Workshop
On
Financial Sector Assessment Programme
Suresh Mathur
Hyderabad
29th December, 2010
Insurance core principle 16 –
Winding up and exit from the
market vis-à-vis Indian Insurance
Act and Companies Act, 1956
Financial Sector Assessment
Program – 29 December 2010
Provisions as per the IAIS principle
16 (insolvency & winding up)
• Define insolvency, establish criteria and procedure for dealing
insolvency
• Legal framework for protection of policyholders & other stakeholders
• Facilitating takeover or merger of troubled insurer with a healthier
insurer
• Policyholders protection fund may be created to protect
policyholders’ interests
• Essential criteria:
– Determination of the point at which insurer must stop doing insurance
business
– Procedure for dealing with insolvency and winding up to be clearly laid
down in law
– High level priority to policyholders’ benefits and minimising disruption, if
any, in providing for benefits to policyholders
Framework under Companies Act,
1956 & Insurance Act, 1938
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Section 425 of Companies Act, 1956 provides for 3 modes of winding up – voluntary,
by or under supervision of the Court
Section 53(2) of the Insurance Act, 1938 provides for additional grounds for winding
up of insurance companies by Court – one of the grounds is that where the insurer is
or is deemed to be insolvent (Section 53(2)(b)(iii))
Prescription of procedures upon winding up:
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Valuation of assets and liabilities of the insurer (section 55)
Application of surplus assets of life insurance fund in liquidation or insolvency (section 56)
Return of deposits kept with RBI made under section 7 (section 59)
Notice to policyholder of their policy values upon merger (section 60)
Section 52H of Insurance Act provides powers to Central Government to acquire any
insurer, if the affairs of the company are detrimental to interests of policyholders or
may order merger with another insurance company and approve the scheme of
merger - this facilitates merger of troubled insurers with healthier insurers
Section 37A of Insurance Act provides for amalgamation of insurance companies by
IRDA in the interests of policyholders
Provision of minimum solvency margin of Rs.500 million (Section 64VA(1A)) – a
higher solvency margin of Rs.750 million is however insisted by IRDA