Risk Analysis and Insurance Planning

In simple words the marine insurance includes (A) Hull insurance which is concerned with the insurance of ships (hull, machinery, etc (B) Cargo insurance which provides insurance cover in respect of loss of or damage to goods during transit by rail, road, sea or air. Risks covered under a marine policy, under the standard policy form and under the various clauses attached to the policy broadly fall into three categories: (i) Marine perils, (ii) Extraneous perils and (iii) War, strike riot, civil commotion and terrorism risks. 4.4.10 Cargo and Hull Insurance Cargo Insurance Marine Cargo Insurance provides indemnity in respect of loss of or damage to goods during transit by rail, road, sea, air or registered post, within the country as well as abroad. Type of goods may range from diamonds to household goods, bulk items like cement, grains, over dimensional cargoes for projects etc. Cargo insurance plays an important role in domestic trade as well as in international trade. Most contracts of sale require that the goods must be covered, either by the seller or the buyer, against loss or damage. Who affects the insurance: The seller or the buyer of the goods [consignment] may insure the cargo depending upon the contract of sale. Marine insurance contract needs to have provisions that apply internationally. This is because it covers goods that are in transit beyond any country‘s borders. The covers are accordingly governed by international conventions and certain clauses attached to the policy. While the basic policy document contains general conditions, the scope of cover and exceptions and special exclusions are attached by separate clauses known as Institute cargo Clauses (ICC). These are drafted by the Institute of London Underwriters. Coverage under Marine Cargo Insurance Cargo policies are essentially voyage policies, i.e. they cover the subject matter from one place to another. However, the insured is required to always act with reasonable care in all circumstances within his control. The main feature of this policy is that it's an Agreed Value Policy. The valuation is agreed between the insurer and insured and is not subject to revaluation later unless fraud is suspected. Another unique feature is that the policy is freely assignable. The cover normally commences from the time the goods leave the warehouse at the place named in the policy and terminates at the destination named in the policy, depending on the terms of the contract of sale. The terms and conditions applicable are governed by either; I. Inland Transit Clause (ITC) A, B or C for inland transit 339

II. Institute Cargo Clause (ICC) A, B, or C for voyage by sea III. Institute Cargo (Air) Clause – A for transport by air I. Institute Cargo Clause C grants the minimum cover, which is loss or damage due to accident to the vehicle or vessel carrying the cargo due to: (i) Fire or explosion (ii) Derailment or overturning of the vehicle (iii) Stranding, grounding or sinking of the vessel (in case of ship) (iv) Collision with an external object II. Institute Cargo Clause Bis wider than C. Apart from the perils covered in Cit also covers loss or damage due to: (i) Act of God (AOG) perils like earthquake, volcanic eruption and lightning (ii) Collapse of bridges in Inland transit (iii) Washing overboard and sling loss in case of ocean transit (iv) Entry of water into the vessel. III. Institute Cargo Clause Ais the widest cover as it covers all perils of B and Cand loss or damage due to any other risk except some exclusion specified such as: (i) Loss or damage due to willful conduct of the insured (ii) Ordinary leakage, breakage, wear and tear or ordinary loss in weight /volume (iii) Insufficiency in packing (iv) Inherent vice (v) Delays (vi) Loss due to insolvency of owners (vii) Nuclear perils These exclusions are common to all clauses of inland, air and sea. There are separate clauses also for trading of specific commodities like coal, bulk oil and tea etc. Marine cover can be extended by paying additional premium to cover War, Strikes, Riots, Civil Commotion and Terrorism. Marine and Aviation policies is the only branch of insurance that offer cover against War perils. Different Types of Marine Policies 1. Specific Policy:This policy covers a single shipment. It is valid for the particular voyage or transit. Merchants who are engaged in regular import and export trade or 340

who are sending consignments regularly by inland transit would find it convenient to arrange insurances under special arrangements like the open policy. 2. Open Policy: The carriage of goods within the country can be covered under an open policy. The policy is valid for one year and all consignments during this period have to be declared by the insured to the insurer as agreed between them on a fortnightly, monthly or quarterly basis. 3. Open Cover: For large exporters and importers who have continuous trade, an open cover is issued. It sets out the terms of cover and rates of premium for one-year transaction of marine dispatches. The open cover is not a policy and it is not stamped. A certificate of insurance is issued for each declaration duly stamped for appropriate value. 4. Duty and Increased Value Insurance: These policies provide extra insurance if the value of the cargo is increased due to payment of customs duty or increase in the market value of the goods at the destination on the date of the landing. 5. Delay in Start Up: Many insured are opting for this cover. In case of new project any loss or damage to the equipment during transit may involve ordering of fresh equipment which leads to delay in completion of the project, and thereby loss of profits. The financial institutions who are interested in timely completion of the project for their debt servicing, would like this risk covered by an insurance contract and the marine (cargo) insurance policy can be extended against consequential loss due to marine delays' or simply - delay start up. Premium Rate depends upon the nature of goods, the mode of transshipment, type of package, the voyage route and the past claims experience. However extended covers like SRCC and War risks (for overseas cargo) risks are governed by special regulations and the premiums collected will be credited to the Central Government. Hull Insurance ‗Hull‘ in marine insurance refers to ocean going vessels (ships, trawlers, barges, fishing vessels, etc), its hull and machinery. This also covers ―builders risks‖, that is when the ship is under construction. Ships are the subject matter of hull insurance. There are different kinds of ships with respect to design, which decides the purpose of the ship. The design and construction of a ship is regulated by the respective Classification societies. They scrutinise the material used for construction, steel, engines, boilers, etc. Once the ship is constructed it has to be registered in compliance with the Merchant Shipping Act. The Indian Register of Shipping (IRS) deals with the registration of ships. This society provides the certification after assessing the mechanical and structural fitness of the ship. Marine hull insurance is done as per international clauses applicable across different 341

countries. Marine hull covers are essentially of two types: (i) Covering a particular Voyage: The set of clauses used here are called Institute Voyage Clauses (ii) Covering a period of time: Usually one year. The set of clauses used here are called Institute (Time) Clauses The ship owner has insurable interest not only in the ship, but also in the freight to be earned during the period of insurance. In addition to freight the ship owner has insurable interest in the amount spent by him in fitting out the vessel, including provisions and stores. These expenses are termed disbursements and are insured concurrently with the hull policy for a period of time. 4.4.11 Inland Transit Insurance The movement of cargo within the country is known as Inland Transit. The inland transit of the cargo may be Rail or Road or Inland water ways and Coastal Shipments. Sometimes sending cargo by Air or Post is also likely. Manufacturers require transit insurance for the raw materials purchased by them and finished goods supplied to their customers. An open policy is issued to cover a number of incoming and outgoing consignments automatically. For regular exporters and importers, continuous and automatic insurance protection is afforded by open cover. Open policy is an ordinary cargo policy expressed in general terms and the sum insured is affected for an amount sufficient to cover a number of dispatches. The sum insured is adjusted against each sending and so it is called a floating policy. Inland Transit Rail / Road Clauses: These clauses are attached to policies covering transit by Rail/Road. There are three types of clauses viz. 1. Inland Transit Rail / Road Clause “C‖: This clause covers the perils of Fire and Lightning 2. Inland Transit Rail / Road Clause “B”: This clause covers the perils of:  Fire  Lightning  Breakage of bridges  Collision with or by the carrying vehicle  Overturning of the carrying vehicle  Derailments or accidents of like nature to the carrying railway wagon / vehicle 3. Inland Transit RAIL / Road Clause “A”: This clause covers All risks of Loss or damage to the subject matter insured except the excluded risks mentioned below: 342

Common Exclusions under Clause A/B/C:  Wilful Misconduct  Ordinary Leakage/ breakage/ shortage etc. i.e. Ullage Losses  Insufficiency/ unsuitability of packing  Delay  Inherent Vice  War and allied perils  Strike, Riot, Civil Commotion & Terrorism (SRCC)* *Note: SRCC risks can be covered by payment of extra premium. Common Exclusions Under Clause ―B‖ & ―C‖: In addition to exclusions 1 to 7 mentioned above, Malicious Damage is also excluded. However, this can be covered by payment of extra premium. 4.4.12 Crop Insurance Agricultural production and farm incomes in India are frequently affected by natural disasters such as drought, floods, cyclone, storm, landslide, earthquake etc. Susceptibility of agriculture to these disasters is compounded by the outbreak of epidemics and man-made disasters such as fire, sale of spurious seeds, fertilizers and pesticides, price crashes, etc. All these events severely affect farmers through loss in production and farm income, and are beyond the control of farmers. With growing commercialization of agriculture, the magnitude of loss due to unfavourable eventualities is increasing. Thus, agricultural insurance is considered an important mechanism to effectively address the risks to output and income resulting from various natural and manmade events Crop insurance is a means of protecting the agriculturist against financial losses due to uncertainties that may arise from crop failures/losses arising from named or all unforeseen perils beyond their control. Crop or Agriculture Insurance covers risks of anticipated loss in yield of various crops. Crop insurance is an arrangement aimed at mitigating the financial losses suffered by the farmers due to damage and destruction of their crops resulting from various production risks. Almost the entire of Crop Insurance business comes from ‗Schemes‘ or ‗Programme‘. These Schemes operate on principles of ‗Area Approach‘. Coverage is compulsory for farmers taking crop loans from rural financial institutions (RFIs) for cultivation of crops, i.e., loanee farmers. Non-loanee farmers can also insure their crops under the same schemes. The main Schemes available to farmers in respect of crop insurance are as under: 1. National Agricultural Insurance Scheme (NAIS) of Government of India 2. National Crop Insurance Programme (NCIP) of Government of India a) Modified National Agricultural Insurance Scheme (MNAIS), b) Weather Based Crop Insurance Scheme(WBCIS) and 343

c) Coconut Palm Insurance Scheme (CPIS) Objectives of Agricultural Insurance Scheme The objectives are:-  To provide financial support to the farmers in the event of failure of any of the notified crop as a result of natural calamities, pests and diseases.  To restore the credit worthiness of farmers arising out of crop losses leading to non- repayment of crop loans.  To encourage the farmers to adopt progressive farming practices, high value in-puts and higher technology in Agriculture. • To help stabilize farm incomes, particularly in disaster years. Risks Covered The Scheme provides comprehensive risk insurance for yield losses due to: (i) Natural Fire and Lightening, Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood, Inundation and Landslide (ii) Drought, Dry spells (iii) Pests / Diseases etc. in Area-Yield Index insurance Schemes and Weather indices under WBCIS or Weather Index based crop insurance Scheme. Eligibility All farmers growing notified crops in notified areas as notified by the State government are eligible for availing insurance. Crops of loanee farmers are compulsorily insured, while non- loanee farmers can insure their crops at their option. Sum Insured Sum Insured is at least equal to loan amount which can be increased to 150% of the value of average yield at the option of the farmer by paying premium on actuarial basis for the difference in the sum insured. There are limits for non-loanee farmers which are published in state government‘s notification. Premium • NAIS: Flat rates of premium ranging from 1.5% to 3.5% are applicable for food and oilseeds crops. For Annual Commercial and Horticultural crops, actuarial premium rates are charged. Subsidy in premium to the extent of 40% to 75% is available to all farmers to make it affordable. • MNAIS and WBCIS: Actuarial rates of premium are charged which vary from crop to crop and area to area. Subsidy in premium is available to all farmers to make it affordable. 344

