CS Professional · Banking and Insurance - Laws and Practice

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

Full chapter guide

Key formulas

Motor third party obligation (Section 32D): Every general insurer must underwrite the minimum % of motor third party business set by regulations; The Authority may by regulations exempt insurers primarily engaged in health, re-insurance, agriculture or export credit guarantee business. The percentage itself is in the regulations, not the Act.
Compulsory reinsurance cession (Section 101A): Cession % of sum assured on each policy is set by the Authority, with Central Government's previous approval; the % set must not exceed 30% of the sum assured; Applies to general insurance policies, not re-insurance policies. Different percentages may be fixed for different classes. Notification needs consultation with the Advisory Committee under Section 101B.
Fire insurance alternative (Section 101A(3)): Reinsure part of first surplus, provided yearly reinsurance premiums ≥ the specified % of premium income from fire business; Premium income is taken without counting reinsurance ceded or accepted.
Lapse notice (Section 50): Notice of options must be given before the end of three months from the date premiums were payable but not paid; Applies to life insurance. Not needed if the options are set out in the policy.
Valuation of assets and liabilities (Section 64V): Assets valued at not more than market or realisable value; proper value placed on every liability; Statement as on 31 March each year, certified by an approved auditor (general insurance) or approved actuary (life insurance).
Surveyor requirement for large claims (Section 64UM(4)): Loss in India + payable in India + amount ≥ limit set by regulations → report of approved surveyor needed before admission or settlement; The Authority may direct otherwise. The actual limit comes from regulations, so do not quote a figure unless you are sure of it.
Eligibility of a surveyor (Section 64UM(1)): Academic qualification as per regulations AND membership of the Indian Institute of Insurance Surveyors and Loss Assessors; Both conditions must be met. For a firm or company, every partner, director or person who may survey must meet them.
Insurer's freedom on amount (proviso to Section 64UM(4)): Insurer may pay or settle at an amount different from the surveyor's assessed amount; The surveyor's report is mandatory but not binding on the amount.
Payment of fee (Section 64UM(7)): Fee for surveying, verifying or reporting on a claim → only to an approved surveyor or loss assessor; Section 64UM(8) allows another person for claims below the limit where an approved surveyor would be disproportionately costly.
Claim record (Section 14(1)(b)): Record = every claim + date of claim + claimant name and address + date of discharge, or date of rejection and grounds; May be kept in electronic form as specified by regulations.
Section 34F(1): order on existing treaties: Authority's opinion that terms are unfavourable to the insurer or detrimental to public interest → order to modify terms or not to renew, at the next renewal date; The order operates when renewal of the treaty or contract next becomes due. Failure to comply is deemed failure to comply with the Act.
Section 34F(2): prior approval order: Reason to believe insurer is entering or likely to enter unfavourable contracts → order that no treaty or contract be entered unless a copy is furnished in advance and terms are approved; This is a pre-clearance power. Non-compliance is deemed failure to comply with the Act.
Quota share (proportional): Reinsurer's claim payment = Claim × Reinsurer's quota share %; Premium is also shared in the same percentage, usually less a ceding commission.
Excess of loss (non-proportional): Reinsurer pays = Loss − Retention, limited to the cover limit; nothing if Loss ≤ Retention; Cedant bears the loss up to the retention, and any amount above retention plus limit.
Overseas investment bar: Policyholders' funds: no investment outside India, directly or indirectly; Section 27E. Both direct and indirect routes are caught.
Revaluation power: Faulty basis + notice + opportunity of hearing → Authority orders valuation by an approved actuary at the insurer's expense; Section 22(1). The insurer appoints the actuary; the Authority approves.
Minimum period for material: Period specified by the Authority ≥ 3 months; Section 22(1). This is the time the insurer has to place all required material before the actuary.
Regulation-making power: Section 114A: regulations must be consistent with the Act and rules; laid before Parliament for 30 days; Investment of assets is covered by clause (i) of sub-section (2); valuation abstract and statement by clause (g).
Premium logic (concept): Premium = expected claims + expenses + margin for risk and profit; A conceptual statement of pricing, not a statutory formula. Use it to explain pricing.
Section 40(1): who may be paid: No person may pay remuneration or reward for soliciting or procuring insurance business in India to anyone except an insurance agent, intermediary or insurance intermediary, in the manner specified by regulations; Payment to anyone outside these categories is prohibited. Commission must follow IRDAI regulations.
Section 40(2) and (3): receiving commission and penalty: An agent or intermediary may receive commission only as per regulations; contravention attracts a penalty up to ₹1,00,000; The Authority must consider the nature and tenure of the policy and the interest of agents and intermediaries when making these regulations.
Section 42(1) and (2): appointment and exclusivity: An insurer may appoint any person as agent if not disqualified; no person may act as agent for more than one life insurer, one general insurer, one health insurer and one of each other mono-line insurer; The Authority must ensure no conflict of interest arises where an agent represents more than one insurer.
Section 42(3): disqualifications: Minor; unsound mind; conviction for criminal misappropriation, breach of trust, cheating, forgery or abetment or attempt; fraud found in judicial proceedings or investigation; lacking qualifications, training or examination; firm or company whose designated persons lack them; code of conduct violation; For convictions, if five years have passed since the sentence was completed, the Authority shall ordinarily declare the disqualification ceases.
Section 42(4) and (5): penalties and insurer liability: Acting as agent in contravention: penalty up to ₹10,000. Insurer appointing a non-permitted person or transacting business through them: up to ₹1 crore. Insurer is responsible for all acts and omissions of agents: up to ₹1 crore; Know the three amounts and who pays each.
Section 42A: prohibited channels: No principal agent, chief agent or special agent; no inducement to take, renew or continue a policy through a multilevel marketing scheme; IRDAI may complain to the police against entities or persons involved in a multilevel marketing scheme (through an authorised officer).
Section 43: record of agents: Insurer keeps a record of each agent's name, address, date appointment began and date it ceased; kept while the agent is in service and for 5 years after cessation; Applies to every insurer and every person who employs agents on behalf of an insurer.
Section 64L(1)(a): Aid and advise insurers on standards of conduct, sound practice and efficient service to policyholders; Advisory role towards insurers carrying on general insurance business.
Section 64L(1)(b): Advise the Authority on controlling expenses, including commission and other expenses; Advice goes to the Authority, not to insurers.
Section 64L(1)(c): Bring to the Authority's notice any insurer acting prejudicially to policyholders' interests; Reporting role. The Committee does not punish.
Section 64L(1)(d): Act in incidental or ancillary matters notified by the Council in the Gazette with the Authority's approval; Both a Gazette notification and the Authority's approval are needed.
Section 64L(2) and proviso: Collect fees as per bye-laws; Council may waive fees for a year by resolution, and if the Authority approves it, no fees are collected that year; Waiver takes effect on collection only when the Authority has approved the resolution.
Related: Section 64M(1): Executive Committee must meet at least once before 31 March every year to advise the Authority on limits of excess expenses of management under the proviso to section 40C(1); Links the expense-control function in 64L(1)(b) to a specific duty.

