INSURANCE REGULATION AND INSURANCE MARKET IN INDIA

I. INTRODUCTION

The present paper is an attempt to map out the major elements of the Indian insurance sector, the
paper has been sub-divided into various parts to investigate the development of insurance laws and
policies in India. The discussions in the succeeding parts of the paper shall give a brief and broad idea
of the various cogs in the machinery of the insurance legal sector in India.

II. HISTORICAL DEVELOPMENT

The first measure to codify the life insurance regime in India was in the year 1912, when the Indian
Life Assurance Companies Act, 1912 (‘1912 Act’) was passed, which was based on the English Act
of 1909.1 Other forms of insurances were left out of the scope of the 1912 Act since they were not
yet developed enough to be demanding a set of legislations. It was only in the year 1938, with the
passing of the Insurance Act, 1938 (‘1938 Act’) that the non-life insurance sector was finally
regulated.2 The 1938 Act, to this day, with its amendments, continues to be the regulating act for both
life insurance3 and general insurance business. In the year 1956, the life-insurance business in India
was nationalised with the formation of the Life Insurance Corporation (the ‘LIC’) and the passing of
the Life Insurance Corporation Act, 1956 (‘LIC Act’). This was followed by the nationalisation of
the general insurance business in India, as well, in the year 1972, by the passing of the General
Insurance Business (Nationalisation) Act, 1972 (‘GIC Act’).4

The LIC and GIC thus enjoyed monopoly in the life and general insurance domain, respectively, after
the nationalisation of the insurance business. Although, in the year 1991, with the wave of
liberalisation of the market hitting the Indian shores, major reforms were undertaken in the Indian
insurance sector. Thereby, in the year 1999 - Insurance Regulatory and Development Authority (the
‘IRDA’ or ‘Authority’) was established with the purpose of regulating and advancing the interest of
insurance and re-insurance sector in India and to safeguard the interest of the insurance policy
holders.5 Presently, there are also other regulators in the Indian insurance sector – the Tariff Advisory
Committee, ‘which controls and regulates the rates, advantages, terms and conditions offered by
insurers in the general insurance business’6; the Insurance Association of India, Councils and
Committees, it primarily ‘conducts examinations for individuals wishing to qualify themselves as

1
Nishith Desai Associates, ‘Insurance Law and Regulations in India’, available at
[Link] (Last visited on
April 7, 2019).
2
Id.
3
Insurance Act, 1938, § 2(11) “Life Insurance Business” means the business of effecting contracts of insurance upon
human life, including any contract whereby the payment of money is assured on death (except death by accident only)
and the happening of any contingency dependent on human life, and any contract which is subject to payment of premiums
for a term dependent on human life…
4
GIC has four major subsidiaries - the National Insurance Company Ltd., the New India Assurance Company Ltd., the
Oriental Insurance Company Ltd., and the United India Assurance Company Ltd.; ‘GIC undertakes mainly re-insurance
business apart from aviation insurance. The bulk of the general insurance business of fire, marine, motor and
miscellaneous insurance business is under taken by the four subsidiaries’.
5
Insurance Regulatory and Development Authority of India, ‘Mission Statement’, available at
[Link] (Last visited on
April 7, 2019).
6
Nishith Desai Associates, supra note 1.
insurance agents’7 and finally the Ombudsman, who ‘resolve all complaints relating to settlement of
claims on the part of insurance companies in a cost-effective, efficient and effective manner’.8

III. LEGAL NECESSITIES TO INITIATE INSURANCE BUSINESS IN INDIA

Having understood the broad structure of the Indian insurance sector it is now pertinent to delve into
the legal necessities that ought to be complied with in order for an entity to operate within the Indian
insurance sector. Prior to the commencement of the insurance business in India, the entity requires to
take a ‘certificate of registration’ from the IRDA. These general registration requirement entails, first
to set up a company in India, thus individuals cannot operate in the insurance business; second the
foreign stake in such company cannot exceed twenty six percent (26%), subject to other requirements
under the 1938 Act; third there needs to separate companies each dealing with life insurance, general
insurance or re-insurance business, thus there is a prohibition on one entity undertaking more than
one insurance business; fourth the name of the entity shall mandatorily contain ‘insurance company’
or ‘assurance company’.9 The minimum paid up equity capital in business of life or general insurance
shall be one billion Indian national rupees, and in the reinsurance business – two billion Indian
national rupees.10

