as insurance of all or part of one insurer's risk by another insurer who accepts the risk for a mutually acceptable premium (clause 16B, Insurance Bill) (see Question 36). In General Insurance Corporation of India v Assistant Commissioner of Income-tax (2009) 125TTJ(Mum) 779 (GIC Case), the court relied on a decision of a US court to interpret the meaning of a reinsurance contract (that is, a "contract of reinsurance is a contract whereby one for a consideration agrees to indemnify another… under a risk the latter has assumed… as insurer of a third party").
The IRDA regulates all contracts of insurance/reinsurance in India. Insurance contracts comprise:
Life insurance contracts.
Health insurance contracts.
General insurance contracts, including contracts relating to fire, marine, property, liability and miscellaneous insurance businesses.
All insurance policies must be filed with the IRDA before they are offered for sale to the general public (File and Use Guidelines).
The following entities can act as insurers in India:
A public limited company incorporated under the Companies Act 1956.
A co-operative society registered under the Co-operative Societies Act 1912.
The IRDA regulates all insurers and reinsurers in the same way in India. Specific statutes govern the public sector entities (see Question 2, Regulatory framework).
Insurers and reinsurers can only carry out the insurance activities for which they have been registered by the IRDA, that is, life insurance, general insurance, health insurance or reinsurance (see Question 9, Insurance/reinsurance providers). Non-insurance business is not permitted.
General insurance and health insurance policies can transfer risk by obtaining reinsurance, subject to the following limits:
10% of the total reinsurance must be placed with the local reinsurer, General Insurance Corporation (obligatory cession).
The risk may be reinsured with a foreign reinsurer registered with the IRDA, which is domiciled in a country that has entered into double taxation avoidance agreements or tax information exchange agreements with India (IRDA Guidelines on Cross Border Reinsurers 2012).
For the immediately preceding five years, the foreign reinsurer must have a rating of at least BBB (with Standard & Poor) or equivalent rating from any other international rating agency. Insurers can place reinsurance business with other reinsurers only after obtaining the IRDA's approval.
A maximum of 10% of the total reinsurance premium ceded outside India can be placed with any one reinsurer, complying with the above conditions. If this limit is to be exceeded, the insurer must obtain IRDA approval, giving reasons for this cession.
The insurer must offer an opportunity to other Indian insurers (including the General Insurance Corporation) to participate in the risk transfer before placing outside India.
The General Insurance Corporation must retrocede (that is, reinsure the reinsured risk) at least 50% of the obligatory cessions that it receives to the ceding insurers after protecting the portfolio through suitable excess of loss covers. This retrocession must be at the original terms of the reinsurance. In addition, an overriding commission to the General Insurance Corporation which cannot exceed 2.5% applies. The retrocession to each ceding insurer must be in proportion to its cessions to the General Insurance Corporation.
Insurers can place reinsurance policies with Lloyd's syndicates subject to compliance with the above conditions and taking care to limit placements with individual syndicates to shares suitable to the syndicate's capacity.
Insurers must regularly file their reinsurance programme and copies of treaty slips with the IRDA.
The insurer must retain the maximum amount of premium earned in India that is appropriate given its financial strength and volume of business. It can transfer risk through reinsurance, subject to the following limits:
The same foreign reinsurer registration and rating requirement applies as for general insurance policies (see above, General insurance and health insurance policies). Insurers can place reinsurance business with other reinsurers only after obtaining the IRDA's approval.
Prior IRDA approval is required for any programme of reinsurance which is on original premium basis.
No life insurer can have a reinsurance treaty arrangement with its promoter company or its associate/group company, except:
on terms which are commercially competitive in the market;
with the prior approval of the IRDA (which will be final and binding).
Insurers must regularly file their reinsurance programme and copies of treaty slips with the IRDA.
Only the following are permitted to carry on insurance or reinsurance business in India:
An Indian insurance company, registered with the IRDA under section 3 of the Insurance Act.
A co-operative society registered under the Co-operative Societies Act 1912.
The sole purpose of an insurance company must be to carry on insurance business. Fronting arrangements, where the licensed insurer (ceding company) obtains regulatory approval for an insurance product and cedes all or most of the risk and underwriting to a foreign reinsurer, is not permitted in India. Branch offices of foreign insurers and reinsurers are not permitted to place business in India.
To obtain authorisation, the insurer must apply for a certificate of registration from the IRDA, under the following procedure ((Registration of Indian Insurance Companies) Regulations 2000 (Registration Regulations)):
Submission of Form IRDA/R1. The applicant (which must be a public limited company, incorporated under the Companies Act 1956 (Companies Act)) must submit to the IRDA Form IRDA/R1.
