Functions in Insurance and Compliance related thereto (Part I): formula sheet

Key formulas

Premium build-up (concept)

Premium = Expected claims cost + Expenses + Margin for profit and contingencies

A general structure, not a statutory formula. Loading is added to this for substandard risks.

Section 64VB: premium in advance

No risk assumed until premium is received, guaranteed in the prescribed manner and time, or a prescribed deposit is made

Applies to business where premium is not ordinarily payable outside India. Where premium can be ascertained in advance, risk may be assumed not earlier than the date premium is paid in cash or by cheque.

Section 64VB(2) Explanation

Premium tendered by postal money order or cheque sent by post: risk may be assumed on the date the money order is booked or the cheque is posted

The Explanation is permissive ('may be assumed'). It fixes the date by posting or booking, not by receipt. It applies only where the premium is tendered by post. Keeping proof of posting is practical advice, not a statutory condition.

Section 64VB(3) and (4): refunds and agents

Refund goes directly to the insured by crossed or order cheque or postal money order; agent deposits collected premium in full within 24 hours, excluding bank and postal holidays

Refund can never be credited to the agent's account. The agent cannot deduct commission.

Section 32D: motor third party

Minimum percentage of motor third party business as specified by regulations

Applies to every insurer carrying on general insurance business. Authority may by regulations exempt insurers primarily in health, re-insurance, agriculture or export credit guarantee.

Section 101A: reinsurance with Indian re-insurers

Percentage of sum assured on each policy specified by the Authority (with previous approval of the Central Government); under s.101A(2)(a) no percentage so specified can exceed 30% of the sum assured on the policy

'Policy' in s.101A(8) means a policy in general insurance business transacted in India, and does not include a re-insurance policy. The insurer may reinsure more than the specified percentage voluntarily. Under s.101A(3), a fire insurer may instead reinsure an amount out of the first surplus, if the aggregate reinsurance premium in a year is not less than the specified percentage of its premium income from that business.

Section 64V: valuation

For ascertaining compliance with s.64VA, assets are valued at not more than market or realisable value, and the Authority may exclude certain assets as specified by regulations; a proper value is placed on every liability as specified by regulations

Under s.64V(3), every insurer furnishes to the Authority, along with the returns under the Act, a statement of assets and liabilities as on 31 March each year. It is certified by an Auditor approved by the Authority (general insurance) or an actuary approved by the Authority (life insurance). It is furnished within the time specified by regulations.

Surveyor eligibility (Section 64UM(1))

Approved surveyor = specified academic qualification + membership of the Indian Institute of Insurance Surveyors and Loss Assessors

Both conditions are required. For a firm or company, every partner, director or person who may survey or assess must satisfy both.

Mandatory survey (Section 64UM(4))

Loss in India, payable in India, ≥ amount specified by the Authority → report from approved surveyor needed before admitting or settling

The threshold is set in the regulations. Do not quote a figure unless you are sure of it. The Authority can direct otherwise.

Insurer's freedom (proviso to 64UM(4))

Insurer may pay or settle at an amount different from the surveyor's assessment

The report is mandatory input, not a binding figure.

Authority's independent report (Section 64UM(5) and (6))

Authority calls for report from another approved surveyor → cost borne by insurer → Authority may direct settlement at a lower or higher figure

The insurer must comply. If the direction lowers an amount already paid, the insurer complies by taking all reasonable steps to recover, with regard to cost. No lower sum is directed where recovery would cause undue hardship to the insured and the amount has been paid.

Small claims (Section 64UM(8) and (9))

Claim < specified amount → insurer may use another person if an approved surveyor would cost disproportionately

That person must not be disqualified. The Authority may still direct a report by an approved surveyor, and then sub-sections (5) and (6) apply.

Fee bar (Section 64UM(7))

No fee for surveying, verifying or reporting on a claim unless the person is an approved surveyor or loss assessor

Section 64UM(8) is the exception for small claims.

No compensation (Section 110D)

No right to compensation for loss caused by compliance with an order or direction given under the Act

Protects insurers who comply with directions. It also covers losses from operation of Sections 34, 34A, 34E and 37A.

Appointment of agent (s. 42(1))

Insurer may appoint any person as agent to solicit and procure business, if no s. 42(3) disqualification applies

The insurer appoints; the agent must be free of every listed disqualification.

Limit on tie-ups (s. 42(2))

Max: one life insurer + one general insurer + one health insurer + one of each other mono-line insurer

The regulator must frame regulations so that no conflict of interest arises for agents representing more than one insurer.

Disqualifications (s. 42(3))

Minor; unsound mind; conviction for criminal misappropriation, breach of trust, cheating, forgery (or abetment/attempt); fraud found in judicial proceedings or investigation; lacking qualifications, training or exam; code of conduct violation

For a company or firm, the designated director, partner, officers or employees must have the qualifications and pass the exam. A conviction may cease to disqualify if at least five years have passed since the sentence was completed and the Authority declares so; the Authority ordinarily does so.

