Chapter 16
LAWS AND
REGULATIONS
Introduction to Chapter
• Career of Insurance Agency is profoundly
rewarding career,
• Not only in terms of money but in terms of
prestige and satisfaction of having done good
to others.
• Agents can earn gratitude of their customers,
provided he keeps learning and has thorough
knowledge of all that he needs to know.
• As a good professional, he must have brief
background of the Laws governing insurance
business in India.
Introduction to Chapter (Continued..)
• The Chapter gives a brief overview of
various Laws and Regulations relating to
Insurance Business in India.
• Agent is expected to have Background of
these laws and also keep himself updated
with any changes in the provisions of the
same, in light of Competition.
• For Example, he must be aware of
provisions of Income-Tax laws, as
prospect’s investment decision has impact
of the same.
Introduction to Chapter (Continued..)
• For Example, the agent must be aware of
Tax-Saving aspects, or Special concessions
to the Guardian of Physically handicapped
child and such benefits, that the Policy
offers to him, based on his needs.
• He must also have knowledge of laws
related to insurance policy, such as Married
Women’s Property Act, Wealth Tax Act etc.
• He must have skills of convincing the
prospect the important features of insurance
over other investment avenues.
Introduction to Chapter (Continued..)
• The Chapter covers brief overview of
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Insurance Act, 1938
LIC Act, 1956
IRDA Act, 1999
Consumer Protection Act, 1986
Ombudsman
Income Tax Act
Wealth Tax Act
Married Women’s Property Act, 1874, etc.
Main Acts
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•
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Insurance Act, 1938.
LIC Act, 1956.
IRDA Act, 1999.
Consumer Protection Act, 1986.
Ombudsman.
Other Acts:• Income Tax Act
• Wealth Tax Act
• Married Women’s Property Act,
1874.
Insurance Act, 1938.
• Came into effect from 1st July 1939.
• Principal enactment relating to
Insurance Business in India.
• Sec. 2 (5A) defines “Chief Agent”.
• Sec. 2 (17) defines “Special Agent”.
• Sec. 42A provides for the registration of
Chief Agents and Special Agents.
• Act vests IRDA with various powers.
Insurance Act, 1938
(Continued….)
• Act contains provisions regarding licensing
of agents and their remunerations,
prohibition of rebates and protection of
policyholder’s interests.
• It also places limits on expenses of insurers,
use of funds and pattern of investments,
maintaining solvency levels and constitution
of Insurance Associations and Insurance
Councils and the Tariff Advisory Committee
for General Insurance.
Chief Agent:- Defined
• Sec 2 (5A) defines ‘Chief Agent’ as under.
• A person who, not being a salaried
employee of an insurer, in consideration of
commission (i) performs any administrative
and organizing functions for the insurer and
(ii) procures life insurance business for the
insurer by employing or causing to be
employed, insurance agents on behalf of the
insurer.
Special Agent:- Defined
• Section 2(17) defines ‘Special Agent’ as under.
• He is a person who procures life insurance
business, in consideration of commission,
employing or causing to be employed insurance
agents on behalf of the insurer.
• Only procures business through agent, but does
not perform administrative functions like a Chief
Agent.
• Special Agent can work in life insurance business,
not in general insurance business.
Section 42A:• Provides for registration of Chief and
Special Agents.
• Certificates to be issued after registration.
• Certificate valid for 12 months and can be
renewed.
• Provisions stipulate number of insurance
agents that a chief agent / Special agent
may employ directly or through special
agents, and also the minimum business they
have to do.
Section 42A – Continued ….
• The Act vests IRDA with powers to inspect
documents, to appoint additional directors,
to issue directions, to take over the
management of an insurer and to appoint
administrators.
• IRDA has powers to adjudicate on disputes
• Maximum amount – Rs.2,000/- , hence not
many disputes are likely to be referred to the
Authority under this section.
Life Insurance Corporation Act, 1956.