Submission of Form IRDA/R2. Once the IRDA has accepted Form IRDA/R1, the applicant must submit to the IRDA Form IRDA/R2. The application must be accompanied by certain documents, including:
documentary proof of the applicant satisfying the requirement to keep and maintain a deposit with the RBI (either in cash or in securities, or partly in cash and partly in securities) in the amount:
equivalent to 1% of its total gross premium, up to a maximum of INR1 billion (for a life insurer) (as at 1 January 2012, US$1 was about INR49.5);
equivalent to 3% of its total gross premium, up to a maximum of INR1 billion (for a general insurer);
of INR2 billion (for a reinsurer).
evidence of minimum capitalisation (INR1 billion for an insurer and INR2 billion for a reinsurer);
confirmation that the foreign promoter's holding (together with all other direct and indirect foreign holdings in the applicant company) does not exceed 26% (section 2(7A), Insurance Act);
certified copies of the applicant's charter documents; and
details of the promoters and the proposed directors (including their performance record). In this context, an Indian promoter means and includes:
a company incorporated under the Companies Act, which is not a subsidiary as defined under the Companies Act;
a banking company as defined under the Companies Act (not including a foreign bank or a branch of a foreign bank operating in India);
a public financial institution as defined under the Companies Act;
a co-operative society registered under any relevant law in force;
a person who is an Indian citizen, or a combination of persons who are Indian citizens.
Grant of certificate in Form IRDA/R3. The IRDA considers the information provided by the applicant under IRDA/R2 and decides whether to grant a certificate of registration. The IRDA usually considers criteria such as the:
track record of promoters;
proposed directors and key management personnel;
applicant's capital structure;
proposed obligations for the rural and social sector (that is, the insurers must write a certain proportion of insurance business for the rural and socially vulnerable sector);
nature of insurance products envisaged; and
level of actuarial and other professional expertise.
An applicant granted a certificate of registration must commence insurance business within 12 months of the date of registration.
Foreign reinsurers undertaking reinsurance business in India must be registered and obtain a unique reference number from the IRDA.
Only the following licensed intermediaries can carry out marketing and solicitation of insurance products:
Individual insurance agents. Individual insurance agents are regulated by the IRDA (Licensing of Insurance Agents) Regulations 2000 (Agent Regulations) and the Insurance Act. An application for a licence must comply with the conditions provided under the Insurance Act and Agent Regulations, such as:
completion of practical training;
payment of fees; and
the agent possessing requisite knowledge to solicit and procure insurance business.
Corporate agents. Corporate agents are regulated by the IRDA (Licensing of Corporate Agents) Regulations 2002 (Corporate Agent Regulations), Guidelines on Licensing of Corporate Agents 2005 (Corporate Agent Guidelines) and the Insurance Act. Entities eligible to operate as a corporate agent include:
non-governmental organisations; and
non-banking financial companies.
An entity can be licensed as a corporate agent of only one life or one general insurer or as a composite agent of one life and one general insurer. The corporate agency licence is issued by the insurer's designated person after obtaining IRDA approval and is valid for a period of three years.
Insurance brokers. Insurance brokers are regulated by the IRDA (Insurance Brokers) Regulations 2002 (Broker Regulations) and the Insurance Act. An insurance broker acts as an agent of the prospective insured and arranges suitable insurance cover from Indian insurance companies on behalf of his clients.
An insurance broker can operate as a direct broker, a reinsurance broker or a composite broker, but can only carry on insurance broking business. Persons eligible for applying for a licence are:
co-operative societies; or
any other person recognised and approved by the IRDA to act as an insurance broker.
A broking company must satisfy minimum capital requirements of:
INR5 million for direct insurance brokers;
INR20 million for reinsurance brokers; and
INR25 million for composite brokers.
Foreign direct investment in a broking company is limited to 26%. The IRDA usually grants a broking licence for a period of three years.
Telemarketers. Telemarketers are regulated by the:
IRDA Guidelines on Distance Marketing of Insurance Products 2011;
Information Technology Act 2000;
Telecom Regulatory Authority of India Act 1997; and
Telecom Unsolicited Commercial Communications (Amendment) Regulations, 2008.
Entities registered with the Telecom Regulatory Authority of India under Chapter III of the Telecom Commercial Communications Customer Preference Regulations 2010 to carry on the business of sending commercial communications can act as telemarketers.
The following provide insurance-related activities:
Third party administrators (TPAs). TPAs are service providers who act as intermediaries between the insurer and the hospitals in the provision of health insurance benefits to the insured. TPAs:
establish networks with hospitals, general practitioners, diagnostic centres, pharmacies, dental clinics, physiotherapy clinics, and others; and
assist policyholders in healthcare delivery and claims settlement.
TPAs are regulated by the IRDA (Third Party Administrators Health Services) Regulations 2001 (TPA Regulations).
The IRDA can grant a TPA licence to any company registered under the Companies Act. There are strict requirements for a licence, including:
a minimum capital requirement of INR10 million;
maximum foreign investment of 26%;
that the company's sole activity be TPA business.
A licence is usually granted for a period of three years.
Insurance surveyors and loss assessors. Insurance surveyors and loss assessors are technical experts appointed by the insurer to investigate and verify claims and assess loss. Insurance surveyors and loss assessors are regulated by the Insurance Act and the IRDA Insurance Surveyors and Loss Assessors (Licensing, Professional Requirements and Code of Conduct) Regulations 2000 (Insurance Surveyor Regulations). They must be licensed by the IRDA.
