Power, functions and Role of IRDA - Essentials of General Contract under Indian

Contract Act,1872- Essential Feature of Insurance Contracts-Salient Features of

Insurance Act,1938- LIC Act,1956- GIC Act,1972- IRDA Act,1999 – Agency Law
- Consumer Protection Act(COPA),1986 - The Insurance Ombudsman
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IRDA Act,1999
Brief history of IRDA

In 1991 the government of India began economic reform programme and

financial sector reform. After that, the committee on reforms in the insurance
sector under the leadership of Shri R.N Malhotra (Former RBI Governor) was set
up to recommend reforms in the insurance sector.

In 1994 Malhotra Committee recommends reforms after going through the

insurance sector and getting inputs from the stakeholders. The key
recommendations of this committee were that private sector companies should
be permitted to promote insurance companies, and foreign promoters should
also be permitted.

After that, in 1996, an interim body called the Insurance Regulatory Authority was
set up, and finally, in 1999, the IRDA Act 1999 was enacted. The formation of the
insurance regulatory and development authority as an autonomous regulatory
body was done on 19th April 2000.

Composition of Authority (IRDA) as per IRDA Act 1999

As per the Act, the authority shall consist of the following members:

​ One chairperson;
 ​ Maximum 5 whole-time members;

​ Maximum 4 part-time members.

It may be noted that these members shall be appointed by the Central

Government. Here the Central Government, while appointing the chairperson
and whole-time members, must ensure that minimum one person is a person
with knowledge or experience in Life insurance, general insurance or actuarial
science.

Tenure and Removal of Members

The tenure of the chairperson shall be 5 years, and he shall be eligible for
reappointment until the age of 65 years. The appointment of members shall also
be for 5 years however no person can hold office as a whole-time member after
62 years of age.

A member may be removed from the office by the Central Government if:

​ He is declared bankrupt;

​ Has become either physically challenged or mentally incapable of acting as

a member;

​ Has been convicted of any offence;

​ Has acquired financial or other interest which affects his function as a

member;

​ Has abused his position in a way that his continuation in office is

detrimental to public interest.
Administrative Powers of Chairperson according to IRDA Act 1999

The Chairperson shall have the power of general superintendence and direction
regarding all administrative matters of the authority as per IRDA Act 1999.

All questions that are presented before any meeting of the authority shall be
decided by the majority of votes of the members, and in case the votes are
equal, then the chairperson, who presides over the meeting, will have a second
or a casting vote

Powers of IRDA
The following are the powers of IRDA

1. All insurance companies have to register with IRDA compulsorily.

2. Companies can undertake only insurance business.

3. The capital structure of the companies will be determined by IRDA.

4. Companies have to deposit with RBI the amount stipulated by IRDA.

5. Accounts and balance sheets of companies have to be submitted to IRDA.

6. Insurance companies have to appoint actuaries and they will value the
liabilities of the insurance companies and report the same to IRDA.

7. Investment of assets will be prescribed by IRDA in the form of approved

securities.

8. The nature of general insurance business will be prescribed by IRDA.

9. Statements of investment assets to be submitted to IRDA every financial year.

10. All insurance companies have to devote certain percentage of their business
including insurance for crops. This should cover unorganized sector including the
economically weaker sections.

11. The appointment of chief executive officer requires prior permission of the
IRDA.

12. All insurance agents must obtain license from IRDA.

13. IRDA has powers for levying penalty on companies which fail to comply with
the rules and regulations.

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Duties of IRDA
1. Regulates insurance companies
The working of insurance companies will be regulated in the following aspects

● the persons to be employed,

● the nature of business,
● covering of risks,
● terms and agreements for covering risks etc., will be prescribed by
IRDA.

2. Promotes insurance companies

Corporate set-up is a must for establishing an insurance company and they have
to submit periodical reports to IRDA. Different kinds of policies and different types
of insurance are also suggested by IRDA to these insurance companies.

3. Ensures growth of insurance and reinsurance companies

Here, the promotion of new companies is encouraged. Even banks are also
permitted to promote insurance companies as a subsidiary.

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Functions of IRDA
1. Issuing certificate of registration.

2. protecting the interest of policy holders.

3. issuing license to agents.

4. Specifying code of conduct for surveyors and loss assessors.

5. Promoting efficiency in the insurance business.

6. Undertaking inspection, conducting enquiries etc., on insurance companies.

7. Control and regulations of rates, terms and conditions by insurance company

to policy holders.

8. Adjudication of disputes between insurance company and others in the

insurance business.

9. Fixing the percentage of insurance business to rural and social sectors.

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Insurance Ombudsman by IRDA:

On the lines of Bank ombudsman, an insurance ombudsman was created by

IRDA. The main purpose of the creation of the ombudsman is to cover disputes
arising between the insured and the insurer. Any complaint made on insurance
companies will be settled by the insurance ombudsman. It is more a watch dog
by which the functioning of the insurance company will be disciplined.

Insurance Ombudsman is basically a consumer protection exercise. The insured

need not worry about their policy amount as any complaint lodged with the
ombudsman will have legal sanctity and even criminal action can be initiated
against the erring insurance company.