• Basis for establishment of L.I.C. as a
body corporate.
• Maximum 16 members, appointed by
Central Govt.
• Duty:-Carry on life insurance business to
the best advantage of community,
• Sec. 30 gave LIC exclusive privilege to
transact Life Insurance in India
• This exclusive privilege ceased after
amendments in 1999.
Insurance Regulatory And
Development Authority Act, 1999
• Enacted in Dec’ 1999, to protect
interests of holders of insurance
policies, to regulate promote and ensure
orderly growth of insurance industry.
• Sought to amend Insurance Act, 1938,
L.I.C Act, 1956 and General Insurance
Business (Nationalization) Act, 1972.
IRDA Act – Continued..
• Corporate Body
• Advised by Insurance Advisory Committee
consisting of not more than 25 members
• It replaces “Controller of Insurance” to
administer provisions of Insurance Act,
which includes registration, licensing and
laying down regulations for proper conduct
of business and protection of policyholder’s
interests.
Regulations framed by IRDA:• Regulations called as ‘Insurance Regulatory
and Development Authority (Licencing of
Insurance Agents) Regulations, 2000.
• Provisions of above are given at the end of
the Book (Page number 198 to 207) and
agents are expected to go through the
same.
• Issue or renewal of licence, Qualifications of
applicant, practical training, Examination,
Fees, Code of Conduct, Cancellation of
licence, Issue of Duplicate Licence etc. may
be referred.
Regulations framed by IRDA:(Continued ….)
• IRDA (Licensing of Corporate Agents)
Regulations 2002.
• Corporate Agent can be a firm, a company
under Companies Act, a banking company,
a co-operative society, a panchayat, a local
authority, a non-government organisation,
a micro leading finance organisation, a
non-banking finance company or any
organisation approved by IRDA.
IRDA (Licensing of Corporate Agents)
Regulations 2002 – (Continued ….)
• Document stating the objectives of person
wanting to be the Corporate Agent, must
state that soliciting and procuring
insurance business is one of its objective.
• Corporate Agent has to nominate
somebody (e.g. Partner, Director, officer,
employee as the case may be) as
‘corporate insurance executive’
• Issue of licence is subject to insurance
executives satisfying requisite
qualifications as in case of an individual
agents.
IRDA (Licensing of Corporate Agents)
Regulations 2002 – (Continued ….)
• The Corporate agent has to nominate somebody
as “Specified Persons”, who will be responsible
for soliciting insurance business on behalf of
Corporate Agent.
• Specified Person also must have minimum
qualifications on same lines as individual
agents, and must also not suffer from any
disqualifications.
• After undergoing training and passing exam, he
has to obtain certificate, which is valid for 3
years and can be renewed.
IRDA (Licensing of Corporate
Agents) Regulations 2002 –
(Continued ….)
• Both Corporate Insurance Executives and
Specified persons are bound by code of
conduct for agents, as applicable for
individual agents.
• A violation of the code can result in the
cancellation of the licence of Corporate
agent, the corporate insurance executives
or certification of the specified persons.
IRDA (Insurance Brokers)
Regulations 2002
• 3 Kinds of Brokers viz. ‘Direct Broker’,
Reinsurance Broker and ‘Composite
Broker’
• Broker has to obtain licence from IRDA,
which is valid for 3 years. IRDA issues
licence subject to applicant having fulfilling
certain requirements such as
infrastructure, at least 2 employees with
necessary qualifications, satisfying
requirements like capital and deposit.
IRDA (Insurance Brokers)
Regulations 2002(Continued ….)
• Application for renewal has to be made more than 30 days
before expiry of the licence. Applications made thereafter are
liable for extra fees.
Direct Broker
Reinsurance
Broker
Composite
Broker
Fees for
Licence
Rs.25,000
Rs.75,000
Fee for renewal Ceiling for
Renewal fee
0.50% of
Rs.1 lac
remuneration
(Minimum = fee
for first licence)
---- do ---Rs.3 lac
Rs.1,25,000
---- do ----
Rs.5 lac
IRDA (Insurance Brokers)
Regulations 2002:- (Continued ….)