Web aggregators. Web aggregators are regulated by the:
IRDA Act; and
Guidelines on Web Aggregators 2011 (Web Aggregator Guidelines).
A company incorporated under the Companies Act with a minimum net worth of INR1 million is eligible to act as a web aggregator. Such a company cannot be a licensed insurance agent, corporate agent, micro insurance agent, TPA, surveyor, loss assessor or an insurance broker. A web aggregator, once approved by the IRDA, is permitted to:
maintain/own a web site displaying information pertaining to insurance products and price comparisons of such products; and
offer leads to insurers/insurance brokers for solicitation of insurance products.
The approval granted by the IRDA to a web aggregator is valid for a period of three years.
Referral companies. Referral companies are regulated by the Insurance Act, the IRDA Act and the IRDA (Sharing of Database for Distribution of Insurance Products) Regulations 2010 (Database Regulations). Entities eligible to operate as a referral company are:
a company incorporated under the Companies Act with a minimum net worth of INR5 million and a minimum turnover of INR10 million during the previous three consecutive years; or
any government organisation/department as approved by the IRDA.
A referral company is permitted to share its customer database with insurers and is specifically prohibited from selling insurance products in India. The approval issued by the IRDA to a referral company is valid for a period of three years.
There are no exceptions to the licensing requirements (see Question 9, Insurance/reinsurance providers). However, the central government can, by notification in the Official Gazette, exempt any insurer that is constituted, incorporated or domiciled in a country outside India from any of the provisions in the Insurance Act, either unconditionally or subject to conditions specified in the notification (section 116, Insurance Act).
There are no exemptions or exclusions from the licensing procedure (see Question 9, Insurance/reinsurance intermediaries).
There are no exemptions or exclusions from the licensing procedure (see Question 9, Other providers of insurance/reinsurance-related activities).
A foreign company, either by itself or through its subsidiary companies or nominees, cannot hold more than 26% of the paid-up equity capital of an Indian insurance company (see Question 9, Insurance/reinsurance providers). In addition, an Indian promoter must also:
Divest itself of any shareholding in the Indian insurance company in excess of 26% of its paid-up capital in a phased manner after ten years from the date of the start of the insurance business (section 6AA, Insurance Act).
Be fit and proper to promote insurance business.
The IRDA must approve the insurer's chief executive officer before his appointment. The share capital of insurance companies, insurance broking companies, TPAs, and surveyors and loss assessors must consist of only ordinary equity shares, rather than preference shares.
The IRDA must pre-approve owners or promoters of a new entity in the insurance sector. In certain cases, the prior approval of the RBI and the Foreign Investment Promotion Board is also required. Prior IRDA approval is also required for any issuance and transfer of shares of an insurer exceeding 1%.
Prior IRDA approval is required for any issue or transfer of shares by an insurance broker (including any renunciation of rights by the existing shareholders) where, after the issuance or transfer, the total paid-up holding of the transferee is likely to exceed:
5% of the insurance broking company's paid-up capital.
2.5% of its paid-up capital, where the transferee is a banking or an investment company.
TPAs require prior approval of the IRDA before registering any transfer of shares, in excess of the above limits (see above, Insurance/reinsurance intermediaries).
Prior IRDA approval is required for:
Issuance and transfer of shares of an insurer exceeding 1% (see Question 12, Insurance/reinsurance providers).
Issuance of any debt security.
Any transaction out of the ordinary course of business.
Where the nominal value of the shares to be transferred by any individual, firm, group, constituents of a group, or body corporate under the same management, jointly or severally exceeds 1% of the paid-up equity capital of the insurer, prior approval of the IRDA is required. Reinsurance arrangements between a life insurer and its promoter or associate/group company also requires prior IRDA approval (see Question 8, Life Insurance Policies).
The following ongoing requirements must be complied with:
Assets, liabilities and solvency margins. Every insurer must, according to specific methods and valuation requirements (IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations 2000 (Solvency Regulations)):
determine the amount of liabilities; and
maintain solvency margins.
Records of these figures must be filed with the IRDA, in the prescribed format provided under the regulations.
Accounts and balance sheet. At the end of every financial year, every insurer must prepare a balance sheet and a profit and loss account concerning insurance business transacted in India (Insurance Act and Solvency Regulations). This must be submitted to the IRDA and disclosed by the insurer as part of public disclosure requirements. The insurer must maintain a separate account of receipts and payments for each class of insurance business and for each sub-class of miscellaneous insurance business. Insurers must also maintain a revenue account for receipts and payments in the prescribed form.
Actuarial report. Every life insurer must, on a yearly basis, instruct an actuary to investigate and report (in the prescribed form) on the financial condition of the life insurer's business, including a valuation of its liabilities.
Submission of returns. Every insurer must submit properly prepared periodic returns to the IRDA within six months from the end of the period to which they refer (IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations 2002).