4.4.13 Poultry Insurance 'Poultry' refers to poultry units consisting of chicks/ hens/ cocks /ducks, Turkeys, Quails and such other domesticated birds' reared for eggs and/or meat. It includes (a) layer birds (b) Broilers (c) Hatchery birds (Breeding Stock). Poultry Insurance is a comprehensive insurance scheme applicable to poultry farms consisting layer birds, broiler birds and parent stock (Hatchery) which are exotic and cross- bred. All birds in a farm should be covered. After issuing policy, if additional birds are introduced in the farm, immediate notice to be given to insurer otherwise claim will be repudiated. The scheme is applicable to poultry farms consisting of minimum 100 birds under scheme category and 500 birds under non-scheme category and under General broilers – 100 per batch, layer‘s 500 per batch and Hatching 2000 birds per batch. Coverage: The policy shall provide indemnity against death of birds due to accident (including fire, lightning, flood, cyclone, strike, riot and civil commotion and terrorism) or diseases contracted or occurring during the period of insurance. Exclusions: Wilful injury, transit by any mode, theft and clandestine sale, intentional slaughter, Avian Leucosis complex disease, war and nuclear perils, improper management, undergrowth, cannibalism, predators action, permanent and partial disablement, loss of production and standard exclusions. 4.4.14 Terrorism and Riot Covers Terrorism insurance is insurance purchased by property owners to cover their potential losses and liabilities that might occur due to terrorist activities. Terrorism coverage is provided as an additional cover to all risks underwritten under fire, engineering and property damage. The policy covers any material loss that takes place due to acts of terrorism. Terror insurance comes as an inbuilt cover for personal accident policies, and most health and life insurance policies though some home insurance policies do offer a cover for it, some don't include it as part of the package. It may need to be bought at an additional cost. It is considered to be a difficult product for insurance companies, as the odds of terrorist attacks are very difficult to predict and the potential liability enormous. This combination of uncertainty and potentially huge losses makes the setting of premiums a difficult aspect. Most insurance companies therefore exclude terrorism from the insurance coverage. Some of the salient features of terror cover as an add-on are:  Terrorism cover is taken as add on cover by payment of additional premium at the option of the insured.  The sum insured opted for can include material damage & business interruption.  The maximum aggregate loss may vary from company to company. 345

 The premium charged will vary based on the risk occupancy (i.e. industrial/non industrial /residential) and on the sum insured.  Mid-term inclusion of terrorism coverage is not allowed.  Terrorism cover has to be taken only in conjunction with property or engineering covers. Most of the insurance companies offer terrorism insurance as an add-on cover with other insurance covers such as property insurance, personal accident policy, etc. With the rise in terrorism-related mishaps in India, there is a greater need for a stand-alone terrorism policy. A stand-alone terrorism insurance policy is a separate, specialty insurance policy that covers loss due to terrorism. The vast majority of stand-alone terrorism policies are property policies that cover loss resulting from damage to the insured's own property. Stand-alone terrorism coverage contrasts with terrorism coverage provided as part of a commercial property policy covering other risks of loss. It is purchased primarily by organizations that are viewed by insurers as being at high risk of loss due to terrorism in one of the following situations: when terrorism coverage is not available as part of the commercial property policy, when the price of terrorism coverage from the insurer providing the commercial property policy is too high, or when the terrorism coverage offered by the insurer providing the commercial property policy is too narrow. Riot Covers Generally property and generally insurance do not cover riot risks, but the increasing incidents of riots have compelled the insurer to consider its insurance. People in India, can get fire insurance policy plus coverage of riot at an additional premium payment. Since people have not purchased riot risk policies, they are denied of claims arising out riots. The Causa proximal is used to decide the riot risks and its payment. Government has been very particular about the purchase of riot policies. It motivates people to purchase fire policy wherein riots etc. are insured with payment of extra premium. 346

SUMMARY  Keyman Insurance is a life insurance policy taken out by a business firm on the life of key employee(s) to compensate that business for financial losses that would arise from the premature demise or extended incapacity of the Keyman. A key person can be anyone directly associated with the business whose loss can cause financial strain to the business.  The premiums paid by companies/employers taking Keyman insurance is an allowable expenditure under section 37(1) of the Income-tax Act. The proceeds of the Keyman insurance will be treated as income under Section 28 (vi) of Income Tax Act. In the event of the policy being assigned to the Keyman, the proceeds of the policy including bonus will be treated as ―Profit in lieu of salary‖ under Section 17 (clause 17) of Income Tax Act.  Professional Indemnity Insurance policy is meant for professionals to cover liability falling on them as a result of errors and omissions committed by them whilst rendering professional service.  The Employee State insurance (ESI) Scheme is a comprehensive social security scheme devised to protect the employees covered under the Scheme against financial distress arising out of events of sickness, maternity, disablement / death due to employment injuries and to provide medical care to the employees and their families.  Workmen compensation policy is essential to every employer who employs ‗workmen‘ as defined under the Workmen‘s Compensation Act in order to protect himself against the legal liabilities arising out of death or bodily injury to this workman.  The Directors & Officers Liability insurance policy is designed to provide protection to the Company as well as its Directors and Officers against their personal civil liability.  Clinical Trial Insurance (CTI) pays for the sums which the Insured shall be liable to pay as damages / compensation (including claimants costs and expenses) arising out of claims which are made by research subjects alleging death, bodily injury or any other adverse reaction in the body causing harm or disability to the body as a result of participation in a clinical trial.  Commercial Vehicle Insurance under the Auto Insurance in India provides cover for all the vehicles which are not used for personal purposes, like the Trucks and HMVs.  A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the insured, in the manner and to the extent thereby agreed, against transit losses, that is to say losses incidental to transit.  Hull insurance which is concerned with the insurance of ships (hull, machinery, etc).  Cargo insurance which provides insurance cover in respect of loss of or damage to goods during transit by rail, road, sea or air. 347

 Crop insurance is a means of protecting the agriculturist against financial losses due to uncertainties that may arise from crop failures/losses arising from named or all unforeseen perils beyond their control.  Poultry Insurance is a comprehensive insurance scheme applicable to poultry farms consisting layer birds, broiler birds and parent stock (Hatchery) which are exotic and cross-bred.  Terrorism insurance is insurance purchased by property owners to cover their potential losses and liabilities that might occur due to terrorist activities. 348

SELF ASSESSMENT QUESTIONS 1. Which of the below statement is correct with regards to an accident? a) An accident usually denotes a sudden, foreseen and an unexpected event. b) An accident usually denotes a sudden, unforeseen and an expected event. c) An accident usually denotes a sudden, foreseen and an expected event. d) An accident usually denotes a sudden, unforeseen and an unexpected event. 2. Which of the below statement is correct with regards to corporate frequent travelers plan? a) It is valid for one trip b) It is valid for 6 trips or 6 months whichever happens first c) It is an annual policy valid for multiple trips with a limit on maximum number of trips d) It is an annual policy valid for multiple trips but ends with the first claim 3. Which of the below statement is correct with regards to a householder‘s insurance policy? a) A named peril policy may be purchased as a less expensive alternative to a comprehensive coverage policy that tends to offer coverage to most perils. b) A comprehensive policy that tends to offer coverage to most perils; may be purchased as a less expensive alternative to a named peril policy. c) A named peril policy or comprehensive policy comes at the same price. d) With regards to a householder‘s policy, only a named peril policy can be bought and comprehensive policies are not available. 4. Motor insurance should be taken in whose name? a) In the name of the vehicle owner whose name is registered with Regional Transport Authority b) If the person who will be driving the vehicle is different from the owner, then in the name of the person who will be driving the vehicle, subject to approval from Regional Transport Authority c) In the name of any family member of the vehicle owner, including the vehicle owner, subject to approval from the Regional Transport Authority d) If the person who will be driving the vehicle is different from the owner, then primary policy should be in the name of the vehicle owner and add-on cover in the name of the person who will be driving the vehicle. 349

5. For Travel insurance the sum insured depends on a) Age b) Number of days of trip c) Countries to be visited d) All of the above 6. Travel insurance covers a) Delay in baggage b) Emergency hospitalization c) Loss of checked baggage d) All of the above 7. Health insurance usually covers a) Pre-hospitalization treatment b) Post-hospitalization treatment c) Domiciliary treatment d) All of the above 8. Personal accident cover is only e) Whilst travelling abroad f) Whilst travelling in India g) For travelling both in India and abroad h) Whilst travelling in India and neighboring countries 9. The following is not covered in Personal Accident a) Death b) Suicide c) Permanent disability d) Loss of one hand 10. The deductible is _________. a) the amount that is deducted from the premium as mortality charge b) the amount of unpaid premiums deducted from the amount of claim c) the sharing of costs incurred between the insurer and the insured according to a specific formula d) the expenses borne by the claimant before an insurer will pay any compensation 350