• Capital Required:• Direct Broker:- Rs.50 lacs
• Reinsurance Broker:- Rs.200 Lacs
• Composite Broker:- Rs.250 lacs.
• There should not be interest of Non-Indian
in the capital
• 20% of Capital to be kept as Fixed Deposit
with Scheduled Bank, but IRDA may ask
for higher amount (Maximum Rs.100 lacs)
IRDA (Insurance Brokers)
Regulations 2002:- (Continued ….)
• Every Broker has to appoint “Principal
Officer” who would be responsible for
business of insurance broking.
• There should also be a ‘Chief Executive
Officer’, who would be appointed
exclusively for insurance business.
• He must satisfy certain qualifications
such as educational qualifications,
training, passing of exam etc.
The Broker’s functions:• Getting information about client and risk
management philosophy
• Advice to client on cover and terms
• Maintaining detailed information about available
insurance markets
• Submission of quotations received from insurers
• Providing underwriting information
• Acting promptly on instructions from clients and
providing progress report
• Assisting in settlement of claims
• Maintaining records of insurance business and
claims
Reinsurance Broker is expected also to
• Advice on technical data on reinsurance covers
available internationally
• Maintain database of reinsurance markets
• To Select / Recommend reinsurer
• Assist in commutation of reinsurance contracts
and settlement of claims
• Collect and remit premiums and claims
• Exercise due diligence at the time of selection of
reinsurers and international insurance brokers,
having regard to their security rating
• Render consultancy and risk management
services
IRDA (Insurance Brokers) Regulations
2002:- (Continued ….)
• Remuneration can be paid by insurers to
Brokers. (e.g. for direct brokers in life
business, commission is 30% of first years
premium and 5% of renewal premium, 2%
of Single premium for annuity cases, etc.)
• Restrictions on business from Single client
(Not to exceed 50% in first year, 40% in 2nd
year and 30% in subsequent years.)
Code of Conduct for Brokers:• Utmost good faith, care and diligence in dealing
with clients
• Convey quotations, explain degree of choice
available, explain reasons for recommendation,
explain claim procedure, etc.
• Keeping information about client as confidential
avoiding conflict of interest
• Becoming a member of the Insurance Brokers’
Association of India or such other body as may be
approved by IRDA
• Not to employ agents or canvassers to bring
business
• Not to criticise other insurers or members of the
Association.
IRDA (Insurance Brokers)
Regulations 2002:- (Continued ….)
• Brokers should obtain insurance policies
covering professional indemnity, against any
omission or commission or negligence, loss
because of fraudulent or dishonest acts, loss
of documents, on part of broker or his
employees.
• Cover should be for the period of licence
• Limit should be 3 times annual
remuneration. (Minimum:- Direct Brokers:50 lacs, Reinsurance Brokers Rs.250 lacs
and Composite Broker Rs.500 Lacs)
IRDA (Insurance Brokers)
Regulations 2002:- (Continued ….)
• Reinsurance Broker allowed to receive
premium from clients or claim amount from
reinsurers.
• Should be managed as trust funds.
• All brokers should prepare Balance Sheet,
Profit & Loss Account and Cash Flow
statements every year.
• Submission to IRDA half yearly.
• Should have Internal Audit.
IRDA (Insurance Brokers)
Regulations 2002:- (Continued ….)
• Licence to Broker can be cancelled at any time
• for violation of the code of conduct
• When he acquires any of the disqualifications
• Violation of provisions of the Act or Regulations.
• Once, licence is cancelled, he is not permitted
to transact any fresh business, but may
continue to service existing business.
• IRDA has right to look into complaints from
clients of the Brokers.
Consumer Protection Act, 1986.
