Basic structure of insurance laws to be altered with proposed amendments: Experts

Chennai, Dec 1: The proposed amendments to the Insurance Act 1938 and the Insurance Regulatory and Development Authority Act 1999 alters the basic structure of the insurance laws that was derived from the Malhotra Committee on Insurance Reforms, said experts.

Further the proposals bestow the sectoral regulator a huge power taken away from Parliament, experts added.

Scrapping of the statutory Rs 100 crore startup capital for life and general insurance business and Rs 200 crore for reinsurance business, allowing different kinds of insurers including captives, changing the investment provisions are some of the major amendments proposed by the Indian government to the insurance laws.

The government also proposes to allow an insurer distribute other financial products as specified by and subject to regulations and to services related or incidental to insurance business and

“God save the industry and the government,” was the cryptic comment of a former official of the Insurance Regulatory and Development Authority of India (IRDAI) to IANS.

Allowing regional insurance companies, reducing minimum startup capital, changing investment norms and other measures may result in mushrooming of small insures and the return of pre-1956 period, N. Rangachary, the first Chairman of IRDAI had recently told IANS.

Prior to 1956, there were several hundreds of small life insurers who were issuing policies in a restricted manner and sold in an unrealistic manner, while claims were not paid.

Incidentally the proposed amendments to the insurance laws seems to do precisely the same.

“Insurance companies cannot be compared with banks that have small finance banks, regional rural banks. The banks deal with assets while insurers deal with risks. The relationship between a banker and its depositors is short/medium term. A depositor can withdraw his money from a bank anytime,” Rangachary had said.

“On the other hand, a life insurance policyholder cannot get back his full money when he surrenders the policy. The relationship between a life insurance policyholder and a life insurer is long term, upwards of 15 years.”

Again, in the case of a bank failure, the depositors have some deposit insurance whereas there is no such guarantee for a policyholder of a life/general insurer. Hence, a life insurer should be structured in a failproof manner, he had remarked.

“On a cursory look at the suggested amendments, it is clear that the government is intending to amend the statutory framework for insurance industry very extensively by weeding out provisions that have outlived their utility and usher in changed legal framework to the changed circumstances,” D. Varadarajan, a Supreme Court advocate specialising in company/competition/insurance laws, told IANS.

“Nevertheless, in its endeavour, the IRDAI would be invested with more powers, some of which border on excessive delegation, if the proposals contained in the Bill graduate into an Act of Parliament,” Varadarajan added.

The Department of Financial Services has put out the proposed amendments to the Insurance Act 1938 and the Insurance Regulatory and Development Authority Act 1999 and has called for comments/ suggestions.

As per the proposals, the government is scrapping the provision of the Insurance Act that stipulates the minimum capital of Rs 100 crore for life, general, health insurance companies and Rs 200 crore for reinsurers.

In the place of statutory provision, the government proposes to vest the sectoral regulator IRDAI the power to prescribe the minimum capital required considering the size and scale of operations, class or subclass of insurance business and the category or type of insurer.

The government has also proposed to reduce the amount of net owned funds required for an insurer to be registered to Rs 500 crore from Rs 5,000 crore.

It is also proposed to put a cap on holding by foreign entities at 26 per cent in an insurance co-operative and not more than 74 per cent in an Indian insurance company, subject to such conditions as may be prescribed.

The nature of amendments vary from overhauling existing provisions and enactment of new provisions, including new definitions to give effect to the proposed changes, Varadarajan said.

According to him, the proposed Bill seeks to introduce new definitions of terms, such as, ‘captive insurer’, ‘class of insurance business’, redefinition of ‘health insurance business’, ‘insurance business’, ‘Indian insurance company’, ‘insurance cooperative society’, ‘intermediary or insurance intermediary’, ‘personal accident insurance business’, ‘premium’, ‘Principal officer’ , ‘sub-class of a class of insurance business’, ‘surveyor and loss assessor’, ‘travel insurance business’ and others.

The Bill seeks to prohibit transaction of insurance business by certain persons.

The provisions in regard to registration of insurers, class or sub-class of insurance business, and IRDAI is proposed to be invested with more powers in this regard, including cancellation of registration.

The government has also proposed to allow general insurers transacting specialised lines of business like motor/travel and others.

The government has also proposed to stipulate the minimum amount of motor third party insurance policies to be underwritten by standalone motor insurance companies that may be set up.

The question that pops up is whether the government would scrap the administered pricing regime for motor third party premium when motor insurance companies are allowed.

According to Varadarajan, drastic amendments are suggested in regard to investments by insurers by amending and deleting some of the existing provisions.

The IRDAI is also would be given extended power to give directions, including in regard to insurance intermediaries.

The provisions relating to insurance agents are also in for amendments, including stiff penalty for agents and insurance companies in cases of omissions and commissions by the agents.

Curiously, the insurers are also sought to be penalised for the violation of code of conduct by the agents, Varadarajan said.

“The composition of both the General Insurance Council and Life Insurance Council is sought to be amended, inter alia, providing for a Central Government nominee on the Councils, which would not gel with the professed self-regulatory mechanism as originally conceived when these Councils were created under the earlier legal dispensation,” Varadarajan remarked.

The proposed amendments to the Insurance Regulatory and Development Authority Act 1999 mostly consequential in nature keeping view of the proposed amendments to the Insurance Act.

Varadarajan said one significant amendment is a proposal to increase the retirement age of IRDAI Members to 65 years, on par with the Chairman.

The scope of delegation of powers of the Authority is also sought to be broad-based by including Members and officers of the Authority as delegates. However, the power to make regulations and registration of insurers are confined to the Authority only, and, as such these two powers are not to be delegated, Varadarajan added.