Register of policies and claims. Every insurer must maintain:
a register or record of policies, with all policy details;
a register or record of claims, with all the relevant details of the claims made.
Copies of policyholder/member reports. Every insurer must provide the IRDA with a certified copy of every report on its affairs which is submitted to the insurer's members or policyholders.
Copy of proceedings of general meetings. Every insurer must provide the IRDA with a certified copy of the minutes of the proceedings of every general meeting, as entered in the insurer's minutes' book, within 30 days from the holding of the meeting to which it relates.
Investments. Every insurer must ensure compliance with the requirements relating to investments that they must maintain or which are prohibited (Insurance Act, IRDA (Investment) Regulations 2000, and relevant circulars and guidelines).
Grievance redressal mechanism. Every insurer must have in place proper and effective mechanisms to address the complaints and grievances of policyholders that are in compliance with the appropriate guidelines (IRDA Guidelines for Grievance Redressal by Insurance Companies 2010 (Grievance Redressal Guidelines) and IRDA (Protection of Policyholders' Interests) Regulations 2002 (Protection of Policyholders Regulations)) (see Questions 27 and 33).
Details of these mechanisms, along with details concerning the insurance ombudsman, must be communicated with the policy document to the policyholder.
Advertisements and disclosure. Every insurer, reinsurer, intermediary or insurance agent must, among others (IRDA (Insurance Advertisements and Disclosure) Regulations 2000):
appoint a compliance officer to oversee the insurer's advertising programme;
maintain a system of control over all advertisements concerning its policies;
maintain an advertising register; and
file a copy of each advertisement with the IRDA.
Every insurer, reinsurer, intermediary or insurance agent must follow recognised standards of professional conduct prescribed by the Advertisement Standards Council of India and discharge its functions in the interest of the policyholders.
Obligations to the rural and social sector. All insurers who begin to carry out insurance business after the start of the IRDA Act must comply with certain requirements until their sixth financial year (IRDA (Obligations of the insurers to the Rural and Social Sectors) Regulations 2002).
Public disclosures. Every insurer must make public disclosures of its risks, including information on (IRDA circular on Public Disclosures by Insurers 2010):
its financial performance;
its company profile;
its financial position;
its risk exposure;
the elements of corporate governance that are in place (see below, Corporate governance guidelines);
The disclosures must be made available for at least five years. Every insurer must publish, in the prescribed format and on a half-yearly basis, its:
profit and loss account;
key analytical ratios;
profit and loss account;
revenue account; and
key analytical ratios.
Corporate governance guidelines. Every insurer must provide a report of its compliance with the corporate governance guidelines to the IRDA, including various requirements concerning (IRDA Corporate Governance Guidelines for Insurance Companies 2009):
the governance structure;
the board of directors;
its delegation of functions;
its senior management;
its significant owners;
its controlling shareholders and any conflicts of interest;
its relationship with stakeholders;
interaction with the IRDA;
its reporting to IRDA; and
its whistleblowing policy.
IRDA Guidelines on Outsourcing of Activities by Insurance Companies 2011 (Outsourcing Guidelines). Every insurer must ensure compliance with the requirements relating to outsourcing of activities and must have in place proper and effective mechanisms regulating the quality of services provided by third party service providers. The outsourcing policy of the insurers must ensure that outsourcing arrangements neither diminish the insurer's ability to fulfil its obligations to policyholders, nor impede effective supervision by regulators.
Insurance agents and corporate agents must comply with the code of conduct in the Corporate Agents Regulations and maintain a register with all the relevant details of its directors, partners, officers or other employees.
Insurance brokers must comply with the code of conduct in the Brokers Regulations, including requirements concerning:
The maximum amount of business from a single client.
The segregation of insurance money from other funds.
Professional indemnity insurances.
The maintenance of books of accounts and records.
TPAs must comply with the code of conduct in the TPA Regulations and, among others, maintain records and keep confidentiality.
Insurance surveyors and loss assessors must comply with the Insurance Surveyor Regulations which, among others, set out their duties and responsibilities, provide their code of conduct and require them to submit returns to the IRDA.
There are specific consequences for non-compliance with statutory and regulatory requirements, including (Insurance Act and Solvency Regulations):
Imposing fines and penalties.
Issuing directions to remedy default or non-compliance.
The party in breach paying a fine in respect of profits made or losses caused.
Suspension or cancellation of the certificate of registration.
The IRDA can also direct that an insurance company be wound-up when that company either:
Fails to comply with the prescribed requirements or breaches the provisions of the Insurance Act.
Continues in its breach for three months after receiving notice from the IRDA.
Any person who carries on insurance business without being validly registered is liable to a penalty not exceeding INR500,000 for each incident and is also punishable with imprisonment of up to three years. Further, the IRDA can instruct any unregistered entity to stop:
Issuing, marketing or selling insurance policies.
Collecting money towards insurance premiums.
Carrying on any activity related to and connected with the insurance business in India.
