BLOG- Insurance Regulatory Development Authority (IRDA)

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Introduction

The Insurance Regulatory and Development Authority of India (IRDAI) is an autonomous, statutory agency tasked with regulating and promoting the insurance and re-insurance industries in India. It was constituted by the Insurance Regulatory and Development Authority Act, 1999, an act of Parliament passed by the government of India. The agency’s headquarters are in Hyderabad, Telangana, where it moved from Delhi in 2001.

The IRDAI attempted to raise the foreign direct investment (FDI) limit in the insurance sector to 49 percent from its current 26 percent. The FDI limit in the sector was raised to 49 percent in June 2016.

Insurance in India

In India insurance was mentioned in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra), which examined the pooling of resources for redistribution after fire, floods, epidemics and famine. The life-insurance business began in 1818 with the establishment of the Oriental Life Insurance Company in Calcutta; the company failed in 1834. In 1829, Madras Equitable began conducting life-insurance business in the Madras Presidency. The British Insurance Act was enacted in 1870, and Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were founded in the Bombay Presidency. The era was dominated by British companies.

In 1914, the government of India began publishing insurance-company returns. The Indian Life Assurance Companies Act, 1912 was the first statute regulating life insurance. In 1928 the Indian Insurance Companies Act was enacted to enable the government to collect statistical information about life- and non-life-insurance business conducted in India by Indian and foreign insurers, including Provident insurance societies. In 1938 the legislation was consolidated and amended by the Insurance Act, 1938, with comprehensive provisions to control the activities of insurers.

The Insurance Amendment Act of 1950 abolished principal agencies, but the level of competition was high and there were allegations of unfair trade practices. The Government of India decided to nationalize the insurance industry.

An ordinance was issued on 19 January 1956, nationalizing the life-insurance sector, and the Life Insurance Corporation was established that year. The LIC absorbed 154 Indian and 16 non-Indian insurers and 75 provident societies. The LIC had a monopoly until the late 1990s when the insurance industry was reopened to the private sector.

General insurance in India began during the Industrial Revolution in the West and the growth of seafaring commerce during the 17th century. It arrived as a legacy of British occupation, with its roots in the 1850 establishment of the Triton Insurance Company in Calcutta. In 1907 the Indian Mercantile Insurance was established, the first company to underwrite all classes of general insurance. In 1957 the General Insurance Council (a wing of the Insurance Association of India) was formed, framing a code of conduct for fairness and sound business practice.

Eleven years later, the Insurance Act was amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee was established. In 1972, with the passage of the General Insurance Business (Nationalisation) Act, the insurance industry was nationalized on 1 January 1973. One hundred seven insurers were amalgamated and grouped into four companies: National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company. The General Insurance Corporation of India was incorporated in 1971, effective on 1 January 1973.

The re-opening of the insurance sector began during the early 1990s. In 1993, the government set up a committee chaired by former Reserve Bank of India governor R. N. Malhotra to propose recommendations for insurance reform complementing those initiated in the financial sector. The committee submitted its report in 1994, recommending that the private sector be permitted to enter the insurance industry. Foreign companies should enter by floating Indian companies, preferably as joint ventures with Indian partners.

Following the recommendations of the Malhotra Committee, in 1999 the Insurance Regulatory and Development Authority (IRDA) was constituted to regulate and develop the insurance industry and was incorporated in April 2000. Objectives of the IRDA include promoting competition to enhance customer satisfaction with increased consumer choice and lower premiums while ensuring the financial security of the insurance market.

The IRDA opened up the market in August 2000 with an invitation for registration applications; foreign companies were allowed ownership up to 26 percent. The authority, with the power to frame regulations under Section 114A of the Insurance Act, 1938, has framed regulations ranging from company registrations to the protection of policyholder interests since 2000.

In December 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and the GIC was converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from the GIC in July 2002. There are 28 general insurance companies, including the Export Credit Guarantee Corporation of India and the Agriculture Insurance Corporation of India, and 24 life-insurance companies operating in the country. With banking services, insurance services add about seven percent to India’s GDP. CURRENT SITUATION The IRDA attended to raise foreign direct investment limit in the insurance sector to 49% from 26%. it is a 10 member body including the chairman, 5 full time and 4 part time members appointed by the government of India.

Structure

As per the section 4 of IRDAI Act’ 1999, Insurance Regulatory and Development Authority of India (IRDAI, which was constituted by an act of parliament) specify the composition of Authority.

The Authority is a ten member team consisting of
(a)    a Chairman;
(b)    five whole-time members;
(c)    four part-time members,
(all appointed by the Government of India)

In September 2016, the authority was chaired by T. S. Vijayan and its full-time members were P. J. Joseph, Nilesh Sathe, V. R. Iyer, Pournima Gupte and D. D. Singh.

