LEGAL

FRAMEWORK IN
INSURANCE
 ESSENTIALS OF GENERAL CONTRACT (SECTION 10) OF
INDIAN CONTRACT ACT 1872

■ An agreement enforceable by law is a contract” A contract, therefore, is an agreement

the object of which is to create legal obligation i.e. a duty enforceable by law.
■ To be enforceable by law, an agreement must possess the essential elements of a valid
contract as contained in section 10.
■ ESSENTIALS OF A VALID CONTRACT
■ 1. Offer and Acceptance- ‘lawful offer’ and a lawful acceptance’
■ 2. Intention to create legal relationship
■ 3. Lawful consideration-An agreement is enforceable only when each of the
parties to it gives something and get something consideration
■ 4. Capacity of parties- If any of the parties to the agreement suffers a from
minority, lunacy, idiocy, drunkenness, etc., the agreement is not enforceable
■ 5. Free consent-Under influence, Fraud
■ 6. Lawful object- The object of the contract must be lawful. It should not be
illegal, immoral or opposed to public policy.
■ 7. Writing and registration-, must be in writing or/and registered
■ 8. Certainty-must be certain and not vague, indefinite or ambiguous.
■ 9. Possibility of performance -An agreement to do an act impossible is itself is
void.
Kind of Contracts
■ 1 Valid Contract
■ 2 Voidable Contract
■ 3 Void Contract
■ 4 Unforceable contract
■ 5 Illegal or unlawful contract
ESSENTIAL FEATURES OF
INSURANCE CONTRACT
■ Insurable interest
■ Contract of “Uberrimae fidei” or contract of Utmost good faith
■ Indemnity
■ Mitigation of loss
■ Causa proxima
■ Subrogation
■ Contribution
ESSENTIAL FEATURES OF
INSURANCE CONTRACT
■ Re-insurance
■ Double insurance
■ Nomination
■ Assignment.
Establishment and incorporation of Life
Insurance Corporation of India
■ The Corporation shall be a body corporate having perpetual succession
and a common seal with power subject to the provisions of this Act, to
acquire, hold and dispose of property, and may by its name sue and be
sued.
■ Constitution of the Corporation—
■ A member who is in anyway directly or indirectly interested in a
contract made or proposed to be made by the Corporation shall as soon
as possible after the relevant circumstances have come to his
knowledge, disclose the nature of his interest to the Corporation and the
member shall not take part in any deliberation or discussion of the
Corporation with respect to that contact.
Establishment and incorporation of Life
Insurance Corporation of India

■ Capital of the Corporation

■ The original capital of the Corporation shall be five crore’s of
rupees provided by the Central Government after due
appropriation made by Parliament by law for the purpose, and
the terms and conditions relating to the provision of such capital
shall be such as maybe determined by the Central Government.

■ The Central Government may, on the recommendation of the

Corporation, reduce the capital of the Corporation to such extent
and in such manner as the Central Government may determine
Functions of the Corporation

• To carryon capital redemption business, annuity certain business

or reinsurance business in so far as such re insurance business
appertains to life insurance business;
• To acquire, hold and dispose of any property for the purpose of
its business;
• To transfer the whole or any part of the life insurance business
carries on outside India to any other person or persons, if in the
interest of the Corporation it is expedient so to do;
• To advance or lend money upon the security of any movable
property or otherwise;
• To borrow or raise any money in such manner and upon such
security as the Corporation may think fit
The General Insurance Business (Nationalization)
Act, 1972

ACT NO. 57 OF 1972 [ 20th September, 1972]

An Act to provide for the acquisition and transfer of shares of

Indian insurance companies and undertakings of other existing
insurers in order to serve better the needs of the economy by
securing the development of general insurance business in the
best interests of the community and to ensure that the operation of
the economic system does not result in the concentration of wealth
to the common detriment, for the regulation and control of such
business and for matters connected therewith or incidental
thereto.
■ It was the nationalization of 107 insurance companies into one
main company called General Insurance Corporation of India and
its four subsidiary companies with exclusive privilege for
transacting general insurance business.
■ This act has been amended and the exclusive privilege ceased on
and from the commencement of the insurance regulatory and
development authority act 1999.
■ General Insurance Corporation (formed in November, 1972 by
central government) has been working as a reinsurer in India. Their
subsidiaries are working as a separate entity and plays significant
role in the public sector of general insurance.
Classification of Indian General
Insurance Industry
PSUs (Public Sector Undertakings)
These insurance companies are wholly owned by the Government of
India(subsidiaries of GIC). There are totally 4 PSUs in India namely:

■ National Insurance Company Ltd-Head Office-Kolkata

■ Oriental Insurance Company Ltd- Head Office- New Delhi
■ The New India Assurance Company Ltd- Head Office-Mumbai
■ United India Insurance Company Ltd- Head Office-Chennai
Private Insurance Companies

private General Insurance companies in India namely

■ Apollo DKV Health Insurance Ltd

■ Bajaj Allianz General Insurance Co. Ltd

■ Cholamandalam MS General Insurance Co. Ltd

■ Future General Insurance Company Ltd

■ HDFC Ergo General Insurance Co Ltd

■ ICICI Lombard General Insurance Ltd

■ Iffco Tokio General Insurance Pvt Ltd

■ Reliance General Insurance Ltd

■ Royal Sundaram General Insurance Co Ltd

■ Star Health and Allied Insurance

■ Tata AIG General Insurance Co Ltd

PRIVATE INSURANCE COMPANIES
PRIVATE GENERAL INSURANCE
COMPANIES IN INDIA NAMELY
■ Apollo DKV Health Insurance Ltd
■ Bajaj Allianz General Insurance Co. Ltd
■ Cholamandalam MS General Insurance Co. Ltd
■ Future General Insurance Company Ltd
■ HDFC Ergo General Insurance Co Ltd
■ ICICI Lombard General Insurance Ltd
■ Iffco Tokio General Insurance Pvt Ltd
■ Reliance General Insurance Ltd
■ Royal Sundaram General Insurance Co Ltd
■ Star Health and Allied Insurance
■ Tata AIG General Insurance Co Ltd
INSURANCE ACT 1938
■ Earlier to the Insurance Act, 1938, the insurance business was carried
by the insurance companies in accordance with the principles of the
Company Law,1913.
■ When the business started growing, the need for an independent law to
regulate the insurance business was noticed and a separate Act, the
Insurance Act, 1938 was legislated.
■ The Act was used for all purposes relating to both life and general
insurance businesses and their regulations. With regards to general
insurance.
■ This Act is being used to regulate the marine insurance, fire insurance
and other insurances. Further growth of business has made it complex
and more legal provisions were required to regulate it.
■ The Marine Insurance Act, 1963, Public Liability Insurance
Act, 1991, Insurance Regulatory and Development Authority
Act, 1999 and regulations made by the IRDA are some of the
legislations that govern the insurance business
Definitions

■ Life insurance:
AS PER section(ii) OF THE INSURANCE ACT 1938 ,
“ LIFE INSURANCE BUSINESS IS THE BUSINESS OF EFFECTING
CONTRACTUPON HUMAN LIFE”.
■ General insurance:
■ General insurance corporation of India was formed in pursuance of section
9(1) of gibna. It was on corporated on 22 November 1972 under the companies
act 1956 as a private company limited by shares. Gic was formed for the
purpose of superintending , controlling and carrying on the business of general
insurance.
Requirements as to capital
 A capital requirement (also known as regulatory capital or capital
adequacy) is the amount of capital a bank or other financial
institution has to have as required by its financial regulator.
 This is usually expressed as a capital adequacy ratio of equity as a
percentage of risk-weighted assets. These requirements are put
into place to ensure that these institutions do not take on excess
leverage and become insolvent.
 Capital requirements govern the ratio of equity to debt, recorded
on the liabilities and equity side of a firm's balance sheet.
 They should not be confused with reserve requirements, which
govern the assets side of a bank's balance sheet—in particular,
the proportion of its assets it must hold in cash or highly-liquid
assets.
 Capital is a source of funds not a use of funds.
Investments of Assets
■ Investment involves making of a sacrifice in the present with the hope of
deriving future benefits.
■ Two most important features of an investment are current sacrifice and future
benefit. Investment is the sacrifice of certain present values for the uncertain
future reward.
■ It involves numerous decision such as type, mix, amount, timing, grade etc, of
investment the decision making has to be continues as well as investment may
be defined as an activity that commits funds in any financial/physical form in
the present with an expectation of receiving additional return in the future.
■ The expectation brings with it a probability that the quantum of return may
vary from a minimum to a maximum.
■ This possibility of variation in the actual return is known as investment risk.
Thus every investment involves a return and risk. Investment has many
meaning and facets.
■ However, investment can be interpreted broadly from three angles - -
economic, - layman, - financial.
Regulations of Employment of
principal agents IRDA ACT 1999
■ IRDAI are defined in Section 14 of the IRDAI Act, 1999, and include:
■ Issuing, renewing, modifying, withdrawing, suspending or cancelling
registrations
■ Protecting policyholder interests
■ Specifying qualifications, the code of conduct and training for intermediaries and
agents
■ Specifying the code of conduct for surveyors and loss assessors
■ Promoting efficiency in the conduct of insurance businesses
■ Promoting and regulating professional organisations connected with the
insurance and re-insurance industry
■ Levying fees and other charges
■ Inspecting and investigating insurers, intermediaries and other relevant
organisations
Need of IRDA