11. Under which of the following circumstances personal accident insurance benefit shall be accepted by the insurer? a) Death due to gunshot b) Self injury due to insanity c) Breach of law with criminal intent d) Accident under the influence of drugs 12. Most health insurance policies cover pre-existing illnesses after______. Get Question a) 12 months b) 24 months c) 48 months d) 3 months 13. Which of the following does not portray a true proposition under Keyman Insurance? a) The value of insurance is linked to the financials of the company and typically much larger than individual covers b) Premiums paid by the company would not be treated as perquisites in the hands of employees covered under the policy c) The insurance is taken by a business firm on the life of key employee(s) to protect the firm against possible financial losses due to their premature death d) The claim amount is exempt under Section 10 (10D) of the Income-tax Act, 1961 if the company is paying the premiums 14. A warehouse insured its premises against fire and natural calamity for a value of ₹ 1.25 crore. Towards liability coverage, separate insurances for risks of fire and burglary for ₹ 12 crore each were taken to cover the goods kept at any time. The company took an umbrella insurance of ₹ 15 crore also. The warehouse was completely destroyed in fire. The registered value of goods at that time was ₹ 30 crore. What insurance can be settled in the Company‘s claim? a) Nil to the Warehouse and ₹ 28.25 crore towards liability proportionately to clients b) ₹ 1.25 crore to the Warehouse and ₹ 19.8 crore towards liability proportionately to clients c) ₹ 1.25 crore to the Warehouse, ₹ 12 crore (max.) towards liability for perishable goods of clients, and ₹ 15 crore (max.) towards liability proportionately to others d) ₹ 1.25 crore to the Warehouse and ₹ 27 crore towards liability proportionately to clients 351

15. Which of the following factors does not match with the need of health insurance? a) Financial protection from rising cost of hospitalization b) Increase in the incidence of critical diseases and accidents c) Access to best medical facilities without liquidating assets d) Improving longevity and better medical facilities 16. Under the Directors and Officers Liability policy, a company seeks to _______. a) alienate itself against any liability arising due to the bona fide acts of its directors and officers in the performance of their duties b) indemnify itself, its directors and officers against certain damages and legal costs brought on by the alleged wrongful acts in their official capacity without a mal-intent c) protect its directors and officers against contingencies such as onsite accidents in the performance of their duties d) indemnify only its directors and officers against certain damages and legal costs brought on by their fraudulent acts 17. Clinical Trial Liability Insurance covers legal liability arising out of _______. a) lack of care, negligence resulting in injury or death of a trial subject b) claim as a result of a lawful act committed while performing duties c) death or disability occurring in clinics or hospitals due to negligence d) third party damages caused due to accidents caused in test runs of automobiles and airplanes 18. The purpose of Excess is to _____. a) provide the insured excess cover over the card rate at a small premium b) fix a limit up to which claims are settled in a cashless manner c) fix a quantum which the claim cannot exceed per contingent event d) restrict coverage to events that are significant enough to incur large costs 19. Which of the following cannot be claimed under travel insurance? a) Medical expenses due to hospitalization or personal accident when travelling abroad b) Burglary and robbery for Indian home while travelling abroad c) Without limit theft of cash and/or jewelry when abroad d) Loss of baggage and financial loss due to delay or cancellation of flight 352

20. Professional indemnity insurance does not cover a) Acts of commission and omission b) Acts of negligence c) Liability arising out of failure of doctor‘s treatment d) Criminal Act 21. The phrase ‗liability in/at Law is invariably understood and primarily used to cover the liability arising out of a) Negligence b) Intentional loss c) Contributory damage d) Direct damage 22. The insurer shall not be liable to make any payment under a medical insurance policy in respect of any expenses incurred by any insured in connection with a) War related injuries b) Elective cosmetic surgery c) Non-accident related dental care d) All of the above 23. Personal liability insurance policies cover damages to properties and injuries to other people due to a) Negligence b) Willful misconduct c) War losses d) Burglary 24. During first year of health insurance cover, claims for any medical expenses incurred during the first ______ days of policy period start date shall not be admissible. (a) 15 days (b) 30 days (c) 60 days (d) 90 days 353

25. The objective of the pre-existing clause is a) to prevent adverse selection b) to reduce underwriting expenses c) to avoid medical expenses d) all of the above 26. Machinery is purchased by Uttam Singh five years ago at a cost of ₹ 10 lakhs. The property is fully covered with insurance. Considering 10% Straight Line depreciation of the machinery, what is the actual amount of payment to be made by the insurer for the loss is based on Actual Cash Value (Market Value) of the property, which is insured? a) 10 lakhs b) 5.9 lakhs c) 5 lakhs d) 9 lakhs 27. The market value of Sahil‘s residential property is assessed at ₹ 25 lakh. He purchased the plot 5 years ago for ₹ 2.5 lakh. He started construction last year and incurred a sum of ₹ 12.5 lakh. The land prices in that area have appreciated by 150% over the five year period and the cost of construction over the previous year has gone up by 35%. You have advised Sahil to insure his house property. Sahil wants to know for what approximate amount he should insure his house property. a) ₹15 lakh b) ₹17 lakh c) ₹23 lakh d) ₹25 lakh 28. A policy with a sum insured of ₹ 5 lakh is subject to a franchise‘ limit of ₹ 50,000/-; the claim filed is ₹ 70,000. What would be the claim amount payable by the insurance company under the said policy? a) ₹50,000/- b) ₹70,000/- c) ₹20,000/- d) Nil 354

29. A software company bought 60 computers for his employees for ₹24 lakh on 1st April, 2017. The cost of similar new computers has declined to ₹33,000. Depreciation charged on computers is 30% on written down value basis. At what appropriate value should the software company insure the computers on next due date of 1st April, 2018? (4 marks) a) 16.80 lakh b) 19.80 lakh c) 13.86 lakh d) 12.60 lakh 30. A businessman bought a piece of land in March, 2002 for ₹80 lakh. He got a factory built on the land at a cost of ₹90 lakh, the factory became operational in 2009. The land prices have appreciated at 15% per annum in the period and the construction cost has escalated at 12% per annum since 2009. At what value the factory should be insured in April, 2017 on Market Value basis if the depreciation on factory premises is charged at 6% per annum on straight line method? (4 marks) a) ₹2.43 crore b) ₹76 lakh c) ₹1.16 crore d) ₹3.09 crore 355

ANSWERS TO SELF ASSESSMENT QUESTIONS 1. (d) An accident usually denotes a sudden, unforeseen and an unexpected event. 2. (c) It is an annual policy valid for multiple trips with a limit on maximum number of trips 3. (a) A named peril policy may be purchased as a less expensive alternative to a comprehensive coverage policy that tends to offer coverage to most perils. 4. (a) In the name of the vehicle owner whose name is registered with Regional Transport Authority 5. (d) All of the above 6. (d) All of the above 7. (d) All of the above 8. (c) For travelling both in India and abroad 9. (b) Suicide 10. (d) the expenses borne by the claimant before an insurer will pay any compensation 11. (a) Death due to gunshot 12. (c) 48 months 13. (d) The claim amount is exempt under Section 10 (10D) of the Income-tax Act, 1961 if the company is paying the premiums 14. (d) ₹1.25 crore to the Warehouse and ₹27 crore towards liability proportionately to clients 15. (d) Improving longevity and better medical facilities 16. (b) indemnify itself, its directors and officers against certain damages and legal costs brought on by the alleged wrongful acts in their official capacity without a mal-intent 17. (a) lack of care, negligence resulting in injury or death of a trial subject 18. (d) restrict coverage to events that are significant enough to incur large costs 19. (c) Without limit theft of cash and/or jewelry when abroad 20. (d) Criminal Act 21. (a) Negligence 22. (d) All of the above 23. (a) Negligence 24. (b) 30 days 25. (a) To prevent adverse selection 26. (c) 5 lakhs Actual cash value = (replacement cost – depreciation) Replacement cost = ₹10 lakhs 356

Cumulative depreciation on the machine for the five years is ₹5 lakhs. Depreciation = 10,00,000*10%*5 = 5,00,000 Hence, ACV = ₹(10 – 5) = 5 lakhs 27. (b) 17 lakh Land will not be insured as it is not perishable in case of fire or other natural calamities. So, the insurance will be taken at the current construction cost = 12,50,000*1.35 = 16,87,500 28. (b) ₹70,000 29. (c) 13.86 lakh Cost of acquisition of computers as on 1st April 2015 = ₹24,00,000 Current Replacement Cost of new computers =₹33,000*60 = ₹19,80,000 Depreciation rate = 30% Depreciation on computers = 594,000 (19,80,000* 30%) Appropriate value at which the setup should be insured on 1st April, 2016 = 19,80,000 - 594,000 = ₹13,86,000 30. (c) 1.16 crore Cost of land will not be insured. Cost of building = ₹90,00,000 Appreciation rate = 12% p.a. No. of years of appreciation = 8 years (2016-2008) Cost of building factory (structure) = 90,00,000(1.12^8)=22283668.59 Depreciation rate = 6%p.a. Depreciation charged = 6%*8 *22283668.59 = 1,06,96,161.40 Market value of factory premises on 1st April 2017 = 22283668.59 – 1,06,96,161.40 = 1,15,87,508.19 357

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SECTION – V Regulations Relating Insurance 359

