banner image

Opt In (Do Not Edit Here)

banner image

Important Provisions Of Insurance Act 1938

Important Provisions Of Insurance Act 1938

Incorporation of insurance companies, issue of licence and renewal of licence (Sections 2C to 5)

Only Companies formed and registered under the Companies Act, 1956, whereunder the foreign equity is not more than 26%, are allowed (IRDA allows only Public limited companies). Every insurer who proposes to do insurance business has to register with IRDA and obtain a licence before they start doing insurance business. Three lines of businesses recognised within insurance – Life insurance, Non-life insurance and Standalone Health insurance. Life insurance companies provide insurance coverage on human lives – i.e. provision of a defined sum on the happening of any contingency linked to human life.

[Post Image Courtesy of Stuart Miles at]

Non-life insurance companies are also allowed provide insurance coverage on all contingencies other than the ones linked to human life, including health insurance. Standalone Health insurance companies focus only on providing hospitalisation and sickness coverage. In addition, re-insurance is also recognized as a separate line of business. Insurance companies are allowed to pass on the risk which they assume to other insurers, called re-insurers. Currently only one Reinsurer GIC is licensed in India as the National Reinsurer. Separate companies will have to be formed for doing Life, Non-Life and Standalone Health insurance business. Such companies cannot transact any business other than the insurance business for which the licence is issued.

All companies formed for the purpose of doing insurance business shall carry the suffix “Assurance” or “Insurance” in their names to enable anyone to recognise that they are engaged in insurance business. A Public company is first incorporated under the Companies Act, 1956, with the primary object of engaging in the business of life or non-life or standalone health insurance business. Applicants for insurance licence will have to submit, among other things, certified true copy of memorandum and articles of association, list of directors, certain affidavits and undertakings from Promoters and the fees required for registration. IRDA conducts due diligence on the Promoters, their background before they issue a licence. Reference is made to the Regulatory of the country in which the foreign promoter operates, as most foreign promoters of insurance companies are established players in other jurisdictions outside India.

IRDA is vested with powers under the Act to cancel the registration of insurers on certain grounds such as default in complying with the provisions of the Act or Regulations passed thereunder, carrying on business other than insurance business etc.

Licence is issued for a financial year and is renewable on an yearly basis on payment of the required fees. The fee for renewal is 0.25% of the premium income generated by the insurance company in the preceding financial year, subject to an overall cap of `5 Crores.

Requirements as to Capital, Transfer of shares, Voting Rights etc.(Sections 6, 6A to 6C)

Every insurer carrying on insurance business shall have a minimum paid up equity capital of `100 Crores for life insurance and general insurance business and `200 crores for an insurer carrying on reinsurance business. This capital shall be maintained after preliminary expenses incurred upon formation of the insurance company and registration of insurance business. The intention of prescribing a minimum capital is to ensure that only serious players who look at a longer term for return of investment enter insurance business.

Further the capital of an insurance company shall consist of only Equity Share capital and no other forms of capital are allowed. All the equity shares shall have a single face value. Further, notwithstanding the provisions contained in the Companies Act, 1956, the voting rights on equity shares shall be strictly in proportion to the paid up amount of the equity shares held.

The Act also provides for restrictions on transfer of shares in an insurance company. Before an insurance company can put through transfer of shares in excess of the following limits, prior approval of IRDA is required:

(a) Where, after the transfer, the transferee’s holding will cross 5% of the paid up equity capital of the insurance company (2.5% if the transferee is a banking company or an investment company)

(b) Where the nominal value of the shares proposed to be transferred by an individual, firm, group or body corporate under the same management exceeds 1% of the paid up equity capital of the insurance company, Persons holding beneficial interest in the equity shares of an insurance company held in another person’s name, are required to submit a declaration of their interest to the insurance company, failing which such person shall have no right or title in such shares and the insurance companies are expected to record the beneficial ownership in a separate Register maintained for this purpose.

While the maximum foreign in an insurance company is 26%, Indian Promoter(s) can hold upto 100% in an Indian insurance company. However, where the Indian promoter(s) hold more than 26% of the paid up equity capital of an insurance company, the holding of an Indian promoter in excess of 26% shall, immediately after the completion of 10 years from the date of commencement of insurance business, be brought down to 26%.

The intention behind this section was to broadbase the equity shareholding of an Insurance company after 10 years in such a way that one Indian promoter cannot control more than 26% equity stake in an insurance company. Either the holding in excess of 26% shall be divested in favour of other Indian promoters or in favour of public upon listing.

