RM-6 - Insurance Industry Regulations & Legislation

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post-graduate program in management & insurance
INSURANCE INDUSTRY
REGULATIONS AND LEGISLATION
Learning Goals 11-3
Introduction 11-4
Qualification of Insurance Related Entities 11-4
Ø Insurance Companies
Ø Ownership and Management of Insurance Companies
Ø Insurance Agents and Brokers
Financial Viability and Strength of Insurers 11-11
Ø Fund Concept of Accounting

Ø Capital Requirements for Insurers
Ø Solvency Requirements for Insurers
Ø Rules Regarding Investment of Insurance Funds
Ø Filing of Statutory Returns
Insurance Business Practices 11-38
Ø Available Distribution Channels

Ø Structure of the agencies
Ø Remuneration
Ø Obligation of Insurers to rural and social sectors
Ø Ombudsman scheme
Ø Consumer Protection Act 1986
Ø Married Women's Property Act 1874
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Professional Standards, Rules & Ethics

Governing Insurance Practice 11-46
Ø Code of conduct for Agents

Ø Code of conduct for Brokers
Ø Code of conduct in Advertisement
Ø Protection of Policyholders' Interest
Insurance Legislation 11-63
Ø History of Insurance Regulation in India

Ø Key points of the Insurance Act 1938
Ø Brief History of LIC Act 1956 and GIC Act 1972
Ø Malhotra Committee Report
Ø Insurance Regulatory & Development Authority Act 1999
Summary 11-69
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Learning Goals
In studying this lesson, the Learning Goals are to:
Ø UNDERSTAND the rules that govern the qualification of insurance related entities.
Ø DESCRIBE the qualification for Insurance Companies.
Ø UNDERSTAND qualification for owners and Managers of insurance companies
Ø DESCRIBE the qualification for Brokers and Insurance Agents
Ø EXPLAIN the rules that help maintain the financial viability and strength of insurance
companies.
Ø UNDERSTAND the Fund Concept of Accounting.
Ø UNDERSTAND the Suitable Capital Requirement for Insurers.
Ø UNDERSTAND the Solvency Requirements for Insurers.
Ø UNDERSTAND basic rules Regarding Investment of Insurance Funds.
Ø DETAILS of certain statutory returns filed by Life and General insurers
Ø UNDERSTAND relevant insurance business practices.
Ø UNDERSTAND obligation of insurers to rural and social sectors
Ø UNDERSTAND Ombudsman scheme
Ø UNDERSTAND Consumer Protection Act 1986
Ø UNDERSTAND Married Women's Property Act
Ø EXPLAIN the importance and nature of professional standards, rules and ethics governing
insurance practice.
Ø UNDERSTAND code of conduct for Agents
Ø UNDERSTAND code of conduct for Brokers
Ø UNDERSTAND code of conduct in Advertisement
Ø UNDERSTAND protection of policyholders interest Regulations, 2002
Ø UNDERSTAND Insurance Regulation and Legislation
Ø UNDERSTAND brief history of Insurance Regulation in India
Ø DESCRIBE the key points of the Insurance Act 1938
Ø UNDERSTAND brief history of LIC Act 1956 and GIC Act 1972
Ø UNDERSTAND the main recommendation of Malhotra Committee
Ø UNDERSTAND Insurance Regulatory and Development Authority Act 1999
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Introduction
The impact of the insurance industry on society's well-being is tremendous. People and their families
depend on the reliability of insurance companies to fulfil their contractual promises in times of need
and crisis. An unstable and volatile insurance industry can affect the economic, social and financial
fabric of society and can cause severe hardship to people when they can least afford to sustain them.
This lesson will delve into the various regulations, professional and ethical rules that govern the
practice of the insurance industry. A financial planner must be sufficiently well-versed and informed
about the measures that help protect the client's interest in respect of the insurance industry.
Qualification of Insurance Related Entities
UNDERSTAND the rules that govern the qualification of insurance related entities.
The impact of the insurance industry on society well-being is tremendous. People and their families
depend on the reliability of insurance companies to fulfil their contractual promises in times of need
and crisis. An unstable and volatile insurance industry can affect the economic, social and financial
fabric of society and can cause severe hardship to people when they can least afford to sustain them.
It is well recognized that for the insurance industry to be above board in its activities and business
dealings, the participants in the industry must be honest, capable and adequately qualified. It is also
the declared policy of the government that Insurance Industry, whether in the public sector or private
sector, must serve the interest of the general public. Rules have been laid down to achieve the
declared objectives to ensure that only suitable parties can qualify for the following positions:
Ø Insurance companies
Ø Ownership and management of insurance companies
Ø Insurance agents and Brokers
Insurance Companies
DESCRIBE the qualification of Insurance Companies.
Section 3 of the Insurance Act provides that no person can carry on any insurance business in India
unless he has obtained from the Insurance Regulatory and Development Authority (IRDA) a certificate
of registration for the particular class of insurance business. The registration will be granted only if
certain conditions stipulated in the Insurance Act and IRDA Regulations are met, to ensure that the
company approved is financially sound and reputable. These conditions are prescribed in Section 2,
2C, 3 and 6 of the Insurance Act and various regulations framed by the IRDA.
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They can be summarized as under:
a) The company must be a public company (not a closely held company) in accordance with the
provisions of the Companies Act or a co-operative society duly registered according to the law of
the State in which it is incorporated.
b) Every requisition for registration of an application by the insurer for carrying on insurance
business in India shall be accompanied by :
1. A certified copy of the Memorandum and Articles of Association, where the applicant is a
Company incorporated under the Companies Act, 1956
2. The name, address and the occupation of the directors and Principal Officer
3. A statement of the class of the insurance business proposed to be carried on
4. A statement indicating the sources that will contribute the share capital.
c) The Memorandum and Articles of Association must clearly state the main object to carry on
Insurance Business of the class for which it intends to carry on.
d) The participation of foreign entrepreneurs should not exceed 26% of the equity capital. The
promoters of Indian insurance companies shall divest their shareholding in excess of 26% in a
phased manner after 10 years.
e) An insurer sole purpose is to carry on life insurance business or general insurance business or
reinsurance business.
f) The minimum paid up capital must be Rs. 100 crores for a company carrying on life insurance or
general insurance business.
g) For re-insurance business the minimum paid up capital requirement is Rs. 200 crores.
h) Every insurer is required to maintain deposits with RBI of the following amounts viz.
Ø Life insurance business - 1% of the gross premium income in a year not exceeding
Rs 10 crores
Ø General insuance business 3% of the gross premium income in a year not exceeding
Rs 10 crores.
Ø Reinsurance business - Not exceeding Rs 20 crores per annum
i) At all relevant times, the applicant's paid-up share capital or value of assets must exceed its
liabilities by the amounts prescribed. In this respect, the IRDA is entitled to prescribe the
amounts for different insurers and/or different classes of insurance.
j) An actuary approved by the IRDA certifies the soundness and workability of terms of life
insurance business.
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k) The business of the company must serve the interests of the public in general.
l) A Registration fee of Rs. 50,000 for each class of business is required to be paid to IRDA for
obtaining registration. The registration has to be renewed annually.
Ownership and Management of Insurance Companies
Describe the qualification for owners and Managers of Insurance Companies
There is a saying that a company is as good as its people. Hence, the IRDA has laid down certain rules
to ensure that only 'fit and proper' persons are allowed to own or manage insurance companies. 'Fit
and proper' persons refer to people who are qualified, experienced and have financial integrity. Some
of these rules are as follows:
Sub Section 2A of Section 3 of the Insurance Act provides that before granting registration to an
insurance entity, the IRDA should after making such enquiry as it deems fit be satisfied that the financial
condition and the general character of the management of the applicant is sound. If the business or a
class of business of an already registered insurer is transferred to or amalgamated with the business of
any other insurer the registration is cancelled.
The IRDA is also empowered to cancel registration of an insurer if any claim under a policy of insurance
is pending for more than three months after final judgment in regular course of law.
Section 6A (4) of the Insurance Act provides that in any transfer of shares the nominal value of
shareholding may not exceed 5%. of the nominal value of shares without the permission of the IRDA.
Complete details of the shareholders and the beneficial interest therein have to be maintained by the
insurance company.
The life insurance business of an insurer is required to be investigated by an actuary every year with
regard to its financial condition and a report submitted to the IRDA.
Insurance Agents and Brokers
DESCRIBE the qualification for Insurance Agents and Brokers
In the insurance business, certain requirements have been set down by the Authority to ensure that
only people of an appropriate education background, caliber, aptitude and character are recruited into
the insurance sales force.
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Insurance Agents
The Insurance Act 1938 defines “insurance agent” as an agent licensed under section 42 who receives
or agrees to receive payment by way of commission or other remuneration in consideration of his
soliciting or procuring insurance business including business relating to the continuance, renewal or
the revival of policies of insurance.
The Indian Contract Act 1872 defines an agent as “a person employed to do any act for another or to
represent another in dealing with a third person”.
The IRDA has laid down some pre-requisites for a life insurance agent :-
Ø The applicant must be at least 18 years of age.

Ø The applicant should have passed the minimum 12th standard if he/she is appointed in a
place having a population of 5000 or more; otherwise 10th pass
Ø The applicant should have undergone a practical training for at least 100 hours in either life
or general insurance as the case may be and 150 hours training incase the applicant wants
to become a composite agent.
Ø The applicant should have passed the pre-recruitment examination conducted by the
Insurance Institute of India.
Ø The applicant must be a person of honesty and integrity. The applicant should not have
been found guilty of any misrepresentation, criminal misappropriation or criminal breach
of trust or cheating or forgery or abetment or attempt to commit any such offence.
Ø The applicant should not be of unsound mind.
Ø Payment of Rs 250 to IRDA towards license fee.
Renewal of Agency
The application for the renewal of the license should reach the concerned person of the company
within 30 days before the date of expiry of the existing license along with the following documents.
Ø Application on prescribed form.

Ø Prior to renewal of license, the agent should complete at least 25 hours of practical training
in life or general insurance. In case of composite insurance agent, 50 hours of practical
training in life or general insurance business is mandatory.
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Termination of Agency
The license of an agent will get terminated in the event of
The Agent acquiring any of the following legal disqualifications : -
Ø Found of unsound mind

Ø Conviction for criminal misappropriation
Ø Criminal breach of trust
Ø Cheating or forgery
Ø Any violation of the code of conduct.
Ø Non-renewal of the license by the Agent
Ø Termination /Cancellation by the insurer in terms of the appointment of the agency for :
Ø Non-performance with regard to minimum business expectations
Brokers
The Insurance Regulatory and Development Authority (IRDA) has laid down certain qualifications for
grant of license to carry out functions of an insurance broker.
The IRDA Act 1999 via its Insurance Brokers Regulations, 2002 has defined “insurance broker” as a
person for the time-being licensed by the Authority under regulation 11, who for a remuneration
arranges insurance contracts with insurance companies and/ or reinsurance companies on behalf of
his clients.
Explanation: The term “insurance broker” wherever it appears in these regulations shall be deemed to
mean a direct broker, a reinsurance broker or a composite broker, as the case may be, unless expressly
stated to the contrary;
“Composite broker” means an insurance broker who for the time-being licensed by the Authority to
act as such, for a remuneration, arranges insurance for his clients with insurance companies and/or
reinsurance for his client/s;
“Direct broker” means an insurance broker who for the time-being licensed by the Authority to act as
such, for a remuneration carries out the functions as specified under regulation 3 either in the field of
life insurance or general insurance or both on behalf of his clients;
“Reinsurance broker” means an insurance broker who, for a remuneration, arranges reinsurance for
direct insurers with insurance and reinsurance companies.
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The IRDA while considering an application for grant of a licence shall take into account, all matters
relevant to the carrying out of the functions by the insurance broker.
(A) whether the applicant is not suffering from any of the disqualifications specified under
sub-section (5) of section 42 D of the Inurance Act 1938.
(B) whether the applicant has the necessary infrastructure, such as, adequate office space,
equipment and trained manpower to effectively discharge his activities;
(C) whether the applicant has in his employment a minimum of two persons who have the
necessary qualifications specified in clause (F) below and experience to conduct the business of
insurance broker;
(D) whether any person, directly or indirectly connected with the applicant, has been refused in the
past the grant of a licence by the Authority.
Explanation : For the purposes of this sub-clause, the expression “directly or indirectly connected”
means a relative in the case of an individual, and in the case of a firm or a company or a body
corporate, an associate, a subsidiary, an interconnected undertaking or a group company of the
applicant . It is hereby clarified that these terms shall have the same meanings as ascribed to them
in the Companies Act, 1956 (1 of 1956) or MRTP Act, 1969 (54 of 1969), as the case may be.
(E ) whether the applicant fulfils the capital requirements as specified in regulation 10 and deposit
requirements as specified in regulation 22;
(F) whether the principal officer of the applicant :

(i) possesses the minimum qualification of :
(a) Bachelors/ Masters degree in Arts, Science, or Social Sciences or Commerce or its
equivalent from any institution/ university recognized by any State Government or
the Central Government; or
(b) Bachelor's degree in engineering or its equivalent from any institution/ university
recognized by any State government or the Central government; or
(c) Bachelor's degree in law or its equivalent from any institution/ University recognized
by any State Government or the Central Government; or
(d) Masters in Business Administration or its equivalent from any institution/ university
recognized by any State Government or the Central Government; or
(e) Associate/ Fellow of the Insurance Institute of India, Mumbai; or
(f) Associate/ Fellow of the Institute of Risk Management, Mumbai; or
(g) any post graduate qualification of the Institute of Insurance and Risk Management,
Hyderabad; or
(h) Associate/ Fellow of the Institute of Chartered Accountants of India , New Delhi; or
(i) Associate/ Fellow of the Institute of Cost and Works Accountants of India, Kolkata; or
(j) Associate/ Fellow of the Institute of Company Secretaries of India, New Delhi; or
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(k) Associate/ Fellow of the Actuarial Society of India; or

