.

THE RELEVANCE OF INSURANCE REGULATORY AUTHORITY OF INDIA IN

THE INDIAN INSURANCE SECTOR

I. INTRODUCTION

The Insurance Regulatory Authority of India ( Formerly known as the Insurance Regulatory
Development authority) was established as a regulatory body in 2000 vide the enactment of
Insurance Regulatory and Development Authority (IRDA) Act, 1999. The body was set up
following the recommendations of the Malhotra Committee Report in 1999 which consolidated
its suggestions and views post the Market reforms of 1991. The Act and the report provide for
the constitution of a body that governs the insurance sector whilst primarily protecting the
right of the policyholders1.

1.1 Origin

The setup for an IRDAI had been in the hindsight prior to 1991 as well, it only gained
momentum later. In 1928, the Indian Insurance Companies Act was enacted to enable the
Government to collect statistical information about both life and non-life business transacted
in India by Indian and foreign insurers including provident insurance societies. In 1938, with a
view to protecting the interest of the Insurance public, the earlier legislation was consolidated
and amended by the Insurance Act, 1938 with comprehensive provisions for effective control
over the activities of insurers.

The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were
many insurance companies and the level of competition was high. There were also allegations
of unfair trade practices. The Government of India, therefore, decided to nationalize insurance
business. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance
sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed
154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign
insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened
to the private sector2.

1
United India Insurance Co. Ltd. v. Mohanlal Aggarwal (2004) 1 GLR 637
2
History of insurance in India, Ref. No: IRDA/GEN/06/2007 at https://www.irdai.gov.in.

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To complement the reforms initiated in the financial sector, the government set up the
Malhotra Committee under the chairmanship of former RBI Governor Mr. R.N. Malhotra, to
submit a report recommending reforms in this sector3. The act is a repository of the guidelines
of the committee .

1.2 Immediate Impact

The IRDAI is an independent regulatory authority and thus is neutral in its approach in bridging
the gap between all stakeholders. It has been the pioneer in terms of promoting the private
sectors role in the insurance market. In August 2000 with opening of market by IRDA,
application for registrations were invited wherein foreign companies were allowed ownership
of up to 26%. It attempts to refocus its targeted sector to the rural, economically backward and
unorganised sector for not only procuring business but distributing insurance scheme benefits
equally. The Authority has the power to frame regulations under Section 114A of the Insurance
Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of
companies for carrying on insurance business to protection of policyholders’ interests 4.

One of the most important functions of the body is to supervise the Insurance sector. The body
is an institution of professional surveyors and loss assessors5. The assessors and surveyors are
on a constant check by the eyes of the authority that is the IRDAI which has an established
hierarchy.

1.3 Composition

The Authority is a 10 member team who are appointed by the government of India. This 10
member team comprises of a Chairman presently Mr.Subhash Chandra Khuntia, five whole
time members, and four part time members.

1.4 The growth in Insurance sector

The IRDAI has been instrumental in achieving a considerable number of milestones in the
recent past. The Indian insurance industry has managed to be in a competing position with the
Asian markets. Further its policy reformation standards have become more investor and policy
holder friendly. With growing markets comes growing competition and thus stricter standards

3
Malhotra Committee Report, 1994
4
LAW COMMISSION OF INDIA , Consultation Paper Of The Law Commission Of India On Revision Of The
Insurance Act 1938 & The Insurance Regulatory And Development Act 1999, available at:
http://lawcommissionofindia.nic.in/consult_papers/insurance%201-27.pdf
5
Master Marine Services Pvt. Ltd. v. Metcalfe and Hodgkinson Pvt. Ltd. and Ors. AIR 2005 SC 2299

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keep evolving. To further transparency in insurance sales the IRDA maintains code of conducts
for its agents and assessors who then promote the same. Lastly there were integrated grievance
redressal mechanism and integrated grievance call centre are in place.

