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Government Regulation of Insurance

ll across the world, insurance is a highly regulated industry. The reason for this is that for the insurance industry to run smoothly, it is essential that the insuring public has complete faith in the capabilities of the insurers. This faith is essential because the insuring public pays premiums much in advance and the claims occur far into the future. If during this period some insurer goes bankrupt and is not able to pay claims of the insured when they arise, then the entire purpose of insurance would be defeated. Also, if because of some unscrupulous insurers the faith of the public gets shaken, then the entire insurance industry would collapse. People would stop buying insurance out of fear. This would lead to dwindling sales and the law of large numbers would cease to be applicable as insurance companies will be unable to get a large number of homogenous risks to cover. This in turn would increase the unpredictability and make it difficult for insurers to charge the correct premia. If the insurers charge excess premia, then they would reduce the market size even more and if they charge less, then they themselves may go bankrupt. As a result, insurers are regulated to: Maintain insurer solvency Ensure reasonable rates and premia Make insurance available to a large number of people Protect consumers from unreasonable restrictive insurance contracts

Insurance Regulation in India

In India, the insurance industry is regulated under the Insurance Act, 1938. The Insurance Act, 1938 came into force on 1 July, 1938. This Act consolidates and amends the law relating to the business of insurance. It applies to both life and general insurance business. Insurance Regulatory and Development Authority Act, 1999 In addition to the Insurance Act 1938, a separate act called the Insurance Regulatory and Development Authority Act, 1999 was passed for the creation of an independent regulatory agency to oversee the insurance industry in India. Agents and brokers Agents and brokers form the marketing backbone of any insurance company. They are the face of the insurance company to the consumer. As a result, they are governed by strict regulations regarding every aspect of their operation.

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Definition: An Agent is a person employed to do any act for another, called Principal, as well as to represent him while dealing with a third person, i.e. prospective or existing client of the Principal. Who can be an Insurance Agent? An Insurance Agent is a person engaged by an Insurance Company to: Solicit or procure new insurance business Deal with the clients on behalf of the company for continuance, renewal or revival of the policies of insurance. According to the Insurance Act, an Insurance Agent has to be licensed under Section 42 of that Act. A license is granted for a period of 3 years and may be renewed after 3 years or cancelled. An Agent can start functioning only after obtaining a valid license. A person can be an agent for one insurance company only, and in case of a composite agent, for one Life and one Non-life Insurance Company only. Types of Agents Broadly, agents are classified into two categories as follows: General Agent - One who is authorized to act for his principal in all matters in a specified sphere. Special Agent - One who is authorized to transact a special business, e.g. to buy or sell a particular product. Insurance Agent Insurance agents are a kind of special agents who are authorized to transact insurance business. They are further subdivided into two categories namely: Direct Agent Corporate Agent Direct Agents Under direct agents, there are three types of agents: Life Insurance Agent - One who is licensed to transact life insurance business only. General Insurance Agent - One who is licensed to transact general insurance business only. Composite Insurance Agent - One who is licensed to transact both life and non-life insurance business. Corporate Agent A corporate agent can be a firm, a company under the Companies Act, a banking company, a regional rural bank, a cooperative society, a panchayat, a local authority, a non-government organization, a micro-lending finance organization, or any other organization approved by IRDA. Essentials to become an Agent The person must be at least 18 years of age. Have passed at least the 12th standard or equivalent examination, if he is to be appointed in a place with a population of one lakh or more. Have passed 10th standard, if he is to be appointed in a place with population less than one lakh.

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Have undergone the prescribed practical training programme for 100 hours in life or non-life insurance as the case may be. Must have cleared the pre-recruitment examination conducted by the Insurance Institute of India or any other examination body recognized by the IRDA. In the case of a person wanting to become a composite insurance agent, the applicant should have completed at least 150 hours practical training in life and general insurance business.

Procedure for becoming an Agent

Training The applicant has to complete at least one hundred hours practical training from an approved institute in life or general insurance business as the case may be. Pre-recruitment Test The applicant has to pass the pre-recruitment examination in life or general insurance business or both, as the case may be, conducted by the Insurance Institute of India or any other examination body recognized by the Authority. Issuance of License The designated person on being satisfied with the formalities of the application, grant the license along with the identity card. In case of a composite agent, separate identity card should be issued by life and non-life insurance company.

Authority and Duty of an Agent

Authority of an Agent An agent can act only to the extent of authority granted to him by the principal. Pre-requisites to Duties and Functions In order to perform all the tasks, the agent should be familiar with: Details of various plans of insurance like covers, premiums, exclusions, conditions, warranties. The office procedures for various matters including the forms and documents considered necessary. Disclose all the material facts accurately to help the underwriter make his decision with regard to acceptance of the proposal, as made. Commission Commission is the remuneration which the Agent gets in lieu of his services towards the Insured and the Insurance company. This is paid by the Insurance company and not the Insured. Commission should not exceed 15% of the premium. The terms of appointment of the agent include rates of commission, which may be: 5% for fire, marine and motor business 10% for some classes of miscellaneous business 15% for majority of rural and non-traditional insurance business

