CS Professional · Banking and Insurance - Laws and Practice

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

Full chapter guide

Key formulas

Premium in advance rule: Risk assumed only after premium is received, guaranteed as prescribed, or deposit made (s. 64VB(1)); Applies to insurance business in India on which premium is not ordinarily payable outside India. The Central Government may relax it for particular categories by rules (s. 64VB(5)).
Date of risk where premium is ascertainable: Risk not earlier than the date premium is paid in cash or by cheque (s. 64VB(2)); If sent by postal money order or cheque by post, risk may start on the booking or posting date.
Agent's deposit of premium: Deposit or post the full premium, without deducting commission, within 24 hours of collection, excluding bank and postal holidays (s. 64VB(4)); The agent cannot keep commission out of the collection.
Premium refund: Refund directly to the insured by crossed or order cheque or postal money order, with receipt; never to the agent's account (s. 64VB(3)); Applies to cancellation, alteration of terms or otherwise.
Indian reinsurance cession: Percentage of sum assured on each policy, as specified by the Authority, with previous approval of the Central Government, capped at 30% of sum assured (s. 101A); Can differ by class. The insurer may reinsure more than the percentage with any Indian re-insurer or other insurer (s. 101A(7)).
Fire insurance option: Reinsure an amount out of the first surplus, provided annual reinsurance premiums are not less than the specified percentage of premium income for that business (s. 101A(3)); Available to insurers carrying on fire insurance in India, in lieu of the percentage cession.
Custody of assets: Assets in India kept in the name of an approved public officer or in the insurer's corporate name (s. 31); Endorsement to a bank solely for collection or realisation of interest, bonus or dividend is allowed.
Section 64C – Council: General Insurance Council = representative body of insurers carrying on general, health insurance business and re-insurance in India; Deemed constituted under the Act from its commencement.
Section 64E – Authority of the Council: Authority of the Council = Executive Committee; The Executive Committee is the working body.
Section 64F(2) – Composition: 4 elected insurer representatives + 1 eminent person not connected with insurance business (nominated by the Authority) + 4 nominees of the Authority representing insurance agents, third party administrators, surveyors and loss assessors, and policyholders = 9 members; The Chairperson is one of the four elected insurer representatives. Elected in individual capacity, in the manner laid down in the bye-laws.
Section 64F(3) – Failure to elect: If a body fails to elect a member, the Authority may nominate a person to fill the vacancy; The nominee is deemed to be duly elected.
Section 64G – Resignation and vacancies: Resignation by written notice to the chairman; casual vacancy filled as per the Council's bye-laws; nominee holds office until the Committee is dissolved; Under 64G(3), no act of the Committee can be questioned merely because of a vacancy or a defect in its constitution.
Section 64H – Duration: Term = 3 years from the date of its first meeting, then it stands dissolved; Outgoing members continue to discharge prescribed duties until a new Committee is constituted.
Section 64L(1) – Functions: (a) aid and advise insurers on standards of conduct, sound practice and efficient service to policyholders; (b) advise the Authority on controlling expenses, commission and other expenses; (c) bring to the Authority's notice any insurer acting prejudicially to policyholders; (d) incidental or ancillary matters notified by the Council with the Authority's approval; Memorise the four clauses in order.
Section 64L(2) – Fees: Fees as laid down in bye-laws from general insurers; Council may waive fees for a year by resolution, and if the Authority approves, no fees are collected for that year; Waiver needs the Authority's approval to take effect.
Section 64M – Expenses: Executive Committee must meet at least once before 31 March every year to advise the Authority on limits under the proviso to Section 40C(1); Authority may warn an insurer after a hearing; after two disregarded warnings it may take prescribed action.
Section 64N – Joint meetings: Authority specifies circumstances, manner and conditions for joint meetings of the two Executive Committees; A sub-committee drawn from both Committees may be appointed to decide a matter.
Function (a): conduct and service: Aid and advise general insurers on standards of conduct, sound practice and efficient service to policyholders; Applies to insurers carrying on general insurance business. Section 64L(1)(a).
Function (b): expenses: Render advice to the Authority on controlling expenses of such insurers in commission and other expenses; Advice goes to the Authority, not to insurers. Section 64L(1)(b).
Function (c): prejudicial conduct: Bring to the Authority's notice any insurer acting prejudicially to holders of general insurance policies; The committee reports; it does not penalise. Section 64L(1)(c).
Function (d): incidental matters: Act in matters incidental or ancillary to (a) to (c), as notified by the General Insurance Council in the Gazette of India with the Authority's approval; Needs both notification and approval. Section 64L(1)(d).
Fees: Collect fees laid down in the Council's bye-laws from general insurers; Section 64L(2). Proviso: Council may waive fees for a year by resolution; if approved by the Authority, no fees are collected for that year.
Related provisions: s.64E authority = Executive Committee; s.64F composition; s.64H term of three years; s.64M annual meeting before 31 March on expense limits; Use these to support answers on the committee's status and work.
Valuation of assets (section 64V(1)): Asset value ≤ market or realisable value; Applies for ascertaining compliance with section 64VA. The Authority may exclude certain assets as specified by regulations.
Valuation of liabilities (section 64V(2)): Every item of liability must carry a proper value, in the manner specified by regulations; Do not state a fixed method. The Act leaves the manner to regulations.
Annual statement of assets and liabilities (section 64V(3)): Statement as on 31 March, furnished with returns, within time specified by regulations; Certified by an Auditor approved by the Authority (general insurance) or an actuary approved by the Authority (life insurance).
Scrutiny of returns (section 33A): Authority may appoint staff to scrutinise returns, statements and information; Shows that filed returns are reviewed by the regulator.
Regulation-making power (section 114A): Regulations must be consistent with the Act and rules; laid before Parliament for 30 days; Section 114A(3) requires laying before each House for a total of thirty days, in one or more sessions.
Executive Committee, General Insurance Council (section 64L(1)): Aid and advise insurers + advise the Authority on expenses + report prejudicial insurers + incidental matters; Four functions, clauses (a) to (d). Fees are collected as laid down in the Council's bye-laws.