II. Objectives

The following paper attempts at navigating through the powers, functions and duties of the
IRDAI, primarily those mentioned in Section 14 of the Act. It also entails within it the
authorities functions as a regulatory head of the Insurance Market of the Country. It studies the
application of the same in various diverse sectors of insurances in India. Finally it lays down
the judicial pronouncements that have helped cement and ascertain the IRDA’s functions and
duties, as well as those which define its boundaries6.

III. Methodology

The following analysis stems from a thorough research of secondary data including Case laws
and Researchers commentaries on various statutes. The data used herein for reference is
derived from the judgements of various cases cited and studied. It is to be noted that the
Malhotra Committee Report has been used a central document of research.

IV. DUTIES AND FUNCTIONS OF IRDA

The main objective of Insurance Regulatory and Development Authority (IRDA) is to

regulate and ensure the growth of insurance industry in India, ensure speedy settlement of
claims and prevent frauds and bring transparency in financial markets that deal with
insurance. One of the major duties of IRDA is to protect the rights and interests of
policyholders. In order to achieve that, Section 14 of the IRDA Act, 1999 entrusts IRDA with
the following duties and functions:

a) Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or

cancel such registration;
b) Protection of the interests of the policyholders 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 contracts of insurance;
c) Specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agents;

6
Ashit Kapur v. Union of India (UOI) and Ors AIR 2004 Delhi 203

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d) Specifying the code of conduct for surveyors and loss assessors;

e) Promoting efficiency in the conduct of insurance business;
f) Promoting and regulating professional organizations connected with the insurance and
re-insurance business;
g) Levying fees and other charges for carrying out the purposes of this Act;
h) Calling for information from, undertaking inspection of, conducting enquires and
investigations including audit of the insurers, intermediaries, insurance intermediaries
and other organizations connected with the insurance business;
i) Control and regulation of the rates, advantages, terms and conditions that may be
offered by insurers in respect of general insurance business not so controlled and
regulated by the Tariff Advisory Committee under Section 64-U of the Insurance Act,
1938;
j) Specifying the form and manner in which books if account shall be maintained and
statement of accounts shall be rendered by insurers and other insurance intermediaries;
k) Regulating investment of funds by insurance companies;
l) Regulating maintenance of margin of solvency;
m) Adjudication of disputes between insurers and intermediaries or insurance
intermediaries;
n) Supervising the functioning of the Tariff Advisory Committee;
o) Specifying the percentage of premium income of the insurer to finance schemes for
promoting and regulating professional organizations;
p) Specifying the percentage of life insurance business and general insurance business to
be undertaken by the insurer in the rural or social sector; and
q) Exercising such other powers as may be prescribed7.

These powers enable IRDA to act as a watchdog and a regulator for the insurance sector in
India.

Further Section 26 of the IRDA Act entrusts IRDA with the power to make regulations in
order -

 to protect the interests of policy holders,

 to regulate, promote and ensure orderly growth of the insurance industry.

7
Section 14, Insurance Regulatory and Development Authority of India Act, 1999.

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Apart from the abovementioned powers and duties, Insurance Act of 1938, by virtue of the
amendments made by the Insurance Regulatory and Developmental Authority Act, 1999,
provides some powers to the IRDA as well.

First of all, it replaces the Controller of Insurance with the Regulatory Authority that existed
prior to IRDA Act. It provides other major powers such as registration8 and cancellation of
any insurance business in India.

IRDA is also authorized to investigate and inspect at any time affairs of any insurer9. Not just
that, IRDA or any other officer in its behalf may issue to any person making an application in
the manner determined by the Regulations and on payment of fee a licence to act as an
insurance agent for the purpose of soliciting or procuring insurance business, if not
disqualified10.

In case IRDA defaults in performance of the abovementioned functions on account of –

 circumstances beyond its control or,

 if circumstances require it in the interest of the public or,
 is persistently defaulting in complying with the directions of the Central Government,
the Central Government may issue a notification suspending the authority and appointing a
person to act as the controller of Insurance.11

4.1.Impact of IRDA

The establishment of IRDA has changed the Insurance sector in India drastically. Before the
creation of IRDA, the only two players in the insurance industry were Life Insurance
Corporation of India (LIC) and General Insurance Corporation of India (GIC), which
increased to 23 new players in the last decade, therefore increasing the competition in the
insurance sector.12

Not only that, IRDA has had an impact on the economic development of the country as the
money invested by investors in different type of insurances has channelized the funds of the
country.