(l) Certified Associateship of the Indian Institute of Bankers, Mumbai; or
(m) any other qualification specified from time to time by the Authority under these
regulations; and
(ii) the principal officer of the applicant has received at least one hundred hours of theoretical
and practical training from an institution recognised by the Authority from time to time.
Provided that where the principal officer of the applicant :
(a) has been carrying on reinsurance related activity or insurance consultancy for a
continuous period of seven years, preceding the year in which such an application is
made; or
(b) has for a period of, not less than seven years prior to the application made to the
Authority has been a principal underwriter or has held the position of a Manager in
any one of the nationalised insurance companies in India; or
(c) is an Associate/ Fellow of the Insurance Institute of India, Mumbai; or Associate/
Fellow of the Institute of Risk Management, Mumbai; or Associate/ Fellow of the
Actuarial Society of India; or any post graduate qualification of the Institute of
Insurance and Risk Management, Hyderabad;
(d) the theoretical and practical training from an institution recognised by the Authority
from time to time according to a syllabus approved by the Authority shall be fifty
hours.
(e) has passed an examination, at the end of the period of training mentioned in the
proviso above, conducted by the National Insurance Academy, Pune or any other
examining body recognised by the Authority.
(G) Whether the principal officer has not violated the code of conduct as specified in Schedule III to
these regulations;
(H) that the applicant is not engaged in any other business other than the main objects of the
applicant; and
(I) the Authority is of the opinion that the grant of licence will be in the interest of policyholders.
Exception: In the case of applications made to the Authority immediately following the
notification of these regulations, the requirements under sub-regulation (2)© shall stand
modified to the extent that instead of two qualified persons mentioned in the requirement be
scaled down to one person, who should have qualified himself at the latest by the time of the
grant of a licence under these regulations. This exception may be available only to applications
st
made to the authority upto 31 March, 2003.
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(J) Any employee responsible for soliciting and procuring insurance business on behalf on an
insurance broker shall also have to fulfill the requirements mentioned in sub-regulations (1) and
(2) above and a list of such employees need to be provided to the Authority and acknowledged
by it.
Ø An Insurance Broker will be disqualified on any of the following ground:-
a) That the person is a minor;

b) That he is found to be of unsound mind by a court of competent jurisdiction;
c) That he has been found guilty of criminal misappropriation or criminal breach of trust or
cheating or forgery or an abetment of or attempt to commit any such offence by a court of
competent jurisdiction:
Provided that, where at least five years have elapsed since the completion of the sentence
imposed on any person in respect of any such offence , the Authority shall ordinarily
declare in respect of such person that his conviction shall cease to operate as a
disqualification under this clause;
d) That in the course of any judicial proceedings relating to any policy of insurance of the
winding up of an insurance company or in the course of an investigation of the affairs of an
insurer it has been found that he has been guilty of or has knowingly participated in or
connived at any fraud dishonestly or misrepresentation against an insurer or an insured;
e) That he does not possess the requisite qualifications and practical training for a period not
exceeding twelve months, as may be specified by the regulations made by the authority in
this behalf;
f) That he has not passed such examinations, as may be specified by the regulations made by
the Authority in this behalf;
g) That he violates the code of conduct as may be specified by the regulations made by the
authority.
Financial Viability and Strength of Insurers
EXPLAIN the rules that help maintain the financial viability and strength of insurance companies.
Just as it is very important to ensure that the players in the insurance industry are capable and suitable,
it is no less important to ensure that the rules governing how the game is to be played are fair,
constructive and protect the interest of the public.
One of the IRDA's main bases of setting the rules is to ensure that the insurers allowed to transact
business are and remain financially sound and viable. To do so, the following rules were
implemented:
a. The fund concept of accounting is adopted.
b. Suitable capital requirements for insurers are laid down.
c. Suitable solvency requirements are set.
d. Prudent rules regarding investment of the insurance funds are stipulated.
e. Life and General insurers must file certain statutory returns.
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Fund Concept of Accounting
UNDERSTAND the Fund Concept of accounting.
(a) Section 10 of the Insurance Act enjoins upon all insurers who carry on Life or General
business (Fire Insurance, Marine Insurance and Miscellaneous Insurance), to keep a
separate account of all receipts and payments in respect of each class of insurance
business. In the case of insurers carrying on life insurance business, all receipts due in
respect of such business shall be carried to a separate fund called the Life Insurance Fund .
Capital Requirements of Insurers
UNDERSTAND the capital requirements of Insurers.
Various minimum paid-up capital requirements for insurers are prescribed in the Insurance
Regulations as follows:
i) In the case of insurer carrying on the business of Life insurance, a minimum paid up capital
of Rs 100 crores is required to be maintained.
ii) In the case of insurer carrying on the business of General insurance, a minimum paid up
capital of Rs 100 crores is required to be maintained.
iii) In the case of any insurer carrying on the business of reinsurance, a minimum paid up
capital of Rs 200 crores is required to be maintained.
At all relevant times, the company's paid up share capital or value of assets must exceed its liabilities
by these prescribed amounts. Further, it is provided that for each class of insurance business, a deposit
with the Reserve Bank of India of an amount equivalent to 1% of the total annual gross premium in the
case of life insurance and 3% in the case of general insurance (maximum Rs. 10 crores for each class of
business) in the form of cash or government securities should be kept and maintained at all relevant
times.
Solvency Requirements for Insurers
UNDERSTAND the Solvency Requirements for Insurers.
The IRDA (Assets, Liabilities, and Solvency Margin of Insurers) Regulations, 2000, has prescribed rules
for valuation parameters, policy options, methods of determination of mathematical reserves, Assets
and Liabilities and solvency margins. Every insurance company is required to submit to the IRDA,
statements in prescribed form separately for business in India and abroad in accordance with the
regulations.
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Some of the rules are explained in Brief:
The IRDA (Assets, Liabilities, and Solvency Margin of Insurers) Regulations, 2000 contains the
following rules viz
Ø Valuation of Assets. (Regulation 3)

Ø Determination of Amount of Liabilities (Regulation 4)
Life Insurance (Schedule II A)
General Insurance (Schedule II B)
Ø Determination of Solvency Margin (Regulation 5)
Ø Health Insurance Business
Ø Business outside India.
Ø Furnishing of Forms
Ø Personal visit of appointed actuary to the Authority
Valuation of Assets (Schedule 1)

As per this schedule, 'non mandated investments' means those investments that are neither approved
securities nor approved investments.
The value of asssets is determined as under:
(1) The following assets should be placed with value zero,--
Ø Agent's balances and outstanding premiums in India, to the extent they are not realised
within a period of thirty days;
Ø Agents' balances and outstanding premiums outside India, to the extent they are not
realisable ;
Ø Sundry debts, to the extent they are not realisable;
Ø Advances of an unrealisable character;
Ø Furniture, fixtures, dead stock and stationery;
Ø Deferred expenses;
Ø Profit and loss appropriation account balance and any fictitious assets other than pre-paid
expenses;
Ø Reinsurer's balances outstanding for more than three months;
Ø Preliminary expenses in the formation of the company;
(2) The value of computer equipment including software shall be computed as under:--
Ø seventy five per cent. of its cost in the year of purchase;

Ø fifty per cent. of its cost in the second year;
Ø twenty-five per cent. of its cost in the third year; and
Ø zero per cent. thereafter.
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(3) All other assets of an insurer have to be valued in accordance with the Insurance Regulatory and
Development Authority (Preparation of Financial Statements and Auditor's Report of Insurance
Companies) Regulations, 2000.
Statement of Assets
Every insurer shall prepare a statement of assets in Form IRDA-Assets- AA.
Determination of Amount of Liabilities.
Life Insurance : Every insurer shall prepare a statement of the amount of liabilities in accordance with
Schedule II-A, in respect of life insurance business.
General Insurance : Every insurer shall prepare a statement of the amount of liabilities in accordance
with Schedule II-B and in Form HG in case of general insurance
Schedule II-A
Valuation of Liabilities - Life Insurance
Interpretation.
1) In this Schedule, –
a) “valuation date”, in relation to an actuarial investigation, means the date to which the
investigation relates.
b) “universal life contracts” means those contracts that are presented in an unbundled form.
The contracts where policyholders have an option to invest in units of insurer's segregated
fund(s) shall be treated as “linked business”; and others shall be treated as “non-linked
business”.
c) “segregated funds” means funds earmarked in respect of linked business.
Method of Determination of Mathematical Reserves
2) (1) Mathematical Reserves shall be determined separately for each contract by a prospective
method of valuation in accordance with sub-paras (2) to (4)..
(2) The valuation method shall take into account all prospective contingencies under which
any premiums (by the policyholder) or benefits (to the policyholder/beneficiary) may be
payable under the policy, as determined by the policy conditions. The level of benefits
shall take into account the reasonable expectations of policyholders (with regard to
bonuses, including terminal bonuses, if any) and any established practices of an insurer for
payment of benefits.
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(3) The valuation method shall take into account the cost of any options that may be available
to the policyholder under the terms of the contract.
(4) The determination of the amount of liability under each policy shall be based on prudent
assumptions of all relevant parameters. The value of each such parameter shall be based
on the insurer's expected experience and shall include an appropriate margin for adverse
deviations (hereinafter referred to as MAD) that may result in an increase in the amount of
mathematical reserves.
(5) (i) The amount of mathematical reserve in respect of a policy, determined in accordance
with sub-para (4), may be negative (called “negative reserves”) or less than the
guaranteed surrender value available (called “guaranteed surrender value deficiency
reserves”) at the valuation date.
(ii) The appointed actuary shall, for the purpose of section 35 of the Act, use the amount
of such mathematical reserves without any modification;
(iii) The appointed actuary shall, for the purpose of sections 13, 49, 64V and 64VA of the
Act, set the amount of such mathematical reserve to zero, in case of such negative
reserve, or to the guaranteed surrender value, in case of such guaranteed surrender
value deficiency reserves, as the case may be.
(6) The valuation method shall be called “Gross Premium Method'.
(7) If in the opinion of the appointed actuary, a method of valuation other than the Gross
Premium Method of valuation is to be adopted, then, other approximations (e.g.
retrospective method) may be used.
Provided that the amount of calculated reserve is expected to be atleast equal to the
amount that shall be produced by the application of Gross Premium Method.
(8) The method of calculation of the amount of liabilities and the assumptions for the valuation
parameters shall not be subject to arbitrary discontinuities from one year to the next.
(9) The determination of the amount of mathematical reserves shall take into account the
nature and term of the assets representing those liabilities and the value placed upon them
and shall include prudent provision against the effects of possible future changes in the
value of assets on the ability of the insurer to meet its obligations arising under policies as
they arise.
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Policy Cash Flows.---
3) The gross premium method of valuation shall discount the following future policy cash flows at
an appropriate rate of interest,---
(a) premiums payable, if any, benefits payable, if any, on death; benefits payable, if any, on
survival; benefits payable, if any, on voluntary termination of contract, and the following, if
any, :-
(i) basic benefits,
(ii) rider benefits,
(iii) bonuses that have already been vested as at the valuation date,
(iv) bonuses as a result of the valuation at the valuation date, and
(v) future bonuses (one year after valuation date) including terminal bonuses (consistent
with the valuation rate of interest);
(b) commission and remuneration payable, if any, in respect of a policy (This shall be based on
the current practice of the insurer). No allowance shall be made for non-payment of
commissions in respect of the orphaned policies;
(c) policy maintenance expenses, if any, in respect of a policy, as provided under sub-para (4)
of para 5;
(d) allocation of profit to shareholders, if any, where there is a specified relationship between
profits attributable to shareholders and the bonus rates declared for policyholders.
Provided that allowance must be made for tax, if any.
Policy Options.
4) Where a policy provides built-in options, that may be exercised by the policyholder, such as
conversion or addition of coverage at future date(s) without any evidence of good health,
annuity rate guarantees at maturity of contract, etc., the costs of such options shall be estimated
and treated as special cash flows in calculating the mathematical reserves.
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Valuation Parameters
5) (1) The valuation parameters shall constitute the bases on which the future policy cash flows
shall be computed and discounted. Each parameter shall have to be appropriate to the
block of business to be valued. An appointed actuary shall take into consideration the
following,--
(a) The value(s) of the parameter shall be based on the insurer's experience study, where
available. If reliable experience study is not available, the value(s) can be based on
the industry study, if available and appropriate. If neither is available, the values may
be based on the bases used for pricing the product. In establishing the expected
level of any parameter, any likely deterioration in the experience shall be taken into
account;
(b) The expected level, as determined in clause (a) of this sub-para, shall be adjusted by
an appropriate Margin for Adverse Deviations (MAD), the level of MAD being
dependent on the degree of confidence in the expected level, and such MAD in each
parameter shall be based on the Guidance Notes issued by the Actuarial Society of
India, with the concurrence of the Authority
(c) The values used for the various valuation parameters should be consistent among
themselves.
(2) Mortality rates to be used shall be by reference to a published table, unless the insurer has
constructed a separate table based on his own experience:
Provided that such published table shall be made available to the insurance industry by the
Actuarial Society of India, with the concurrence of the Authority.
Provided further that such rates determined by reference to a published table shall not be less
than hundred per cent. of that published table.
Provided further that such rates determined by reference to a published table may be less than
hundred per cent. of that published table if the appointed actuary can justify a lower per cent.
(3) Morbidity rates to be used shall be by reference to a published table, unless the insurer has
constructed a separate table based on his own experience:
Provided that such published table shall be made available to the insurance industry by the
Actuarial Society of India, with the concurrence of the Authority:
Provided further that such rates determined by reference to a published table shall not be less
than hundred per cent. of that published table.
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Provided further that such rates determined by reference to a published table may be less than
hundred per cent. of that published table if the appointed actuary can justify a lower per cent.
(4) Policy maintenance expenses shall depend on the manner, in which they are analysed by
the insurer, viz., fixed expenses and variable expenses. The variable expenses shall be
related to sum assured or premiums or benefits. The fixed expenses may be related to
sum assured or premiums or benefits or per policy expenses. All expenses shall be
increased in future years for inflation, the rate of inflation assumed should be consistent
with the valuation rate of interest.
(5) Valuation rates of interest, to be used by appointed actuary -
a) shall be not higher than the rates of interest, for the calculation of the present value of
policy cash flows referred to in para 4, determined from prudent assessment of the
yields from existing assets attributable to blocks of life insurance business, and the
yields which the insurer is expected to obtain from the sums invested in the future,
and such assessment shall take into account —
i) the composition of assets supporting the liabilities, expected cash flows from
the investments on hand, the cash flows from the block of policies to be valued,
the likely future investment conditions and the reinvestment and
disinvestment strategy to be employed in dealing with the future net cash
flows;
ii) the risks associated with investment in regard to receipt of income on such
investment or repayment of principal;
iii) the expenses associated with the investment functions of the insurer;
1. shall not be higher than, for the calculation of present value of policy cash
flows in respect of a particular category of contracts, the yields on assets
maintained for the purpose of such category of contacts;
2. in respect of non-participating business, shall recognise the risk of
decline in the future interest rates;
3. in respect of participating business , shall be based on the assumption
(with regard to future investment conditions), that the scale of future
bonuses used in the valuation is consistent with the valuation rate of
interest, and
4. in respect of single premium business, shall take into account the effect
of changes in the risk-free interest rates.
(6) Other parameters, may be taken into account, depending on the type of policy. In
establishing the values of such parameters, the considerations set out in this
Schedule shall be taken into account.
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6) Applicability to Reinsurance.
(1) This Schedule shall also apply to the valuation of business in the books of reinsurers.
(2) As regards the business ceded by insurers, this Schedule shall be applicable to the net
sums at risk retained by the insurer.
(3) Reinsurance arrangement with an element of borrowing in the form of deposit or credit of
any kind from insurer's reinsurers without the prior approval of the Authority shall not be
treated as credit for reinsurance for the purpose of determination of required solvency
margin.
Additional Requirements for Linked Business.
7) (1) Reserves in respect of linked business shall consist of two components, namely, unit
reserves and general fund reserves.
(2) Unit reserves shall be calculated in respect of the units allocated to the policies in force at
the valuation date using unit values at the valuation date.
(3) General fund reserves (non-unit reserves) shall be determined using a prospective
valuation method set out in this Schedule, which shall take into account of the following,
namely:-
(a) premiums, if any, payable in future;
(b) death benefits, if any, provided by the general fund (over and above the value of
units);
(c) management charges paid to the general fund;
(d) guarantees, if any, relating to surrender values or minimum death and maturity
benefits;
(e) fund growth rates and management charges. (The values of these parameters, along
with others, shall be determined in accordance with para 5);
(f) negative reserves, if any, shall be dealt with in accordance with sub-para (5) of para 2
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Additional Requirements for Provisions.---
8) The appointed actuary shall make aggregate provisions in respect of the following, where it is
not possible to calculate mathematical reserves for each policy, in the determination of
mathematical reserves:-
(a) Policies in respect of which extra premiums have been charged on account of underwriting
of under-average lives that are subject to extra risks such as occupation hazard, over-
weight, under-weight, smoking history, health, climatic or geographical conditions;
(b) Lapsed policies not included in the valuation but under which a liability exists or may arise;
c) Options available under individual and group insurance policies;
d) Guarantees available to individual and group insurance policies;
e) The rates of exchange at which benefits in respect of policies issued in foreign currencies
have been converted into Indian Rupees and what provision has been made for possible
increase of mathematical reserves arising from future variations in rates of exchange;
f) Others, if any.
Statement of Liabilities
9) An insurer shall furnish a statement of liabilities in accordance with the Insurance Regulatory and
Development Authority (Actuarial Report and Abstract) Regulations, 2000.
Schedule II-B
Valuation of Liabilities (General Insurance)
Interpretation.
1) In this schedule,----
(a) “Reserve for claims incurred but not reported (IBNR”) means the reserve for claims
incurred but not reported on the balance sheet date, and includes reserve for claims which
may be inadequately reserved;
(b) “Reserve for outstanding claims” means the reserve for outstanding claims as mentioned
in para 2(1)(b)(iii) of this Schedule;
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Determination of Liabilities.
2) An insurer shall —
(i) place a proper value in respect of the following items, namely:-
(I) provision for bad and doubtful debts,
(II) reserve for dividends declared or recommended, and outstanding dividends in full,
(IV) amount due to insurance companies carrying on insurance business, in full,
(V) amount due to sundry creditors, in full,
(VI) provision for taxation, in full, and
(VII) foreign exchange reserve.
(ii) determine the amount of following reserves, in the manner specified herein below for each
reserve:-
(a) reserve for unexpired risks, shall be, in respect of,---
(I) Fire business, 50 per cent,
(II) Miscellaneous business, 50 per cent,
(III) Marine business other than marine hull business, 50 per cent; and
(IV) Marine hull business, 100 per cent,
of the premium, net of re-insurances, received or receivable during the preceding