Where an insurance agent, corporate agent or insurance broker breaches or does not comply with a legal or regulatory requirement, the IRDA can take measures, including:
Imposing a fine.
Issuing directions to remedy the breach or non-compliance.
Suspending or cancelling the licence.
In relation to non-licensed activity, see above, Insurance/reinsurance providers.
Where a TPA, insurance surveyor or loss assessor breaches or does not comply with a legal or regulatory requirement, the IRDA can take similar measures as for insurance agents, corporate agents or insurance brokers (see above, Insurance/reinsurance intermediaries).
In relation to non-licensed activity, see above, Insurance/reinsurance providers.
There are no restrictions on the sale of insurance policies to Indian residents, subject to compliance with applicable IRDA regulations.
The IRDA and the RBI regulate the sale of insurance policies to persons of Indian nationality that are resident outside India, depending on the type of insurance:
Life insurance. Indian insurers can issue life insurance policies in foreign currency to resident persons of Indian nationality or origin who have returned to India after residing outside India (RBI Foreign Exchange Management (Insurance) Regulations 2000 - Life Insurance Memorandum (LIM)). However, the premium for those insurance policies must be paid out of remittances from:
foreign currency funds held by those persons abroad;
resident foreign currency accounts held by those persons with authorised dealers in India.
Insurers can issue life insurance policies denominated in foreign currency or rupees to foreign nationals not permanently resident in India only if the premium is paid out of:
foreign currency funds;
the foreign nationals' income earned in India; or
repatriable superannuation or pension funds in India.
General insurance. General insurance is classified into marine insurance, non-marine insurance and reinsurance (RBI Memorandum of Exchange Control Regulations relating to General Insurance in India 2002 (GIM)). All non-marine risks concerning assets outside India owned by Indian residents can be covered, as long as the immovable property held outside India by Indian nationals was held with permission of the RBI (where it was necessary).
There is no implied duty or right in a reinsurance contract for the cedant to consult with or obtain the reinsurer's consent before the cedant settles a claim by the insured.
The reinsurance contract governs the monitoring of claims, settlements and underwriting of the cedant company. It commonly includes claims control and claims co-operation clauses. The reinsurance contract can also contain a follow the settlements clause requiring the reinsurer to follow any settlement reached by the insurer with the insured. Reinsurance operates with limited documentation and it is common for the reinsurance contract to give the reinsurer access rights to the cedant's settlement records to check the settlement terms.
As a reinsurance policy is also a contract of insurance, it is governed by the same doctrines, such as insurable interest, subrogation, and indemnity. In particular, the parties to the reinsurance contract must observe utmost good faith (uberrimae fides) at all times (see Question 20, Utmost good faith). This means that the:
Cedant has a duty to disclose material facts to the reinsurers.
Reinsured must inform the reinsurer of all the facts within its knowledge which are material to the risk.
If there is any non-disclosure or concealment, the contract is void.
The reinsurance contract may include additional disclosure or notification obligations of the cedant company towards the reinsurance company.
The policy of insurance is subject to its policy terms, conditions and exceptions. The IRDA should approve standard policy forms issued in the case of life insurance in relation to their rates and other contractual terms. The Tariff Advisory Committee (TAC), a statutory body established under section 64U of the Insurance Act, regulates the policy wordings and other terms of policies of general insurance relating to fire, marine (hull), motor, engineering, all industrial risks and workmen compensation.
The general form and content requirements for insurance policies depend on the insurance company as well as the type of insurance taken. Commonly, however, it has four sections:
The proposal form. This forms the basis on which the insurer issues the policy. The proposal form provides the details of the:
risk sought to be covered; and
all material information pertaining to the risk.
The schedule. This specifies particulars such as the:
name of the insurer;
reference number of the policy;
duration of the policy;
amount of the premium; and
Terms and conditions. This section contains the contract between the parties, setting out matters such matters as, for example:
the insuring clause (see below, Commonly found clauses);
risks covered by the policy;
the applicable exclusions;
details pertaining to the liability of the insurers; and
The most commonly found clauses in an insurance policy are as follows:
Insuring clause. This clause establishes the scope of the insurer's indemnity and specifies the:
extent of cover;
period of cover; and
Conditions precedent to the validity of the policy. These conditions relate to matters which precede the formation of the contract and which are essential for its validity, such as that the:
statements made in the proposal must be true and complete;
subject matter of insurance must be:
adequately described; and
in existence when the policy comes into force.
If those conditions are not fulfilled, the policy is void or voidable from its inception.
Conditions subsequent to the validity of the policy. These conditions relate to matters which are considered essential by the parties for the policy's continued validity, such as that the insured must not:
transfer its interest in the subject matter of insurance without the insurer's consent;
alter the risk as originally described.
If such a condition is breached, the policy ceases to be valid and the insurer can avoid the policy with effect from the date of breach.
Conditions precedent to the liability of the insurer. These are conditions which the insured must observe when the loss occurs, or the insurer will not be liable for the claim, even though the policy otherwise covers the loss. They include conditions such as that the insured must:
give notice of loss to the insurer immediately on its occurrence;
forward to the insurer every notice, claim or writ received by the insured; and
render all assistance to the insurer in the investigation of the cause of loss.