(COPA)
• To safeguard the interests of
Customers.
• Four Basic Consumer rights…
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The Right to Safety
The Right to be informed
The Right to Choose
The Right to be heard (Redress)
COPA :- Continued …
• Consumer can approach various forums
for redress, in case he is not satisfied
with goods / services provided.
• Has to allege a defect in the goods or
service
• Fault, imperfection, shortcoming or
inadequacy in quality, nature or manner
of performance, which is required to be
maintained
COPA :- Continued….
• Consumer dispute redressal forums are to
be established in each district and each
state.
• District Level :- complaints up to value of
Rs.5 lac
• State Level :- Complaints up to value of
Rs.20 lac.
• Also, provision for constitution of National
Commission, for attending matters beyond
jurisdiction of State Forum or appeals
against State Forum’s decisions.
COPA :- To Insurance Business
• COPA applies to Insurance business
also.
• Majority disputes on repudiation and
delays in claims
• Various reasons for delays – may be
minimised by intervention of Agents
• If agent takes proper care at the time of
submitting the proposal, there can not
be repudiation, if all material information
is supplied.
OMBUDSMAN
• Section 114 (1) of Insurance Act
empowers Central Govt. to frame rules
known as “Redressal of Public
Grievances Rules, 1998, whereby
Ombudsmen are appointed.
• Appointed by Governing body of the
Insurance Council.
• Resolves complaints regarding disputes
between Policyholders and Insurers
Ombudsman – Continued ….
• Complaints may relate to
• Partial or total repudiation of claims
• Dispute relating to payment of premium
• Dispute on legal construction of the policy
relating to claims
• Delay in settlement of claims
• Non-issue of insurance document to
customers
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Ombudsman – Continued ….
Not a judicial authority
Acts as counsel and mediator
No right to summon witnesses
Lawyers not permitted to argue case –
Parties are allowed to make personal
submissions.
• Entertained only if a) Complaint rejected by
insurer or b) reply not received within 1 month
or c) Unsatisfactory Reply by insurer
Ombudsman – Continued ….
• Complaint to be made within 1 year after
rejection of representation by insurer
• The matter should not be before any court or
consumer forum or arbitration.
• Ombudsman makes recommendations within 1
month, and insurer has to comply within 15
days and inform Ombudsman.
• If unacceptable to complainant, it passes award
in writing, within 3 months
Ombudsman – Continued ….
• The complainant has to intimate his
acceptance of the award within one
month, and insurer has to comply within
15 days and inform Ombudsman.
• If complainant does not intimate
acceptance, award can not be
implemented.
Other Acts
• Income Tax Act
• Married Women’s Property Act, 1874.
• Wealth Tax Act
Income Tax Act
• Income Tax Act provisions keep on changing
every year, hence one has to update himself
with the prevailing Tax laws and amendments
made therein from time to time.
• So far, Tax laws encourage people to save in
various instruments, including Life Insurance,
by providing relief from tax liabilities.
• Knowledge of tax provisions is essential to
Agents, as it affects benefits under the policy.
Income Tax – with Regard to Life
Insurance
• Any sum received under life insurance policy
is exempt from income tax. Sec 10(10D)
• Sec. 80 C – Deduction from taxable income,
(Maximum Rs.150,000/-)
Tax Rebates – A brief overview
• Section 80 C – Investments in Life Insurance
Premiums, contribution to Provident Fund, Public
Provident Fund, approved Superannuation Fund,
National Saving Certificates, Approved
Infrastructure Bonds etc. are eligible for rebate
under Section 80 C.
Wealth Tax Act:• The Wealth Tax Act exempts life
insurance policies totally provided
premiums are payable for a period of 10
years or more. If the policy term is less
than 10 years, proportionate value will
be exempted.
Married Women’s Property Act,
1874.