Need for Insurance Regulatory and Development Authority

Due to liberalization and Globalization followed by entry of private
sector in General Insurance business an uniform code of conduct to
be exercised became necessary and restrict the players to act
according to their own whims and choice.

Current Chairman:
 Subhash Chandra Khuntia, who was a former Karnataka Chief
Secretary, has been appointed as Chairman of Insurance
Regulatory and Development Authority of India (IRDAI).
 The Appointments Committee of the Cabinet (ACC) has approved
his appointment for a period of three years.
IRDA Evolution
Mission Statement of IRDA
Roles and responsibilities of
authority (IRDAI):
 To issue to the applicant certification of registration, to renew,
modify or withdraw the registration.
 It protects the interest of policy holders in matters concerning
assigning of policy, nomination, interest, settlement of claim and
other terms and conditions.
 It specifies requisite qualification code of conduct and training
for insurance intermediaries, agents, surveyors and assessors.
 Regulating the investments of funds by insurance companies.
 It adjudicates the disputes between insurers and intermediaries.
■ Supervising the functions of tariff advisory committee.
■ It prescribes the form and manner in which books of accounts
shall be maintained.
■ It Promotes efficiency in the conduct of insurance business.
■ It levies fees and other charges to carry out the purpose of this
act.
■ Promoting and regulating professional organization connected
with the insurance and reinsurance business
■ It regulates maintenance of margin of solvency.
■ The Authority lay down the percentage of life insurance and
general insurance business that can be carried out by the
insurer in the rural or social sector.
Insurance Advisory Committee

IRDAI’s Insurance Advisory Committee was constituted last in 2000

under the Chairmanship of C Rangachary.

• The committee advises IRDAI on development, disclosures and

regulatory aspects of the insurance industry.

• The committee also looks into matters relating to regulation of

insurance for ensuring investor protection and issues related to
development of insurance industry.

• Among its recent key recommendations was the increase in

commission structure of insurance agents and insurance
intermediaries.

• In the reconstituted committee, the total number of members has

been reduced to 24 from 25.
Powers of Central
Government
■ Power to issue directions
■ Power to make rules
■ Power to remove difficulties
■ Grants by central government
JEEVAN not at all SARAL
Problem with Jeevan Saral

1. The proposal form did not have any provision to mention the (lower)
maturity sum assured; instead it had a provision only for the higher death
benefit.

2. The maturity benefit was not printed on even the policy documents.

3. The agents, as well as some LIC officers were not aware of the plan in
general, and the fact that customers may get lesser money than the total
premium paid.

4. The prospective customers were not informed at the time of sale that the
higher insurance coverage provided by the product would lead to poor
(negative for those in the higher age group) returns.
Conclusions

■ The future looks promising for the life insurance industry with
several changes in regulatory framework which will lead to
further change in the way the industry conducts its business
and engages with its customers.
■ The overall insurance industry is expected to reach US$ 280
billion by 2020. Life insurance industry in the country is
expected grow by 12-15 per cent annually for the next three to
five years.
■ Demographic factors such as growing middle class, young
insurable population and growing awareness of the need for
protection and retirement planning will support the growth of
Indian life insurance.
■ The insurance business is at a critical stage in India. Over the
next two decades we are likely to witness high growth in the
insurance sector for three reasons.
■ Financial deregulation which always speeds up the
development of the insurance sector.
■ Growth in income also helps the insurance business to grow.
■ In addition, increased longevity and aging population will also
spur growth in health and pension segments.
“The future development of this great potential insurance field
depends upon how regulatory bodies work over them and how
private insurance companies cross the legal barriers in their
way”

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