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5.1 REGULATIONS RELATING INSURANCE Learning Outcomes  Describe the powers and functions of the Insurance Regulatory and Development Authority.  Explain the provisions of The Insurance Act, 1938 for monitoring and control of operations of insurance companies.  Understand the application of the provisions of the Indian Contract Act to insurance contracts  Describe the provisions of other important legislations governing the general insurance business in India such as Public Liability Insurance Act- 1991, Motor Vehicle Act- 1988,Consumer Protection Act- 1986, Workmen‘s Compensation Act- 1923, Employee State Insurance Act- 1948 5.1.1 Insurance Regulatory and Development Authority (IRDA) Act- 1999 Insurance Regulatory and Development Authority (IRDA) was established in 2000 as an independent authority to regulate and develop the insurance industry by an act of Parliament, [namely Insurance Regulatory & Development Authority Act, 1999]. The preamble of the IRDA Act states: ―An Act to provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.‖ IRDA has prescribed regulations for protecting the interests of policyholders stipulating obligations on both insurers as well as intermediaries. These regulations prescribe insurers‘ obligations at the point of sale, towards policy servicing, claims servicing, and control on their expenses, investment and financial strength to meet the commitments to policyholders. Powers / Functions of IRDA Under Section 14 of the IRDA Act, IRDA has the following powers: a) Issue of Certificate of Registration to insurance companies, renew, modify, withdraw, suspend or cancel the certificate of registration b) Protection of interests of policyholders in matters concerning assignment of policies, nomination, insurable interest, claim settlement, surrender value and other terms and conditions of insurance contract c) Specification of requisite qualifications, practical training and code of conduct for insurance agents and intermediaries d) Specification of code of conduct for surveyors and loss assessors e) Promoting efficiency in the conduct of insurance business 361

f) Promoting and regulating professional organizations connected with insurance and reinsurance business g) Levying fees and other charges for carrying out the purposes of the Act h) Calling for information from or undertaking inspection of insurance companies, intermediaries and other organisations connected with insurance business i) Control and regulation of rates, advantages, terms and conditions that may be offered by general insurance companies j) Specifying the form and manner in which books of account shall be maintained by insurance companies and intermediaries k) Regulation of investments of funds by insurance companies l) Regulation of maintenance of margin of solvency m) Adjudication of disputes between insurers and insurance intermediaries n) Supervising the functioning of 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 insurance business to be undertaken by insurers in rural or social sectors q) Such other powers as may be prescribed. 5.1.2 The Insurance Act-1938 The Insurance Act, 1938 is the basic insurance legislation of the country, governing insurance business in India. It was created to protect the interest of insured population, with comprehensive provisions for effective control over the activities of insurers and came into effect on 1st July, 1939. This Act has been amended from time to time to strengthen the legal provisions of the Act. The Insurance Act, 1938, broadly provides the ground rules for the operating insurance companies in India. The important provisions of the Act relate to: Registration: Every insurer is required to obtain a Certificate of Registration from the Controller of Insurance, by making the payment of requisite fees. Registration should be renewed annually. Accounts and Audit: An insurer is required to maintain separate accounts of the receipts and payments in each class of insurance viz. Fire. Marine and MiscellaneousInsurance. Apart from the regular financial statements, the companies are required to maintain the following documents in respect of each class of insurance:  Record of Cover notes specifying the details of the risk covered  Record of policies  Record of premiums 362

 Record of endorsements  Record of Bank guarantees  Record of claims  Register of agency force and business procured by each with details of  commission  Register of employees  Cash Books  Reinsurance details  Claims register Investments: Investments of insurance company are usually made in approved investments under the provisions of the Act. The guidelines and limitations are issued by the Central Government from time to time. Limitation on Management Expenses: The Act prescribes the maximum limits of expenses of management including commission that may be incurred by an insurer. The percentages are prescribed in relation to the total gross direct business written by the insurer in India. Prohibition of Rebates: The Act prohibits any person from offering any rebate of commission or a rebate of premium to any person to take insurance. Any person found guilty would be punished with a fine up to five hundred rupees. Powers of Investigation: The Central Government may at any time direct the Controller or any other person by order, to investigate the affairs of any insurer and report to the central government. Other Provisions: Other provisions of the Act deal with the licensing of agents, surveyors, advance payment of premium and Tariff Advisory Committee (TAC).  Prohibition of rebates  Powers of investigation  Licensing of agents  Advance payments of premiums  Tariff Advisory Committee 5.1.3 Indian Contract Act- 1872 The Indian Contract Act, 1872, sets forth the basic requirements of a Contract. Insurance contracts are also governed by the provisions of the Indian Contract Act, 1872. An Insurance policy is also a contract entered into between two parties, viz., the Insurance Company and the Policyholder and fulfills the requirements enshrined in the Indian Contract Act. Policy contract has the same meaning as stated u/s. 10 of Indian Contract Act, 1872, ―All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly 363

declared to be void. Nothing herein contained shall affect any law in force in, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents‖. A Policy Contract needs to necessarily have all the ingredients as mentioned under Indian Contract Act, the prominent amongst them are communication, acceptance, consideration etc. However, unlike any other contract, an Insurance Contract commences only on communication of acceptance. Mere silence to the proposal doesn‘t complete the contract. There has to be an acceptance to the proposal which should be communicated. In general, there are four requirements that are common to all valid contracts. To be legally enforceable, an insurance contract must meet these four requirements: 1. Offer and Acceptance 2. Consideration 3. Capacity 4. Consensus ad idem 5. Legal purpose 1. Offer and Acceptance: The first requirement of a binding insurance contract is that there must be an offer and an acceptance of its terms. In most cases, the applicant for insurance makes this offer, and the company accepts or rejects the offer. An agent merely solicits or invites the prospective insured to make an offer. A legal offer by an applicant for insurance must be supported by a tender of the premium and it should always be prior to commencement of the ‗coverage‘. The agent usually gives the insured a conditional receipt that provides that acceptance takes place when the insurability of the applicant has been determined by the Insurer. In property and liability insurance, the offer and acceptance can be oral or written. 2. Consideration: A consideration is the value given to each contracting party. The insured‘s consideration is made up of the monetary amount paid in premiums, plus an agreement to abide by the conditions of the insurance contract. The insurer‘s consideration is its promise to indemnify upon the occurrence of loss due to certain perils, to defend the insured in legal actions, or to perform other activities such as inspection or collection services, or loss prevention and safety services, or as the contract may specify. 3. Competency to Contract: Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is sound mind and is not disqualified from contracting by any law to which he is subject. In the case of Insurance the person with whom the Contract is entered into is called ―Policyholder‖ or ―Policy Owner‖ who could be different from the subject matter which is insured. In Life insurance contracts, for example, the person whose life is insured could be different. For example, the Policyholder could be the Father and the 364

Life assured could be the son. In the case of Fire insurance, the Policy owner could be the Owner of a building and the subject matter of insurance would be the building itself. The Policyholder must have attained the age of majority at the time of signing the proposal and should be of sound mind and not disqualified under any law. However, the life assured could suffer from the above infirmities. 4. Consensus ad Idem: Two or more person are said to consent when they agree upon the same thing in the same sense. Both the insurance company and the Policyholder must agree on the same thing in the same sense. The Policy document issued to the Policyholder (―Customer‖) clearly defines the obligations of the insurer and the terms and conditions upon which the Insurance contract is issued. Free consent: Consent is said to be free when it is not caused by – 1. Coercion, or 2. Undue influence or 3. Fraud, or 4. Misrepresentation, or 5. Mistake The third and fourth grounds which vitiate consent are more relevant in insurance. Insurance contracts are based on the principles of utmost good faith‘. The Policyholder is expected to disclose about the status of his health, family history, income, occupation or about the subject matter insured truthfully without concealing any material fact to enable the underwriter to assess the risk properly. In case it is established by the insurance company that the Policyholder did not truthfully disclose any fact in the Proposal form which had a material impact on the decision of the underwriter, the insurance company has a right to cancel the contract. When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. 5. Legal Purpose: The consideration or object of an agreement must be lawful, The consideration or object of an agreement is unlawful under the following circumstances: (a) Where a contract is forbidden by law or (b) Where the contract is of such nature that, if permitted, it would defeat the provisions of any law or is fraudulent; (c) Where the contract involves or implies, injury to the person or property of another; or (d) Where the Court regards it as immoral, or opposed to public policy. Every agreement of which the object or consideration is unlawful is void. The object of an insurance contract, i.e. to cover the risk by taking out an insurance policy, is a lawful object. For insurance policies, this requirement means that the contract must neither violate the 365

requirements of insurable interest nor protect or encourage illegal ventures. In other words, an insurance policy that encourages or promotes something illegal and immoral is contrary to public interest and cannot be enforced. Example: A street pusher of heroin and other illegal drugs cannot purchase property insurance policy that would cover seizure of the drugs by the police. 5.1.4 Public Liability Insurance Act- 1991 This Act provides for mandatory public liability insurance for installations handling hazardous substances to provide minimum relief to victims of accidents, other than employees. For example, the Bhopal Gas Tragedy, which arose on account of leakage of the methyl isocynate gas from the Union Carbide plant in Bhopal on 2 & 3 December 1984, resulting into a liability of US$ 470 million for Union Carbide. In a way, this incident led to the enactment of Public Liability Insurance Act in 1991. The Act imposes no fault liability, i.e. irrespective of any wrongful act, neglect or default on the owner to pay relief in the event of (a) death of or injury to any person (other than workman) or (b) damage to property of any person arising out of accident while handling any hazardous substance. No fault liability means that the claimant is not required to prove that the death, injury or damage was due to any wrongful act, neglect or default of any person. The compensation payable by the owner of the establishment in the case of death or injury to any person other than a workman or damage to any property resulting from an accident is as follows: Medical expenses(Reimbursement) Maximum of ₹12,500 per person Death ₹25,000 Fatal Accidents ₹25,000 per person + Medical expenses upto maximum of ₹12,500 Permanent Partial Disability/ Reimbursement of medical expenses up to injury/sickness maximum of ₹12,500 + cash benefit on the basis of medical certification Temporary Partial Disability (Loss of Fixed monthly relief not exceeding ₹1,000/- wages) per month up to a maximum of 3 months • unless hospitalized for 3 days • victim is above 16 years of age Permanent Total Disablement ₹25,000 Actual damage to private property ₹6,000 366