Penalties (s. 42(4), (5))

Acting as agent in contravention: up to ₹10,000. Insurer appointing or using a barred person: up to ₹1 crore. Insurer liable for agents' acts and omissions: up to ₹1 crore

Note which party bears which penalty.

Prohibited structures (s. 42A)

No principal agent, chief agent or special agent; no inducement through multilevel marketing

The Authority may, through an authorised officer, complain to the police against those involved in multilevel marketing.

Agent record (s. 43)

Keep name, address, appointment date and cessation date; retain while in service and for five years after cessation

The duty falls on the insurer and anyone employing agents on its behalf.

Commission (s. 40)

Remuneration for procuring business only to an agent or intermediary, as per regulations; penalty up to ₹1 lakh on an agent or intermediary who contravenes

Both payer and receiver are restricted.

Compulsory reinsurance (Section 101A(1))

Every insurer must re-insure with Indian re-insurers the percentage of sum assured on each policy specified by the Authority

The percentage is set under sub-section (2), with previous approval of the Central Government.

Ceiling on the percentage (Section 101A(2)(a))

Specified percentage ≤ 30% of the sum assured on the policy

Different percentages may be set for different classes of insurance. The Authority also specifies how the percentage is shared among Indian re-insurers.

Fire insurance alternative (Section 101A(3))

Premiums paid on re-insurance in a year ≥ specified % × premium income of that business (before reinsurance ceded or accepted)

A fire insurer may reinsure out of the first surplus instead, if the total premium meets this floor.

Excess beyond the percentage (Section 101A(7))

Insurer may re-insure the whole sum assured or any portion above the specified percentage

Reinsurance beyond the compulsory share is allowed, with any Indian re-insurer or other insurer.

Quota share cession

Ceded claim = Claim × cession %; Retained claim = Claim × (1 − cession %)

Premium is shared in the same proportion, usually less a ceding commission.

Excess of loss recovery

Recovery = Loss − Retention, limited to the cover limit, and zero if Loss ≤ Retention

Retention here means the deductible the insurer bears on each loss.

Premium building blocks

Office premium = Net premium + Loading for expenses, commission and margins

Net premium is the actuarial cost of claims. This is a conceptual breakdown, not a statutory formula.

Net single premium for a one-year term cover (simple case)

Net premium = Sum assured × Probability of death within the year

Ignores interest and expenses. Use it only when the question gives a death probability.

Valuation surplus (concept)

Surplus = Value of assets − Value of liabilities (policy reserves)

Bonuses to policyholders are allocated from surplus found at the periodic actuarial valuation.

Asset valuation for solvency (Section 64V(1))

Value of asset ≤ Market or realisable value

The Authority may exclude certain assets by regulations.

Statement of assets and liabilities (Section 64V(3))

As on 31 March each year, certified by an approved actuary (life) or approved auditor (general)

Filed with the returns, within the time set by regulations.

Paid-up value under Section 113(3)

Policy kept in force for the paid-up sum insured (by approved formula in the policy) + reversionary bonuses already attached

Applies to non-linked plans that have acquired surrender value. Exceptions are in Section 113(4).

Section 64L(1)(a)

Aid and advise general insurers on standards of conduct, sound practice and efficient service to policyholders

Directed at insurers carrying on general insurance business.

Section 64L(1)(b)

Render advice to the Authority on controlling expenses of such insurers, in commission and other expenses

Applies to insurers carrying on business in India.

Section 64L(1)(c)

Bring to the Authority's notice any insurer acting prejudicially to the interests of general insurance policyholders

A reporting function, not a power to penalise.

Section 64L(1)(d)

Act in incidental or ancillary matters notified by the General Insurance Council in the Gazette of India, with the Authority's approval

Both the notification and the approval are needed.

Section 64L(2) and proviso

Collect fees as laid down in the bye-laws; fees for a year may be waived by Council resolution approved by the Authority

The Committee does not collect fees for that year once the resolution is approved.

Composition under section 64F(2)

4 elected representatives of members + 1 eminent person not connected with insurance + 4 persons for agents, third party administrators, surveyors and loss assessors, and policyholders

The Chairperson is elected from the four elected representatives. Nominations are by the Authority.

Foreign investment ban (Section 27E)

No insurer shall directly or indirectly invest outside India the funds of the policyholders

Covers indirect investment also. The ban is on policyholders' funds.

Returns of investments (Section 28)

Every insurer submits to the Authority returns giving details of investments made, in the form, time and manner specified by regulations

Form, time, manner and authentication are left to regulations.