Thus, enough judiciary powers are given to insurance ombudsman by which

speedy settlement of cases connected with individual policy holder is possible.

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Essentials of a valid contract - insurance

In general, an insurance contract must meet four conditions in order to be legally

valid: it must be for a legal purpose; the parties must have a legal capacity to
contract; there must be evidence of a meeting of minds between the insurer and
the insured; and there must be a payment or consideration.

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Essentials Elements of a Valid Contract

Section 10 of the Indian Contract Act,1872 lays down conditions which makes
a contract valid.

Following are some of those conditions :

1. Offer
2. Acceptance
3. Intention to Create Legal Relationship
4. Lawful Object and Lawful Consideration
5. Consideration should not be forbidden by law
6. Capacity to Contract
7. Possibility of Performance
8. Legal Formalities
9. Free consent
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Consumer Protection Act

Consumer Protection Act has been implemented(1986) or we can bring into

existence to protect the rights of a consumer. It protects the consumer from
exploitation that business practice to make profits which in turn harm the well
being of the consumer and society

This right help to educate the consumer on the right and responsibilities of being
a consumer and how to seek help or justice when faced exploitation as a
consumer. It teaches the consumer to make right choices and know what is right
and what is wrong.

Who is a consumer according to the Consumer Protection Act, 1986? A

consumer is one that buys good for consumption and not for the resale or
commercial purpose. The consumer also hires service for consideration.

Redressal: Three Tier System Under Consumer Act

● District Forum: These fora are set by the district of the state concerned
in each district wherein it consists of President and two members of
which one should be a woman and is appointed by the State
Government. In this, the complaining party should not make a
complaint more than 20 Lacs and once the complaint is filed the goods
are sent for testing and if they found defective the accused party
should compensate and if the party is dissatisfied can make an appeal
with state commission within 30 days.
 ● State Commission: This is set up by each state It consists of President
and two members. Complains should be at least 20 lacs and exceed
not more than 1 crore. The goods are sent for testing and if found
defective are asked for replacement or compensation. If not satisfied
can make an appeal within 30 days in front of the National
Commission.
● National Commission: Consist of President and 4 members. The
complaint must exceed an amount of 1 crore. The goods are sent for
testing and if found defective are asked for replacement or
compensation

Consumer Rights

● Right to Safety: This is the first and the most important of the
Consumer Rights. They should be protected against the product that
hampers their safety. The protection must be against any product
which could be hazardous to their health – Mental, Physical or many of
the other factors.
● Right to Information: They should be informed about the product. The
product packaging should list the details which should be informed to
the consumer and they should not hide the same or provide false
information.
● Right to Choose: They should not be forced to select the product. A
consumer should be convinced of the product he is about to choose
and should make a decision by himself. This also means consumer
should have a variety of articles to choose from. Monopolistic practices
are not legal.
 ● Right to Heard: If a consumer is dissatisfied with the product
purchased then they have all the right to file a complaint against it. And
the said complaint cannot go unheard, it must be addressed in an
appropriate time frame.
● Right to Seek Redressal: In case a product is unable to satisfy the
consumer then they have the right to get the product replaced,
compensate, return the amount invested in the product. We have a
three-tier system of redressal according to the Consumer Protection
Act 1986.
● Right to Consumer Education: Consumer has the right to know all the
information and should be made well aware of the rights and
responsibilities of the government. Lack of Consumer awareness is the
most important problem our government must solve.

Responsibilities

The consumer has a certain responsibility to carry as an aware consumer can

bring changes in the society and would help other consumers to fight the unfair
practice or be aware of it.

● They should be aware of their rights under the Consumer Protection

Act and should practice the same in case of need.
● They should be well aware of the product they are buying. Should act
as a cautious consumer while purchasing the product.
● If in case a product is found of anything false or not satisfactory a
complaint should be filed.
● The consumer should ask for a Cash Memo while making a purchase.
 ● A customer should check for the standard marks that have been
introduced for the authenticity of the quality of the product like ISI or
Hallmark etc.

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Salient features of IRDA

The following are salient features of the IRDA Act (1999):

1. The insurance sector in India is thrown open to the private sector. The 2nd and
3rd schedules of the Act provide for removal of existing corporations (or
companies) to carry out the business of life and general (non-life) insurance in
India.

2. An Indian insurance company is a company scheduled under the Companies

Act, 1956, in which foreign equity does not exceed 26% of the total equity
shareholding, including the equity shareholding of NRIs, FIIs and OCBs.
3. After start of an insurance company, the Indian promoters can hold more than
26% of the total equity holding for a period of 10 years, the balance shares being
held by non-promoter Indian shareholders who will not include the equity of the
foreign promoters, and the shareholding of NRIs, FIIs and OCBs.

4. After the permissible period of 10 years, excess equity above the prescribed
level of 26% is disinvested as per a phased programme to be indicated by IRDA.
The Central Government is empower to extend the period of ten years in
individual cases and also to provide for higher ceiling on share holding of Indian
promoters in excess of which disinvestment is required.

