The Insurance (Amendment) Bill 2014: Analysis

Introduction:

The Indian insurance sector has been that one that has waited long enough for a comprehensive legislative overhaul. But recently, various amendments have been introduced to this sector through the legislation. Out of which is the most awaited Insurance Laws (Amendment) Bill which has become a provisional law in India. The Bill was promulgated by the President of India as an ordinance on December 26, 2014. The Bill focuses on amending three Acts, namely, the Insurance Act, 1938, the Insurance Regulatory and Development Act, 1999 and the General Insurance Business (Nationalisation) Act, 1972. This Bill has been passed with a perspective to increase the amount of foreign investment in the insurance sector, in order to create a conducive environment for business and to boost the economic growth and development of the country.

The 2014 Bill provides for an increase within the cap on foreign investment in Indian insurance companies but with Indian control. It also makes insurers vicariously accountable for violations by agents and provides appellate rights against orders of the Insurance Regulatory Development Authority (“IRDA”). The 2014 Bill seeks to allow insurers to take care of records of policies and claims in electronic form.

Background

The issue of legislative reforms within the insurance sector has been on the anvil for a reasonably long period. The Law Commission of India [hereinafter LCI] was entrusted with the task of suggesting the framework for the revision of insurance laws. In June 2003, the LCI prepared a consultation paper on the topic and circulated it among all the stakeholders for his or her comments and suggestions. Supported the feedback received, the LCI submitted its 190th Report [hereinafter LCI Report] to the govt. in June 2004.[1]  Subsequently, the govt. introduced the Insurance Laws (Amendment) Bill, 2008 [hereinafter 2008 Bill] within the Rajya Sabha. The 2008 Bill was noted the Parliamentary committee on Finance headed by Mr. Yashwant Sinha. The commission submitted its Report in December 2011.

The initial bill, which was brought by Congress in 2008 was withdrawn. After the new government headed by Mr. Narendra Modi came to power in 2014, the Bill was again observed the commission of the Rajya Sabha headed by Dr. Chandan Mitra [hereinafter the Select Committee]. The committee submitted its Report in December 2014.[2] Supported this, a brand new Bill was introduced, but it didn’t make from now on progress. Thereafter, the 2014 Bill was presented to the President of India for his approval and for its publication within the official gazette before it becomes law.

The govt. decided to push ahead with the initiative by taking the ordinance route. The ordinance was laid before Parliament for its approval and on December 26, 2014, the President promulgated the Insurance Laws (Amendment) Ordinance, 2014 [hereinafter the Ordinance]. Finally, the Insurance Laws (Amendment) Bill, 2015 was introduced within the Lok Sabha and passed by both Houses of the Parliament in March 2015. It received the Presidential assent on March 20, 2015. The Insurance Laws (Amendment) Act, 2015 [hereinafter 2015 Act] is deemed to own get the force on the date of the promulgation of the Ordinance, i.e. 26th day of December 2015.

Timeline of Events

Year	Event
2004	UPA govt. proposed to increase the foreign cap up to 49% but faced opposition
2008	The Congress lead coalition govt. tables in the Parliament the Insurance Laws (Amendment) Bill.
2011	A finance committee, lead by the former Finance Minister, Yashwant Sinha recommends in negative for the proposal.
2012	Green signal given by the Cabinet to the revised Bill which proposed to raise FDI limit up to 49%
2014	Bill which was referred to a selective committee headed by Chandan Mishra, MP of BJP.
2015	Cabinet gave its assent to the amendments as per the selective committee’s recommendations.
2015	Ordinance issued to this effect; Rajya Sabha withdrew the old Bill and passed the new one.

Important aspects of the Bill (2014)

1. Increase in foreign direct investment: 26% to 49%

The approval of the Insurance Laws (Amendment) Bill, 2014 could be a welcome step because it ends the uncertainty. The bill was approved by the Lok Sabha on March 4, and it provided for raising of foreign investment cap in the insurance sector from 26 percent 49 percent, and returns of funds are expected to be in thousands of crores. This shows the Government’s resolve to carry forward its reform agenda.

The Bill approves an increase in foreign capital cap to 49%, which is able to allow the much-required flow of long-term capital to the arena and therefore the flexibility of various capital structures counting on each company’s requirements. With the provision of additional capital, the industry is in a very position to expand its distribution reach. During this critical phase of growth within the insurance sector, the approval of this Bill has lead to attract the much-needed domain capital.