5.1.5 Motor Vehicle Act- 1988 The Motor Vehicles Act, 1988 is an Act of the Parliament of India which regulates all aspects of road transport vehicles. The Act came into force from 1 July 1989. It replaced the Motor Vehicles Act, 1938 which earlier replaced the first such enactment Motor Vehicles Act, 1914. The Act provides in detail the legislative provisions regarding licensing of drivers and conductors, registration of motor vehicles, control of motor vehicles through permits, special provisions relating to state transport undertakings, traffic regulations, insurance, liability, offences and penalties etc. Further, in order to exercise the legislative provisions of the Act, the Government of India made the Central Motor Vehicles Rules, 1989. Necessity for Insurance against Third Party Risk Section 146 of the above Act states that no person shall use, other than as a passenger or allow to use amotor vehicle in a public place unless a policy of insurance which covers the liability to third party on account of death or bodily injury to such third party or damage to any property of a third party arising out of the use of the vehicle in a public place. Therefore, it is mandatory for the owner of any motor vehicle to obtain, at the minimum, a policy from any General insurance company holding a valid licence from IRDA, which covers the risk of death or bodily injury to a third party arising out of usage of the vehicle in a public place. The liabilities which require compulsory insurance are as follows: a) death or bodily injury of any person including the owner of the goods or his authorised representative carried in the carriage b) damage to any property of a third party c) death or bodily injury of any passenger of a public service vehicle d) liability arising under the Workmen‘s Compensation Act, 1923 in respect of death or bodily injury of e) the paid driver of the vehicle, conductor or ticket examiner (public service vehicles) and workers carried in a goods vehicle f) The limit of liability to third party property is ₹6,000. Important Legal Provisions • No Fault Liability: Section 140(1) of the MV Act, 1988 contains provisions regarding no-fault liability of the insured as follows: ―Where the death or permanent disablement of any person has resulted from an accident arising out of the use of a motor vehicle, the owner of the vehicle shall, or, as the case may be, the owners of the vehicle shall, jointly and severally, be liable to pay compensation in respect of such death or disablement in accordance with the provisions of this section‖. The essence of this provision is that, the negligence of the owner, or user of the motor vehicle is no longer relevant to decide the question of liability. On the other hand the claimants shall also not be required to plead and establish that the death or permanent 367

disablement in respect of which the claim has been made was due to any wrongful act, neglect or default of the owner, or owners, of the vehicle or vehicles concerned or any other person. This concept is known as No-Fault Liability. The compensation payable following is as follows: Death ₹50,000 Permanent Disablement ₹25,000 Note: Permanent disablement refers to injury or injuries involving permanent privation of sight of either eye, hearing of either ear, or privation of any member of joint, or disfiguration of the head or face. • Hit and Run Accidents: Hit and run accident is ―an accident arising out of the use of a motor vehicle or motor vehicles, the identity whereof cannot be ascertained in spite of reasonable efforts for the purpose.‖ Section 163 of the MV Act provides that the Central Government may establish a fund known as Solatium Fund to be utilised for paying compensation in respect of death or grievous hurt to persons resulting from Hit and run motor accidents. The compensation payable following is as follows: ₹25,000 Death ₹12,500 Permanent Disablement Note: According to section 320 of IPC ‘Grievous Hurt‘ includes emasculation, permanent privation of sight of either eye, hearing of either ear, or privation of any member of joint, or disfiguration of the head or face, fracture or dislocation of a bone or tooth, any hurt which endangers life or which causes severe bodily pain for twenty days, or unable to follow his ordinary pursuits. Duty of Insurers to Satisfy Judgements and Awards against Persons Insured in Respect of Third Party Risks Where a judgement or an award has been given against a insured person in respect of a third party liability covered under the insurance policy, then, notwithstanding the rights or the insurer to avoid or cancel the insurance policy, the insurer shall be liable to pay to the person entitled to the benefit of decree (third party), as if the insurer were the judgement debtor, together with any amount payable in respect of costs and any sum payable along with interest. However, no sum as above shall be payable by an insurer if notice of the bringing of any such proceedings in which the judgement or award is given, is given to insurer and the insurer can defend the action on the ground of breach of any of the following conditions in the policy document: a) Condition that the vehicle on the date of contract of insurance not covered by a permit to ply for hire or reward – if the vehicle was used for hire or reward b) For organised racing and speed testing 368

c) For purposes not allowed by the permit under which vehicle is used where the vehicle is a transport vehicle d) Without side car being attached where the vehicle is a motor cycle e) Usage of car by an unlicensed person f) Condition excluding liability for injury caused or contributed by conditions of war, civil war, riot or civil commotion g) The policy was obtained by non disclosure of a material fact or by representation of a fact which was false in some material particular A settlement between the insurer and insured shall be valid only if the third party is also made a party to the settlement contract. Insolvency of the insured person will not affect the liability of the insured or claims by third parties. Issuance of Certificate of Insurance As per the Act, policy of insurance shall have no effect unless and until a certificate of insurance in the form prescribed under the Rules of the Act is issued. The only evidence of the existence of a valid insurance as required by the Motor Vehicles Act acceptable to the police authorities and R.T.O. is a certificate of insurance issued by the insurers. Transfer of Insurance upon Sale of Vehicle Where a person holding a Certificate of insurance for a motor vehicle, transfers the ownership of the vehicle to another person, the certificate of insurance and the policy described in the certificate shall be deemed to have been transferred in favour of the person to whom the motor vehicle is transferred with effect from the date of transfer. The transferee shall apply within 14 days from the date of transfer in the prescribed form to the insurer for making necessary changes in regard to the fact of the transfer in the certificate of insurance and the policy described in the certificate in his favour and the insurer shall make the necessary changes in the certificate and the policy of insurance in regard to the transfer of insurance. Motor Accidents Claim Tribunals For speedy disposal of third party claims and at a minimum cost, the Claims Tribunals have been constituted by different State Governments. Only a nominal fee has to be paid for instituting a case and Court fee is not based on the value of the suit. Thus it is very much less expensive and poor third party claimants are not prevented from making proper claims. Where a Tribunal has been set up for an area, no Civil Court has any jurisdiction to entertain any claim falling under the tribunal‘s jurisdiction. 5.1.6 Consumer Protection Act- 1986 Consumer Protection Act is an act of Parliament enacted in 1986 to protect interests of consumers in India. It makes provision for the establishment of consumer councils and other authorities for the settlement of consumers‘ disputes and for mattes connected therewith. This Act was passed ―to provide for better protection of the interest of consumers and to 369

make provision for the establishment of consumer councils and other authorities for the settlement of consumer‘s disputes.‖ The Act has been amended by the Consumer Protection (Amendment) Act, 2002. Consumer Protection Councils are established at the national, state and district level to increase consumer awareness. The Central Consumer Protection Council is established by the Central Government which consists of the Minister of Consumer Affairs as the chairman and such number of other official or non official members representing such interests as may be prescribed. The State Consumer Protection Council consists of the Minister in charge of consumer affairs in the State Government as the Chairman and such other officials appointed by the Central and State Government. Definitions under the Act Some definitions provided in the Act are as follows: • Service: ―Service‖ means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information. But it does not include the rendering of any service free of charge or under a contract of personal service. Insurance is included as a service. • Consumer: ―Consumer‖ means any person who: • Buys any goods for a consideration and includes any user of such goods. But does not include a person who obtains such goods for resale or for any commercial purpose or  Hires or avails of any services for a consideration and includes beneficiary of such services.  Defect: Defect' means any fault, imperfection, shortcoming inadequacy in the quality, nature and manner of performance which is required to be maintained by or under any law or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service. • Complaint: Complaint' means any allegation in writing made by a complainant that: (i) An unfair trade practice or restrictive trade practice has been adopted (ii) The goods bought by him suffer from one or more defects (iii) The services hired or availed of by him suffer from deficiency in any respect (iv) Price charged is in excess of that fixed by law or displayed on package Goods which will be hazardous to life and safety when used are being offered for sale to the public in contravention of the provisions of any law requiring trader to display information in regard to the contents, manner and effect of use of such goods. 370

• Consumer dispute: Consumer dispute' means a dispute where the person against whom a complaint has been made, denies and disputes the allegations contained in the complaint. Consumer Disputes Redressal Agencies (a) District Consumer Disputes Redressal Forum established by the State Government in each district of the State. The State Government may establish more than one District Forum in a district. It is a district level court that deals with cases valuing upto₹20 lakhs. (b) State Consumer Disputes Redressal Forum established by the State Government takes up cases valuing less than ₹1 Crore. (c) National Consumer Disputes Redressal Commission established by the Central Government , which works as a national level Court and deals with amounts more than ₹1 Crore. None of the above forum can entertain a complaint unless it is filed within two years from the date on which the cause of action had arisen. Notwithstanding the above, a complaint may be entertained after the period of two years, if the complainant satisfies the concerned forum that he had sufficient cause for not filing the complaint within such period and the reason for condonation of the delay is recorded by the concerned forum. Filing of Complaints The procedure for filing a complaint for the three redressal agencies mentioned above is very simple. There is no fee for filing a complaint or filing an appeal whether before the State Commission or National Commission. The complaint can be filed by the complainant himself or by his authorized agent. It can be filed personally or can even be sent by post. It may be noted that no advocate is necessary for the purpose of filing a complaint. Consumer Forum Orders If the forum is satisfied that the goods complained against suffer from any of the defects specified in the complaint or that any of the allegations contained in the complaint about the services are proved, the forum can issue an order directing the opposite party to do one or more of the following namely, (i) To return to the complainant the price, [or premium in case of insurance], the charges paid by the complainant (ii) To award such amount as compensation to the consumers for any loss or injury suffered by the consumer due to negligence of the opposite party (iii) To remove the defects or deficiencies in the services in question (iv) To discontinue the unfair trade practice or the restrictive trade practice or not to repeat them 371