8
Section 3, Insurance Act, 1938
9
Section 33, Insurance Act, 1938
10
Section 42, Insurance Act, 1938
11
Section 19, Insurance Regulatory and Development Authority of India Act, 1999.
12
Dr. H. H. Bharadi, Role of Insurance Regulatory and Development Authority in Indian Insurance Sector,
SSIJMAR, Nov.-Dec. (2011), at 4-5.

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The government and individuals didn’t remain unaffected in this process. IRDA is making
the government responsible and accountable in bringing uniformity in the insurance sector
whereas individuals have developed a better understanding and are now more aware about
the benefits of an insurance policy.13

IRDA, in order to promote insurance business in the market, is trying to make insurance
policies more investor friendly by way of introducing tax exemptions on such insurance
policies.

IRDA ensures the timely settlement of claims by ensuring that the insurer is in a position to
settle all its claims by carefully evaluating the risks that would arise out of the underwritten
contracts, thus protecting the interests of the policyholders.14

4.2.Cases pertaining to exercise of duties by the IRDA

In the case of United India Insurance Company Limited v. Manubhai Dharmasinhbhai

Gajera15, the Supreme Court while explaining the statutory objects and purposes of the
Insurance Regulatory and Developmental Authority of India said that “the object of the
IRDA is to regulate the insurance companies to offer a fair deal and all the terms and
conditions of their offer must be transparent”, thus abiding by the duty entrusted with it under
Section 14(b) and 14(f) of the IRDA Act, 1999.

In the case of Virendra Pal Kapoor v. Union of India and Ors.16, it was observed that, “IRDA
is a regulatory body. It represents the policyholders’ interests and not his rights. An advice of
IRDA could not be the basis of change in the policy, which is a contract unless written
consent of policyholder was obtained.” The IRDA failed to do so in this case and thus
violated Section 14(b) of the IRDA Act, 1999.

In State of Kerala v. Kurian Abraham (P) Ltd.17, it was held that insurance policies that are
tariff policies are completely under the control of IRDA. The tariff has to be fixed by IRDA.
What should be the reasonable tariff would be the subject-matter of exercise of jurisdiction of

13
Deepak Soni, Devendra Kumar Sharma, Role and Functions of Insurance Regulatory Development Authority,
Vol. 1, Issue 2, AIJRA 13, (2015).
14
Ibid.
15
United India Insurance Company Limited v. Manubhai Dharmasinhbhai Gajera, (2008) 10 SCC 404.
16
Virendra Pal Kapoor v. Union of India and Ors., (2014) 105 ALR 76.
17
State of Kerala v. Kurian Abraham (P) Ltd., (2008) 3 SCC 582.

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IRDA. In case this isn’t followed, it will be considered to be a breach of Section 14(i) of the
IRDA Act, 1999.

Therefore, IRDA has brought a significant change in the insurance sector and tried to fulfil its
objectives to an extent, but has failed at times.

V. IRDA AND ITS RELEVANCE IN LIGHT OF THE RECENT

DEVELOPMENTS SEEN IN THE INDIAN INSURANCE SECTOR:

5.1.Insurance Laws (Amendment) Act, 2015

The latest Amendment Act of Insurance Laws, 2015 sought to amend the Insurance Act, 1938,
The General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and
Development Authority Act, 1999. It was the first major amendment in the Indian Insurance
Laws since the enactment of the IRDA Act, 1999.

5.1.1. The prolonged amendment:

The Insurance Laws Amendment bill which sought to increase FDI from 26% to 49% among
other reforms was first put forth by the UPA in the year 2004, but could not be passed due to
strong opposition. The coalition government led by Congress in the year pushed for the
amendment again in 2008, however a committee on finance which was led by Yashwant Sinha
shot the bill down by recommending against the proposed reforms.

