Regulatory Framework in Insurance: formula sheet

Key formulas

Timeline of key laws

Insurance Act, 1938 → LIC Act, 1956 → General Insurance Business (Nationalisation) Act, 1972 → IRDA Act, 1999

Learn the order and the purpose of each Act. Years of the Malhotra Committee report are best not stated unless you are sure.

Section 2A of the 1938 Act

Undefined words take the meaning given in the LIC Act, 1956, the 1972 Act and the IRDA Act, 1999

Shows how the older and newer laws link together.

Section 32C of the 1938 Act

Every insurer must serve rural sector, unorganised-sector workers and economically vulnerable or backward classes, including crop insurance

Applies after the IRDA Act, 1999 commenced. Other categories may be specified by regulations.

Controller to Authority

1999 Act replaced "Controller" with "Authority" in the 1938 Act, effective 19-4-2000

Seen in the footnotes to sections 64L and 64R.

Section 64VC of the 1938 Act

New place of business, closure or change of location (other than within the same city, town or village) only as specified by regulations

Substituted by the 2015 amendment.

Establishment

Authority = body corporate + perpetual succession + common seal + can sue and be sued

Section 3 of the IRDA Act, 1999. Use these four features whenever a question asks about legal status.

Composition

Chairman + whole-time members + part-time members, all appointed by the Central Government

Section 4 of the IRDA Act, 1999. State the statutory caps on whole-time and part-time members as given in your study material.

General duty

Regulate + promote + ensure orderly growth of insurance business and reinsurance business

Section 14(1) of the IRDA Act, 1999. This is the opening line of any answer on functions.

Specific powers

Section 14(2): registration | policyholder protection | intermediaries and surveyors | fees | information, inspection, investigation | accounts and investment | solvency | disputes | rural and social sector

Group the powers in your answer instead of listing them in random order.

Supersession

Authority superseded under section 19 of IRDA Act → Central Government may appoint a Controller of Insurance until the Authority is reconstituted

Section 2B, Insurance Act, 1938. The appointee's experience and actuarial qualifications must be considered.

Insurer's records

Section 14, Insurance Act, 1938: record of policies + record of claims, kept in a form (including electronic) specified by regulations

Do not confuse this with section 14 of the IRDA Act. They are different Acts.

Published summary of returns

Section 116A, Insurance Act, 1938: summary of accounts, balance-sheets, statements and returns furnished to the Authority is published every year

Certain statements and returns named in the proviso need not be published.

Section 13(a): vesting of assets and liabilities

On the appointed day: all assets and liabilities of the Interim Authority → stand transferred to, and vested in, the Authority

Transfer happens by operation of law. The Explanation defines assets and liabilities widely.

Explanation: meaning of assets

Assets = rights and powers + all properties (movable or immovable) + cash balances, deposits and other interests + books of account and documents

Books of account and related documents are expressly included.

Explanation: meaning of liabilities

Liabilities = all debts, liabilities and obligations of whatever kind

No class of liability is carved out.

Section 13(b): contracts and obligations

Debts, obligations, liabilities incurred, contracts entered into and matters engaged to be done immediately before the appointed day → deemed incurred, entered into or engaged by, with or for the Authority

Applies if done for or in connection with the purpose of the Interim Authority. It works without prejudice to clause (a).

Section 13(c): sums due

Sums of money due to the Interim Authority immediately before the appointed day → deemed due to the Authority

The Authority can recover them in its own name.

Section 13(d): legal proceedings

Suits and legal proceedings instituted, or which could have been instituted, by or against the Interim Authority → may be continued or instituted by or against the Authority

The words 'could have been instituted' also cover claims not yet filed.

Section 2B(1): appointment

Authority superseded under s.19(1) IRDA Act → Central Government notifies Controller of Insurance → serves till Authority reconstituted under s.19(3)

Section 2B(1) provides for the appointment when the Authority is superseded. The appointment is by notification in the Official Gazette.

Section 2B(2): factors to consider

Due regard to: (i) experience in industrial, commercial or insurance matters; (ii) actuarial qualifications

The Act says 'due regard to' these considerations. Do not write that both are mandatory conditions.

Grounds for supersession (s.19(1) IRDA Act)

(a) inability due to circumstances beyond control; (b) persistent default causing harm to finances or administration; (c) public interest

Any one ground is enough. Reasons must be specified in the notification.

Period and safeguards

Supersession period ≤ 6 months; reasonable opportunity for representations first

The Government must consider the Authority's representations before notifying.

Effects of supersession (s.19(2))

Members vacate office; Controller exercises Authority's powers; Authority's property vests in Central Government

All three effects last until reconstitution.

Reconstitution and Parliament (s.19(3), (4))

Reconstitute on or before the period ends; lay notification and full report before each House

Former members may be reappointed.

Rule-making (s.114 Insurance Act)

Central Government rules, after previous publication in the Gazette, laid before Parliament for 30 days

The 30 days may fall in one session or in two or more successive sessions. Parliament may modify or annul the rule.

Capital for life or general insurer

Paid-up equity capital ≥ ₹100 crore

Section 6(1)(i). Applies to a person carrying on life insurance or general insurance business.

Capital for exclusive health insurer

Paid-up equity capital ≥ ₹100 crore

Section 6(1)(ii). Applies only if the insurer carries on exclusively health insurance.

Capital for exclusive re-insurer

Paid-up equity capital ≥ ₹200 crore

Section 6(1)(iii). Applies only to exclusive re-insurance business.

Foreign re-insurer branch (section 2(9)(d))

Net owned funds ≥ ₹5,000 crore

Section 6(2). Net owned funds, not paid-up capital, is the test.

Counting paid-up equity capital

Paid-up equity capital counted = paid-up equity capital − preliminary expenses as specified by regulations

Second proviso to section 6(1). Preliminary expenses of formation and registration are excluded.

