INSURANCE REGULATORY

AUTHORITY OF INDIA AND

PROVISIONS RELATED TO
INSURANCE COMPANIES
ABHAY LIMAYE,
EX DEPUTY CHIEF GENERAL MANAGER,
SARASWAT COOPERATIVE BANK
RETAIL LOANS AND CUSTOMER RELATIONSHIP
 WHY REGULATION OF INSURANCE BUSINESSES
• 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 liberlisation and entrance of Private players in Insurance business and seeing the large numbers of
customers and high risk potential, Government of India constituted the Insurance Regulatory and
Development Authority in Year 1999.
 CONSTITUTION OF INSURANCE REGULATORY
AND DEVELOPMENT AUTHORITY
• The IRD Act has established the Insurance Regulatory and Development Authority (“IRDA” or “Authority”) as a
statutory regulator to regulate and promote the insurance industry in India and to protect the interests of holders
of insurance policies. The IRDA Act also carried out a series of amendments to the Act of1938 and conferred the
powers of the Controller of Insurance on the IRDA. The members of the IRDA are appointed by the Central
Government from amongst persons of ability, integrity and standing who have knowledge or experience in life
insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration etc. The
Authority consists of a chairperson, not more than five whole-time members and not more than four part-time
members.
• Every Chairperson and member of IRDA appointed shall hold office for a term of five years. However,
Chairperson shall not hold office once he or she attains 65 years while whole time members shall not hold office
beyond 62 years. A part-time member shall hold office for a term not exceeding five years from the date on which
he enters upon his office.
• Central Government may remove any member from office if he or she is adjudged insolvent or is physically or
mentally incapacitated or has been convicted of an offence involving moral turpitude or has acquired financial or
other interests or has abused his position. Chairperson and the whole time members shall not for a period of two
years from the date of cessation of office in IRDA, hold office as an employee with Central Government or any
State Government or with any company in the insurance sector.
 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
• (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 organizations connected with insurance business ( pg 80 )
• (i) Control and regulation of rates, advantages, terms and conditions that may be offered by general insurance companie
• (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 prescribe
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, whereunder the foreign equity is
not more than 49% (from July 2014), are allowed (IRDA allows only Public limited companies). Every
insurer who proposes to do insurance business has to register with IRDA and obtain a licence before they
start doing insurance business. Three lines of businesses recognised within insurance – Life insurance,
Non-life insurance and 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. Nonlife 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 licence 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/ Companies Act, 2013,
with the primary object of engaging in the business of life or non-life or standalone health
insurance business. Applicants for insurance licence 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 licence.
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
thereunder, carrying on business other than insurance business etc.
• Licence is issued for a financial year and is renewable on an yearly basis on payment of the
required fees. The fee for renewal is 0.20% of total gross premium written direct by an insurer in
India during the financial year preceding the year in which the application for renewal of
certificate is required to be made, subject to an overall cap of Rs.5 Crores.
REQUIREMENTS AS TO CAPITAL, TRANSFER OF SHARES,
VOTING RIGHTS ETC.(SECTIONS 6, 6A TO 6B)
• Every insurer carrying on insurance business shall have a minimum paid up equity capital of Rs.100 Crores for
life insurance and general insurance business and Rs.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 / Companies Act, 2013, 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:
(1) 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)
• (2) 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.
• While the maximum foreign in an insurance company is 26%, Indian Promoter(s) can hold upto
100% in an Indian insurance company. However, where the Indian promoter(s) hold more than
26% of the paid up equity capital of an insurance company, the holding of an Indian promoter in
excess of 26% shall, immediately after the completion of 10 years from the date of
commencement of insurance business, be brought down to 26%. The intention behind this
section was to broadbase the equity shareholding of an Insurance company after 10 years in
such a way that one Indian promoter cannot control more than 26% equity stake in an insurance
company. Either the holding in excess of 26% shall be divested in favour of other Indian
promoters or in favour of public upon listing.
 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
alongwith 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 shareholders and policyholders. The forms provided in Schedule III to the Companies Act,
2013 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. The financial statements shall be audited by an auditor. Detailed guidelines 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.
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 Section
27A. The deposits made with Reserve 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 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 invest or keep invested in the shares of any one banking company or investment
company, an amount exceeding two and a quarter percent 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 invest or keep invested in the shares of any one company other than
banking or investment company, an amount exceeding two and a quarter percent 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
• Prohibited Investments (Section 27A(5) and 27C)
• Investments in the shares or debentures of a Private Limited Company and
investments out of Policyholders funds outside India are prohibited.