Banking and Insurance - Laws and Practice · Functions in Insurance and Compliance related thereto (Part III)

Insurance Underwriting Function and Compliance

Updated 11 October 2026 · Fact-checked

Underwriting is the insurer's function of assessing a proposed risk, deciding whether to accept it, and fixing the premium and terms. It rests on utmost good faith and insurable interest. Compliance covers the Insurance Act, 1938 duties, such as motor third party share (Section 32D) and reinsurance cessions (Section 101A), and IRDAI rules.

Understand Insurance Underwriting Function and Compliance

Underwriting is the process by which an insurer decides which risks to accept, on what terms and at what price. The person who does it is the underwriter. Think of it as the gatekeeper of the insurer's solvency. If it accepts bad risks at low prices, claims will exceed premiums.

The process starts with a proposal form. The proposer discloses material facts under the principle of utmost good faith. The underwriter checks the facts, such as age, health, occupation, vehicle, property, location and claims history. Medical reports, surveys or inspections may be called for. The underwriter then classifies the risk as standard, substandard (extra premium or special terms) or declined.

Premium should reflect the risk. Insurers group similar risks into classes, so that the premium charged is fair to each group and adequate overall. Underwriters also use reinsurance to share large risks, and they avoid adverse selection, where people with higher risk are more keen to buy cover. Acceptance is usually communicated by a cover note or acceptance of the proposal, and the policy is then issued.

Compliance matters because underwriting is regulated. The Insurance Act, 1938 requires, for example, that every insurer carrying on general insurance business underwrite a minimum percentage of motor third party risks as set by regulations (Section 32D). Insurers must also reinsure a specified percentage of the sum assured on each general insurance policy with Indian re-insurers (Section 101A). For life insurance, an insurer must notify the policy-holder of options on lapse (Section 50). As a Company Secretary, you ensure these duties are met and recorded.

Key rules to remember

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).

How to solve Insurance Underwriting Function and Compliance questions

Use this method for any written question on underwriting and its compliance. Link every point to the facts given.

1Define underwriting in one line: selecting and pricing risks so that the insurer stays solvent.
2Identify the class of business: life, general, motor, fire, health or reinsurance. The compliance rule depends on it.
3Apply the underwriting process: proposal, disclosure, risk assessment, classification, premium and terms, acceptance, issue of policy.
4Name the principle at stake: utmost good faith, insurable interest, adverse selection or risk spreading.
5State the statutory provision in plain words, with the section number only if you are sure of it. Section 32D, 101A and 50 are safe.
6Apply it to the facts: check the percentage, the time limit, the exemption or the notice.
7Conclude clearly and add a compliance point, such as records, reporting or board and committee review.

Quickest way: Process then provision

When to use it: Use when time is short and the question asks you to explain the function and the legal duty together.

Write the five-part process: proposal, assessment, pricing, acceptance, issue.
Add one principle: utmost good faith.
Pick the rule that matches the facts: 32D for motor third party, 101A for reinsurance, 50 for lapse.
State the key limit: the 30% ceiling in Section 101A, the three-month period in Section 50.
Close with a one-line conclusion.

Common mistakes in Insurance Underwriting Function and Compliance

Treating underwriting as only premium calculation.
Students link it with pricing alone.
Fix: Cover selection, classification, pricing, terms and acceptance. Pricing is one part.
Saying Section 101A fixes the cession at 30%.
The 30% figure is remembered but not its meaning.
Fix: Write that the Authority specifies the percentage and that it cannot exceed 30% of the sum assured on a policy.
Applying Section 101A to reinsurance policies or to life policies.
The word 'policy' is read loosely.
Fix: Remember the section covers general insurance policies and excludes re-insurance policies.
Saying the Act fixes the motor third party percentage in Section 32D.
Students assume numbers sit in the Act.
Fix: State that the minimum percentage is specified by regulations. The Authority may exempt insurers engaged primarily in health, reinsurance, agriculture or export credit guarantee.
Mixing the Section 50 time limit: saying notice is due after lapse.
The old wording was 'within three months of lapsing'.
Fix: The notice must be given before three months expire from the date the premium was payable but unpaid.

Worked examples

Example 1

Explain the underwriting function of an insurer and the steps in the process. Why is it important for solvency?

Show the solution

Define: underwriting is assessing, selecting and pricing risks.
List the steps: proposal form with full disclosure; verification through reports, surveys or medical tests; classification as standard, substandard or declined; fixing premium and special terms; acceptance; issue of policy.
Link to principles: the proposer owes utmost good faith and the insurer must guard against adverse selection.
Explain solvency: premiums from each class must be enough to pay claims and expenses. Poor underwriting leads to claims exceeding premiums.
Add reinsurance: large risks are shared to limit the net exposure.

Answer: Underwriting is the insurer's process of evaluating proposals, accepting suitable risks and pricing them adequately. It protects solvency by matching premium to risk and preventing adverse selection.

Example 2

A general insurer issues a fire policy for a sum assured of ₹10,00,00,000. The notified cession to Indian re-insurers for this class is 20% of the sum assured. What must the insurer do under Section 101A, and what is the minimum cession?

Show the solution

Section 101A(1) requires every insurer to reinsure with Indian re-insurers the percentage of sum assured on each policy that the Authority specifies.
The specified percentage here is 20%, which is within the 30% ceiling.
Cession = 20% × ₹10,00,00,000 = ₹2,00,00,000.
Under Section 101A(3), a fire insurer may instead reinsure part of the first surplus, provided the total yearly reinsurance premium is not less than the specified percentage of its fire premium income.
The insurer may reinsure more than the percentage with Indian re-insurers or other insurers (Section 101A(7)).

Answer: The insurer must cede at least ₹2,00,00,000 of the sum assured to Indian re-insurers, or use the fire-business first-surplus alternative if it meets the premium test.

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.

Practice questions from Functions in Insurance and Compliance related thereto (Part III)

Insurance Underwriting Function and Compliance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Insurance Underwriting Function and Compliance: frequently asked questions

What is underwriting in insurance?

It is the process of evaluating a proposed risk, deciding whether to accept it, and fixing the premium and terms. The underwriter weighs the risk against the premium to keep the insurer solvent.

What is the limit on compulsory reinsurance under Section 101A?

The Authority specifies the percentage of the sum assured on each policy to be reinsured with Indian re-insurers. No specified percentage can exceed 30% of the sum assured on that policy.

What does Section 32D require?

Every insurer carrying on general insurance business must underwrite the minimum percentage of motor third party risks that the regulations specify. The Authority may exempt insurers mainly engaged in health, reinsurance, agriculture or export credit guarantee.

What must a life insurer do when a premium is unpaid?

Under Section 50, it must give the policy-holder notice of the options available before three months have passed from the date the premium was payable but unpaid. The notice is not needed if the policy already sets out the options.