Deposits with Reserve Bank of India (Sections 7 to 9)

Section 7 mandates that every life insurance company shall maintain a sum equivalent to 1% of the total gross premium written in India in any financial year commending after 31 day of March 2000, but not exceeding `10 Crores with the Reserve Bank of India in the form of Cash or approved securities. In respect of general insurance business, a sum equivalent to 3% of the total gross premium written in India in any  financial year commencing after 31 day of March 2000, but not exceeding `10 Crores is required to be maintained. For reinsurance companies, a flat sum of `20 Crores has been prescribed. The deposit under Section 7 shall not be available for discharge of any liability of the insurer, except for undischarged policy liabilities. Further the deposit cannot be attached by any Policyholder towards any dues from the insurance company. The deposit is refundable only upon the insurer ceasing to carry on insurance business and the insurer’s liabilities have been satisfied, unless otherwise the Court orders return of the deposit.

Accounts, Audit and Actuarial report and Abstract (Sections 10, 11, 12)

Separate books of account are required to be maintained for each class of business. Since separate companies will have to be formed for Life, Non-Life or Reinsurance, this provision is automatically taken care for formation of separate companies and consequent maintenance of separate books of account. Further a separate fund called Life insurance fund shall be formed, the assets of which shall be separate and distinct from all other assets of the insurer. By virtue of the powers given under Section 11, IRDA have framed Regulations for Financial Statements which provides for forms of Revenue Account, Profit and Loss Account and Balance Sheet alongwith the form of Management Report and some of the documents annexed to the financial statements.

Further, every insurer shall keep separate accounts relating to funds of shareholders and policyholders. The forms provided in Schedule VI to the Companies Act, 1956 is not applicable to Insurance companies as they are required to follow the forms prescribed under the IRDA Regulations.

The accounts and the statements referred to in Section 11 shall be signed by the Chairman of the Board of the Insurance company and two other Directors, the Principal Officer of the Company (CEO or Managing Director) and shall be accompanied by a statement containing the names, descriptions and occupations of, and the directorships held by the persons in charge of the management of the business during the period to which the accounts and statements relate to.

Section 12 provides for audit of the financial statements shall be audited by an auditor. Detailed guidelines have been framed by IRDA on the qualifications of persons who can be appointed as Statutory Auditors of the Company.

Section 13 requires investigation of financial condition of the life insurance business carried on by an actuary. While the section mandates actuarial valuation not more than once in two years, IRDA have mandated an yearly actuarial valuation. IRDA have issued detailed regulations on preparation of Actuarial Report and Abstract.

Provisions Relating to Investments (Sections 27, 27A, 27B, 27E)

Section 27 requires insurance companies to invest in the manner specified in the section an amount equivalent to the amount of liabilities of the insurance companies on account of matured claims and on account of liability on policies maturing for payment after deducting the premiums due but grace period not expired and the amount of loans outstanding against the policies issued by the insurer. The manner in which the investment is required to be made is – not less than 50% in Government and Approved securities (out of which 25% only in Government securities) and the balance in Approved investments as specified in Section 27A. The deposits made with Reserve Bank of India under Section 7 are deemed to be Government Securities for this purpose.

Section 27A prescribes the approved investments for the purpose of Section 27. It lists down various investments which have been recognised for this purpose. The following are some of the approved investments recognized under the section:

(a) Approved securities as defined under Section 2(3) of the Insurance Act, 1938

(b) Debentures of companies having a interest paying track record of 5 years immediately preceding or five out of the 6 of 7 years immediately preceding, secured by a first charge on any immovable property, plant or equipment of sssthe Company

(c) Debentures of companies secured by a first charge on the immovable property, plant of machinery of a Company where the book value or the market value whichever is less of the asset is at least three times the value of debentures (in such cases, interest track record is not mandatory)

(d) First debentures secured by a floating charge on all assets of a Company which has paid dividends on Equity shares for five years or atleast five out of six or seven years preceding

(e) First mortgage on immovable property situated in India (other than leasehold property with an outstanding term of less than 30 years and the value of property exceeds one-third of the mortgage money (if it is building, one-half)

(f) Preference shares of any company on which dividends on equity shares have been paid for the immediately preceding five years or for atleast five out of the six or seven years immediately preceding

(g) Preference shares of a company which has paid dividends on such preference shares for five years immediately preceding or for atleast five out of six or seven years immediately preceding and such Preference shares have priority over equity shares in the event of winding up

(h) Equity shares of a Company which has paid dividends of not less than four percent for the seven years immediately preceding or for atleast seven out of the eight or nine years immediately preceding

(i) Fixed deposits with Banks

(j) Such other investments notified by IRDA as Approved Investments through Regulations. Investment in “Other investments”

Any investment in other than Approved Investments as above is allowed upto 15% of the sum specified in Section 27, provided such investments are made with the consent of all the directors present at a Board meeting and eligible to vote, in respect of which a special notice has been given to all the Directors in India.