The Authority would then make the evaluation of the application, basis the above-mentioned points
and shall grant the certification to the applicant. This registration is to be renewed on an annual basis
and is to be accompanied with a prescribed fee. The registration is also amenable to suspension or
cancellation, at the discretion of the Authority, in case there is a breach of duties by the applicant in
the view of the Authority.

IV. LAWS GOVERNING THE INDIAN INSURANCE SECTOR

There are a multitude of legislations that govern the Indian insurance sector. Depending on the aspect,
the primary regulations that govern the said business are –1938 Act, the Life Insurance Corporation
Act, 1956, the General Insurance Business (Nationalisation) Act, 1982, the Marine Insurance Act,
1963 and the Motor Vehicles Act, 1988.11 The Indian Contract Act, 1872, regulates the formation
and enforcement aspects of the insurance contracts. All insurance entities ought to maintain a deposit
with the Reserve Bank of India (‘RBI’) at all times, for the entire duration that they are operating
within the insurance market. Further, there are investment requirements under the 1938 Act, which
mandates that the insurer keeps invested a part of the assets, as determined under the said act, at all
times. These investment limits vary in accordance with the nature of the business – life, general,
pension and general annuity or reinsurance.12

Under the IRDA (Appointed Actuary) Regulations, 2000, all entities operating in the insurance and
reinsurance business in India are required to appoint an Actuary, who shall assist the said entity with
advice on issues pertaining to ‘product design and pricing, insurance contract wording, investments
and reinsurance’.13 There are further duties that the said Actuary is endowed with in case the entity
is operating in the life insurance business. To further comment on the strict regulation of the Indian
insurance sector it is important to point out the regulations pertaining to the advertisements in the
insurance business. In that aspect The IRDA (Insurance Advertisements) Regulations, 2000 becomes

7
Id.
8
Id.
9
Insurance Act, 1938, Part II.
10
Insurance Act, 1938, § 6A.
11
Nishith Desai Associates, supra note 1.
12
Insurance Act, 1938, § 27.
13
Nishith Desai Associates, supra note 1.
crucial. The said regulations seek to regulate the advertisements as issued by the insurer, its
intermediary or its agent.14 There ought to be a system of control over the content that shall be covered
under the advertisement. The said regulations, state that the advertisement being issued ought not to
be an ‘unfair or misleading advertisement’. Which essentially translates to not making claims that
‘fails to identity the product as insurance’15, or making a claim that cannot be reasonably delivered
by the insurer, or providing information in a misleading manner, or making unfair or incompetent
comparisons with competitors, and the like. There has to be mention in such advertisement that
‘insurance is the subject matter of solicitation’.16 Non-compliance with the conditions mentioned
therein may result in a reprimand by the Authority, who in turn, might seek clarification on the non-
compliance and may suggest measures to alter the said advertisement.

There are certain social obligations on the insurance providers operating in the country. The IRDA
(Obligations of insurers to Rural or Social Sectors) Regulations, 2000 makes it mandatory for the
insurance providers to provide insurance to people residing in rural areas, or workers employed in
the unorganised sector, or the economically or socially disadvantages subgroup of Indian population,
for the first five financial years of their existence.17

V. AN INSURANCE POLICY DOCUMENT: WHAT DOES IT CONTAIN?

Having undertaken the broad discussion on the structure, obligations and duties of the entities
operating in the insurance sector in India, it is now pertinent to understand how an insurance policy
document is regulated in the Indian scenario. A policy document is contract that is personal in nature
and hence it may not be transferred to another person, by the policy holder, without the consent of
the insurer. The privity of parties to a contract being the basic rule governing this feature of an
insurance contract. In case of a life or an accident coverage policy, since the subject matter of the said
policy is a human life, by definition, it is not transferable. Although in such a scenario, there may be
an assignment of right to be eligible for the proceeds of the said policy.