(v) To provide for adequate costs to parties Appeal An appeal shall be filed within thirty days. Delay in filing appeal may be condoned if there is sufficient cause. Limitation Period Limitation period shall apply within two years from the date on which the cause of action has arisen. 5.1.7 Workmen’s Compensation Act- 1923 The Workmen‘s Compensation Act 1923 had been framed on the model of the English Employer‘s Liability Act, 1880.The act was later amended in 1934 and 1946. The objective of this Act is to take over the liability of the employer under the Act in return for payment of appropriate premium to the insurer. It provides compensation for workers for death and disability due to accident arising out of and during the course of employment for which the employer is liable under the Workmen‘s Compensation Act, 1923. The objective of this act is to prevent any sort of delay in settlement of claims arising out of employment injuries or death. In the event an employee is injured while at work, the employer becomes liable to pay the compensation to him within a month of the accident. The act restricts the employer from delaying the payment. It requires the employer to deposit a provisional amount with the employee or the Commissioner within a month even if he wishes to contest the claim for any reason. In case he fails to do so, interest at the rate of 6% would be levied for the period of delay. Such penalty can be imposed to the maximum limit of 50% of the compensation amount. Moreover, the act states that the compensation amount is not liable to any assessment, charge or attachment. The Act thus provides a comprehensive protection for the timely payment of compensation to the injured employee. The act has set the amount to be paid in the event of death, permanent, total or partial disablement and in the case of temporary disablement. The compensation amount is directly proportionate to the wages drawn by the employee. If the accident has been caused directly because of:  The influence of intoxicants consumed by the worker  His wilful removal or disregard of any safety guard or other device meant for his safety or  His wilful disobedience to any express order or rule meant for his safety; then the employer is only liable if it results in death and not otherwise. Legal Mechanism for Settlement of Claims under this act: Employer‘s liability for compensation is absolute in the following circumstances wherein, 1. If personal injury is caused to a workman by accident arising out of and in the course of his employment his employer shall be liable to pay compensation in accordance with the provisions of this Chapter: 372

Provided that the employer shall not be so liable: a) in respect of any injury which does not result in the total or partial disablement of the workman for a period exceeding three days; b) in respect of any injury not resulting in death or permanent total disablement caused by an accident which is directly attributable to (i) the workman having been at the time thereof under the influence of drink or drugs or (ii) the wilful disobedience of the workman to an order expressly given or to a rule expressly framed for the purpose of securing the safety of workmen or (iii) thewilful removal or disregard by the workman of any safety guard or other device he knew to have been provided for the purpose of securing the safety of workman. 2. If a workman employed in any employment specified in Part A of Schedule III contracts any disease specified therein as an occupational disease peculiar to that employment. Amount of Compensation Subject to the provisions of this Act the amount of compensation shall be as follows namely:- a) where death results from the injury an amount equal to fifty per cent of the monthly wages of the deceased workman multiplied by the relevant factor; or an amount of Rs.120000 whichever is more; b) where permanent total disablement results from the injury an amount equal to sixty per cent of the monthly wages of the injured workman multiplied by the relevant factor; or an amount of Rs.140000 whichever is more. 5.1.8 Employee State Insurance Act- 1948 An Act to provide for certain benefits to employees in case of sickness, maternity and ‗employment injury‘ and to make provision for certain other matters in relation thereto. The Employee State Insurance (E.S.I.) act is applicable to non-seasonal factories that use and don‘t use power, with certain restrictions relating to number of employees. This act allows the central and state government to extent their provisions of the scheme to industrial, commercial, agricultural and other sectors. To be more specific in case of hotels, restaurants, shops, cinemas, transport, newspaper, etc. the number of employees should be more than twenty to be covered under the scheme. 373

Applicability  Under Section 2(12) the Act is applicable to non-seasonal factories employing 10 or more persons.  Under Section 1(5) of the Act, the Scheme has been extended to shops, hotels, restaurants, cinemas including preview theatres, road-motor transport undertakings and newspaper establishments employing 20* or more persons.  Further under section 1(5) of the Act, the Scheme has been extended to Private Medical and Educational institutions employing 20* or more persons in certain States/UTs. *Note: 14 State Govts. / UTs have reduced the threshold limit for coverage of shops and other establishments from 20 to 10 or more persons. Remaining State Governments/UTs are in the process of reducing the same. The existing wage limit for coverage under the Act is ₹21,000/- per month. The employer and the employee make contributions in this scheme. Employee‘s contribution at present is 1.75 per cent and employer contribution 4.75 per cent of the wages. The employees drawing wages up to ₹21,000/- per month are part of this scheme. Those employees who earn ₹25 per day are exempted to pay the amount but still they will receive the benefits of the scheme. Medical benefit under this scheme is provided to workers and their dependants. The medical services are provided through hospitals, E.S.I. dispensaries, diagnostic centres and occupational disease centres. The medical services under E.S.I. scheme are broadly divided under three categories: preventive services, promotive services and curative services. It consists of family welfare services, health education and checkup, basic health care, surgical procedures etc. Cash benefit is payable to employees under this scheme if they are sick or disabled temporarily or permanently due to employment. The benefit payable in case of sickness is about 50% of the wages. In case of temporary or permanent disablement the cash benefit is paid at higher rates. Wherever the ESI Act applies, the Workmen’s Compensation ceases to apply automatically. 374

SUMMARY  IRDA Act provides for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.  The Insurance Act, 1938, broadly provides the ground rules for the operating insurance companies in India.  An insurance policy is like any contract, a legal document and enforceable in a court; the provisions of the Indian Contracts Act, 1872 are applicable to insurance contracts as well. As stated u/s. 10 of Indian Contract Act, 1872, ―All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents‖.  Public Liability Insurance Act provides for mandatory public liability insurance for installations handling hazardous substances to provide minimum relief to victims of accidents , other than employees  The Motor Vehicles Act, 1988 is an Act of the Parliament of India which regulates all aspects of road transport vehicles. The Act came into force from 1 July 1989.  Section 146 of the Motor Vehicles Act states that no person shall use, other than as a passenger or allow to use a motor vehicle in a public place unless a policy of insurance which covers the liability to third party on account of death or bodily injury to such third party or damage to any property of a third party arising out of the use of the vehicle in a public place.  The principle of ―no fault‖ means that the claimant need not prove negligence on the part of the motorist. Liability is automatic in such cases.  ―Hit and run motor accident‖ is accident arising out of a motor vehicle or motor vehicles the identity of whereof cannot be ascertained in spite of reasonable efforts for the purpose.  Consumer Protection Act is an act of Parliament enacted in 1986 to protect interests of consumers in India. It makes provision for the establishment of consumer councils and other authorities for the settlement of consumers‘ disputes and for mattes connected therewith.  The objective of the Workmen‘s Compensation Act 1923 is to take over the liability of the employer under the Act in return for payment of appropriate premium to the insurer. It provides compensation for workers for death and disability due to accident arising out of 375

and during the course of employment for which the employer is liable under the Workmen‘s Compensation Act, 1923.  Employee State Insurance Act is an act to provide for certain benefits to employees in case of sickness, maternity and employment injury‘ and to make provision for certain other matters in relation thereto. Wherever the ESI Act applies, the Workmen‘s Compensation ceases to apply automatically. 376

5.2. OTHER REGULATORY ASPECTS OF INSURANCE AND AGENCY LAW Learning Outcomes: At the completion of this topic, students should be able to:  Describe the laws regarding insurance companies in India.  Understand the role of various players/intermediaries in the insurance markets such as agents, corporate agents, brokers, surveyors, loss assessors, etc.  Explain the difference between the insurance agents and brokers.  Understand the application of the doctrines of waiver and estoppels. 5.2.1 Laws Regarding Insurance Companies in India Any industry wherein the stakes of the public are high would come within the purview of a Regulation –reason being that failure of such companies could result in serious implications on the economy of the country at large. Insurance business involves collection of money from various Policyholders, investing them properly, honouring the obligations of the Policyholders and providing an efficient service. It is important to ensure that the entities providing these services stick to their commitments. Failure to honour commitments by such entities could have major repercussions on the financial services industry. After liberalisation and entrance of Private players in Insurance business and considering the large numbers of customers and high risk potential, Government of India constituted the Insurance Regulatory and Development Authority in Year 1999. The Insurance Regulatory and Development Authority (IRDA), is the statutory body entrusted with the responsibility of regulation of operations of the insurance companies as well ensuring orderly development and growth of the insurance business in India. The primary concern of the IRDA is the protection of the policyholder‘s interest. Acts/Regulations Common to General and Life Insurance Business in India The following Acts regulate the Insurance Business in India. • Insurance Act, 1938 • IRDA Act, 1999 • Insurance Amendment Act, 2002 • Exchange Control Regulations (FEMA) • Insurance Co-op Society • Indian Stamp Act, 1899 • Consumer Protection Act, 1986 • Insurance Ombudsman 377

Regulations Governing/ Affecting Life Insurance Business in India The following Acts govern /regulate the life insurance business in India. • LIC Act, 1956 • Amendments to LIC Act Regulations Affecting General Insurance Business in India The following Acts affect, circumscribe or regulate in some way or the other, some aspect of the General Insurance Business in India. • General Insurance Nationalization Act, 1972 • Amendments to GIN Act, 1972 • Multi-Modal Transportation Act, 1993 • Motor Vehicles Act. 1988 • Inland Steam Vessels Amendment Act, 1977 • Marine Insurance Act, 1963 • Carriage of Goods by Sea Act, 1925 • Merchant Shipping Act, 1958 • Bill of Lading Act, 1855 • Indian Ports (Major Ports) Act, 1963 • Indian Railways Act, 1989 • Carriers Act, 1865 • Indian Post Office Act, 1898 • Carriage by Air Act, 1972 • Workmens' Compensation Act, 1923 • ESI Act, 1948 • Public Liability Insurance Act. 1991 The Insurance Act, 1938, broadly provides the ground rules for the operating insurance companies in India. The Act provides for the following: The Insurance Act is the parent legislation which aimed at consolidating and amending the law relating to the business of insurance in February 1938, when, during the British Rule in India, there were many insurance companies which were operating. The Insurance Act, 1938, broadly provides the ground rules for the operating insurance companies in India. The details of few of the important provisions of insurance act, 1938 are described below: 378