5. On foreign promoters, the maximum of 26% will always be operational. They

will thus be unable to hold any equity beyond this ceiling at any stage.

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General Insurance Corporation of India (GIC)

General insurance industry in India was nationalised and a government company

known as General Insurance Corporation of India was formed by the central
government in November, 1972. General insurance companies have willingly
catered to these increasing demands and have offered a plethora of insurance
covers that almost cover anything under the sun.
Objective of the GIC:
 ● To carry on the general insurance business other than life, such as
accident, fire etc.
● To aid and achieve the subsidiaries to conduct the insurance business and
● To help the conduct of investment strategies of the subsidiaries in an
efficient and productive manner.

Role and Functions of GIC

● Carrying on of any part of the general insurance, if it thinks it is desirable to

do so.
● Aiding, assisting and advising the acquiring companies in the matter of
setting up of standards of conduct and sound practice in general insurance
business.
● Rendering efficient services to policy holders of general insurance.
● Advising the acquiring companies in the matter of controlling their
expenses including the payment of commission and other expenses.
● Advising the acquiring companies in the matter of investing their fund.
● Issuing directives to the acquiring companies in relation to the conduct of
general insurance business.
● Issuing directions and encouraging competition among the acquiring
companies in order to render their services more efficiently.

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LIC Corporation Act, 1956

Life Insurance Business in India was nationalized with effect from January 19,
1956. On the date, the Indian business of 16 non-Indian insurers operating in
India and 75 Provident Societies were taken over by Government of India. Life
Insurance Corporation of India, Act was passed by the Parliament on June 18,
1956 and came into effect from July 1, 1956. Life Insurance Corporation of India
commenced its functioning as a corporate body from September 1, 1956. Its
working is governed by the LIC Act. The LIC is a corporate having perpetual
succession and a common seal with a power to acquire hold and dispose of
property and can by its name sue and be sued.

Important Provisions of Life Insurance Corporation Act, 1956

● Constitution
● Capital
● Functions of the Corporation
● Transfer of Services
● Set-up of the Corporation
● Committee of the Corporation
● Authorities
● Finance, Accounts and Audit
● Miscellaneous

Life Insurance Corporation of India (LIC)

The LIC of India was set up under the LIC Act, 1956 under which the life
insurance was nationalised. As a result, business of 243 insurance companies
was taken over by LIC on 1-9- 1956.

It is basically an investment institution, in as much as the funds of policy holders

are invested and dispersed over different classes of securities, industries and
regions, to safeguard their maximum interest on long term basis. LIC is required
to invest not less than 75% of its funds in Central and State Government
securities, the government guaranteed marketable securities and in the
socially-oriented sectors. At present, it is the largest institutional investor. It
provides long term finance to industries. Besides, it extends resource support to
other term lending institutions by way of subscription to their shares and bonds
and also by way of term loans.

LIC which has entered into its 57th year has emerged as the world’s largest
insurance co. in terms of number of policies covered. The LIC’s total coverage of
policies including individual, group and social schemes has crossed the 11 crore.

Objectives of LIC of India

The LIC was established with the following objectives:

 ● Spread life insurance widely and in particular to the rural areas, to the
socially and economically backward claries with a view to reaching all
insurable persons in the country and providing them adequate financial
cover against death at a reasonable cost
● Maximisation of mobilisation of people’s savings for nation building
activities.
● Provide complete security and promote efficient service to the
policy-holders at economic premium rates.
● Conduct business with utmost economy and with the full realisation that
the money belong to the policy holders.
● Act as trustees of the insured public in their individual and collective
capacities.
● Meet the various life insurance needs of the community that would arise in
the changing social and economic environment
● Involve all people working in the corporation to the best of their capability
in furthering the interest of the insured public by providing efficient service
with courtesy.

Role and Functions of LIC

● It collects the savings of the people through life policies and invests the
fund in a variety of investments.
● It invests the funds in profitable investments so as to get good return.
Hence the policy holders get benefits in the form of lower rates of premium
and increased bonus. In short, LIC is answerable to the policy holders.
● It subscribes to the shares of companies and corporations. It is a major
shareholder in a large number of blue chip companies.
● It provides direct loans to industries at a lower rate of interest. It is giving
loans to industrial enterprises to the extent of 12% of its total commitment.
● It provides refinancing activities through SFCs in different states and other
industrial loangiving institutions.
● It has provided indirect support to industry through subscriptions to shares
and bonds of financial institutions such as IDBI, IFCI, ICICI, SFCs etc. at
the time when they required initial capital. It also directly subscribed to the
shares of Agricultural Refinance Corporation and SBI.
● It gives loans to those projects which are important for national economic
welfare. The socially oriented projects such as electrification, sewage and
water channelising are given priority by the LIC.
 ● It nominates directors on the boards of companies in which it makes its
investments.
● It gives housing loans at reasonable rates of interest.
● It acts as a link between the saving and the investing process. It generates
the savings of the small savers, middle income group and the rich through
several schemes.

Formerly LIC has played a major role in the Indian capital market. To stabilise the
capital market it has underwritten capital issues. But recently it has moved to
other avenues of financing. Now it has become very selective in its underwriting
pattern.