Ceilings  On Investments:

(a) in one Banking Company or Investment Company [Section 27A(3)]

An insurance company cannot out of the Controlled fund invest or keep invested in the shares of any one banking company or investment company, an amount exceeding 11/4% of the amount specified in Section 27 (or) 2% of the subscribed share capital and debentures of the Banking company or investment company concerned, whichever is less

(b) in any Company other than Banking Company or Investment Company [Section 27A(4)]

An insurance company cannot out of the controlled fund invest or keep invested in the shares of any one company other than banking or investment company, an amount exceeding 21/4% of the amount specified in Section 27 (or) 10% of the subscribed share capital and debentures of the Company.

(c) in Fixed Deposits or Current deposits of Banks or Co-operative Societies

Not more than 3% of the Controlled funds is allowed to be deposited in the Fixed or Current deposits with any one Banking company or any one Co-operative Society registered under the Co-operative Societies Act, 1912

Formation of subsidiary companies for doing insurance business (Proviso to Section 27A(4)

The restriction given as above will not be applicable if an insurance company invests in the share capital of a subsidiary company for carrying on insurance business after getting previous approval of the Authority. This is more relevant in the context of recent notification of IRDA permitting formation of foreign subsidiaries engaged in insurance business.

Prohibited Investments (Section 27A(5) and 27C)

Investments in the shares or debentures of a Private Limited Company and investments out of Policyholders funds outside India are prohibited.

Encumbrance, charge or hypothecation of Assets forming part of Controlled fund

All assets forming part of Controlled fund to be kept of free of any encumbrance or charge except to the extent not exceeding 1/10th of the controlled fund, subject to such conditions as may be prescribed by IRDA. Such charge or encumbrance can be created only for the purpose of a loan taken by an insurance company for the purpose of any investment. However, Government Securities and Approved Securities forming part of the Controlled fund cannot be subject to any charge or encumbrances.

Note: Controlled Fund is defined as all funds pertaining to life insurance business, except for any part of the fund in respect of which IRDA is satisfied that it would not be in the interests of the insurer to apply the provisions of Section 27A.

Prohibition of Loans

Section 29 prohibits grant of any loans or temporary advances to any Director, Actuary or Auditor of the insurance company or to any company or firm in which any such Director, Actuary or Auditor holds the position of a Director, Actuary or partner. This prohibition is not applicable to:

(a) loans made by an insurer to a banking company in which such Director, Actuary or Auditor is interested

(b) loans or advances made by an insurance company to its subsidiary or to the loans or advances made by an insurance company to its holding company

(c) Policy loans granted by the insurance company within the surrender value of the policy

Loans to Insurance Agents

Subject to the above provisions, an insurance company can grant any temporary advances to an insurance agent upto the renewal commission earned by such agent in the year immediately preceding the year of grant. Where the Insurance Agent is newly appointed and has not earned any renewal commission, the total amount of loan which can be sanctioned cannot exceed one hundred rupees and the total amount of advances so made cannot exceed `10,000 (Note: these monetary limits were placed under the Insurance Act, 1938 which have been removed in the Insurance Bill. The only limit as per the Bill would be the restriction of advance to the preceding year’s renewal commission).

Minimum insurance business under Rural and Social Sectors

Section 32B and 32C requires every insurer to undertake such minimum percentage of the insurance business for covering risks associated with persons forming part of rural or social sector, workers in the unorganized or informal sector or economically vulnerable or backward classes of society or such classes as prescribed by IRDA.

Insurance Law And Practice - ICSI
Important Provisions Of Insurance Act 1938 Important Provisions Of Insurance Act 1938 Reviewed by Blog Editor on Wednesday, May 03, 2017 Rating: 5

No comments:

Do you have any reasonable comments for this post ? Please feel free to drop them below using the comment box. We will moderate and publish them as soon as possible. Cheers !

Powered by Blogger.