twelve months;
(b) reserve for outstanding claims shall be determined in the following manner:-
where the amounts of outstanding claims of the insurers are known, the amount is to be
provided in full;
(I) where the amounts of outstanding claims can be reasonably estimated according to
the insurer, he may follow the 'case by case method' after taking into account the
explicit allowance for changes in the settlement pattern or average claim amounts,
expenses and inflation;
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(c) reserve for claims incurred but not reported (IBNR) shall be determined using actuarial
principles. In such determination, the appointed actuary shall follow the Guidance Notes
issued by the Actuarial Society of India, with the concurrence of the Authority, and any
directions issued by the Authority, in this behalf.
Statement of Liability.
Every general insurer shall prepare a statement of liabilities in Form HG, certified by an auditor
approved by the Authority in accordance with Section 64V of the Act, and also certified by its
appointed actuary in respect of IBNR reserves. The statement shall be furnished to the Authority along
with the returns mentioned in section 15 of the Act.
Determination of Solvency Margin
Life Insurance - Every insurer shall prepare a statement of solvency margin in accordance with
Schedule III-A, in respect of life insurance business.
General Insurance - Every insurer shall prepare a statement of solvency margin in accordance with
Schedule III-B and in Form KG in respect of general insurance business.
Schedule III-A
(See Regulation 5)
DETERMINATION OF SOLVENCY MARGINSLIFE INSURERS
Interpretation.
1. In this Schedule
(a) 'Available Solvency Margin' means the excess of value of assets (furnished in
IRDA- Form-AA) over the value of life insurance liabilities (furnished in Form H as specified
in Regulation 4 of Insurance Regulatory and Development Authority (Actuarial Report and
Abstract) Regulations, 2000) and other liabilities of policyholders' fund and shareholders'
funds;
(b) “Solvency Ratio” means the ratio of the amount of Available Solvency Margin to the
amount of Required Solvency Margin.
Determination of Solvency Margin.
2. Every insurer shall determine the required solvency margin, the available solvency margin, and
the solvency ratio in Form K as specified under Insurance Regulatory and Development
Authority (Actuarial Report and Abstract), Regulations, 2000.
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Schedule III-B
(See Section 5)
DETERMINATION OF SOLVENCY MARGINSGENERAL INSURERS
In this Schedule
(a) “Available Solvency Margin” means the excess of value of assets (furnished in Form IRDA-
Assets- AA) over the value of liabilities (furnished in Form HG), with further adjustments as
shown in Table III of Form KG.
(b) “Solvency Ratio” means the ratio of the amount of Available Solvency Margin to the
amount of Required Solvency Margin.
Determination of Solvency Margin.Every insurer shall determine the required solvency margin, the
available solvency margin, and the solvency ratio in Form KG.
RSM-1 in Form KG means Required Solvency Margin based on net premiums, and shall be determined
as twenty per cent. of the amount which is the higher of the Gross Premiums multiplied by a Factor A
as specified in the schedule and the Net Premiums.
RSM-2 in Form KG means Required Solvency Margin based on net incurred claims, and shall be
determined as thirty per cent. of the amount which is the higher of the Gross Net Incurred Claims
multiplied by a Factor B as specified in the schedule and and the Net Incurred Claims.:
RSM means Required Solvency Margin and shall be the higher of the amounts of RSM-1 and RSM-2.
Health Insurance Business
Where the insurer transacts health insurance business, providing health covers, the amount of
liabilities shall be determined in accordance with the principles specified under these Regulations.
Business outside India.
Where the insurer transacts insurance business in a country outside India, and submits statements or
returns or any such particulars to a public authority of that country, he shall enclose the same along
with the Forms specified in accordance with these Regulations and the Insurance Regulatory and
Development Authority (Actuarial Report and Abstract) Regulations, 2000.
Provided that if the appointed actuary is of the opinion that it is necessary to set additional reserves
over and above the reserves shown in the statements or returns or any such particulars submitted to
the public authority of a country outside India, he may set such additional reserves.
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Furnishing of Forms
The Forms, namely, Form IRDA- Assets- AA , Form HG, and Form KG, shall be furnished separately for
Business within India and Total Business transacted by the insurer.
Personal visit of appointed actuary to the Authority
The Authority may, if considered necessary and expedient, ask the appointed actuary to make a
personal visit to the office of the Authority to elicit from him any further information.
Forms at a glance:
NAME OF THE SCHEDULE FORM CONTENTS OF THE FORM

STATEMENT
Statement of Assets I IRDA -Assets-AA The form contains the details of the
Assets which are categorised as
approved securities, approved
investments, deposits, non-mandated
investments and other assets
Statement of Liabilities II B Form HG The form contains the details viz
(General Insurance) reserves for unexpired risks, reserves
for outstanding claims and reserves
for claims incurred but not reported
(IBNR) for each class of general
insurance ie Fire, Marine,
Miscellaneous and Health.
Statement of Solvency III B Form KG The form contains the details of the
Margin (General required solvency margin based on
Insurance) net premium and net incurred claims,
available solvency margin and
solvency ratio.
Rules Regarding Investment of Insurance Funds
UNDERSTAND basic Rules Regarding Investment of Insurance Funds.
In order for the insurance business to be financially viable for the insurer, the assets available with the
insurer have to be invested to reap returns. This will entail taking risks. On the other hand, the main
purpose of clients taking up insurance policies is that in the event of the peril insured happening, the
insurer must automatically be able to deliver the proceeds to the beneficiaries to alleviate suffering
and financial hardship. Insurance is meant to achieve important social objectives. The need to
generate returns and the need to ensure that sufficient funds are always available to pay out proceeds
are generally inconsistent with each other. To resolve the tension between the two objectives, the
Insurance Act has provided regulations in Sections 27, 27A, 27 B, 27 C and 27 D of the Insurance Act.
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Section 27 provides that the amount required to meet the claims of the holders of policies of claims,
matured or maturing, after deducting the premiums that have fallen due on the policies and the loans
granted to the insured within the surrender value of the policies to be invested in the manner
prescribed in the said Section 27 and the following sections 27 A and 27 B.
Briefly speaking they are as under:
25% in Government Securities
Not less than 25% in Government Securities or other approved Securities and the balance in
investments specified in Section 27 A and 27 B which includes investment in mortgage of property,
debentures, fixed deposits with banks and several other avenues specified in these Sections. Section
27 D gives authority to the IRDA to specify the time, manner and other conditions of investments of
assets in the interest of policyholders. Section 27 C prohibits funds of the policyholders to be invested
outside India directly or indirectly.
Regulation of Investments Life Insurance
Life Business: Without prejudice to Section 27 or Section 27A of the Act, every insurer carrying on the
business of life-insurance shall invest and at all times keep invested his controlled fund in the manner
mentioned below. In terms of explanation in Section 27 A of the Act, the Authority has determined that
assets relating to Pension business, Annuity business and Linked Life Insurance business shall not
form part of the Controlled Fund.
S. No Type of Investment Percentage
I) Government Securities 25%
II) Government Securities or other approved Not less than 50 %
securities (Including (I) Above)
Approved Investments as specified in Schedule I
III) Infrastructure and Social Sector
A) Explanation: For the purpose of this Not less than 15%
requirement, Infrastructure and Social Sector
shall have the meaning as given in regulation 2(h)
of Insurance Regulatory and Development Authority
(Registration of Indian Insurance Companies)
Regulations, 2000 and as defined in the Insurance
Regulatory and Development Authority
(Obligations of Insurers to Rural and Social Sector)
Regulations, 2000 respectively
B) Others to be governed by Exposure Not exceeding 35%
Norms as specified in regulation 5.
Investment in “other than approved
Investments” can in no case exceed 15% of the fund
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Pension and General Annuity Business’: Every insurer shall invest and at all times keep invested
funds belonging to his Pension Business, General Annuity Business in the following manner:-
Sl.No Type of Investment Percentage
i) Government Securities, being not less than 20%

ii) Government Securities or other approved
securities (inclusive (I) above, being not less than) 40%
iii) Balance to be invested in Approved Investments as
specified in Schedule 1 and to be governed by
Exposure/Prudential Norms specified in Regulation 5 Not exceeding 60%
Note: For the purposes of this sub-regulation no unapproved investments shall be made.
‘Unit Linked Life Insurance Business’: Every insurer shall invest and at all times keep invested his
segregated fund of unit linked life insurance business as per pattern of investment offered to and
approved by the policyholders. Unit Linked policies may only be offered where the units are linked to
categories of assets which are both marketable and easily realizable. However, the total investment in
other than approved category of investments shall at no time exceed 25% of the fund.
Prohibition for investment of funds outside India
No insurer shall directly or indirectly invest outside India the funds of the policy-holders. (Section 27 C ,
inserted by IRDA Act, 1999).
Regulation of Investments – General Insurance Business
General Business: Without prejudice to Section 27 or Section 27B of the Act, - Every insurer carrying
on the business of general insurance shall invest and at all times keep invested his total assets in the
manner set out below:
S.No Type of Investment Percentage
i) Central Government Securities being not less than 20%

ii) State Government securities and other Guaranteed
Securities including (i) above being not less than 30%
iii) Housing and Loans to State Government for Housing 5%
And Fire Fighting equipment, being not less
than,(Subscription to/purchase of Bonds/debentures issued
by HUDCO, National Housing Bank or House building
institutions duly accredited by National Housing Banks,
for house building activities, duly guaranteed by
Government or carrying current rating of not less than
‘AA’ by independent, reputed and recognised
rating agencies would also qualify for compliance
of this (regulation.)
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iv) Investments in Approved Investments as

specified in Schedule II
a) Infrastructure and Social Sector Not less than 10%
Explanation:
For the purpose of this requirement, Infrastructure
and Social Sector shall have the meaning as given in
regulation 2(h) of Insurance Regulatory and Development
Authority (Registration of Indian Insurance Companies)
Regulations, 2000 and as defined in the Insurance
Regulatory and Development Authority (Obligations of
Insurers to Rural and Social Sector)
Regulations, 2000 respectively.
b) Others to be governed by Exposure Norms specified in Not exceeding 55%
regulation 5 so however that investment in “other than
approved investments” can in no case exceed
25% of the assets.
Reinsurance Business: Every reinsurer carrying on reinsurance business in India shall invest and at all
times keep invested his total assets in the same manner as set out in sub-regulation (1), until such time
separate regulations in this behalf are made by the Authority.
Note : For the purpose of the regulations 3 and 4:
Every insurer shall endeavor to maintain a proper balance between the investments made in
infrastructure sector and those in the social sector. Bonds issued for development of these sectors,
duly guaranteed by Government or otherwise rated not less than ‘‘AA’’ by independent, reputed and
recognised rating agencies, issued by others would qualify for compliance of this regulation.
Ø All investment in assets/ instruments, which are capable of being rated as per market
practice, be based on rating of such assets/ instruments.
Ø The rating should be by an independent, reputed and recognised Indian or foreign rating
agency.
Ø The assets/ instruments under consideration for investment, shall be of a grade not less
than “AA” of investment grade as per their current rating. In case Investments of this grade
are not available to meet the investment requirements of the investing insurance company
and investment committee of the investing insurance company is fully satisfied about the
same, then, for the reasons to be recorded in the investment committee’s minutes, the
investment committee may approve investment in instruments carrying current rating of
not less than +A. Investments in the +A to be kept to the minimum.
Ø The rating of Debt Instruments issued by all India financial institutions recognised as such
by RBI may be of ‘AAA’ or equivalent rating. In case investment of this grade are not
available to meet the requirements of the investing insurance company and investment
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committee of the investing insurance company is fully satisfied about the same, then, for
the reasons to be recorded in the investment committee’s minutes, the investment
committee may approve investments in instruments carrying current rating of not less
than ‘AA’ or equivalent as rated by an independent, reputed and recognised Indian or
foreign rating agency.
Ø No investment shall be made in an asset/ instrument, which is capable of being rated as per
market practice but has not been rated.
Ø Investments in equity shares listed on a recognised stock exchange should be made in
actively traded and liquid instruments viz., its trading volume does not fall below ten
thousand units in any trading session during the last 12 months or trading value of which
exceeds Rs. 10 lacs in any trading session during last 12 months.”
EXPOSURE/ PRUDENTIAL NORMS
A) Exposure Norms
Without prejudice to anything contained in sections 27A and 27B of the Act, every insurer shall limit his
investments based on the following exposure norms:
Type of Limit for Limit for the entire Limit for the Industry
investment Investee Company group to which the Sector to which
Investee Company belongs the Investee
Company belongs
(a) All In case of Indian Insurance Exposure at any point of time Investment by the
investments in Companies: not to exceed 10% of the insurer in any
Equity / Exposure at any point of time not to aggregate subscribed share industrial sector
Preference exceed 10% of the subscribed share capital, free reserves and would not exceed
Shares of the capital, free reserves and debentures/ debentures of all the group 10% of its total
Company bonds of the investee company companies in which i n v e s t m e n t
(b)Debentures Or investments including exposure to the
(Convertible/ the 10% of the Insurer’s total assets investments under industrial sector as a
partly in case of non-life insurers and 10% of considerations, have been or whole.
convertible/ the Controlled funds in case of Life proposed to be made by the (Classification of
non- insurers, whichever is less. insurer or the 10% of the total Industrial sector to
convertible) In the case of existing insurers: The assets in case of Non-Life be done on the lines
(c) Short/ limits mentioned above as applicable Insurers and 10% of the of classification in
Medium/ Long to the Indian Insurance Companies, Controlled Funds in case of Industries done by
term loans shall stand modified as under:- Life Insurers whichever is less. CMIE (Centre for
(d) Any other a) exposure at any point of time not to The percentage of 10% of the Monitoring Indian
permitted exceed 20% of the subscribed share total assets in the case on Economy)
investments capital, debentures/ bonds of the Non-Life insurers and 10% of
as per the Act investee company or 5% of the the Controlled Fund in case of
/Regulation Controlled funds of the life insurer or Life insurers can be raised to
10% of the general insurers total 15% in each case subject to
assets specific approval of IRDA.
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Notes
1. Subject to exposure limits as per Insurance Act, 1938, investment in equity including preference
shares, investment in equity convertible part of debentures should not exceed 50% of the above
exposure norms as mentioned in the table. A similar 50% of exposure norms limit would also
apply to investment in immovable property.
2. Subject to exposure limits mentioned in the table above, an Insurer shall not have investments of
more than 5% in aggregate of its Controlled funds in the case of a life insurer or 5% in aggregate
of its assets in the case of non-life insurer in the companies belonging to the promoters’ groups.
For the purposes of this regulation “group” will have the same meaning as in the MRTP Act, 1969.
All investments in this category would specifically be referred to the Authority.
B) Exposure Norms for Investment in Public Financial Institutions
Equity Share and Preference Not exceeding 15% in general of the paid up
Shares (at their face value). equity/ preference capital of the institution
or the existing holding % level, if higher.
Investment in Equity Capital, Bonds, Not exceeding 10% of the capital employed by
Debentures, Term Loans. an institution as per the last audited
Balance Sheet.
Total Investment vis-à-vis Not exceeding 60% of Net Worth
Net Worth of the Company. of the institution.
Total Investment in a Financial Year. 7.5% of annual accretions.
Total Investments in all the Annual aggregate financial assistance to all
Financial Institutions. Development Financial Institutions put together
in a single year shall not exceed 20% of the
estimated annual accretions for the year.
C) Prudential Norms The prudential norms for various instruments shall be as under:
i) Debentures:
Norms for Fully Convertible Debentures and Partly Convertible Debentures:
Investment decisions are related to attractiveness of equity shares to be received as a result of