In the year 2012, the erstwhile UPA cabinet gave its assent to the bill, and in 2014, the successor
government led by BJP referred the same to a committee headed by Chandan Mitra. In 2015,
the Union Cabinet gave its assent to the proposed amendments in light of the recommendations
made by the committee, and an ordinance was issued to this effect, as the parliament was not
in session. Later in 2015, the old bill (without the recommendations) was withdrawn by the
Rajya Sabha and the new bill was passed. 18

5.1.2. Effect of the 2015 Amendment with specific reference to IRDA:

IRDA is the controlling authority of insurances in India. It carries out the various functions in
the furtherance of the positive duties obligated under the IRDA Act, 1999 and the Insurance

18

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Act, 1938. Thus, the Amendment Act is bound to impact the IRDA. The enactment of 2015
establishes authority as under S.3 of the Amendment Act, by substituting S. 1(A) of the
Insurance Act, 1938, as:

(1A) ''Authority'' means the Insurance Regulatory and Development Authority of India
established under sub-section (1) of section 3 of the Insurance Regulatory and
Development Authority Act, 1999.19

The amendment act has 165 separate mentions of the word “authority”, which echoes the
assertion made by the researchers that, the enactment vastly discusses the relevance of IRDA
in the insurance industry.

Apart from the key amendments like increasing the extent of foreign direct investment from
26% to 49%20, the amendment brought about the following key changes:

1. It mandated that the properties in India not to be insured with foreign insurers except
with the permission of Authority,(in place of the central government) failing which a
penalty upto 5 crore rupees may be imposed.21

2. The amendment provided that the Authority may withhold the registration already made
in favor of an insurance company if it is satisfied that in the country in which such
person has been debarred by law or practice of that country to carry on insurance
business.22

3. The amendment provided for various instances which could enable the authority to
cancel the registration of an insurer wholly or in part23, which included insolvency, non-
compliance of regulations and laws under the Insurance Act etc.

4. The amended Law has several provisions for levying higher penalties ranging from up
to Rs.1 Crore to Rs. 25 Crore for various violations including mis-selling and
misrepresentation by agents / insurance companies.24

19
S. 3, The Insurance Laws (Amendment) Act, 2015
20
S. 3(iv), The Insurance Laws (Amendment) Act, 2015
21
S. 4, The Insurance Laws (Amendment) Act, 2015
22
S.6(v)(3), The Insurance Laws (Amendment) Act, 2015
23
S.6(v)(4), The Insurance Laws (Amendment) Act, 2015
24
Ss. 4, 53, 63, 88, The Insurance Laws (Amendment) Act, 2015

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5. The amendment further provides for any insurer or the insurance intermediary
aggrieved by any order of the IRDA to prefer an appeal to the Securities Appellate
Tribunal (SAT).

Apart from these provisions, the amendment generally empowers the IRDA, as it expands the
powers of the regulator and makes its exercise very flexible, and while doing the same, it
increases the reach of the insurance industry, which reflects in terms of increased insurance
penetration. Since the amendment in the year 2014, the insurance penetration(as % of GDP)
has increased from 3.3 to 3.44 in 2015, to 3.49 in 2016 and 3.69 in 2017.25

5.2.Other initiatives by the IRDA and their benefits.

Since October, 2016 IRDA has mandated E-insurance account to purchase insurances, the same
is expected to decrease the cost by 15-20% for life insurance and 20-30% for non-life
insurance.26

In April 2017, IRDA started a web portal isnp.irda.gov.in that allows the insurers to sell and
register policies online. This portal is open to intermediaries in insurance business also, the
same is expected to boost the economics of the industry furthermore.