Functions

Section 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.

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

  • issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration;
  •  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 value of policy and other terms and conditions of contracts of insurance;
  • specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents
  • specifying the code of conduct for surveyors and loss assessors;
  • promoting efficiency in the conduct of insurance business;
  • promoting and regulating professional organizations connected with the insurance and reinsurance business;
  • levying fees and other charges for carrying out the purposes of this Act;
  • calling for information from, undertaking inspection of, conducting inquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business;
  • control and regulation of the rates, advantages, terms and conditions that may be offered by 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);
  •  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;
  • regulating investment of funds by insurance companies;
  •  regulating maintenance of margin of solvency;
  • adjudication of disputes between insurers and intermediaries or insurance intermediaries;
  •  supervising the functioning of the Tariff Advisory Committee;
  • specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause (f);
  •  specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and
  • exercising such other powers as may be prescribed.

Insurance repository

The Finance Minister of India announced an insurance repository system, helping policyholders buy and maintain insurance policies in electronic form rather than on paper. Insurance repositories, like share depositories or mutual fund transfer agencies, will hold electronic records of insurance policies issued to individuals as electronic or e-policies.

MISSION STATEMENT OF THE AUTHORITY

1.       To protect the interest of and secure fair treatment to policyholders;
2.      To bring about speedy and orderly growth of the insurance industry (including annuity and superannuation payments), for the benefit of the common man, and to provide long term funds for accelerating growth of the economy;
3.      To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates;
4.      To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery;
5.      To promote fairness, transparency and orderly conduct in financial markets dealing with insurance and build a reliable management information system to enforce high standards of financial soundness amongst market players;
6.      To take action where such standards are inadequate or ineffectively enforced;
7.      To bring about optimum amount of self-regulation in the day-to-day working of the industry consistent with the requirements of the prudential regulation.

Insurance Regulatory Development Authority Act, 1999: Salient features

The Insurance Regulatory Development Authority Act, 1999 marked the end of government monopoly in the insurance business. The IRDA Act received the assent of the President of India on 29 December 1999. The IRDA Act has ramifications on The Insurance Act (1938), The Life Insurance Corporation Act (1956) and The General Insurance Business (Nationalization) Act (1972).

The following are salient features of the IRDA Act (1999):

  • The insurance sector in India has been thrown open to the private sector. The second and third schedules of the Act provide for removal of existing corporations (or companies) to carry out the business of life and general (non-life) insurance in India.
  • An Indian insurance company is a company registered under the Companies Act, 1956, in which foreign equity does not exceed 26 per cent of the total equity shareholding, including the equity shareholding of NRIs, FIIs, and OCBs.
  • After commencement of an insurance company, the Indian promoters can hold more than 26 per cent of the total equity holding for a period of ten years, the balance shares being held by non-promoter Indian shareholders which will not include the equity of the foreign promoters, and the shareholding of NRIs, FIIs, and OCBs.
  • After the permissible period of ten years, excess equity above the prescribed level of 26 per cent will be disinvested as per a phased programme to be indicated by IRDA. The Central Government is empowered to extend the period of ten years in individual cases and also to provide for a higher ceiling on share holding of Indian promoters in excess of which disinvestment will be required.
  • On foreign promoters, the maximum of 26 per cent will always be operational. They will thus be unable to hold any equity beyond this ceiling at any stage.
  • The Act gives statutory status to the Interim Insurance Regulatory Authority (IRA) set up by the Central Government through a Resolution passed in January 1996.
  • All the powers presently exercised under the Insurance Act, 1938, by the Controller of Insurance (COI) will be transferred to the IRDA.
  • The IRDA Act also provides for the appointment of CoI by the Central Government when the Regulatory Authority is superseded.
  • The minimum amount of paid-up equity capital is Rs.100 crore in case of life insurance as well as general insurance, and Rs.200 crore in the case of reinsurance.
  • Solvency margin (excess of assets over liabilities) is fixed at not less than Rs.50 crore for life as well as general insurance; for reinsurance solvency margin is stipulated at not less than Rs.100 crore in each case. Insurance companies will deposit Rs.10 crore as security deposit before starting their business.
  • Safeguards for policy holders’ funds include a specific provision prohibiting investment of policy holders’ funds outside India and provision for the investment of funds in accordance with policy directions of IRDA, including social and infrastructure investments.
  • Every insurer shall provide life insurance or general insurance policies (including insurance for crops) to the persons residing in the rural sector, workers in the unorganized or informal sector or for economically vulnerable or backward classes of the society and other categories of persons as may be specified by regulations made by IRDA.
  • Failure to fulfill the social obligations would attract a fine of Rs.25 lakh; in case the obligations are still not fulfilled, the license would be canceled.

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