conversion. Due consideration is also given to the factors, viz
a) rate of interest at the time of subscription to said debentures,
b) appreciation and
c) dividend income likely to be received from the equity shares.
Similar considerations also apply for Non-Convertible (NC) Debentures with detachable warrants
attached to it.
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Norms for Non-Convertible Debentures and Non-Convertible Debentures with warrants attached:
1. Eligibility Amount
a) Working Capital Debentures 20% of the current assets, loans and advance minus
outstanding amount of existing working capital NC
Debentures.
b) Project Finance As appraised by the Investment Committee
c) Normal Capital Expenditure As assessed by the Investment Committee
Asset Cover
Asset Cover shows the relationship between Fixed Assets and secured loans. First pari passu charge
on fixed assets of the company offered as security with a minimum of 1.25 times including proposed
borrowings (excluding revaluation of assets). It is to be calculated by dividing Fixed Assets by Secured
Loans.
Debt Equity Ratio (as specified in Schedule III):
The relationship describing the lendor’s contribution against owner’s contribution shall be debt equity
ratio. Not to exceed 2:1 including the proposed NC Debenture issue. However, in case of capital
intensive project debentures, higher ratio upto 4:1 may be considered. It shall be calculated by
dividing long term debt by Networth.
Interest Cover (as specified in Schedule III):
Interest Cover:
Interest Cover shows the number of times the interest charges are covered by funds that are ordinarily
available for payment. Not less than 2 times for the latest year or on the basis of the average of the
immediately preceding three years after including the interest on the proposed debentures at the
applicable rate. It shall be calculated by dividing Profit before depreciation, Interest and Tax (PBDIT) by
Interest Charges.
Dividend Pay-out:
Minimum dividend of 10% in each of the two years out of the immediately preceding three years
including the latest year.
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Term Deposits and Loans with Non Banking Companies:
The insurer need to place the deposits with a view to cater to working capital needs of the corporate
sector. The placement of the deposit are to be decided after evaluating financial and non-financial
aspects of the performance parameters of the companies. The analysis need to include study of
financial position, track record and other features such as quality of management, future prospects
and market potential for the company’s products. Credit rating of borrower should be uniformly
maintained at a position which is indicative of a very strong financial position being not less than AA of
Standard and Poor or equivalent rating of any other reputed and independent rating agency.
The maximum amount of Short Term Deposit that may be placed with any company is restricted to Rs
2 crores or 10% of net worth whichever is less.
The various norms/ parameters for the placement of term loans are as under:
Particulars Limits
Unsecured borrowing Not to exceed 25% of net worth including the proposed loan, subject
as a % of net worth. to networth of the borrowing company being not less than
Rs. 15 crores.
Interest Cover. Atleast 2.5 times including interest on proposed loans.
Debt/ Equity Ratio. Not to exceed 2:1.
Current Ratio. Not less than 1.33:1.
Dividend Record. At least 10% for the last 5 years or

15% and above for 3 out of 5 years.
Listing Equity shares of the Company shall be listed on any recognised stock
exchange and the price should continuously been quoting above par
at least for 12 months prior to the date of sanction of loan.
Collateral Security Cheques shall be obtained for principal and interest amount. Personal
guarantee of promoters and pledge of shares may be taken.
2) Infrastructure and Social Sector:
In the case of projects/ works in the infrastructure and social sector undertaken by a person other
than a company, the norms indicated in the table above shall have to be met to the extent
applicable.
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3) Guidelines on subscription to Preference Shares:
a) Companies whose preference shares are selected for investment should have sound
financial position and steady income earning capacity.
b) The dividend payable on the preference shares should be cumulative.
c) The preference shares shall be redeemable.
d) Preference capital after proposed issue shall not exceed 100% of equity capital.
e) Dividend should have been paid on equity shares for two years out of immediately
preceding three years.
f) Preference dividend should have been paid for 3 years or 3 out of 4 or 5 years including
latest 2 years if the preference shares are issued earlier.
g) Non-dividend paying preference shares should not be considered for investment.
h) Dividend cover on the basis of average profit of last 3 to5 years should be 3 times.
4) Power to Call for additional information
The Authority may, by general or special order, require from the insurers such other information
in such manner, intervals and time limit as may be specified therein.
5) Duty to Report extraordinary events affecting the investment portfolio
Every insurer shall report to the Authority forthwith, the effect or the probable effect of any event
coming to his knowledge, which could have material adverse impact on the investment portfolio
and consequently on the security of policyholder benefits or expectations.
6) Constitution of Investment Committee
(1) Every insurer shall constitute an Investment Committee which shall consist of a minimum
of two non-executive directors of the Insurer, the Principal Officer, Chiefs of Finance and
Investment divisions, and wherever appointed actuary is employed, the Appointed
Actuary. The decisions taken by the Investment Committee shall be properly recorded and
be open to inspection by the officers of the Authority.
(2) Every insurer shall draw up annually an Investment Policy and place the same before its
Board of Directors for its approval. In framing such a policy, the Board will be guided by
i) issues relating to liquidity, prudential norms, exposure limits, stop loss limits in
securities trading, management of all investment & market risks, management of
assets liabilities mismatch, investment audits and investment statistics, etc. and the
provisions of the Insurance Act, 1938 and Insurance Regulatory and Development
Authority (Investment) Regulations, 2000.
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Ii) ensuring an adequate return on Policyholders & Shareholders funds consistent with
the protection, safety and liquidity of such funds.
iii) the funds of the insurer shall be invested and continued to be invested in equity shares,
preference shares and instruments which enjoy a rating referred to in note below
regulation 4 and made by a national/international agency; in the absence of a rating for an
asset, the Board shall lay down clearly the norms that will be followed by the investment
committee which will ensure that the safety and liquidity of the policyholders’ funds are
assured.
(3) The investment policy as approved by the Board will be implemented by the investment
committee, which shall keep the Board informed periodically about its activities.
(4) The Board shall review its investment policy and its implementation on an half-yearly basis or at
such short intervals as it may decide and make such modifications in its existing investment
policy as are necessary to bring them in tune with the requirements of law and regulations – in
regard to protection of policyholders’ interest and pattern of investment laid down.
(5) The details of the Investment Policy or its review as periodically decided by the Board shall be
submitted to the Authority within 30 days of its decision thereto. The Authority may call for
further information from time to time from the insurer as it deems necessary and in the interest of
policyholders issue such directions to the insurers as it thinks fit. “
D) Miscellaneous
(1) Valuation of Assets and Accounting of Investments shall be as per the Insurance Regulatory and
Development Authority (Preparation of Financial Statements and Auditor’s Report of Insurance
Companies) Regulations, 2000.
(2) The Authority may, by any general or special order, modify or change the application of
regulations (3), (4), (5) and (6) to any insurer either on its own or on an application made to it.”
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Schedule I
(See Regulation 3)
List of approved Investments for life business
‘Approved Investments’ for the purposes of section 27A of the Act shall be as follows:
(a) all approved investments specified in section 27A of the Act except
(i) clause (b) of sub-section (1) of section 27A of the Act;
(ii) first mortgages on immovable property situated in other country as stated in clause (m) of
sub-section (1) of section 27A of the Act;
(iii) immovable property situated in other country as stated in clause (n) of sub-section (1) of
section 27A of the Act.
(b) In addition the authority under powers given vide clause (s) of sub-section (1) of section 27A of
the Act declares the following investments as approved investments:
(i) All secured loans, secured debentures, secured bonds, other secured debt instruments,
shares and preference shares and debt instruments issued by all India Financial Institutions
recognised as such by Reserve Bank of India – investments to be made in terms of
investment policy guidelines, benchmarks and exposure norms/ limits approved by the
Board of Directors of the insurer.
(ii) Subject to norms/ limits approved by the Board of Directors of the insurers deposits with
banks (e.g. in Current account, call deposits, notice deposits, certificate of deposits etc.)
included for the time being in the Second Schedule to Reserve Bank of India Act, 1934 (2 of
1934) and deposits with Primary Dealers duly recognised by Reserve Bank of India as
such.
(iii) Commercial papers issued by a company or all India Financial Institution recognised as
such by Reserve Bank of India having a rating by a reputed and independent rating agency
under the category of ‘very strong’ or more;
(iv) Treasury Bills issued by RBI, Inter-Bank Repos of RBI and Bills Rediscounting.
Explanation –
1. Any investment in the short or medium or long-term loans or deposits with private limited
companies shall not be treated as ‘approved investments’.
2. All conditions mentioned in the ‘note’ applicable to regulations 3 and 4 are to be complied with.”
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Schedule II
(See Regulation 4)
List of approved investments for general business
‘Approved Investments’ for the purpose of section 27B of the Act shall be as follows:
(a) All approved investments specified in section 27B of the Act except
( i) clause (b) of sub-section (1) of section 27A of the Act;
(ii) Immovable property situated in other country as stated in clause (n) of sub-section (1) of
section 27A of the Act;
(iii) First mortgages on immovable property situated in other country as stated in clause (i) of
sub-section (1) of section 27B of the Act.
(b) In addition the authority under powers given vide clause ( j ) of sub-section (1) of section 27B of
the Act declares the following investments as approved investments:
(i) All secured loans, secured debentures, secured bonds, other secured debt instruments,
shares and preference shares and debt instruments issued by all India Financial Institutions
recognised as such by Reserve Bank of India – investments to be made in terms of
investment policy guidelines, benchmarks and exposure norms/ limits approved by the
Board of Directors of an insurer.
(ii) Subject to norms/ limits approved by the Board of Directors of the insurers deposits with
banks (e.g., in current account, call deposits, notice deposits, term deposits, certificate of
deposits etc.) included for the time being in the Second Schedule to Reserve Bank of India
Act, 1934 (2of 1934) and deposits with Primary Dealers duly recognised by Reserve Bank of
India as such.
Iii) Commercial papers issued by a company or all India Financial Institution recognised as
such by Reserve Bank of India having a ‘very strong’ or more rating by a reputed and
independent rating agency;
(Iv) Treasury Bills issued by RBI, Inter Bank Repos of RBI and Bills Rediscounting;
Explanation –
1. Any investment in the short or medium or long-term loans or deposits with private limited
companies shall not be treated as ‘approved investments’.
2. All conditions mentioned in the ‘note’ applicable to regulations 3 and 4 are to be complied with.”
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Details of certain statutory returns filed by Life and General insurers
Filing of Statutory Returns
In order to ensure that it is able to fulfil its obligations, an insurer must maintain its financial strength
and which the IRDA has a legal responsibility to monitor.
The following returns are to be submitted annually by all insurers Under the Insurance Act, 1938 as
amended by the Insurance (Regulatory and Development Authority) Act, 1999.
The Authority may, by any general or special order, modify or relax any requirement relating to the
above.
Name of Return Details
Form A Balance Sheet
Form AA Classified summary of Assets
Forms B & C Profit & Loss Account
Forms C Profit & Loss Appropriation Account
Form D Revenue Account applicable to life insurance business
Form DD Classified statement of life insurance policies
Form DDD Additions to and deductions from policies
Form DDDD Policies forfeited or lapsed
Form F Revenue Account applicable to Fire, Marine and Miscellaneous

insurance business
Form G Consolidated Revenue Account
Form H Summary and valuation of policies
Form J Specimen policy reserve values and minimum surrender
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Every insurer shall submit to the Authority the following returns within such time, at such intervals and
verified / certified in such manner as indicated there against. These returns shall be in addition to those
prescribed above.
S.No Form No as Short description Periodicity Time limit for Verified/

annexed to of returns submission Certified by
these
regulations
1 Form 1 Statement of investment Yearly Within 30 days from Principal

and income on investment the date of Board Officer/ Chief
approval of audited (Investment)
accounts.
2 Form 2 Statement of down graded Quarterly Within 21 days of Principal

Investments. the end of each Officer/ Chief
quarter. (Investment)
3 Form 3 A Statement of Investment Quarterly Within 21 days of Principal

of Controlled Fund (Life) – the end of each Officer/ Chief
Compliance Report quarter. (Investment)
4 Form 3 B Statement of Investment Quarterly Within 21 days of Principal

of Total Assets (General) – the end of each Officer/ Chief
Compliance Report quarter. (Investment)
5 Form 3 C Exception Report on Quarterly Within 21 days of Principal

instruments not complying the end of each Officer/Chief
with “AA” or “AAA” grade – quarter (Investment)
Compliance Report
6 Form 4 Prudential Investment Yearly Within 30 days Principal