IRDA recently allowed life insurance companies that have completed 10 years of operations to
raise capital through Initial Public Offerings (IPOs). Companies will be able to raise capital if
they have embedded value of twice the paid-up equity capital. Insurance sector companies in
India raised around Rs 434.3 billion (US$ 6.7 billion) through public issues in 2017 alone.27

5.3.IRDA and the Insurance Ombudsman Regulations, 2017

5.3.1. Functioning of the Insurance Ombudsman under the Regulations:

The Central government notified the latest Insurance Ombudsman Regulations in furtherance
of the S.24 of the IRDA Act, 1999 and the Redressal of Public Grievances Rules, 1998. The
new rules strengthen the position of the Insurance Ombudsman in the Indian Insurance Sector.
The powers derived by the ombudsman through the duties and functions enlisted for him under
Rule 12 talk about how he is to receive and consider complaints or disputes relating to the delay

25
Swiss Re Institute, Increasing Penetration and Density of Insurance Over the Years, www.ibef.org (accessed
on 29th September, 2018)
26
Aranca Research, Insurance, July 2018
27
IRDA, Annual report, 2018

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in settlements of claims, repudiation of policies, disputes over premium paid/payable, the legal
construction of contracts of insurance etc.

Rule 12(2) provides that the ombudsman shall act as a counsellor and mediator relating to the
aforementioned contingent on the consent of the parties. The Central Government or as the
case may be, the IRDAI may, at any time refer any complaint or dispute relating to insurance
matters specified.

5.3.2. Accountability of the Insurance Ombudsman

Now, since the Insurance Ombudsman are entrusted with such great extent (they can award
compensation upto 30 Lakhs of Rupees)28 there must be an element of accountability on these
officials, the onus to ensure the same is on the IRDA.

The executive council of insurers is provided for by the Rules, the same is entrusted to control
and facilitate the office of the Insurance Ombudsman. The council while is to help with the
functioning of the office of the ombudsman, it is also under a positive obligation to inquire into
allegations levelled against the ombudsman, provide the ombudsman to make a representation
and then forward the inquiry report and the representation of the ombudsman to the IRDA.

The IRDA is under an obligation to decide upon the action to be taken, if any against the
insurance ombudsman, and even effect the removal of the ombudsman. IRDA can further
inquire suo moto in the functioning of the Insurance Ombudsman and order the executive
council of insurers to initiate proceedings and then act.29

The IRDA is to be further submitted by the Insurance ombudsman a statement of accounts and
any other relevant information and submit to the Executive Council of Insurers with a copy to
the IRDAI by the 30th June annually. Further the executive council is also under an obligation
to furnish a report with the general view of the performance of the Insurance Ombudsman
before IRDA post 30th June and before 30th September annually. IRDA shall consider these
reports and take steps as it deems necessary.

Further an advisory committee of 5 eminent persons (including one central government

nominee) to review the performance of the Insurance Ombudsman is to be constituted by the
IRDA, which shall submit its report to the IRDA.

28
Rule 17, Insurance Ombudsman Rules, 2017
29
Rule 9, Insurance Ombudsman Rules, 2017

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VI. Conclusion

The Insurance Regulatory and Development Authority while is the controlling authority of the
insurance markets in India, while it has certainly done a lot to regulate the insurance sector, the
aspect of development has been conveniently side-lined. The initiatives like the e-insurances
and the insurance ombudsmen have been excellently drafted, but not implemented that greatly.

Further, despite the various grants and sanctions from the union government for the insurance
sector, the insurance watchdog has very casually left the execution to the various governments
without much vigilance.

The failures in speedy disposal of the various disputes before the authority has created deterrent
effect of sorts among investors in the markets. The lack of insurance ombudsmen, is further of
urgent attention, as these officials are the sentinels of the public.

IRDA has however been a greatly successful regulator in the Indian market, the level of
transparency in the policy making and the availability of the insurance data in the public
domain has increased exponentially over recent times. The digitalization initiative in itself has
increased people’s access and has made IRDA much more accountable.

VII. Recommendations

The researchers propose the following recommendations to ensure a better insurance sector in
the country:

1. The vacancies in the Insurance regulators and the ombudsmen offices should be
regularly filled up.

2. Stringent penalties for breach of duty shall be imposed on the authority by way of
amendments in the Act.

3. A process must be incorporated by way of a legislation to facilitate the dispute redressal

initiated by the companies.

4. The authority must create a portal for the luminaries and other academicians to upload
their recommendations.

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5. IRDA should organize awareness drives to empower the policy holders and the
potential policy holders through discourses on their rights.

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