Valuation of assets (Section 64V(1))

Assets valued at a value not exceeding their market or realisable value

Used to ascertain compliance with Section 64VA. The Authority may exclude certain assets by regulations.

Valuation of liabilities (Section 64V(2))

A proper value placed on every item of liability, as specified by regulations

Applies to every item of liability.

Certified statement (Section 64V(3))

Statement of assets and liabilities as on 31 March each year, certified by an Authority-approved Auditor (general insurance) or actuary (life insurance)

Filed with the returns, within the time specified by regulations.

Publication of returns (Section 25)

No publication in India of a return in a form other than that furnished to the Authority

Proviso: a true and accurate abstract may be published for publicity.

Paid-up equity capital (Section 6(1))

₹100 crore for life or general insurance; ₹100 crore for exclusively health insurance; ₹200 crore for exclusively reinsurance

Preliminary expenses are excluded in determining paid-up equity capital.

Net owned funds (Section 6(2))

Not less than ₹5,000 crore

Applies to an insurer defined in section 2(9)(d), not to the others above.

Foreign insurer filing (Section 63)

File particulars with the Authority within 3 months of establishing a place of business or appointing a representative in India

Includes charter documents, directors list, service-of-process person, principal office address, classes of business and affidavit.

Quick revision

• Underwriting decides which risks to accept and on what terms and price.
• Claims management covers intimation, assessment and settlement of claims.
• Intermediaries distribute insurance and must act within the regulator's rules.
• Reinsurance lets an insurer pass part of its risk to another insurer.
• The actuarial function supports pricing, reserves and valuation.
• Section 64E: the authority of each Council is its Executive Committee.
• Section 64F(2): General Insurance Council Executive Committee has four elected members, one eminent person and four nominated persons.
• The Chairperson of that Committee is elected from among the four elected representatives.
• Section 64H: the Executive Committee lasts three years from its first meeting; outgoing members continue until a new one is constituted.
• Section 64G(3): no act of the Committee is questioned merely because of a vacancy or defect in its constitution.
• Section 64L(1): advise insurers, advise the Authority on expenses, and report prejudicial conduct.
• Section 64M: the Committee must meet at least once before 31 March each year to advise on expense limits under Section 40C.

Common mistakes

• Treating underwriting and reinsurance as the same thing. Fix: Underwriting accepts risk from the insured. Reinsurance transfers part of accepted risk to another insurer. Keep this contrast ready in two lines.
• Saying the risk starts when the cheque reaches the insurer by post. Fix: Where premium is tendered by cheque sent by post, the Explanation to Section 64VB(2) says risk may be assumed on the date the cheque is posted (or the money order is booked). Write 'may', because the Explanation is permissive.
• Saying the insurer must pay exactly the surveyor's assessed amount. Fix: Quote the proviso to Section 64UM(4): the insurer may pay or settle at a different amount.
• Saying every claim needs an approved surveyor. Fix: The mandatory requirement applies to claims at or above the specified amount. Small claims fall under Section 64UM(8) and (9).
• Saying a broker is appointed by the insurer like an agent. Fix: Link agents to the insurer's appointment under s. 42. Describe brokers as licensed intermediaries acting for the client, under IRDAI regulations.
• Letting an agent tie up with any number of insurers. Fix: Quote s. 42(2): one life, one general, one health and one of each other mono-line insurer.
• Treating reinsurance and coinsurance as the same thing. Fix: Remember: in coinsurance insurers share a risk directly with the insured. In reinsurance one insurer issues the policy and passes risk to another, and the policyholder has no claim on the reinsurer.
• Saying the Act fixes the compulsory cession at 30%. Fix: Write that the Authority specifies the percentage by notification and that it cannot exceed 30% of the sum assured on a policy.
• Saying an actuary certifies the assets and liabilities statement for every insurer. Fix: Remember the split: approved actuary for life business, approved auditor for general insurance business.
• Treating bonus allocation as banned under the dividing principle. Fix: The proviso expressly permits bonuses to life policyholders from a periodic actuarial valuation, as reversionary additions or immediate cash bonuses or otherwise.

Exam tips

• Write the section number with the rule when you are sure of it. Section 64VB, 32D, 101A and 64V are the key ones here.
• In case questions, always quote the date and mode of payment from the facts before concluding.
• Keep a two-line contrast between underwriting and reinsurance ready; it is a common short note.
• Use the order provision, analysis, conclusion, and add a practical compliance point at the end.
• For process questions, show the flow: proposal, information gathering, classification, rating, decision, policy issue.
• Write the provision, then facts, then conclusion. Cite Section 64UM only for surveyor points.
• Use the exact terms 'approved surveyor or loss assessor' and 'the Authority'.
• Do not give a rupee threshold or a day count unless you are certain. Refer to the regulations.