Norms – Compliance from the date of Officer/ Chief
Report Board approval of (Investment)
audited accounts.
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Insurance Business Practices
UNDERSTAND relevant insurance business practices.
To advise clients properly on insurance products, the financial planner must be familiar with relevant
business practices in the insurance industry. In particular, as the insurance sales has a wide exposure
to and impact on the clients, their sales practices and regulations have to be properly appreciated. In
particular, the following merit attention:
Ø Available distribution channels

Ø The structure of the agencies
Ø Remuneration to the sales force
Available Distribution Channels
In the liberalised insurance market, insurers are likely to have the following types of distribution
channels viz
Ø Insurance Agents
Ø Corporate Agents
a) Firms
b) Banking Companies
c) Companies under the Companies Act
Ø Brokers
a) Individual Brokers
b) Firms
c) Companies under the companies Act
Ø Insurance Consultants
Structure of the agencies
The agency structure in India is a three tier structure namely, the agents (as the basic tier), the
Development Officers/ Sales Managers of the insurance company (as the intermediate tier) and the
Branch Managers (as the highest tier).
Remuneration
Insurance companies pay remuneration to their agents in the form of commission as specified under
section 40 A of the Insurance Act, 1938 . The types of commission that are usually paid to agents are :
Ø First Year Sales Commission As the name suggests, the commission paid on the sale of
Whole Life or Endowment plan, paid in the first year on First year Premium .
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Ø Renewal Commission As per the Section 44 of the Insurance Act, agents who have put in
at least 5 years and have done business of at least Rs 50,000 or have put in at least 10 years,
will be entitiled to receive the renewal commissions, even after the agency has terminated.
Such commission will continue to be paid to the heirs of the agent after his death subject to
following conditions.
a) The termination should be for reasons other than fraud.
b) Agent does not procure business, directly or indirectly, for another person.
Ø Hereditary Commission In the event of death of the agent renewal commission is

continued to be paid to the nominee or heirs of the agent.
Obligation of insurers to rural and social sectors
UNDERSTAND obligation of insurers to rural and social sectors
The Insurance Regulatory and Development Authority of India has made the following
recommendations with regard to obligation of insurers to rural and social sectors. The obligation to
rural and social sector are as follows :
Obligations
Every insurer, who begins to carry on insurance business after the commencement of the Insurance
Regulatory and Development Authority Act, 1999 (41 of 1999), shall, for the purposes of sections 32B
and 32C of the Act, ensure that he undertakes the following obligations, during the first five financial
years, pertaining to the persons in—
(a) Rural Sector,
(1) in respect of a life insurer, --

i) Five per cent. in the first financial year;
ii) seven per cent. in the second financial year;
iii) ten per cent in the third financial year;
iv) twelve per cent in the fourth financial year;
v) fifteen per cent in the fifth year;
of total policies written direct in that year;
(2) in respect of a general insurer,--

i) two per cent. in the first financial year;
ii) three per cent. in the second financial year;
iii) five per cent. thereafter,
of total gross premium income written direct in that year.
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(B) Social Sector, in respect of all insurers, --
(i) five thousand lives in the first financial year;

(ii) seven thousand five hundred lives in the second financial year;
(iii) ten thousand lives in the third financial year;
(iv) fifteen thousand lives in the fourth financial year;
(v) twenty thousand lives in the fifth year;
Provided that in the first financial year, where the period of operation is less than twelve months,
proportionate percentage or number of lives, as the case may be, shall be undertaken.
Provided further that, in case of a general insurer, the obligations specified shall include insurance for
crops.
Provided further that the Authority may normally, once in every five years, prescribe or revise the
obligations as specified in Regulation 3.
Obligations of existing insurers.
(1) The obligations of existing insurers as on the date of commencement of IRDA Act shall be
decided by the Authority after consultation with them and the quantum of insurance business to
be done shall not be less than what has been recorded by them for the accounting year ended
st
31 March, 2000.
(2) The Authority shall review such quantum of insurance business periodically and give directions
to the insurers for achieving the specified targets.
Important Definitions.
(a) “Rural sector” shall mean any place as per the latest census which has
(i) a population of not more than five thousand;
(ii) a density of population of not more than four hundred per square kilometer; and
(iii) at least seventy five per cent. of the male working population is engaged in agriculture.
(b) “Social sector” includes unorganised sector, informal sector, economically vulnerable or
backward classes and other categories of persons, both in rural and urban areas;
(c) “Unorganised sector” includes self-employed workers such as agricultural labourers, bidi
workers, brick kiln workers, carpenters, cobblers, construction workers, fishermen, hamals,
handicraft artisans, handloom and khadi workers, lady tailors, leather and tannery workers,
papad makers, powerloom workers, physically handicapped self-employed persons, primary
milk producers, rickshaw pullers, safai karmacharis, salt growers, seri culture workers,
sugarcane cutters, tendu leaf collectors, toddy tappers, vegetable vendors, washerwomen,
working women in hills, or such other categories of persons.,
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(d) “economically vulnerable or backward classes” means persons who live below the poverty line;
(e) “other categories of persons” includes persons with disability as defined in the Persons with
Disabilities (Equal Opportunities, Protection of Rights, and Full Participation) Act, 1995 and who
may not be gainfully employed; and also includes guardians who need insurance to protect
spastic persons or persons with disability;
(f) All words and expressions used herein and not defined herein but defined in the Insurance Act,
1938 (4 of 1938), or in the Insurance Regulatory and Development Authority Act, 1999 (41 of
1999), shall have the meanings respectively assigned to them in those Acts.
Ombudsman Scheme
UNDERSTAND ombudsman Scheme (Redressal of Public Grievances Rules 1998)
The word 'Ombudsman” has originated from Sweden which literally means an appointment of an
official to investigate people's complaints with regard to mal-administration by public authorities. The
scope and function of Ombudsman is keenly followed in different countries to control and monitor
corruption The Indian Banks have resorted to ombudsman to improve customer service and to
control corruption.
In 1998, the Indian Government introduced Insurance Ombudsman for redressal of grievances of
policyholders of life and non-life insurance business and to resolve complaints in an efficient and
impartial manner.
Appointment of Ombudsman
The rules state the following with regard to appointment of ombudsman.
Ø One or more persons may be appointed as ombudsman

Ø Selection will be from an eminent group of persons who have experience in Industry,
judicial service, administrative service etc
Ø The Governing Body of Insurance Council appoints an ombudsman
Ø Initial appointment is for 3 years but reappointment is allowed.
Powers
Ombudsman is authorised to deal with
Ø Claim disputes including delays and refusals

Ø Disputes with regard to premium payable
Ø Disputes with regard to legal aspects of policies
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Ø The non issue of relevant insurance documents after receipt of premium

Ø Any delay in settlement of claims
Appointing Authority
The insurance council is the final authority to decide the territorial jurisdiction of the Insurance
Ombudsman at each centre and to appoint the necessary secretarial staff for assistance.
Who can make a complaint to Ombudsman
Ø A complaint may be made by an insured person himself or his legal heirs in writing to the
ombudsman within whose jurisdiction the branch or office of the insurer, against whom the
complaint is made, is located.
Ø All complaints must relate to policies of life insurance or non-life.
Ø Only an individual policyholder can make the complaint. Firms and organisations are
debarred to approach ombudsman for making a complaint.
Circumstances in which complaint can be sent to Ombudsman
A written complaint can be sent to Insurance Ombudsman in the following circumstances viz
Ø When the insurer has rejected complainant's written representation,
Ø When the complainant has not received a reply for more than a month, or
Ø When the complainant is dissatisfied with the reply given by the Insurance Company
Time limit for filing a complaint
Any complaint shall be made to insurance ombudsman within one year of the complaint being
rejected by the insurance company (specifically where the insurer has rejected the complaint or has
not replied with in a span of one month of receiving the complaint).
Complaint Procedure
Ø If the person making the complaint and the insurance company give their consent in
writing for the ombudsman to act as mediator, then the ombudsman has to give his
“Recommendation” within a period of one month for resolving the complaint. If the
complainant accepts the “Recommendations”, then the Insurance Company shall
implement the “Recommendation”.
Ø If the complaint is not settled by the agreement as mentioned above, the ombudsman shall
pass an “Award” which is fair and is based on facts and circumstances of the case within 3
months of receipt of the original complaint. If the “Award”is acceptable to the Complainant,
then the Insurance Company shall implement the award and intimate to the ombudsman
accordingly.
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Expenses of the Ombudsman Scheme
All new Insurance Companies will come under the purview of Insurance Ombudsman Scheme. As per
the rules, the expenses of Ombudsmen's office will be borne by Life Insurance and General Insurance
Industry. The expenses will be shared by companies within each industry (Life and General) in
proportion to their Gross Premium Income.
Consumer Protection Act 1986
UNDERSTAND Consumer Protection Act 1986
Introduction
Consumerism in society is growing consistently. As the demand lines increase supply lines also keep
on increasing as steadily as ever. However, some supply lines may not fulfill their promises to the
consumer. Some unscrupulous suppliers may willfully default on their fulfillments or unwittingly
indulge in unfair trade practices for their profits. The consumer needs protection.
An aggrieved consumer can approach the Court in Torts and under the Contract Act but the procedure
is cumbersome and expensive. In 1969 the Indian Parliament passed the Monopolies and Restrictive
Trade Practices Act. The object of the Act as defined in the preamble to the Act is to ensure that the
operation of the economic system does not result in the concentration of economic power to the
common detriment. It sought to control the monopolies and to prohibit monopolistic and restrictive
trade practices. Although the law did define and prohibit unfair trade practices it did not have the
consumer in mind.
The opportunities provided by the media to manufacturers to advertise their products has to a large
extent resulted in the increase in consumerism. Surrounded by the dazzling promises and incentives
to buy particular products the consumer is likely to fall prey to the unfair trade practices of
unscrupulous businessmen. Development of technology and resulting demand of higher standard of
life have increased the needs and transactions of consumer goods. There is every possibility of
dissatisfaction with goods or services which willfully or inadvertently they may not be able to rectify.
Consumer Protection Act (CPA)
The need of the hour to safeguard the interests of the consumer was felt. In 1986 the Parliament of
India passed the Consumer Protection Act. It provides for the better protection of the interests of
consumers by the establishment of consumer forums for settlement of their disputes and the
redressal of their grievances. After seeing the ground realities for seven years the Act was amended in
1993. It enlarged the scope of the provision of the act to include deficiency in services and also to allow
complaints to be filed jointly by consumers having common interest or by a class or recognized
association of consumers. It also empowers the courts to impose punishment to the complainant in
case of frivolous or vexatious complains.
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Main features
Courts to hear complaints
The CPA has provided for the establishment of Consumer Courts known as Forums and commissions
to hear and decide the compensation for loss or damages suffered by a complainant on account of
deficiency in goods, service or unfair trade practice of a manufacturer or the supplier of goods or
services. The forums are :
(a) District Forums established in each district. These forums hear and decide complaints
where the damages claimed are not in excess of Rs. 5 lacs
(b) State Commissions established in each State. They hear and decide complaints where the
compensation claimed is in excess of Rs. 5 lacs but not exceeding Rs. 20 lacs. They also
hear appeals against orders of District Forums.
(c) National Commission has all India jurisdiction. It is empowered to hear and decide
complaints where the compensation claimed is in excess of Rs. 20 lacs. It also hears
appeals against orders of the State Commissions passed in their original jurisdiction.
Complainants
A complaint under the CPA can be filed by
(a) The consumer who is aggrieved

(b) Recognized voluntary consumer association Non Government Association (NGO) or a
registered association it is not necessary that the consumer on whose behalf the complaint
is filed is a member of the Association
(c) Central or State Government
(d) One or more consumers having the same interest i.e. a collective complaint popularly
known as Class Action without the intervention of an NGO
Nature of complaint
A complaint is required to be made in writing if there is the allegation of :
(a) Any unfair trade practice. Clause (l) of Section 2 of the CPA defines a large number of acts,
which form an unfair trade practice. It includes among other things misguiding
advertisements and representations, which lure the consumer to buy defective or sub-
standard goods or pay higher prices.
(b) Supply of defective goods
(c) Deficiency in service
(d) Excess price charged by the trader
(e) Unlawful sale or sale of hazardous goods
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The written complaint should contain all material facts stating the events and be supported by
documents where necessary. The complainant must point out in his complaint as to what damage or
harm financial or otherwise he or the party represented by the complainant association has actually
suffered and how he can be compensated. No complaint can be made for a hypothetical or expected
injury. The complainant can ask for
(i) Repair or replacement of the defective goods or
(ii) Refund of the price paid for the goods
(iii) Refund of excess price charged
(iv) Removal of the deficiency in service
(v) Withdrawal of hazardous goods and
(Vi) Compensation for the loss and mental suffering due to the fault of the supplier of goods or
services and
(vii) Adequate cost for filing and pursuing the complaint
There is no Court Fee Stamp payable on the complaint. The complainants are expected to represent
their cases in person. However, lawyers are permitted and in fact most cases at present are
represented by lawyers.
Complaint can be made for deficiency in service provided by a professional who charges fees for his
services. If a practicing Doctor gives free treatment the poor patient who has suffered from the
negligence of the Doctor can make a complaint even though he has not paid for it. The CPA is
applicable to deficiency or negligence in service provided by a doctor, lawyer, engineer, banker or
even a teacher. The Railways, telephone Department and Electricity Boards have also been held to be
liable under the CPA for deficiency in service provided to the consumer for their services.
A trader who buys goods for resale in the market is not a consumer under the CPA and he cannot
approach the Consumer Forums. He has nevertheless right in tort or under the Contract Act.
Conclusion
All over the world consumer movement is gathering momentum. There is a greater awareness among
the public about their rights as consumers. They very frequently approach consumer societies and
associations who are equipped with the necessary knowledge and infrastructure. For a financial
planner it is imperative to know the rights and liabilities of consumers as well as the manufacturers and
traders. A businessman client should be advised to keep himself aware of day-to-day technical
developments so that he may not be accused of unfair trade practices through ignorance. A consumer
should be advised to weigh all pros and cons and refrain from filing frivolous and fictitious complaints.
All said and done, in the scheme of things today it is most essential that the consumer should feel that
his interests are safe and he is well protected.
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Married Women's Property Act 1874
UNDERSTAND Married Women's Property Act 1874
Married Women's Property (MWP) Act, 1874 is of special importance in relation to life insurance. The
section 5 and section 6 of this Act has links with life insurance of which, section 6 is of utmost
importance. Section 6 of the Act enables the Male Life Assured to form a Trust for the exclusive benefit
of his wife and childern. The trust formed under the Act doesn't allow any part of the proceeds of the
policy to be made available for the benefit of creditors. Thus, creditors cannot attach the proceeds of
the policy.
For the purpose of this Act, married man includes a widower and a divorcee. The policy must be on the
assured's own life. The provision of the trust applies even in case of a divorce. However, the trust
should not be formed with the intention to defraud creditors.
The main objective of the MWP Act is to:
Ø Simplify the method for making settlement of payment