Exclusions. Insurers undertake to indemnify the insured against losses caused by certain perils arising under normal conditions, whose effects are statistically estimated. Exceptions are inserted for the purpose of excluding the liability of the insurer for perils which can cause losses of great magnitude, for instance, fire caused during riots, war, or earthquakes.
Warranties. A warranty under the policy is a condition specified in the contract which, if breached, renders the contract void. A warranty must be strictly and literally complied with.
Finally, there are specific clauses which must be included in a life insurance and general insurance policy (Protection of Policyholders Regulations). For example, unit-linked life insurance policies must mandatorily contain details and objectives of the various funds, the investment strategy, the definition of all applicable charges, the method of appropriation of these charges, and the fundamental risk profiles of different types of investments that are offered under the funds.
Both facultative and treaty insurance are common in India.
Facultative reinsurance is usually sought for large risks, liability business and other non-conventional kind of business where local capacity is insufficient. It can be in the form of either:
Pro rata or proportional reinsurance. This provides a specified proportional division of premiums and losses between the cedant and the reinsurer.
Excess of loss reinsurance. The reinsurer responds to a loss only when the loss exceeds a specific amount.
Treaty insurance between the ceding primary insurer and the reinsurer are through written and agreed treaties. The general conditions for reinsurance policies are fairly uniform for all treaties, but special conditions depend on the needs of the contracting parties and the type of underlying insurance:
Quota share (proportional) treaty arrangements. These are not generally found in India, except for the obligatory 10% cession to the General Insurance Corporation (see Question 8, General insurance and health insurance policies).
Surplus and excess of loss treaties. These are commonly found in India.
Commonly found clauses in reinsurance contracts include the following:
Follow the settlement.
Follow the fortunes.
Cut-through (see Question 26).
See Question 16.
The duty of utmost good faith is the fundamental basis of all contracts of insurance. It places a positive duty on the insured to voluntarily disclose, accurately and fully, all facts material to the risk being proposed, whether this is requested or not (see Question 17). A material fact is one which would influence the judgment of an insurer in deciding whether to underwrite the risk. The duty of disclosure of material facts is not confined to only those facts which are in the knowledge of the insured. It also covers facts which the insured ought to have known as a prudent man, irrespective of whether the insured thinks those facts to be material or not.
Subrogation is also implied into insurance contracts. It is based on common law principles, and set out in section 79 of the Marine Insurance Act 1963. Subrogation can be defined as the transfer of all the rights and remedies of the insured against a third party to the insurer, when that insurer has indemnified the insured in respect of a loss. It occurs automatically and does not depend on a formal transfer of rights. An insurer exercising a right of subrogation against the third party must do so in the name of the insured and can only recover up to the extent it has indemnified the insured.
The TAC continues to regulate the wording for fire, engineering and motor risks. The standard wordings for such insurance policies are available on the Insurance Information Bureau's website www.iib.gov.in and all insurers must strictly follow this wording.
Insurance policies usually contain a detailed grievance redressal mechanism, which the policyholder can resort to in the case of any dispute (see Question 27). Insurers must also provide information about the insurance ombudsman, who is appointed by the IRDA to resolve all complaints relating to settlement of claims on part of the insurance companies in a cost-effective and efficient manner (see Question 33). Any person who has a grievance against an insurer and is not satisfied with the insurer's response can make a complaint to the ombudsman appointed in his jurisdiction (the ombudsman's jurisdiction can include two or more states).
The Indian trade associations do not provide standard policies or terms.
The IRDA requires insurers to clearly specify the cover provided in the insurance contract, along with the procedure the insured must follow in the event of the occurrence of an insured event. An insured must give full particulars necessary to sufficiently prove the occurrence of loss, so that an insurer can:
Verify the claim.
Assess the loss.
Ascertain whether the insured has complied with the policy conditions.
The phrase full particulars has often been held to mean the best particulars that the insured can reasonably give. Whether particulars are sufficient depends on the circumstances of the case, although reasonably satisfactory proof will usually be sufficient. Most insurers specify that particulars for proof of loss must be delivered in a certain way or within a certain time before the insured can make a claim.
Third parties can claim under an insurance policy in certain circumstances.
Policies can be assigned to third parties. Assignment can be made with or without consideration and must be made either by:
Endorsement on the policy itself.
A separate instrument signed by the transferor or his agent and attested by at least one witness, specifically setting out the fact of assignment.
Assignment will only be valid when notice has been given to the insurer and the endorsement or instrument (or its certified true copy) has been delivered to the insurer.
A policyholder can nominate a third party, before the date the policy matures, to receive the money secured under a life insurance policy in the event of the policyholder's death. This nomination can be made by an endorsement on the policy, if not already incorporated in the policy itself, and must be communicated to the insurer and registered in his records.