Enhancing capital

Enhancement allowed under the Companies Act, 2013, SEBI Act, 1992 and rules, regulations or directions under them or other law

First proviso to section 6(1).

Common officers (life insurer)

MD or officer of a life insurer ≠ MD or officer of another life insurer, a banking company or an investment company

Section 32A(1). The Authority may permit it for amalgamating or transferring business between two insurers.

Section 32B - duty

Every insurer must undertake specified percentages of life and general insurance business in the rural and social sectors

Percentages are specified by the Authority in the Official Gazette. The Act fixes no figure.

Section 32C - persons covered

Rural residents + unorganised or informal sector workers + economically vulnerable or backward classes + other categories specified by regulations

Policies may be life or general and must include crop insurance.

Source of IRDAI power

Section 14(2)(p) IRDA Act, 1999 and section 114A(2)(id) Insurance Act, 1938

Clause (p) deals with specifying the percentage. Clause (id) deals with regulations on the obligation under sections 32B and 32C.

Applicability

Applies to every insurer after the commencement of the IRDA Act, 1999

Commencement of the IRDA Act is the reference point stated in both sections.

Appeal against Authority's order (section 110)

Aggrieved person → SAT, within 45 days of receiving a copy of the order

SAT may condone delay if sufficient cause is shown. It should try to dispose of the appeal within 6 months.

Appeal against Tribunal order (section 61A)

Aggrieved person → NCLAT, within 45 days of receiving the order

No appeal lies from an order made with the consent of parties. NCLAT may condone delay for sufficient cause.

Appeal on capital structure scheme (section 6B)

Aggrieved shareholder or person → SAT, within 90 days of the order sanctioning the scheme

The decision of SAT, or of the officer if no appeal is made, is final and binding.

Appeal against Administrator's order (section 52BB)

Aggrieved person → SAT, within 14 days from service of the order

The order stays in force for 3 months unless an application is made under section 106. Transfers in breach are void.

Alteration in registration particulars (section 26)

Alteration → insurer furnishes full particulars to the Authority forthwith

Particulars must be authenticated. For changes to life insurance rates, advantages, terms or conditions, an actuarial certificate must accompany them.

Quick revision

• The IRDA Act, 1999 constitutes the Authority that regulates and develops the insurance industry.
• Section 13 of the IRDA Act transfers all assets and liabilities of the Interim Insurance Regulatory Authority to the Authority on the appointed day.
• Assets transferred include rights, powers, properties, cash balances, deposits, books of account and documents.
• Liabilities transferred include all debts, liabilities and obligations of whatever kind.
• Contracts and matters of the Interim Authority are deemed to be those of the Authority.
• Sums due to the Interim Authority are deemed due to the Authority.
• Suits and proceedings by or against the Interim Authority may continue or be instituted by or against the Authority.
• Section 32B of the Insurance Act, 1938: every insurer must undertake the specified percentages of life and general insurance business in the rural and social sectors.
• The percentages under Section 32B are specified by the Authority in the Official Gazette.
• Section 32B uses the words rural and social sectors, substituted in 2015 for rural or social sector.
• Section 32C requires insurers to discharge Section 32B obligations for rural residents, unorganised sector workers and economically vulnerable or backward classes.
• Policies under Section 32C include insurance for crops.

Common mistakes

• Placing the IRDA Act, 1999 before the nationalisation Acts or mixing the order. Fix: Remember the story: base law, State takeover, then opening and a regulator.
• Saying the 1938 Act was repealed by the IRDA Act. Fix: The 1938 Act still operates. The 1999 Act amended it and created the Authority.
• Quoting section 14 of the Insurance Act, 1938 as the Authority's powers section. Fix: Section 14 of the IRDA Act, 1999 covers duties, powers and functions. Section 14 of the Insurance Act, 1938 covers the record of policies and claims kept by insurers. Always write the Act's name beside the number.
• Saying the Authority is a department of the Central Government. Fix: Write that it is a body corporate with perpetual succession, a common seal and the power to sue and be sued.
• Confusing section 13 of the IRDA Act with section 13 of the Insurance Act, 1938 Fix: Link IRDA Act s. 13 to 'transfer' and Insurance Act s. 13 to 'actuary report'. Always name the Act.
• Saying the Interim Authority's assets were transferred by a deed or government order Fix: State that the assets and liabilities stand transferred and vested on the appointed day by force of the section itself.
• Saying the Controller of Insurance is the regular insurance regulator today. Fix: Write that section 2B(1) provides for the Controller when the Authority is superseded, and that the Controller serves until the Authority is reconstituted.
• Stating that supersession can be for any period the Government chooses. Fix: Write: for a period not exceeding six months, specified in the notification.
• Saying a foreign re-insurer branch needs paid-up capital of ₹5,000 crore. Fix: Remember section 6(2) uses net owned funds of at least ₹5,000 crore for the section 2(9)(d) category.
• Applying ₹100 crore to every health insurer. Fix: The health limb applies to a person carrying on exclusively health insurance. State that word in your answer.

Exam tips

• Answer in stages with a clear heading for each, because examiners look for the sequence of laws.
• Quote section 2A, 32C and 64VC correctly. Correct section numbers show precision.
• Use the word 'Authority' for the present regulator and mention the Controller only as the earlier body.
• For case-style questions, give provision, facts, and conclusion in that order.
• Avoid exact dates or figures you are not sure of, apart from those in the Act.
• Always name the Act beside the section number. Examiners use the two section 14s to test careful readers.
• For functions questions, open with the section 14(1) duty and then group the section 14(2) powers. Grouping shows structure and saves time.
• For case-based questions, write provision, analysis and conclusion in separate short paragraphs. Identify the specific power the facts attract.