Ø No settlement deed is required.
Ø It provides statutory privileges to beneficiaries (Wife and childern) to enjoy better
protection as compared to other Acts
Ø Creditors have no claim against the policy proceeds.
Professional Standards, Rules and Ethics Governing Insurance Practice
EXPLAIN the importance and nature of professional standards, rules and ethics governing
insurance practice.
As the impact of the insurance industry on the society and its individuals is wide and far reaching, is
very mindful that the conduct of the insurance business must be carried out with utmost integrity and
professionalism. In this respect, both the insurers and their agency sales force must act in a manner
that is fair and beneficial to the client. In this section, you will understand :-
a) Code of conduct for agents (specified by IRDA -Licensing of Insurance Agents -
Regulations, 2000)
b) Code of conduct for brokers (specified by IRDA - Insurance Brokers - Regulations, 2002)
c) Code of conduct in advertisement (Specified by IRDA - Insurance Advertisements and
Disclosure Regulations 2000)
d) Right of protection of policyholders interest Regulations, 2002
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Agency Sales Force
Every agent and insurance broker shall follow recognised standards of professional conduct and
discharge functions in the interest of policyholders. The Insurance Regulatory and Development
Authority has specified certain code of conduct for agents and brokers via its regulations These
regulations may be called Insurance Regulatory and Development Authority (Licensing of Insurance
Agents) Regulations, 2000 and Insurance Regulatory and Development Authority (Insurance Brokers)
Regulations, 2002
Code of Conduct for Agents
UNDERSTAND code of conduct for Agents
Code of conduct which govern the agent in his day-to-day dealings with his insurance company and
his clients is specified below :-
(i) (Every insurance agent shall,---

(a) identify himself and the insurance company of whom he is an insurance agent;
(b) disclose his licence to the prospect on demand;
(c) disseminate the requisite information in respect of insurance products offered for sale by
his insurer and take into account the needs of the prospect while recommending a specific
insurance plan;
(d) disclose the scales of commission in respect of the insurance product offered for sale, if
asked by the prospect;
(e) indicate the premium to be charged by the insurer for the insurance product offered for
sale;
(f) explain to the prospect the nature of information required in the proposal form by the
insurer, and also the importance of disclosure of material information in the purchase of an
insurance contract;
(g) bring to the notice of the insurer any adverse habits or income inconsistency of the
prospect, in the form of a report (called “Insurance Agent's Confidential Report”) along with
every proposal submitted to the insurer, and any material fact that may adversely affect the
underwriting decision of the insurer as regards acceptance of the proposal, by making all
reasonable enquiries about the prospect;
(h) inform promptly the prospect about the acceptance or rejection of the proposal by the
insurer;
(i) obtain the requisite documents at the time of filing the proposal form with the insurer; and
other documents subsequently asked for by the insurer for completion of the proposal;
(j) render necessary assistance to the policyholders or claimants or beneficiaries in
complying with the requirements for settlement of claims by the insurer;
(k) advise every individual policyholder to effect nomination or assignment or change of
address or exercise of options, as the case may be, and offer necessary assistance in this
behalf, wherever necessary;
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(ii) No insurance agent shall -
(a) solicit or procure insurance business without holding a valid licence;

(b) induce the prospect to omit any material information in the proposal form;
(c) induce the prospect to submit wrong information in the proposal form or documents
submitted to the insurer for acceptance of the proposal;
(d) behave in a discourteous manner with the prospect;
(e) interfere with any proposal introduced by any other insurance agent;
(f) offer different rates, advantages, terms and conditions other than those offered by his
insurer;
(g) demand or receive a share of proceeds from the beneficiary under an insurance contract;
(h) force a policyholder to terminate the existing policy and to effect a new proposal from him
within three years from the date of such termination;
(i) have, in case of a corporate agent, a portfolio of insurance business under which the
premium is in excess of fifty percent of total premium procured, in any year, from one
person (who is not an individual) or one organisation or one group of organisations;
(j) apply for fresh licence to act as an insurance agent, if his licence was earlier cancelled by
the designated person, and a period of five years has not elapsed from the date of such
cancellation;
(k) become or remain a director of any insurance company;
(iii) Every insurance agent shall, with a view to conserve the insurance business already procured
through him, make every attempt to ensure remittance of the premiums by the policyholders
within the stipulated time, by giving notice to the policyholder orally and in writing;
Code of Conduct for Brokers
UNDERSTAND code of conduct for Brokers
Brokers
Code of conduct which govern the brokers in their day-to-day dealings with the insurance company
and their clients is specified below :-
Conduct in relationship to clients
Every insurance broker/ insurance consultant shall:

a) conduct its dealings with clients with utmost good faith and integrity at all times;
b) act with care and diligence;
c) ensure that the client understands his relationship with the broker and on whose behalf the
broker is acting;
d) treat all information supplied by the prospective clients as completely confidential to
themselves and to the insurer to which the business is being offered;
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e) take appropriate steps to maintain the security of confidential documents in their

possession;
f) understand the type of client it is are dealing with and the extent of the clients awareness of
risk and insurance.
g) avoid conflicts of interest.
Sales practices
Every insurance broker shall:
a) confirm that it is member of the Insurance Brokers Association of India or such a body of
brokers as approved by the Authority.
B) identify itself and explain as soon as possible the degree of choice in the products that are
on offer;
C) ensure that the client understands the type of service it can offer
D) ensure that the policy proposed is suitable to the needs of the prospective client;
E) give advice only on those matters in which it is knowledgeable and seek or recommend
other specialist for advice when necessary;
F) not make inaccurate or unfair criticisms of any insurer or Insurance Brokers Association of
India member;
(G) explain why a policy or policies are proposed and provide comparisons in terms of price,
cover or service where there is a choice of products;
(H) state the period for which the quotation remains valid if cover is not effected immediately;
I) explain when and how the premium is payable and how such premium is to be collected,
where another party is financing all or part of the premium, full details should be given to
the client including any obligations that the client may owe to that party, and
J) explain the procedures to follow in the event of a loss.
Conduct in relation to furnishing of information
A) ensure that the consequences of non-disclosure and inaccuracies are pointed out to the
prospective client;
B) avoid influencing the prospective client and make it clear that all the answers or statements
given are the latter's -own responsibility, ask the client to carefully check details of
information given in the form and to him;
C) request the client to make true, fair and complete disclosure where it believes that the
client has not done so and in case further disclosure is not forthcoming it should consider
declining to act further;
D) explain to the client the importance of disclosing all subsequent changes that might affect
the insurance throughout the duration of the policy; and
E) disclose on behalf of its client all material facts within its knowledge and give a fair
presentation of the risk.
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Conduct in cases of insurance contract
(A) identify the insurer or insurers and advise changes once the contract has commenced;
(B) explain all the essential provisions of the cover afforded by the policy recommended by
him so that, as far as possible, the prospective client understands what is being purchased;
C) draw attention to any major or unusual restrictions and exclusions in the policy,explain
how the contract may be cancelled;
D) provide the client with prompt written confirmation that insurance has been effected;
E) notify changes to the terms and conditions of any insurance contract and give reasonable
notice before any changes take effect;
F) advise their clients of any insurance proposed on their behalf with an insurer outside India
and, if appropriate, of the possible risks involved; and
(g) advise their client that any non-insurance product will not be subject to Insurance Brokers
Association of India and, if appropriate, the implications in terms of consumer redress and
solvency.
Conduct in case of renewal of policies
A) ensure that its client is aware of the expiry date of the insurance even if it chooses not to
offer further cover to the client;
B) ensure that renewal notices contain a warning about the duty of disclosure including the
necessity to advise changes affecting the policy, which have occurred since the policy
inception or the last renewal date;
C) ensure that renewal notices contain a requirement for keeping a record (including copies of
letters) of all information supplied to the insurer for the purpose of renewal of the contract;
d) ensure that the client receives the insurer's renewal invitation.
Conduct in case of a claim by client
a) explain to its clients their obligation to notify claims promptly and to disclose all material
facts and advise subsequent developments as soon as possible;
b) request the client to make true, fair and complete disclosure where it believes that the
client has not done so. If further disclosure is not forthcoming they should consider
declining to act further for the client;
c) give prompt advice to the client of any requirements concerning the claim;
d) forward any information received from the client regarding a claim or an incident that may
give rise to a claim without delay, and in any event within three working days;
e) advise the client without delay of the insurers' decision or otherwise of a claim; and give all
reasonable assistance to the client in pursuing his claim.
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Conduct in case of complaints
A) ensure that letters of instruction, policies and renewal documents contain details of
complaints handling procedures;
B) accept complaints either by phone or in writing;
C) acknowledge a complaint not later than fourteen days from the receipt of correspondence,
advise the member of staff who will be dealing with the complaint and the timetable for
dealing with it;
d) ensure that response letters inform the complainant of what he should do if he is unhappy
with the response;
E) ensure that complaints are dealt with at a suitably senior level;
F) have in place a system for recording and monitoring complaints.
Conduct in relation to documentation
A) ensure that any documents issued by them comply with all statutory or regulatory
requirements from time to time in force;
B) send policy documentation without avoidable delay,
C) make available, with policy documentation, advice that the documentation should be read
carefully and retained by the client;
D) not withhold documentation from its clients without their consent, unless adequate and
justifiable reasons are disclosed in writing and without delay to the client. Where
documentation is withheld, the client must still receive full details of the insurance contract;
E) acknowledge receipt of all money received in connection with an insurance policy;
F) ensure that they reply promptly or use their best endeavours to obtain a prompt reply to all
correspondence;
G) ensure that all written terms and conditions are fair in substance and set out clearly and in
plain language client's rights and responsibilities; and
H) subject to the payment of any monies owed to them, make available to any new Insurance
broker instructed by the client all documentation to which the client is entitled and which is
necessary for the new Insurance broker to act on behalf of the client.
Conduct in relation to handling client's money and insurers' money
Every insurance broker / insurance consultant shall:
A) ensure that the moneys belonging to clients or insurers are not mixed with its own:
B) separate accounts are properly maintained in regard to those amounts and proper
information is periodically provided to the client and insurer:
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C) ensure that these moneys are banked in a proper manner:

D) ensure that moneys belonging to others are kept with them for a reasonable period only.
E) ensure strict compliance of the provisions of regulation 22.
Conduct in matters relating to advertising
A) ensure that statements made when advertising are not misleading or extravagant;
B) where appropriate, distinguish between contractual benefits which the insurance policy is
bound to provide and non-contractual benefits which may be provided;
C) ensure that advertisements shall not be restricted to the policies of one insurer except
where the reasons for such restriction are fully explained with the prior approval of that
insurer obtained.
D) ensure that advertisements contain nothing which is in breach of the law nor omit anything
which the law requires.
E) ensure that advertisement does not encourage or condone defiance or breach of the law.
F) ensure that advertisements contain nothing which is likely, in the light of generally
prevailing standards of decency and propriety, to cause grave or widespread offence or to
cause disharmony.
G) ensure that advertisements are not so framed as to abuse the trust of clients or exploit their
lack of experience or knowledge.
H) ensure that all descriptions, claims and comparisons which relate to matters of objectively
ascertainable fact should be capable of substantiation.
Conduct in relation to remuneration received by insurance broker
A) disclose all fees or charges (not commission) they propose to charge the client, which will
be in addition to the insurance premium. Claw back of commission will be considered as a
charge for these purposes;
B) advise the client in writing of the insurance premium and any fees or charges separately
and the purpose of any related services;
C) if requested by a client, disclose the amount of their commission or other remuneration
they receive as a result of effecting insurance for that client. This will include any payment
received as a result of securing on behalf of the client any service additional to the
arrangement of the contract of insurance; and
D) advise their clients prior to effecting the insurance of their intention to make any deductions
from the amount of claim collected for a client where this is a recognised practice for the
type of insurance concerned.
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Conduct in relation to matters relating to training
A) ensure that their staff are aware of and adhere to the standards expected of them by this
code;
B) ensure that staff are competent, suitable and have been given the necessary training as
required by the Authority
C) ensure that there is a system in place to monitor the quality of advice given by their staff,
D) ensure that members of staff are aware of legal requirements including the law of agency
affecting their activities; and only handle classes of business in which they are competent
and/or are licensed by the Authority.
Every insurance broker/ insurance consultant shall display in any office where they are carrying on
business and to which the public have access a notice to the effect that a copy of the code of conduct is
available upon request and that if a member of the public wishes to make a complaint or requires the
assistance of the Authority in resolving a dispute, he may write to the Authority.
An insurance broker as defined in these regulations under categories I, II , III and IV above or an
insurance consultant shall not act as an insurance agent of any insurer under section 42 of Insurance
Act, 1938.
Every insurance broker shall work for at least three companies or organisations.
Every insurance broker/ insurance consultant shall abide by the provisions of the Insurance Act,1938
(4 of 1938), IRDA Act 1999(41 of 1999), rules and regulations made thereunder which may be
applicable and relevant to the activities carried on by them as insurance brokers/ insurance
consultants.
Code of Conduct in Advertisement
UNDERSTAND code of conduct in Advertisement
Code of conduct in Advertisement
Insurance Regulatory and Development Authority of India has specified the following regulations with
regard to insurance advertisement and disclosure viz.
The regulation defines “Insurance Advertisement” as any communication directly or indirectly relating
to a policy and intended to result in a sale of the policy. It includes forms of print and electronic
medium.
The regulation defines “unfair or misleading advertisement” as any advertisement that :
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i) that fails to clearly identify the product as insurance;

Ii) makes claims beyond the ability of the policy to deliver or beyond the reasonable
expectation of performance;
Iii) describes benefits that do not match the policy provisions;
iv) uses words or phrases which hide / minimizes the costs / risks
v) fails to disclose or discloses insufficiently, important exclusions, limitations and conditions
of the contract;
vi) gives misleading information;
vii) illustrates future benefits on assumptions which are not realistic nor realisable in the light of
the insurer's current performance;
viii) where the benefits are not guaranteed, does not explicitly say so as prominently as the
benefits are stated or says so in a manner or form that it could remain unnoticed;
ix) implies a group or other relationship like sponsorship, affiliation or approval, that does not
exist;
x) makes unfair or incomplete comparisons with products which are not comparable or
disparages competitors.
The regulation state the following in relation to an Insurance company
(1) Every insurance company shall be required to prominently disclose in the advertisement
and that part of the advertisement that is required to be returned to the company or
insurance intermediary or insurance agent by a prospect or an insured the full particulars
of the insurance company, and not merely any trade name or monogram or logo.
(2) Where benefits are more than briefly described, the form number of the policy and the type
of coverage shall be disclosed fully.
The regulation state the following in relation to insurance agents
(1) Every advertisement by an insurance agent that affects an insurer must be approved by the
insurer in writing prior to its issue;
(2) It shall be the responsibility of the insurer while granting such approval to ensure that all
advertisements that pertain to the company or its products or performance comply with
these regulations and are not deceptive or misleading.
Explanation: An agent shall not be required to obtain written approval of the company prior to issue
for:
(i) those advertisements developed by the insurer and provided to the agents;
generic advertisements limited to information like the agent's name, logo, address and
phone number; and advertisements that consist only of simple and correct statements
describing the availability of lines of insurance, references to experience, service and
qualifications of agents; but making no reference to specific policies, benefits, costs or
insurers.
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The following is stated in regulation with regard to insurance intermediaries
(i) Only properly licensed intermediaries may advertise or solicit insurance through
advertisements.
The regulation specify the following with regard to advertising on the internet:
(1) Every insurer or intermediary's web site or portal shall