Motorists must carry motor insurance policies; under those compulsory policies, a third party can make a direct claim against the insured for personal injury or for property damage. The claim is not made under the policy, but the insurer can pay the claim proceeds directly to the third party.
The insurance policy generally prescribes the time period under which the policyholder, nominee or assignee must:
Inform the insurer by serving a notice of loss.
Submit the claim application to the insurer.
It is a strict contractual requirement that the insurer must be given notice of loss under the policy, both on discovery of any event likely to give rise to a claim or when the loss actually occurs. The notice must be in writing and within the time stipulated in the policy. The time period usually runs from the event, such as the loss, or occurrence. If the claimant does not make his claim within the prescribed time period, the claimant is barred from making any claim, although a relaxation may be provided by the insurer for genuine claims.
Where no time period is prescribed, the Limitation Act 1963 prescribes a period of three years for contracts of insurance, after which the insured is prohibited from submitting any claims with the insurer.
In the case of a reinsurance policy, the time period for submitting claims is agreed between the parties and included in the reinsurance contract.
A third party or original policyholder can enforce the reinsurance contract only if the reinsurance contract contains a cut-through clause, which is triggered in the event of the cedant's insolvency (see Question 19, Commonly found clauses).
An insurer's breach of an insurance policy is considered to be a grievance. Every insurer must have a system and procedure for receiving, registering and disposing of grievances in each of its offices (Grievance Redressal Guidelines). The Grievance Redressal Guidelines prescribe:
The procedure and manner in which the insurer must address any grievance received.
The time frame within which the insurer must respond.
When a complaint can be deemed to be closed.
If policyholders do not receive a response from the insurer or are dissatisfied with the response, they can:
Approach the Grievance Cell of the IRDA.
Apply to the insurance ombudsman based in their jurisdiction (see Question 33).
File a complaint against the insurer under the Consumer Protection Act 1986 alleging deficient service.
Seek an appropriate remedy through the Indian courts or apply for arbitration (depending on the insurance contract's dispute resolution clause).
If the insured has committed a breach, then depending on whether the insured has breached a condition, condition precedent or warranty, the insurer can:
Claim for damages.
Repudiate the claim.
Avoid the policy entirely.
Punitive damages are not insurable in India.
Insurance companies are subject to the general regime applicable to companies, which prescribe the following modes of winding-up (Companies Act):
Winding-up by the court.
Winding-up subject to the court's supervision.
A distressed or insolvent insurance or reinsurance company or any entity providing insurance related services can be ordered to be wound-up in accordance with the provisions of the Companies Act.
Sections 53 to 58 of the Insurance Act also deal with the winding-up of an insurance company. Section 53 prescribes the manner in which the court can order a winding-up of an insurance company and also specifies the grounds on which the court can pass such an order. Section 54 of the Insurance Act prohibits an insurance company from entering into a voluntary winding-up, except for the purpose of effecting an amalgamation or reconstruction on the ground that it cannot continue its business because of its liabilities.
There is no law or judicial precedent governing this question and this matter is governed by the terms of the insurance contract.
The Insurance Act is silent on the right to set-off mutual debts and credits in an insolvency proceeding. As per the general rules of insolvency, a set-off is permitted where the cross-claims are mutual, commensurable, legally recoverable and between the parties occupying the same character. An insurer or reinsurer can set off mutual debts and credits provided the criteria above are satisfied.
Special rules provide for the calculation of taxable income for insurance companies engaged in the business of life insurance and non-insurance business (sections 44 and 115 B read with First Schedule, Income Tax Act 1961).
Service tax (an indirect tax levied on transaction of certain services as specified by central government under the Finance Act 1994) is payable on general insurance business, life insurance business and insurance auxiliary services.
General insurance and life insurance. Any service provided or to be provided to a policyholder or any person, by an insurer (including a reinsurer in relation to general insurance business or life insurance business) is considered to be a taxable service (Finance Act 1994). Service tax rates are at 10% of the value of the service plus education cess (that is, a surcharge levied by the government of India to promote basic education in India) at 2% of the service tax payable and secondary and higher education cess at 1% of the service tax payable.
Insurance auxiliary services. Insurance auxiliary services provided by an actuary, an intermediary or insurance intermediary (other than an insurance agent) in relation to general insurance business or life insurance business which includes risk assessment, claim settlement, survey and loss assessment are also considered as a taxable service under the Finance Act 1994. For insurance agents, the insurer who has appointed the agent is liable to pay service tax (Service Tax Rules 1994). Insurance auxiliary service providers are required to pay service tax at the central government rates above.
The grievance procedure mentioned in Question 27 can be used. One special procedure concerns the insurance ombudsman, who can receive and consider claims from any person who has a grievance against an insurer. The position of insurance ombudsman was created in 1998. It has two functions:
An insurance ombudsman can receive and consider complaints from any person who has a grievance against an insurer, such as:
An insurance company's partial or total repudiation of claims.
A dispute concerning premium that is paid or payable on the policy.
A dispute on the legal construction of policy wordings where that dispute relates to claims.
Delay in the settlement of claims.