2. Intermediary

The Bill introduced a brand new definition for the term ‘intermediary’. The Bill defines the term ‘intermediary’ to incorporate insurance brokers, reinsurance brokers, insurance consultants, corporate agents, third party administrators, surveyors and loss assessors, and such other entities IRDA may notify by regulations from time to time.

3. Licenses to agents

The Bill provides that not a soul can be an agent for over more than one life insurer and one general or health insurer. It also provides that IRDA shall ensure, while framing regulations that no conflict of interest arises for any agent in representing two or more insurers.

4. Right and power to appeal

Appeals against decisions by the Insurance Regulatory Development Authority of India (IRDA) would be filed before the Securities Appellate Tribunal (SAT), founded under the SEBI Act, 1992.

5. Reinsurance in India

The Bill permits foreign reinsurers to open branches just for reinsurance business in India. The provisions prohibiting an insurer to speculate directly or indirectly outside India the funds of policyholders would apply to such branches.

The management and control of the insurance companies shall remain with Indian companies. The term ‘control’ has been defined to mean “the right to appoint a majority of the administrators or to manage the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements”.

6. Foreign Company

Lloyd’s of London to be treated as an overseas company so as to facilitate the entry of Lloyd’s of London covered under the Lloyd’s Act, 1871 of the United Kingdom, the Bill amends the definition of ‘foreign company’, which is able to now include an organization or body established under a law of any country outside India and includes Lloyd’s of London, established under the Lloyd’s Act, 1871, or of any member. Registration requirements for doing insurance business in India: Every insurer is required to be registered so as to hold out the insurance business in India.

Under the Bill, public companies, cooperative societies, foreign companies operating through a branch, and statutory bodies established by acts of Parliament must be registered to hold out insurance. so as to be registered, each category of insurer requires a minimum amount of capital: health insurance, general insurance and life insurance, the minimum paid-up capital required is INR 1 billion (around US$16 million), and for reinsurance business, the minimum paid-up capital required is INR 2 billion (around US $32 million). Such paid-up equity capital wouldn’t include the preliminary expenses incurred for the formation and registration of the reinsurance company.

Penalties

The Bill enhances penalties for offenses, like carrying on the business of insurance without registration or not complying with the need towards the agricultural and social sector and third party insurance of motorcars. It provides for imprisonment for up to 10 years for selling out policies without registration with the IRDA. The legislation will provide and permit the PSU general insurers to boost funds from the capital market. It also provides for an increased penalty to discourage multilevel marketing of insurance products.

Conclusion

The amendments made so far, have resulted in incorporating enhancements in the Insurance Laws and have also helped the insurance industry to emerge as an economically developed sector. The insurance industry is a capital intensive sector and hence requires a great amount of investment. Money is needed to pay out claims and since our country does not have a very well developed insurance market, far more capital is required for carrying out business operations. The insurance companies should have enough capital in hand because without capital they cannot function. More FDI is required to provide more coverage to the citizens of the country. But with the clearance of the Insurance Laws (Amendment) Bill, 2014, foreign investment can now flow freely and there is a better availability of capital within the market.

As a result of which, large insurance companies now have proper legislation and better clarity of framework that results in better distribution of goods and services to underserved areas. Better insurance policies can be formulated and developed. These amendments, as a whole, help to maintain healthy and cordial relations between the insurers and the consumers. Lastly, these amendments are expected to fulfill the desired goals of the insurance sector and to contribute to the economic growth and development of the country.

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References:

[1] LAW COMMISSION OF INDIA, 190TH REPORT ON THE REVISION OF THE INSURANCE ACT, 1938 AND THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999 (2004), available at http:// lawcommissionofindia.nic.in/reports/InsuranceReport-2nddraft1.pdf [hereinafter LCI Report]. (n.d.).

[2] REPORT OF THE SELECT COMMITTEE ON THE INSURANCE LAWS (AMENDMENT) BILL, 2008 (2014), available at http://www.prsindia.org/uploads/media/Insurance/Select%20committee%20on%20Insurance%20Laws.pdf. (The Report was presented to the Rajya Sabha on Dec. 10, 2014) [hereinafter Select Committee Report]. (n.d.).