a) Incorporation of insurance companies, issue of licence and renewal of licence(Sections 2C to 5) Only Companies formed and registered under the Companies Act, 1956, where under the foreign equity is not more than 26% (since 2014, it has been increased to 49%),are allowed (IRDA allows only Public limited companies). Every insurer who proposes to do insurance business has to register with IRDA and obtain a license before they start doing insurance business. Three lines of businesses recognised within insurance are: (i) Life insurance (ii) Non-life insurance (iii) Standalone Health insurance. Life insurance companies provide insurance coverage on human lives – i.e. provision of a defined sum on the happening of any contingency linked to human life. Non-life insurance companies are also allowed provide insurance coverage on all contingencies other than the ones linked to human life, including health insurance. Standalone Health insurance companies focus only on providing hospitalisation and sickness coverage. In addition, re-insurance is also recognized as a separate line of business. Insurance companies are allowed to pass on the risk which they assume to other insurers, called re-insurers. Currently only one Reinsurer GIC is licensed in India as the National Reinsurer. Separate companies will have to be formed for doing Life, Non-Life and Standalone Health insurance business. Such companies cannot transact any business other than the insurance business for which the license is issued. All companies formed for the purpose of doing insurance business shall carry the suffix ―Assurance‖ or ―Insurance‖ in their names to enable anyone to recognise that they are engaged in insurance business. A Public company is first incorporated under the Companies Act, 1956, with the primary object of engaging in the business of life or non-life or standalone health insurance business. Applicants for insurance license will have to submit, among other things, certified true copy of memorandum and articles of association, list of directors, certain affidavits and undertakings from Promoters and the fees required for registration. IRDA conducts due diligence on the Promoters, their background before they issue a license. Reference is made to the Regulatory of the country in which the foreign promoter operates, as most foreign promoters of insurance companies are established players in other jurisdictions outside India. IRDA is vested with powers under the Act to cancel the registration of insurers on certain grounds such as default in complying with the provisions of the Act or Regulations passed there under, carrying on business other than insurance business etc. License is issued for a financial year and is renewable on an yearly basis on payment of the required fees. The fee for renewal is 0.25% of the premium income generated by the insurance company in the preceding financial year, subject to an overall cap of ₹5 Crores. 379

b) Requirements as to Capital, Transfer of shares, Voting Rights etc. (Sections 6, 6A to 6C) Every insurer carrying on insurance business shall have a minimum paid up equity capital of ₹ 100 Crores for life insurance and general insurance business and ₹ 200 crores for an insurer carrying on reinsurance business. This capital shall be maintained after preliminary expenses incurred upon formation of the insurance company and registration of insurance business. The intention of prescribing a minimum capital is to ensure that only serious players who look at a longer term for return of investment enter insurance business. Further the capital of an insurance company shall consist of only Equity Share capital and no other forms of capital are allowed. All the equity shares shall have a single face value. Further, notwithstanding the provisions contained in the Companies Act, 1956, the voting rights on equity shares shall be strictly in proportion to the paid up amount of the equity shares held. The Act also provides for restrictions on transfer of shares in an insurance company. Before an insurance company can put through transfer of shares in excess of the following limits, prior approval of IRDA is required: a) Where, after the transfer, the transferee‘s holding will cross 5% of the paid up equity capital of the insurance company (2.5% if the transferee is a banking company or an investment company) b) Where the nominal value of the shares proposed to be transferred by an individual, firm, group or body corporate under the same management exceeds 1% of the paid up equity capital of the insurance company Persons holding beneficial interest in the equity shares of an insurance company held in another person‘s name, are required to submit a declaration of their interest to the insurance company, failing which such person shall have no right or title in such shares and the insurance companies are expected to record the beneficial ownership in a separate Register maintained for this purpose. Under the Insurance Act, 1938 (―Insurance Act‖), an₹ Indian Insurance Company‘ was permitted to have foreign investment of up to 26% of the equity share capital of the company. The Government of India (―GoI‖), by a notification dated February 19, 2015 has notified the Indian Insurance Companies (Foreign Investment) Rules, 2015 (―Rules‖) permitting investment of up to 49% in the insurance sector, with any investment above 26% being under the approval route. Thus, the Insurance Laws (Amendment) Act 2015 provides for enhancement of the foreign investment cap in an Indian Insurance Company from 26% to an explicitly composite limit of 49% with the safeguard of Indian ownership and control. (c) Deposits with Reserve Bank of India (Sections 7 to 9) Section 7 mandates that every life insurance company shall maintain a sum equivalent to 1% of the total gross premium written in India in any financial year commending after 31 day of March 2000, but not exceeding ₹ 10 Crores with the Reserve Bank of India in the form of Cash or approved securities. In respect of general insurance business, a sum equivalent to 3% of the total gross premium written in India in any 380

financial year commencing after 31 day of March 2000, but not exceeding ₹ 10 Crores is required to be maintained. For reinsurance companies, a flat sum of ₹ 20 Crores has been prescribed. The deposit under Section 7 shall not be available for discharge of any liability of the insurer, except for undischarged policy liabilities. Further the deposit cannot be attached by any Policyholder towards any dues from the insurance company. The deposit is refundable only upon the insurer ceasing to carry on insurance business and the insurer‘s liabilities have been satisfied, unless otherwise the Court orders return of the deposit. (d) Accounts, Audit and Actuarial report and Abstract (Sections 10, 11, 12) Separate books of account are required to be maintained for each class of business. Since separate companies will have to be formed for Life, Non-Life or Reinsurance, this provision is automatically taken care for formation of separate companies and consequent maintenance of separate books of account. Further a separate fund called Life insurance fund shall be formed, the assets of which shall be separate and distinct from all other assets of the insurer. By virtue of the powers given under Section 11, IRDA have framed Regulations for Financial Statements which provides for forms of Revenue Account, Profit and Loss Account and Balance Sheet along with the form of Management Report and some of the documents annexed to the financial statements. Further, every insurer shall keep separate accounts relating to funds of share holders and policy holders. The forms provided in Schedule VI to the Companies Act, 1956 is not applicable to Insurance companies as they are required to follow the forms prescribed under the IRDA Regulations. The accounts and the statements referred to in Section 11 shall be signed by the Chairman of the Board of the Insurance company and two other Directors, the Principal Officer of the Company (CEO or Managing Director) and shall be accompanied by a statement containing the names, descriptions and occupations of, and the directorships held by the persons in charge of the management of the business during the period to which the accounts and statements relate to. Section 12 provides for audit of the financial statements shall be audited by an auditor. Detailed guide lines have been framed by IRDA on the qualifications of persons who can be appointed as Statutory Auditors of the Company. Section 13 requires investigation of financial condition of the life insurance business carried on by an actuary. While the section mandates actuarial valuation not more than once in two years, IRDA have mandated an yearly actuarial valuation. IRDA have issued detailed regulations on preparation of Actuarial Report and Abstract. (e) Provisions Relating to Investments (Sections 27, 27A, 27B, 27E) Section 27 requires insurance companies to invest in the manner specified in the section an amount equivalent to the amount of liabilities of the insurance companies on account of matured claims and on account of liability on policies maturing for payment after deducting the premiums due but grace period not expired and the amount of loans outstanding against the policies issued by the insurer. The manner in which the investment is required to be made is – not less than 50% in Government and Approved securities (out of which 25% only in Government securities) and the balance in Approved investments as specified in Section27A. The deposits made with Reserve 381

Bank of India under Section 7 are deemed to be Government Securities for this purpose. Section 27A prescribes the approved investments for the purpose of Section 27. It lists down various investments which have been recognised for this purpose. The following are some of the approved investments recognized under the section: a) Approved securities as defined under Section 2(3) of the Insurance Act, 1938 b) Debentures of companies having a interest paying track record of 5 years immediately preceding or five out of the 6 of 7 years immediately preceding, secured by a first charge on any immovable property, plant or equipment of the Company c) Debentures of companies secured by a first charge on the immovable property, plant of machinery of a Company where the book value or the market value whichever is less of the asset is atleast three times the value of debentures (in such cases, interest track record is not mandatory) d) First debentures secured by a floating charge on all assets of a Company which has paid dividends on Equity shares for five years or atleast five out of six or seven years preceding e) First mortgage on immovable property situated in India (other than leasehold property with an outstanding term of less than 30 years and the value of property exceeds one-third of the mortgage money (if it is building, one-half) f) Preference shares of any company on which dividends on equity shares have been paid for the immediately preceding five years or for atleast five out of the six or seven years immediately preceding g) Preference shares of a company which has paid dividends on such preference shares for five years immediately preceding or for atleast five out of six or seven years immediately preceding and such Preference shares have priority over equity shares in the event of winding up h) Equity shares of a Company which has paid dividends of not less than four percent for the seven years immediately preceding or for atleast seven out of the eight or nine years immediately preceding i) Fixed deposits with Banks j) Such other investments notified by IRDA as Approved Investments through Regulations. Investment in “Other investments” Any investment in other than Approved Investments as above is allowed upto 15% of the 382

sum specified in Section 27, provided such investments are made with the consent of all the directors present at a Board meeting and eligible to vote, in respect of which a special notice has been given to all the Directors in India. Ceilings on Investments (a) In one Banking Company or Investment Company [Section 27A(3)] An insurance company cannot out of the Controlled fund investor keep invested in the shares of any one banking company or investment company, an amount exceeding 11/4% of the amount specified in Section 27 (or) 2% of the subscribed share capital and debentures of the Banking company or investment company concerned, whichever is less (b) In any Company other than Banking Company or Investment Company [Section 27A(4)] An insurance company cannot out of the controlled fund investor keep invested in the shares of any one company other than banking or investment company, an amount exceeding 21/4% of the amount specified in Section 27 (or) 10% of the subscribed share capital and debentures of the Company. (c) In Fixed Deposits or Current deposits of Banks or Co-operative Societies Not more than 3% of the Controlled funds is allowed to be deposited in the Fixed or Current deposits with any one Banking company or any one Co-operative Society registered under the Co-operative Societies Act, 1912 Formation of Subsidiary Companies for doing Insurance Business (Proviso to Section 27A(4) The restriction given as above will not be applicable if an insurance company invests in the share capital of a subsidiary company for carrying on insurance business after getting previous approval of the Authority. This is more relevant in the context of recent notification of IRDA permitting formation of foreign subsidiaries engaged in insurance business. Prohibited Investments (Section 27A(5) and 27C) Investments in the shares or debentures of a Private Limited Company and investments out of Policy holders funds outside India are prohibited. Encumbrance, Charge or Hypothecation of Assets Forming Part of Controlled Fund All assets forming part of Controlled fund to be kept of free of any encumbrance or charge except to the extent not exceeding 1/10th of the controlled fund, subject to such conditions as may be prescribed by IRDA. Such charge or encumbrance can be created only for the purpose of a loan taken by an insurance company for the purpose of any investment. However, Government Securities and Approved Securities forming part of the Controlled fund cannot be subject to any charge or encumbrances Note: Controlled Fund is defined as all funds pertaining to life insurance business, except for any part of the fund in respect of which IRDA is satisfied that it would not be in the interests of the insurer to apply the provisions of Section 27A. 383