Quick revision

Underwriting means assessing and selecting risks and fixing terms and premium; claims means assessing and settling policyholder claims.
The authorities of the Life Insurance Council and the General Insurance Council are their Executive Committees (Section 64E).
The General Insurance Council represents insurers carrying on general, health and re-insurance business (Section 64C).
The General Insurance Council's Executive Committee has four elected insurer representatives, one eminent person unconnected with insurance nominated by the Authority, and four nominated persons representing agents, third party administrators, surveyors and loss assessors, and policyholders (Section 64F).
The Chairperson is elected from among the four elected insurer representatives.
If the electing bodies fail to elect a member, the Authority may nominate a person to fill the vacancy.
An Executive Committee lasts three years from its first meeting; outgoing members continue until a new one is constituted (Section 64H).
Casual vacancies are filled as laid down in the Council's bye-laws, and the new member serves until the Committee is dissolved (Section 64G).
No act of the Committee can be questioned merely because of a vacancy or a defect in its constitution (Section 64G).
Section 64L: the Committee advises insurers on conduct and sound practice, advises the Authority on commission and expenses, and reports prejudicial conduct to the Authority.
The Committee may collect fees under bye-laws; the Council may waive them for a year by resolution, if approved by the Authority.
Section 64M: the Committee meets at least once before 31 March each year to advise on expense limits under Section 40C.

Common mistakes

Saying risk can start on the date the proposal is signed. Fix: Under section 64VB, tie the start of risk to receipt of premium, a valid guarantee or a prescribed deposit.
Ignoring the postal rule. Fix: Remember that for a postal money order or cheque sent by post, risk may be assumed from the booking or posting date.
Saying the Council itself exercises the functions in Section 64L. Fix: Section 64L gives functions to the Executive Committee. Write that the Executive Committee is the Council's authority.
Stating the Executive Committee has nine members but listing them wrongly, for example making the eminent person elected. Fix: For general: four elected insurers, one eminent person nominated by the Authority, four nominated persons (agents, third party administrators, surveyors and loss assessors, policyholders). The life committee has a different list.
Saying the committee can penalise insurers who act prejudicially. Fix: Section 64L(1)(c) only lets it bring the case to the Authority's notice. Action is for the Authority.
Mixing up the Life and General Insurance Councils. Fix: Section 64L is for the General Insurance Council only. Check the word 'general' in the question.
Saying assets are valued at cost or book value for solvency purposes. Fix: Remember section 64V(1): value not exceeding market or realisable value, with certain assets excludable by the Authority.
Saying any chartered accountant can certify the statement of assets and liabilities. Fix: State that the certifier must be approved by the Authority: an Auditor for general insurance and an actuary for life insurance.

Exam tips

Write section 64VB in its four parts: advance premium, date of risk, refund, and agent's 24-hour deposit. Many questions test just one.
In case questions, work out the date of risk first. It decides the answer.
Quote the 30% ceiling in section 101A with the words 'as specified by the Authority'. It shows you know who sets the rate.
Link each function to its compliance. A one-line link, such as claims with receipt on refund, earns marks.
If you are not sure of a section number, state the rule in words and skip the number.
Answer in the order provision, facts, conclusion. Name the section before the rule.
Learn the composition as 4 + 1 + 4 and write the three groups clearly. Examiners often test the difference from the Life Insurance Council.
For functions, write all four clauses of 64L(1) and add the fee provision in 64L(2) for a full answer.