• Sec. 6 of the MWP Act provides that a
policy of insurance effected by any
married man on his own life and
expressed on the face of it for the
benefit of his wife and children shall be
deemed to be a trust for the benefit of
his wife and children and shall not be
subject to control of Life Assured or his
creditors or form part of his estate.
Saving Plan is good when ….
• It is safe
• It is flexible
• It has incentive to help save
continuously without default.
• It helps in saving Tax
• It fulfils the financial objectives, even if
one dies.
An Ideal Saving scheme
provides ..
• Safety
• Liquidity (Capable of converting into
cash easily)
• High rate of interest yield
• Capital Growth
• Beneficial to save Tax.
But……
• No investment is “Most Perfect” having
all these attributes.
• A sacrifice has to be made for sake of
one or the other attribute
• Hence look for those investments which
offer the best solutions to his personal
needs, under his own set of
circumstances.
High Returns… High Risk!!!!
• Highest Returns and Best Returns are
not the same.
• High Returns may be offset by risk to
capital.
• Best Return is determined by
advantages an investment offers to
achieve one’s financial objectives under
his given circumstances.
Basics about Banking….
Type of Account Interest
Current Account No Interest
Saving Accounts Relatively
low interest
Term Deposit
Offers
varying
interest
rates,
depending
on Term
Liquidity
No restriction on
withdrawals
Some restriction
on number of
withdrawals, exist
Wait till maturity to
get money, else
be prepared to
suffer some loss
of interest
Mutual Funds
• Large number of individuals pool their
moneys collectively in a single fund.
• Amount so collected is invested in
shares/securities of large number of
companies under professional
management.
• Investments are divided into segments
called “units”, which normally have Face
Value of Rs.10/-.
• Units can be traded at market price.
Mutual Funds
(Continued….)
• Different Tax Benefits for different schemes
• Sometimes, income distributed is tax free.
• Contributions to specified mutual funds
aggregated with insurance premia are
entitled for tax rebates.
• Value of unit is not protected
• Net Asset Value can vary and may also go
below face value.
Shares
• Most PopularBut person should lave
adequate savings before investing in
Shares.
• Motive is Capital Appreciation
• Earnings not Guaranteed
• Dividends may not be declared,
although Company has made profits.
• As Dividends are declared on Face
Value, the Yield may be insignificant, if
purchased from market at higher price.
Shares – Continued ….
• No tax advantages
• Chances of losses are as GREAT as
chances of making profits – Uncertainty
is the key to bear in mind.
• Share prices fluctuate and sensitive to
many factors ranging from Changes in
US economy to State level politics.
• Liquidity exists, but has to be sold at
prevailing market conditions, hence
capital appreciation can not be
guaranteed
Comparison of various Investments on
Safety, Liquidity and Returns
Type of
Investment
Saving Bank
Account
Fixed Deposits
with Banks
Life Insurance
Safety Liquidity
Returns
High
High
Low
High
Moderate
High
Moderate /
High
Low
Shares
Low
High
Provident Fund / High
PPF
Low
Moderate /
Low
Moderate
Moderate
Comparison Between Insurance Plans
• Comparisons are often unfair
• While comparing 2 different plans of same
insurer , it would be wrong to compare only
premiums.
• Choice of plan must depend on requirement
of Prospect. e.g. Whole-life plan should not
be offered against Endowment, just because
it is cheap.
• If plan identified for needs of prospects is
unaffordable to him, it is better to consider
reduction in Sum Assured, rather than going
for a cheaper plan.
Plan Comparison – Continued….
• While comparing the plans, one must
consider
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The manner in which benefits are payable
Ease with which Death claims can be settled
Ease of alteration
Availability of Loans (Liquidity) e.g. Money
back plans – liquidity is there, but money is
paid only on scheduled dates, but in case of
Endowment plans, Loan can be raised as per
needs of individual, after completion of
stipulated period.
THANK YOU
M. J. MALIK
S.B.A.
836 B.O.
AHMEDABAD D.O.
09879094925
lic.malik@gmail.com