Prohibition of Loans Section 29 prohibits grant of any loans or temporary advances to any Director, Actuary or Auditor of the insurance company or to any company or firm in which any such Director, Actuary or Auditor holds the position of a Director, Actuary or partner. This prohibition is not applicable to: a) loans made by an insurer to a banking company in which such Director, Actuary or Auditor is interested. b) loans or advances made by an insurance company to its subsidiary or to the loans or advances made by an insurance company to its holding company. c) Policy loans granted by the insurance company within the surrender value of the policy. Loans to Insurance Agents Subject to the above provisions, an insurance company can grant any temporary advances to an insurance agent upto the renewal commission earned by such agent in the year immediately preceding the year of grant. Where the Insurance Agent is newly appointed and has not earned any renewal commission, the total amount of loan which can be sanctioned cannot exceed one hundred rupees and the total amount of advances so made cannot exceed ₹ 10,000 (Note: these monetary limits were placed under the Insurance Act, 1938 which have been removed in the Insurance Bill. The only limit as per the Bill would be the restriction of advance to the preceding year‘s renewal commission) Minimum Insurance Business under Rural and Social Sectors Section 32B and 32C requires every insurer to undertake such minimum percentage of the insurance business for covering risks associated with persons forming part of rural or social sector, workers in the unorganized or informal sector or economically vulnerable or backward classes of society or such classes a sprescribed by IRDA. Appointment of Managing or Whole Time Director or Chief Executive Officer Requires Previous Approval of IRDA (Section 34A) An insurance company needs to have a Chief Executive Officer who is also the Principal Officer of the Company. He is normally on the Board of Directors of the Company and designated as the Managing Director. Some insurance companies appoint Executive or Whole Time Directors who hold some functional responsibilities in the Company. The appointment of all such positions – i.e. Managing Director, Chief Executive Officer, Principal Officer, Whole Time Director or Executive Director require the prior approval of IRDA. Due diligence is conducted by the Authority on the candidate proposed to be appointed to the above positions and only after they are satisfied about the background of the person the approval is given. Further, IRDA approval is also required for payment of any remuneration or increase in any remuneration or termination of appointment of the persons occupying the above positions The provisions of Section 268, 269, 309, 310, 311, 387 or 388 of the Companies Act, 1956, shall apply in relation to matters in respect of which an approval from IRDA has been obtained 384

from IRDA. It may be noted that Section 48B prohibits common directors between two life insurance companies. 5.2.2 Various Intermediaries – Agents, Corporate Agents, Brokers, Surveyors, Loss Assessors, Consultants, etc. In Insurance industries, an insurance intermediary is a person or a company that helps you in buying insurance. Insurance intermediaries facilitate the placement and purchase of insurance, and provide services to insurance companies and consumers that complement the insurance placement process. Traditionally, insurance intermediaries have been categorized as either insurance agents or insurance brokers. Intermediary activity benefits the overall economy at both the national and international levels. The role of insurance intermediaries in the overall economy is, essentially, one of making insurance – and other risk management products – widely available, thereby increasing the positive effects of insurance generally – risk-taking, investment, provision of basic societal needs and economic growth. The various types of insurance intermediaries are: 1. Agents 2. Brokers 3. Surveyors & Loss Assessors 4. Health Third Party Administrators The Role of Various Players of Insurance Market is being Discussed hereby: 1. Insurance Agent Section 2(10) of the Insurance Act, 1938, defines an Insurance Agent as an insurance agent licensed under Section 42 of the said Act and who received 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 revival of policies of insurance. The following are the different types of Insurance Agents recognised under the Regulations: (A) Individual Agent (B) Corporate Agent (C) Micro Insurance Agent (A) Individual Agent Insurance agents are intermediaries whose activities include soliciting, procuring, and servicing the general insurance market. An agent must fulfill the 385

statutory requirements of his competence prescribed by the regulator and for which he has to pass the stipulated examination to satisfy the regulator after undergoing specified number of hours of training at accredited institutions (online / off-line). Upon the successful completion of the examination, all the agents in the insurance business are given license granted as provided under Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000, as amended upto date. The following are the different types of licences issued within the Regulations: (a) Direct Life (b) Direct Non Life (c) Composite Licence (both Life and Non-Life) Application for the same are to be made in prescribed form. The contact of agency between the company and agent defines the authority and responsibility and sets forth the agreement of the parties with respect to commissions and other details of the relationship. Renewal of license should be done in time by paying the prescribed fees. However, no license can be granted, if the individual does not meet any of the following requirements:  if the person is a minor.  if found to be of unsound mind by a competent court.  if found guilty of or connived at any fraud, dishonesty or misrepresentation against any insured or insurer. The appointment of agents is governed by Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000. The IRDA has prescribed both qualifications and disqualification for a person to be given a licence under section42 of the Insurance Act. A person must: a) Be at least of 18 years of age. b) Have passed at least 12thstandard or equivalent examination appointed if he/she resides in a place having a population of five thousand or more as per the last census, or 10th standard otherwise. c) Have undergone a training program of 50 hours in Life or General insurance business or any other pre-recruitment examination recognized by IRDA. (However there are reduction in the required hours based on insurance qualifications, etc. of the applicant for Agency.) d) For a composite agency, a person should have completed 75 hours of training in Life and General insurance business spread over 6 to 8 weeks. An agency license is usually given for 3 years, which may be either renewed or cancelled later. But before renewal of the license, it is a prerequisite that the agent 386

should have undergone 25 hours of practical training in Life and General Insurance business or at least 50 hours practical training in subject for a composite agency renewal. The agent is expected to procure a minimum premium amount depending upon the company rules and targets. The agent is paid commission as remuneration for discharge of all his functions, the commission rates are subject to the guide lines issued from time to time by the IRDA. A license issued under the provision of the above Regulations entitles an Insurance Agent to sell on behalf of one life insurer or one General insurer at a time. An identity card is issued by the concerned Insurer for this purpose. An Agent is entitled to change insurer but has to follow the process laid down by IRDA. (B) Corporate Agent Like individual insurance agents, corporate agents are also licensed by the IRDA and governed by the Insurance Regulatory and Development Authority (Licensing of Corporate Agents) Regulations, 2002. An agent represents only one insurance company (one general, one life or both if a composite agent, apart from a health insurance company). The IRDA (Licensing of Corporate Agents) Regulations, 2002 provides the licensing framework for Corporate Agents similar to the Regulations applicable to Individual Agents. The Corporate Agents regulations recognize agents who are one of the following entities (as against individual agents who are licensed under the IRDA (Licensing of Insurance Agents) Regulations, 2002): (a) Firm (b) Company under the Companies Act, 1956 (c) Banking company (d) Co-operative society (e) Panchay at or local authority (f) Non-Government organisation The license is issued to the entity as against the individual under licensing of individual agents. However, the persons who are authorised to sell on behalf of a Corporate Agent will have to undergo the training and examination requirements similar to that of an Individual agent. Further a Group to which the applicant Corporate Agent belongs to, can be granted only one corporate agency licence. In other words, any proposal from an applicant, some of whose group entities are already engaged in insurance business, such as corporate agent, broker, insurer etc., shall not be normally granted a corporate agency licence. IRDA does not normally grant any exception unless the entities are licensed by Reserve Bank of India with substantial client base or otherwise have assets, turnover or net worth of ₹ 15 Crores. The minimum qualifications, practical training and examination requirements are similar to that of an individual agent. A Corporate Agent is allowed to act for only three life insurer (Direct-Life) or three general insurer (Direct-Non-Life) or 387

Composite Corporate Agent (three Life and three General at a time) Qualifications  The corporate agent should ensure that depending upon the nature of the entity, the Partnership Deed, Memorandum of Association or any other document evidencing the constitution of the entity shall contain as one of its main objects soliciting or procuring insurance business as a Corporate Agent.  The corporate insurance executive shall possess the minimum qualification of a pass in 12th Standard or equivalent examination conducted by any recognized Board/Institution, where the applicant resides in a place with a population of five thousand or more as per the last census, and a pass in 10th Standard or equivalent examination from a recognised Board/Institution if the applicant resides in any other place.  Should have completed from an approved institution, at least, fifty hours‘ practical training which may be spread over one to two weeks, in either life or general insurance business, as the case may be.  Or shall have completed from an approved institution, at least, seventy five hours‘ practical training both in life and general insurance business, where such an applicant is seeking licence for the first time to act as a composite corporate agent. The applicant seeking the Corporate Agency from the authority or any other corporate insurance executive of the applicant should be a professional as mentioned below: a) an Associate/Fellow of the Insurance Institute of India, Mumbai; b) an Associate/Fellow of the Institute of Chartered Accountants of India, New Delhi; c) an Associate/Fellow of the Institute of Costs and Works Accountants of India, Calcutta; d) an Associate/Fellow of the Institute of Company Secretaries of India, New Delhi; e) an Associate/Fellow of the Actuarial Society of India, Mumbai; f) a Master of Business Administration of any Institution/ University recognised by any State Government or the Central Government; or g) possessing Certified Associate ship of Indian Institute of Bankers (CAIIB); or 388