Failure to issue an insurance document to a customer after receipt of premium.
The ombudsman's powers are restricted to insurance contracts whose value does not exceed INR2 million. The insurance companies must honour the awards passed by an insurance ombudsman within three months.
Arbitration is a preferred dispute resolution method used to settle reinsurance claims. The reinsurance contract generally includes an arbitration clause, under which any party to the reinsurance contract can, in the event of a dispute:
Invoke the arbitration clause.
Appoint arbitrators to the arbitration panel in accordance with the agreed law.
In India, the arbitration proceedings are governed by the Arbitration and Conciliation Act 1996. However, for international commercial arbitrations, other international arbitration procedures are also commonly adopted, such as the:
Singapore International Arbitration Centre (SIAC) Arbitration Rules.
In addition, the London Court of International Arbitration (LCIA) has issued a set of LCIA India Arbitration Rules.
Finally, the parties to a reinsurance contract have the right to approach the courts in India to resolve the disputes related to reinsurance claims, particularly to obtain interim relief.
Where both parties are Indian, an agreement to absolutely oust the jurisdiction of Indian courts shall be unlawful and void being against public policy (TDM Infrastructure Private Limited v. UE Development India Private Limited, 2008 (8) SCALE 576.). Where one party is Indian, the choice of forum, venue and applicable law shall be governed by the terms of the contract.
However, an Indian party shall always have the right, notwithstanding anything to the contrary contained in the policy or in any agreement relating thereto, to receive payment in India of any sum secured thereby and to sue for any relief in respect of the policy in any court of competent jurisdiction in India. If a suit is brought in India on any question of law arising in connection with any such policy, the same shall be determined according to the law in force in India. This principle is inapplicable to marine insurance (section 46, Insurance Act).
The Insurance Laws (Amendment) Bill 2008 (Insurance Bill) is pending with the Parliament of India. This bill purports to amend three Acts:
The Insurance Act.
The IRDA Act.
The General Insurance Business (Nationalization) Act 1972.
The Insurance Bill proposes the following key reforms:
New definitions in the Insurance Act, including:
health insurance business, to be defined as a contract that provides for sickness benefits and medical expenses on the basis of an indemnity, reimbursement, service or prepaid plan;
actuary to be redefined to bring it in line with the definition in the Actuaries Act 2006.
An increase of the maximum permissible foreign direct investment in insurance companies from 26% to 49%.
Amendment of provisions related to the capital structure, voting rights and maintenance of registers of beneficial owners of shares of public limited companies included in the Insurance Act.
Enabling the entry of Lloyd's of London in the insurance business in India as a:
foreign company in a joint venture with Indian partners;
branch of a foreign reinsurer.
Increasing penalties for offences such as:
carrying on insurance business without registration;
not complying with obligations concerning the rural and social sector and third party insurance of motor vehicles.
The enactment of the Insurance Bill will provide the Indian insurance sector with a favourable environment for sustainable growth.
The IRDA has also taken various initiatives to regulate and promote the insurance sector in India. The IRDA has issued the Exposure Draft on IRDA (Licensing of Bancaassurance Agents) Regulations 2011 (Bancassurance Regulations). These regulations propose that:
An institution licensed to accept deposits from the public under the Banking Regulation Act 1949, including non-banking finance companies, shall be eligible to act as a bancassurance agent.
A bancassurance agent can act for such number of life, non-life, health and specialised insurers as permitted for each zone.
A bancassurance agent shall not tie up with more than one life, one non-life and one standalone health insurance company in any of the states, in addition to one specialised insurer.
No insurer other than a specialised insurer shall tie up with any bancassurance agent in more than nine states/union territories in zone A and six states/union territories in zone B.
The licence shall be valid for a period of three years.
Main activities. The LIC is a statutory body constituted under the Insurance Act, which connects various stakeholders of the life insurance sector and assists the sector in developing and co-ordinating discussions between the government, IRDA and the public. The LIC functions through several sub-committees and includes all life insurance companies in India as members.
Main activities. The GIC is a statutory body constituted under the Insurance Act, which represents the collective interests of non-life insurance companies in India and:
Speaks out on issues of common interest.
Helps to inform and participate in discussions related to policy formation.
Acts as an advocate for high standards of customer service in the insurance industry.
Main activities. All licensed insurance brokers must be members of the IBAI (Insurance Broker Regulations). Its main functions are to:
Promote interaction among the insurance/reinsurance broker members.
Encourage, promote, facilitate and protect the interests of the IBAI's members.
Provide an avenue to members for further education, training and research in all fields of insurance and reinsurance.
Represent the interests of insurance brokers with other organisations.
T +91 11 4159 0700
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Qualified. India, 2000
Areas of practice. Insurance; general corporate.
T +91 11 2692 0500
F +91 11 2692 4900
Qualified. India, 1980
Areas of practice. Insurance; corporate law: takeover offers, privatisation and disinvestment; M&A; joint ventures; infrastructure; projects and project finance; banking and finance; capital markets and commercial law; corporate governance.