I) include disclosure statements which outline the site's specific policies vis-á-vis the
privacy of personal information for the protection of both their own businesses and
the consumers they serve.
(ii) display their registration/ license numbers on their web sites.
(2) For the purposes of these regulations, except where otherwise specifically excluded or
restricted, no form or policy otherwise permissible for use shall be deemed invalid or
impermissible if such form or policy accurately reflects the intentions of the parties in such
form or policy as published electronically or transmitted electronically between parties.
Every advertisement for insurance shall :
(1) State clearly and unequivocally that insurance is the subject matter of the solicitation; and
(2) State the full registered name of the insurer/ intermediary/ insurance agent.
Protection of Policyholders' Interest
UNDERSTAND protection of policyholders interest Regulations, 2002
The Insurance Regulatory and Development Authority (Protection of Policyholders' Interests)

Regulations, 2002 apply to all insurers, insurance agents, insurance intermediaries and policyholders.
The regulation defines “Cover” as an insurance contract whether in the form of a policy or a cover note
or a Certificate of Insurance or any other form prevalent in the industry to evidence the existence of an
insurance contract.
The “Proposal Form”, under the regulation means a form to be filled in by the proposer for insurance,
for furnishing all material information required by the insurer in respect of a risk, in order to enable the
insurer to decide whether to accept or decline, to undertake the risk, and in the event of acceptance of
the risk, to determine the rates, terms and conditions of a cover to be granted.
“Material” for the purpose of these regulations shall mean and include all important, essential and
relevant information in the context of underwriting the risk to be covered by the insurer.
“Prospectus” means a document issued by the insurer or in its behalf to the prospective buyers of
insurance, and should contain such particulars as are mentioned in Rule 11 of Insurance Rules, 1939
and includes a brochure or leaflet serving the purpose. Such a document should also specify the type
and character of riders on the main product indicating the nature of benefits flowing thereupon;
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Point of Sale
(1) A prospectus of any insurance product shall clearly state the scope of benefits, the extent of
insurance cover and in an explicit manner explain the warranties, exceptions and
conditions of the insurance cover and, in case of life insurance, whether the product is
participating (with-profits) or non-participating (without-profits).
The allowable rider or riders on the product shall be clearly spelt out with regard to their
scope of benefits, and in no case, the premium relatable to health related or critical illness
riders in case of term or group products shall exceed 100% of premium under the basic
product. All other riders put together shall be subject to a ceiling of 30% of the premium of
the basic product. Any benefit arising under each of the riders shall not exceed the sum
assured under the basic product.
Provided that the benefit amount under riders shall be subject to section 2(11) of the Insurance Act,
1938.
Explanation: The rider or riders attached to a life policy shall bear the nature and character of the main
policy, viz. participating or non-participating and accordingly the life insurer shall make provisions,
etc., in its books.”
(2) An insurer /agent / intermediary shall provide all material information in respect of a proposed
cover to the prospect to enable the prospect to decide on the best cover that would be in his or
her interest.
(3) Where the prospect depends upon the advice of the insurer /agent / intermediary, such a person
must advise the prospect dispassionately.
(4) Where the proposal and other connected papers are not filled by the prospect, a certificate may
be incorporated at the end of proposal form stating that the prospect has fully understood the
significance of the contract.
(5) In the process of sale, the insurer or its agent or any intermediary shall act according to the code
of conduct prescribed by:
i) the Authority
ii) the Councils that have been established under section 64C of the Act and
iii) the recognized professional body or association of which the agent or intermediary or
insurance intermediary is a member.
Proposal for insurance
(1) Except in cases of a marine insurance cover, in all cases, a proposal for grant of a cover,
either for life business or for general business, must be evidenced by a written document. It
is the duty of an insurer to furnish within 30 days of the acceptance of a proposal, a copy of
the proposal form.
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(2) Forms and documents used in the grant of cover may be made available in languages
recognised under the Constitution of India.
(3) In filling the form of proposal, the prospect is to be guided by the provisions of Section 45 of
the Act. Any proposal form seeking information for grant of life cover may prominently
state therein the requirements of Section 45 of the Act.
(4) Where a proposal form is not used, the insurer shall record the information obtained orally
or in writing, and confirm it within a period of 15 days thereof with the proposer and
incorporate the information in its cover note or policy. The onus of proof shall rest with the
insurer in respect of any information not so recorded, where the insurer claims that the
proposer suppressed any material information or provided misleading or false information
on any matter material to the grant of a cover.
(5) Wherever the benefit of nomination is available to the proposer, the insurer shall draw the
attention of the proposer to it and encourage the prospect to avail the facility.
(6) Proposals shall be processed by the insurer with speed and efficiency. An insurer shall
communicate all the decisions in writing within 15 days from receipt of proposals by the
insurer.
Grievance redressal procedure
Every insurer shall have in place proper procedures and effective mechanism to address complaints
and grievances of policyholders. The insurer shall communicate to the policyholder information with
respect to Insurance Ombudsman.
Matters to be stated in life insurance policy
(1) A life insurance policy shall clearly state:

(a) the name of the plan governing the policy, its terms and conditions;
(b) whether it is participating in profits or not;
(c) the basis of participation in profits such as cash bonus, deferred bonus, simple or
compound reversionary bonus;
(d) the benefits payable and the contingencies upon which these are payable and the
other terms and conditions of the insurance contract;
(e) the details of the riders attaching to the main policy;
(f) the date of commencement of risk and the date of maturity or date(s) on which the
benefits are payable;
(g) the premiums payable, periodicity of payment, grace period allowed for payment of
the premium, the date the last instalment of premium, the implication of
discontinuing the payment of an instalment(s) of premium and also the provisions of
a guaranteed surrender value.
(h) the age at entry and whether the same has been admitted;
(i) the policy requirements for (a) conversion of the policy into paid up policy, (b)
surrender (c) non-forfeiture and (d) revival of lapsed policies;
(j) contingencies excluded from the scope of the cover, both in respect of the main
policy and the riders;
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(k) the provisions for nomination, assignment, and loans on security of the policy and a
statement that the rate of interest payable on such loan amount shall be as prescribed
by the insurer at the time of taking the loan;
(L) any special clauses or conditions, such as, first pregnancy clause, suicide clause etc.;
and
(m) the address of the insurer to which all communications in respect of the policy shall
be sent.
(N) the documents that are normally required to be submitted by a claimant in support of
a claim under the policy.
(2) While acting under regulation 6 (1) in forwarding the policy to the insured, the insurer shall
inform by the letter forwarding the policy that he has a period of 15 days from the date of
receipt of the policy document to review the terms and conditions of the policy and where
the insurer disagrees to any of those terms and conditions, he has the option to return the
policy stating the reasons for his objection, when he shall be entitiled to a refund of the
premium paid, subject only to a deduction of a proportionate risk premium for the period
on cover and the expenses incurred by the insurer on medical examination of the proposer
and stamp duty charges.
(3) In respect of a unit linked policy, in addition to the deductions like proportionate risk
premium and expenses, the insurer shall also be entitled to repurchase the unit at the price
of the units on the date of cancellation.
(4) In respect of a cover, where premium charged is dependent on age, the insurer shall attain
the proof of age before issuance of the policy document. In case where age has not been
admitted by the time the policy is issued, the insurer shall make efforts to obtain proof of
age and admit the same as soon as possible.
Matters to be stated in general insurance policy
(1) A general insurance policy shall clearly state:

(a) the name(s) and address(es) of the insured and of any bank(s) or any other person
having financial interest in the subject matter of insurance;
(b) full description of the property or interest insured;
(c) the location or locations of the property or interest insured under the policy and,
where appropriate, with respective insured values;
(d) period of Insurance;
(e) sums insured;
(f) perils covered and not covered;
(h) any franchise or deductible applicable;
(i) premium payable and where the premium is provisional subject to adjustment, the
basis of adjustment of premium be stated;
(j) policy terms, conditions and warranties;
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(k) action to be taken by the insured upon occurrence of a contingency likely to give rise
to a claim under the policy;
(l) the obligations of the insured in relation to the subject matter of insurance upon
occurrence of an event giving rise to a claim and the rights of the insurer in the
circumstances;
(M) any special conditions attaching to the policy;
(N) provision for cancellation of the policy on grounds of mis-representation, fraud, non-
disclosure of material facts or non-cooperation of the insured;
(O) the address of the insurer to which all communications in respect of the insurance
contract should be sent;
(P) the details of the riders attaching to the main policy;
(Q) proforma of any communication the insurer may seek from the policyholders to
service the policy.
(2) Every insurer shall inform and keep informed periodically the insured on the requirements
to be fulfilled by the insured regarding lodging of a claim arising in terms of the policy and
the procedures to be followed by him to enable the insurer to settle a claim early.
Claims procedure in case of Life Insurance
(1) A life insurance policy shall state the primary documents which are normally required to
be submitted by a claimant in support of a claim.
(2) A life insurance company, upon receiving a claim, shall process the claim without delay.
Any queries or requirement of additional documents shall be raised all at once and not in a
piece-meal manner, within a period of 15 days of the receipt of the claim.
(3) A claim under a life policy shall be paid or be disputed giving all the relevant reasons, within
30 days from the date of receipt of all relevant papers and clarifications required. However,
where the circumstances of a claim warrant an investigation in the opinion of the insurance
company, it shall initiate and complete such investigation at the earliest. Where in the
opinion of the insurance company the circumstances of a claim warrant an investigation, it
shall initiate and complete such investigation at the earliest, in any case not later than 6
months from the time of lodging the claim.
(4) Where a claim is ready for payment but the payment cannot be made due to any reasons of
a proper identification of the payee, the life insurer shall hold the amount for the benefit of
the payee. The insurer shall also pay interest on such amount at the rate applicable to a
savings bank account with a scheduled bank (effective from 30 days following the
submission of all papers and information).
(5) Where there is a delay on the part of the insurer in processing a claim for a reason other
than the one mentioned above, the life insurance company shall pay interest on the claim
amount at a rate which is 2% above the bank rate prevalent at the beginning of the financial
year in which the claim is reviewed by it.
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Claims procedure in case of General insurance
(1) An insured or the claimant shall give notice to the insurer of any loss arising under contract
of insurance at the earliest or within such extended time as may be allowed by the insurer.
On receipt of such a communication, a general insurer shall respond immediately and give
clear indication to the insured on the procedures that he should follow. In cases where a
surveyor has to be appointed for assessing a loss/ claim, it shall be so done within 72 hours
of the receipt of intimation from the insured.
(2) Where the insured is unable to furnish all the particulars required by the surveyor or where
the surveyor does not receive the full cooperation of the insured, the insurer or the
surveyor as the case may be, shall inform in writing the insured about the delay that may
result in the assessment of the claim. The surveyor shall be subjected to the code of
conduct laid down by the Authority while assessing the loss, and shall communicate his
findings to the insurer within 30 days of his appointment with a copy of the report being
furnished to the insured, if he so desires. However, in special circumstances, the surveyor
shall under intimation to the insured, seek an extension from the insurer for submission of
his report. In no case shall a surveyor take more than six months from the date of his
appointment to furnish his report.
(3) If an insurer, on the receipt of a survey report, finds that it is incomplete in any respect, he
shall require the surveyor under intimation to the insured, to furnish an additional report on
certain specific issues as may be required by the insurer. Such a request may be made by
the insurer within 15 days of the receipt of the original survey report.
Provided that the facility of calling for an additional report by the insurer shall not be
resorted to more than once in the case of a claim.
(4) The surveyor on receipt of this communication shall furnish an additional report within
three weeks of the date of receipt of communication from the insurer.
(5) On receipt of the survey report or the additional survey report, as the case may be, an
insurer shall within a period of 30 days offer a settlement of the claim to the insured. If the
insurer, for any reasons to be recorded in writing and communicated to the insured,
decides to reject a claim under the policy, it shall do so within a period of 30 days from the
receipt of the survey report or the additional survey report, as the case may be.
(6) Upon acceptance of an offer of settlement as stated in sub-regulation (5) by the insured, the
payment of the amount due shall be made within 7 days from the date of acceptance of the
offer by the insured. In the cases of delay in the payment, the insurer shall be liable to pay
interest at a rate which is 2% above the bank rate prevalent at the beginning of the financial
year in which the claim is reviewed by it.
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Policyholders' Servicing
(1) An insurer carrying on life or general business, as the case may be, shall at all times,
respond within 10 days of the receipt of any communication from its policyholders in all
matters, such as:
(a) recording change of address;

(b) noting a new nomination or change of nomination under a policy;
(c) noting an assignment on the policy;
(d) providing information on the current status of a policy indicating matters, such as,
accrued bonus, surrender value and entitlement to a loan;
(e) processing papers and disbursal of a loan on security of policy;
(f) issuance of duplicate policy;
(g) issuance of an endorsement under the policy; noting a change of interest or sum
assured or perils insured, financial interest of a bank and other interests; and
(h) guidance on the procedure for registering a claim and early settlement thereof.
General provisions:
(1) The requirements of disclosure of “material information” regarding a proposal or policy

apply, under these regulations, both to the insurer and the insured.
(2) The policyholder shall assist the insurer, if the latter so requires, in the prosecution of a
proceeding or in the matter of recovery of claims which the insurer has against third
parties.
(3) The policyholder shall furnish all information that is sought from him by the insurer and
also any other information which the insurer considers as having a bearing on the risk to
enable the latter to assess properly the risk sought to be covered by a policy.
(4) Any breaches of the obligations cast on an insurer or insurance agent or insurance
intermediary in terms of these regulations may enable the Authority to initiate action
against each or all of them, jointly or severally, under the Act and/or the Insurance
Regulatory and Development Authority Act, 1999.
Professionalism
Apart from adhering to the various rules, regulations and ethical codes, it is desirable for the insurance
adviser to maintain the utmost level of professionalism and integrity. Because of the specialised
expertise that the insurance adviser can offer, he is considered a professional, and with such a
recognition comes the obligation to deliver quality service.
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The insurance professional must constantly put his client's interest above his own. Any
recommendation made should be for the sole benefit and interest of the client. For example, he
should not sell a product to a client just so that he can earn a commission or fulfil any quota or to win
any award. He should ensure that whatever product offered is affordable to the client and over-selling
should be resisted a good insurance professional should have genuine concern for his or her clients'
interest. If the professional belongs to a highly ethical and reputable profession, he/she may also be
more motivated to act ethically. Ethical professionals, in fact, tend to become more successful. This is
because, by virtue of their conduct, they can gain the client's trust and will be able to act more
extensively for the client. If the professional is unethical, the client may not want to deal with him or
her for fear of becoming a victim of the professional's misdeeds.
Furthermore, as a professional, the adviser must constantly upgrade his or her knowledge and
expertise to suit the changes in the environment. He or she should:
Ø Attend seminars, courses and, if possible, attain further qualifications and keep himself up
to date
Ø Read extensively, particularly relevant journals, magazines and other materials to update
his or her knowledge.
Ø Seek the views of experts in related fields like law, accountancy, etc. pertaining to matters
relevant to his practice.
For the insurance adviser, the importance of advising the client professionally and competently cannot
be over-emphasised. Clients generally buy an insurance product from an agent or broker based on
three criteria revolving around “trust”:
Ø They trust the insurance company;
Ø They trust the quality of the product ; and
Ø They trust the insurance agent.
However, the insurance agent should not adopt an ethical and professional practice just because this
approach will enhance his reputation and business. He should do so primarily because it is the right
thing to do.
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Insurance Legislation
UNDERSTAND Insurance Regulation and Legislation
History of Insurance Regulation in India
UNDERSTAND brief history of Insurance Regulation in India
Prior to 1912, the Insurance Act was passed which set down the rules and regulations specific to the
insurance industry. This was the first comprehensive legislation in India to regulate insurance
business. It was felt that the Indian Company Act did not meet the purpose. Amendments to the act
were made in 1919 and 1928 but the most fundamental changes were enacted in 1938 and many of the
rules introduced are still valid today.
Key points of the Insurance Act 1938
DESCRIBE the key points of the Insurance Act , 1938
In 1938, the Insurance Act was passed and came into force with effect from 1st July 1939. The act aimed
to protect the interest of insuring public and to consolidate and amend the law relating to the business
of Insurance. To administer the aforesaid legislation, an insurance wing was established and attached
with the Ministry of Finance to decide policy matters pertaining to insurance. The Controller of
Insurance looked after the actuarial and operational matters relating to insurance. The most important
amendments were made in 1950 and 1968. In 1950, the act was amended to make certain necessary
changes in order to limit the expenses and control the investments.
The main highlights of changes that were enacted in 1950 are :
Ø Abolition of chief agents, special agents and principal agents.