Quick revision

Section 52 bans business on the dividing principle, but insurers may allocate bonuses to life policyholders after a periodical actuarial valuation.
Section 42A(1) bars appointing principal agents, chief agents and special agents after the 2015 amendment commenced.
Section 42A(2) prohibits offering any inducement to take out, renew or continue a policy through a multilevel marketing scheme.
Under Section 42A(3), the Authority can have an authorised officer complain to the police about multilevel marketing.
The Life and General Insurance Councils act through Executive Committees (Section 64E).
Life Insurance Council Executive Committee has four elected members, one eminent outsider, three nominees for agents, intermediaries and policyholders, and one each from self-help groups and insurance co-operative societies.
General Insurance Council Executive Committee has four elected members, one eminent outsider and four nominees for agents, third party administrators, surveyors and loss assessors, and policyholders.
The Chairperson of each Executive Committee is elected from among the four elected members.
An Executive Committee lasts three years from its first meeting, and outgoing members continue until a new one is formed (Section 64H).
The General Insurance Council Executive Committee must meet at least once before 31 March each year to advise on expense limits (Section 64M).
After two disregarded warnings under Section 64M, the Authority may take prescribed action against the insurer.
Vacancies or defects in constitution do not invalidate the Committee's acts (Section 64G(3)).

Common mistakes

Treating underwriting as only premium calculation. Fix: Cover selection, classification, pricing, terms and acceptance. Pricing is one part.
Saying Section 101A fixes the cession at 30%. Fix: Write that the Authority specifies the percentage and that it cannot exceed 30% of the sum assured on a policy.
Saying the surveyor's report fixes the amount the insurer must pay. Fix: Quote the proviso to Section 64UM(4): the insurer may pay or settle at a different amount.
Quoting a specific rupee threshold for compulsory survey as if it is in the Act. Fix: Say the limit is specified in regulations by the Authority. Give a number only if you are certain.
Saying the reinsurer pays the policyholder directly Fix: State that the policyholder's contract is with the original insurer only. The reinsurer reimburses the cedant.
Mixing up treaty and facultative Fix: Remember: treaty is automatic for a class of business; facultative lets the reinsurer accept or reject each individual risk.
Treating pricing and reserving as the same thing Fix: Pricing sets the premium before sale for a product. Reserving measures the liability on policies already sold.
Saying the Authority can order revaluation without notice Fix: Section 22 requires notice to the insurer and an opportunity to be heard before it orders a revaluation.
Treating a surveyor as a distribution channel that sells policies. Fix: Say surveyors and loss assessors assess loss at claim stage. They do not solicit or procure business.
Saying an agent can represent any number of insurers. Fix: Quote Section 42(2): one life, one general, one health and one of each other mono-line insurer.

Exam tips

Tie each compliance point to a section: 32D, 101A, 50 and 64V are in your text.
Always say who sets the percentage: regulations or the Authority, not the Act.
Use facts in the question to apply the rule. A bare list of provisions scores less.
Draw the underwriting process as a short numbered list for quick marks.
Add a compliance point, such as keeping records of cessions and notices, to show practical understanding.
Write the section number with the rule. Section 64UM for surveyors and Section 14 for records earn clear marks.
Use the order: provision, facts, conclusion. Do not just narrate the claim process.
Separate the mandatory survey from the non-binding assessment. Examiners like this distinction.