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Renewal of License An application for renewal has to be filed at least 30 days before the expiry of the license. The procedure for this is exactly the same as for the issuance of fresh license with the following differences: Training The Agent has to complete 25 hours practical training in life or general insurance business, as the case may be, or at least 50 hours practical training in life and general insurance business, in the case of a composite insurance agent. Fees Rs.100/- . However, an additional fee of Rs. 100 is charged in case of late applications, even if it is made before the date of expiry. Termination of Agency An Agency can be terminated in the following circumstances: Cancellation or non-renewal of the license. Non-fulfillment of business guarantees. Legal disqualifications like permanent incapacity, conviction for criminal misappropriation, criminal breach of trust, cheating or forgery, etc. Offering rebate for whole or part of commission in violation of Section 41 of Insurance Act. Insurance Brokers While an agent represents a single insurance company and can bind the company with his actions, a broker is an intermediary who solicits insurance business for a number of insurers. Brokers do not have the authority to bind the insurer. They solicit insurance business and then try to place the risk with one of the insurers. A Direct Broker is licensed to carry out specified functions in life insurance or general insurance or both on behalf of his clients. Code of Conduct Every insurance broker needs to follow recognized standards of professional conduct and discharge his functions in the interest of the policyholders. Remuneration On Direct General Insurance Business: No insurance broker can be paid or contracted to be paid by way of remuneration (including royalty or license fees or administration charges or such other compensation) an amount exceeding: On tariff products: 10% of the premium on that part of the business, which is compulsorily under any statute or any law in force. 12.5% of the premium on others. On non-tariff products: 17.5% of the premium on direct business. Premium from a single client: The premium shall not exceed 50% of the total premium of a broker in the first year of business, 40% of in the second year of business, and 30% from the third year of business.

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Any applicant seeking to become an insurance broker should satisfy the following conditions: A Direct Broker needs to have a minimum amount of capital of Rs. 50 Lakhs. The capital in the case of a company limited by shares and a cooperative society, shall be in the form of equity shares. The capital in case of other applicants shall be brought in cash. The applicant shall exclusively carry on the business of an insurance broker as licensed under these regulations. Every insurance broker before the commencement of his business, deposits a sum equivalent to 20% of the initial capital in fixed deposit in any scheduled bank. He cannot release this amount of deposit without the prior permission of the Authority. Every insurance broker has to maintain a professional indemnity insurance cover throughout the validity of the period of the license granted to him by the Authority. Doctrines of waiver and estoppel The doctrines of waiver and estoppel are concerned with the law of agency. They derive their origin from the fact that an agent can bind the company with his actions. Due to the application of these doctrines, the insurer may be forced to pay claims that could have been avoided. Let us look at these in more detail. Waiver is the voluntary relinquishment of a known legal right. If the insurer or the agent acting on behalf of the insurer voluntarily waives a legal right under the contract, it cannot later deny payment of a claim by the insured on the grounds that such a right was violated. For example, if an insurer issues a policy despite non-completion of all formalities by the insured, then it cannot deny payment of a claim at a later date citing this reason. Estoppel is when a person makes a statement to another, who believes it to be true and acts on that basis to his detriment, then the person who made the statement cannot deny that such a statement was made. For example, if an agent makes a statement to a prospective client that it is not necessary to declare pre-existing diseases in a health insurance proposal form, then the insurer at a later date cannot deny payment of claim on the grounds that pre-existing diseases were not disclosed.

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Exercise
Lets take a look at a case study. Pramod is 24 years old and has lived in Mumbai all his life. He hails from Vaishalinagar which is 50kms north of Mumbai. He has finished his schooling up to eleventh standard in Mumbai. Whilst at school, he went to an English medium school, and thus learnt the language well. He could converse with people and his strength was getting around with people and getting work done. His family circumstances led him to quit school early on in life. He has tried his hands at many different things. He was an intelligent person, and good at calculations and basic math. He also felt that he should start some business with the little capital that he had built up over the years. However, his family needed his support and help. He thought of becoming an insurance agent. He could easily undertake the 100 hours practical training and had run through and studied the books already. He wants to specialize in both life and non-life insurance. He also realized that with a bit of effort, he could become a certified insurance agent and that his dreams would come true. Can he become an agent in Mumbai? What is his option,given that he wants to become successful in this area? Will he be considered a direct agent or a corporate agent? What type of an agent does Pramod aspire to become in terms of areas that he would like to look after? Solution : No, he cannot become an agent in Mumbai because he has not completed his XII standard, one option is that he attempts to complete his education, which is of prime importance to him along with his job, since his family needed the income. The other option for him is to register at Vaishalinagar, nearby town close to Mumbai and start educating people about small savings schemes and insurance policies. He could begin a career from the nearby town. He will be a direct agent. Pramod aspires to become a composite Insurance Agent. Part II of the case study: Pramod struggled for a few years, and finally became an insurance agent. Slowly but steadily,he got better with time. On an average, he sold about 5 or 6 policies with a premium of Rs. 10000 pa in a month. He made an average of about Rs. 5000 to Rs. 7000pm, which he was quite happy with. He got a good name in his community of being an honest worker and people often asked for his advice. Infact, he was always there to help farmers who had already purchased their policies with him with their paper work and completing the procedures including documentation and form filling exercise in a timely fashion. Infact, in a few more years, he hired some younger boys to help him with the settlement of claims in case of any eventuality in any of the locations, which he was handling. Since it was a rural setup, the people did not know how to file a claim report and provide the company with all the required documentation. He now planned to include his brother in this business after he completes his education and he wanted to move on to new areas, which interested him equally. There was a farmer in the Modak taluka, Vaishalinagar who wanted the policy for himself. He was a fairly well-to-do farmer. He told Pramod that he had installed a pacemaker a couple of days back, as advised by the doctor, after a series of medical problems. However, he wanted to know if he should disclose in his declaration, when he is applying for the policy. What advise should Pramod give the farmer? In how many years should Pramod renew his license to solicit business as an insurance agent? Solution: He should advise the farmer to disclose all medical ailments when he is taking the policy. The farmer should be informed that in case of mis-information, it is likely that a claim may not be settled since the disclosure was not complete. Ultimately, he will turn out to be the loser in the long run,should such misguided information be declared in the policy statement. Pramod should renew his license in 3 years.

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Chapter Review

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