Ø Equity capital requirement for companies carrying on Life Insurance Business.
Ø Stringent control on investments of Life Insurance Companies.
Ø Ceiling on shareholding pattern in such companies.
Ø Investment and other information details to be submitted periodically to the Controller.
Ø Fixed a limit on management expenses and agency commission.
Ø Appointment of administrators for companies being mismanaged.
Ø Formation of councils, committees and incorporation of the Insurance Association of India
for self-regulation.
No person shall after the commencement of the Insurance Act, 1950, begin to carry on any class of
Insurance business in India and no insurer carrying on any class of insurance business in India shall
after the expiry of one year from such commencement continue to carry on such business unless he is
a) A Public Limited Company
b) A society registered under the Co-operative Societies Act, 1912
c) A Body Corporate incorporated under the law of any country outside India not being a
private Company.
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Brief History of LIC Act 1956 and GIC Act 1972
UNDERSTAND brief history of LIC Act 1956 and GIC Act 1972
Few of the important sections of the Insurance Act 1938 are :-
Section 2 (7A) states that business transactions of an Indian Insurance company registered under the
LIC Act, 1956 can conduct business in which the total equity shares holding by a foreign company
should not exceed 26% of the paid-up equity capital of the Indian Company.
Section 7(1) states the guidelines for deposit which an insurer has to maintain with the Reserve Bank of
India.
Ø General Business 3% of the gross premium income per annum, not exceeding Rs 10
crores.
Ø Life Insuance Business 1% of the gross premium income per annum, not exceeding Rs 10
crores.
Ø Reinsurance Business Not exceeding 20 crores per annum
Section 3 stipulates that any insurer carrying business in India has to obtain a certificate of registration
from IRDA and the registration has to be reviewed annually without fail.
Section 21 & 22 state the powers of IRDA for accepting and declining any such returns which lacks
accuracy and can revaluate if it feels that the returns appear abstract.
Section 45 states that no insurer can dispute a policy after expiry of 2 years from the date of policy.
Section 113 deals with guaranteed surrender value which is payable after the payment of premiums
for three consecutive years.
The Act provides for registration of insurance companies, maintenance of accounts and valuation
reports, investment and utilisation of funds, limitation in expenses of Management, approval of
premium rates and plan, prohibition of rebates, powers of investigation, licensing of Agents and
Surveyors, advance payment of premium etc. The Act has empowered IRDA to inspect the
documents, appoint additional directors, issue directions, exercise management control on the
insurer by appointing an Administrator to be appointed by the Central Government.
Life Insurance
Life Insurance Business in India is regulated by the Insurance Act of 1938 as amended by the Life
Insurance Corporation Act, 1956.
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With effect from 1 September, 1956, a corporation called Life Insurance Corporation (LIC) was formed
with perpetual succession and common seal. The act empowered LIC with the power to acquire, hold
and dispose the property and sue and be sued in its name. Sec 30 of the act provided exclusive rights
to LIC to carry on Life Insurance Business in India.
General Insurance
General insurance business is governed by two statutes viz General Insurance Business
(Nationalisation) Act, 1972 and the amended Insurance Act, 1938. In addition, the practice of general
insurance is directly or indirectly affected by other statutes viz Marine Insurance Act, Motor Vehicles
Act, Workmens Compensation Act.
The 1938 Act applies to the General Insurance Corporation of India and the four subsidiary Companies
subject to exceptions, restrictions and limitations, as specified by the Central Government under
powers conferred by Section 35 of the General Insurance Business (Nationalisation) Act.
General Insurance Business (Nationalisation) Act, 1972.

st
This Act came into force on 1 January, 1973.
The object of the Act, as stated therein, is
Ø To provide for the acquisition and transfer of shares of Indian Insurance Companies and
undertakings of other existing insurers.
Ø To serve better the needs of the economy by securing the development of general
insurance business in the best interests of the community.
Ø To ensure that the operation of the economic system does not result in the concentration of
wealth to the common detriment.
Ø For the regulation and control of such business and for matters connected therewith or
incidental thereto.
Malhotra Committee Report
UNDERSTAND the main recommendation of the Malhotra Committee Report
A committee was appointed under the chairmanship of late R N Malhotra for recommending reforms
in the insurance sector. The committee was known as the “Malhotra Committee”. The main
recommendations of the committee were viz,
Government shareholding in the insurance companies to be reduced to 50% in order to provide them
with greater autonomy.
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A minimum paid up capital of Rs 1 billion to be made a pre requisite for entry of private companies into
the industry. No company should be allowed to deal in both Life and General Insurance as a single
entity. Foreign companies to be allowed to enter only in collaboration with the domestic companies.
To set up an independent regulatory body to promote and regulate insurance companies.
Based on the above recommendations of the committee, the Insurance Regulatory Authority was
formed in January 1996. The word “development” was added later and IRDA Bill was passed.
Amendments have been made in Insurance Act 1938 through the IRDA Act 1999 following
nationalisation of the Insurance business. The move came in the wake of very limited application of the
Insurance Act, 1938 to the nationalized LIC and the GIC.
Insurance Regulatory and Development Authority Act 1999
UNDERSTAND Insurance Regulatory and Development Authority Act 1999
The Insurance Regulatory Development Authority Act, 1999 extends to the whole of India. The Act
came into force with effect from March 2000. It is an act to provide for the establishment of an Authority
to protect the interest of holders of insurance policies, to regulate, promote and ensure orderly growth
of the insurance industry and for matters connected therewith or incidental thereto and further to
amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance
Business (Nationalisation Act 1972)
The authority is a body corporate with perpetual succession and a common seal with power to
acquire, hold and dispose off property, both moveable and immoveable, to contract and to sue and be
sued by the said name(IRDA).
The authority shall consist of the following comprising namely of :

A) A Chairperson,
B) Not more than five whole time members,
C) Not more than four part-time members,
The members would be appointed by the Central Government. The Central Government would
appoint persons of ability and integrity and those who have knowledge or experience in life insurance,
general insurance, acturial science, finance, economics, law, accountancy, administration or any
other discipline.
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The basic duties and functions of IRDA are as follows:-
1. To issue to the applicant of the Life or General Insurance a certificate of registration, renew,
modify, withdraw, suspend or cancel such registration.
2. Protection of interest of policy holders in matters concerning assigning of policy,
nomination by policy holders, insurable interest, settlement of insurance claim, surrender
value of policy and other terms and conditions of the contract of Insurance
3. Specifying requisite qualifications, code of conduct and practical training of insurance
intermediaries or agents.
4. Specifying code of conduct for Surveyors and loss assessors.
5. Promoting efficiency in the conduct of insurance business
6. Promoting and regulating professional organizations connected with the insurance and re-
insurance business.
7. Regulation and control of the rates, advantages, terms and conditions that may be offered
by the insurers in respect of general insurance.
8. Specifying the norm and manner in which books of accounts shall be maintained and
statement of accounts rendered by the insurers and their intermediaries.
9. Regulating investment of funds by the insurance companies.
10. Regulating maintainence of margin of solvency.
11. Adjudication of disputes between insurers and insurance intermediaries.
12. Supervising the functioning of the tariff advisory committee.
13. Specifying the percentage of life insurance and general insurance to be undertaken in rural
sectors.
Grants by Central Government :- (Section 15)
The Central Government may, after due appropriation made by Parliament by law in this behalf, make
to the Authority grants of such sums of money as the Government may think fit for being utilised for
the purposes of this Act.
Constitution of Funds : - (Section 16)
(1) There shall be constituted a fund to be called “the Insurance Regulatory and
Development Authority Fund” and there shall be credited thereto-
(a) all Government grants, fees and charges received by the Authority;
(b) all sums received by the Authority from such other source as may be decided upon
by the Central Government;
(c) the percentage of prescribed premium income received from the insurer.
(2) The Fund shall be applied for meeting -

(a) the salaries, allowances and other remuneration of the members, officers and other
employees of the Authority;
(b) the other expenses of the Authority in connection with the discharge of its functions
and for the purposes of this Act.
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Accounts and Audit.(Section 17)
(1) The IRDA shall maintain proper accounts and other relevant records and prepare an
annual statement of accounts in such form as may be prescribed by the Central
Government in consultation with the Comptroller and Auditor-General of India.
(2) The accounts of the Authority shall be audited by the Comptroller and Auditor-General of
India at such intervals as may be specified by him and any expenditure incurred in
connection with such audit shall be payable by the Authority to the Comptroller and
Auditor-General.
(3) The Comptroller and Auditor-General of India and any other person appointed by him in
connection with the audit of the accounts of the Authority shall have the same rights,
privileges and authority in connection with such audit as the Comptroller and Auditor-
General generally has in connection with the audit of the Government accounts and, in
particular, shall have the right to demand the production of books of account, connected
vouchers and other documents and papers and to inspect any of the offices of the
Authority.
(4) The accounts of the Authority as certified by the Comptroller and Auditor-General of India
or any other person appointed by him in this behalf together with the audit-report thereon
shall be forwarded annually to the Central Government and that Government shall cause
the same to be laid before each House of Parliament.
Power of Central Government to issue directions (Section 18)
(1) Without prejudice to the foregoing provisions of this Act, the Authority shall, in exercise of
its powers or the performance of its functions under this Act, be bound by such directions
on questions of policy, other than those relating to technical and administrative matters, as
the Central Government may give in writing to it from time to time.
PROVIDED that the Authority shall, as far as practicable, be given an opportunity to express
its views before any direction is given under this sub-section.
(2) The decision of the Central Government, whether a question is one of policy or not, shall be
final.
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Furnishing of returns to Central Government (Section 20)
(1) The Authority shall furnish to the Central Government at such time and in such form and
manner as may be prescribed, or as the Central Government may direct to furnish such
returns, statements and other particulars in regard to any proposed or existing programme
for the promotion and development of the insurance industry as the Central Government
may, from time to time, require.
2) Without prejudice to the provisions of sub-section(1), the Authority shall, within nine
months after the close of each financial year, submit to the Central Government a report
giving a true and full account of its activities including the activities for promotion and
development of the insurance business during the previous financial year.
(3) Copies of the reports received under sub-section(2) shall be laid , as soon as may be after
they are received, before each House of Parliament.
Summary
For the insurance industry to effectively serve the needs of the public, two basic requirements must be
met. Firstly, the players must be honest, competent, financially strong and have integrity. Secondly,
the rules governing their conduct must be fair, efficient and sensible.
In this lesson, the student is introduced to both requirements. He or she should, in reading the
materials, understand how the insurance industry is run, and appreciate how it affects the financial
well-being of his or her client.
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RM-6 - Insurance Industry Regulations & Legislation

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RM-6 - Insurance Industry Regulations & Legislation

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HIGH with

Learning Goals 11-3

Qualification of Insurance Related Entities 11-4

Financial Viability and Strength of Insurers 11-11

Ø Fund Concept of Accounting

Insurance Business Practices 11-38

Ø Available Distribution Channels

Professional Standards, Rules & Ethics

Ø Code of conduct for Agents

Insurance Legislation 11-63

Ø History of Insurance Regulation in India

In studying this lesson, the Learning Goals are to:

Qualification of Insurance Related Entities

DESCRIBE the qualification of Insurance Companies.

They can be summarized as under:

Ownership and Management of Insurance Companies

Describe the qualification for owners and Managers of Insurance Companies

Insurance Agents and Brokers

DESCRIBE the qualification for Insurance Agents and Brokers

Ø The applicant must be at least 18 years of age.

Ø Application on prescribed form.

The license of an agent will get terminated in the event of

The Agent acquiring any of the following legal disqualifications : -

Ø Found of unsound mind

(F) whether the principal officer of the applicant :

(k) Associate/ Fellow of the Actuarial Society of India; or

Provided that where the principal officer of the applicant :

Ø An Insurance Broker will be disqualified on any of the following ground:-

a) That the person is a minor;

Financial Viability and Strength of Insurers

Fund Concept of Accounting

UNDERSTAND the Fund Concept of accounting.

Capital Requirements of Insurers

UNDERSTAND the capital requirements of Insurers.

Solvency Requirements for Insurers

UNDERSTAND the Solvency Requirements for Insurers.

Some of the rules are explained in Brief:

Ø Valuation of Assets. (Regulation 3)

Valuation of Assets (Schedule 1)

The value of asssets is determined as under:

(1) The following assets should be placed with value zero,--

Ø seventy five per cent. of its cost in the year of purchase;

Every insurer shall prepare a statement of assets in Form IRDA-Assets- AA.

Determination of Amount of Liabilities.

Valuation of Liabilities - Life Insurance

Method of Determination of Mathematical Reserves

(6) The valuation method shall be called “Gross Premium Method'.

Policy Cash Flows.---

(i) basic benefits,

(ii) rider benefits,

(iv) bonuses as a result of the valuation at the valuation date, and

Provided that allowance must be made for tax, if any.

(5) Valuation rates of interest, to be used by appointed actuary -

Additional Requirements for Linked Business.

(a) premiums, if any, payable in future;

(c) management charges paid to the general fund;

Additional Requirements for Provisions.---

c) Options available under individual and group insurance policies;

d) Guarantees available to individual and group insurance policies;