The 1938 Act, lays down the specific procedural requirements that ought to be followed to assign the
said benefits. First, such an endorsement has to be made either on the policy document or another
instrument being entered into for the said identified purpose; second, the said instrument ought to be
signed by the transferor, or their agent and must be attested by at least two witnesses; third, the said
instrument must explicitly lay down the fact of such transfer or assignment. 18 The insurer shall be
given due notice of this alteration and they would be entitled to hold the new assignee or transferee
to the same liabilities and/or equities to which the transferor was originally liable. The said
assignment could be both absolute or conditional. Further, a person signing for a life insurance policy
on their own life has the right to nominate another person for the benefits that shall become receivable
in the event the insurable event occurs.

VI. FOREIGN INTERESTS IN THE INDIAN INSURANCE MARKET

As mentioned, briefly, in the earlier part of the paper, there are certain restrictions on the foreign
investment in the field of insurance in India. These restrictions are also applicable on Indian residents,
thus as per the Foreign Exchange Management (Insurance) Regulations, 2000, no person resident in

14
IRDA (Insurance Advertisements) Regulations, 2000, Regulation 2(b).
15
Nishith Desai Associates, supra note 1.
16
See, for example, Shriram General Insurance, ‘Why Insurance is the subject matter of solicitation’, available at
[Link] (Last visited on April 7,
2019).
17
IRDA (Obligations of insurers to Rural or Social Sectors) Regulations, 2000, Regulation 2(c),(d),(e).
18
Insurance Act, 1938, § 38.
India is allowed to buy any general or life insurance policy, as being issued, from an insurer outside
India. Even so, the RBI, in its discretion, may, for reasonable grounds, allow a resident in India to opt
for any life insurance policy issued by an insurer not from India.19 Further, a person resident in India
but not being a permanent resident20 may continue to hold any insurance policies, issued to them, by
insurers outside of the country. There is also possibility of a person, being a resident in India, to obtain
a general insurance policy from an insurer outside of India, provided a prior approval has been
obtained from the Central Government.

This leads the discussion to the operations of foreign firms desirous to enter the insurance market in
India. To do the same, the said firms could pernitrate the Indian markets in broadly two ways. First,
through direct investments in an existent Indian insurance company. As mentioned earlier, a foreign
company can only invest an upward of twenty six percent in the insurance company, the rest seventy
four percent has to be invested by the Indian company. Second, way is to operate in India through the
means of a branch or a liaison office. There will be a requirement to seek prior approval of the RBI
or the Indian government. Although, through this second route the foreign company would be allowed
to undertake only a limited amount of activities.

VII. GENERAL PRINCIPLES OF INDIAN INSURANCE LAW

Moving to the ‘principles of insurance law’ in India. The foremost principle is that of ‘uberrimea
fidei’, which means that the insurance contract is that of ‘good faith’, thereby necessitating both the
parties to act in utmost good faith and disclose all material facts to each other.21 Another essential
principle associated with insurance is that of ‘representations’, it has been settled by relevant case
laws, that a mere recital of representations shall not be assumed to be of relevance, unless they pertain
to the integral parts of the contract.22 It is also pertinent to note that an insurance policy cannot be
called into question, basing the grounds of ‘misrepresentation’, after a time span of two years has
lapsed since the signing of the insurance policy. The burden of proof, to attribute the intent to
misrepresent, is on the insurer.23 Warranties in the Indian insurance contracts are to be strictly
complied with and the contract can be avoided, even when the said breach of a warranty did not
impact the material performance of the contract.

The concept of ‘indemnity and subrogation’ is relevant to insurance policies, except for life and
accident coverage policies, where the insurer essentially agrees to indemnify the insured against an
event and hence the policy may not be used to enrich the insured over and above the actual loss
suffered owing to an insured event. There is also emphasis on the concept of ‘insurable interest’ in
India, before an insurance policy could be obtained – which can be checked by the presence of a
possibility to suffer ‘pecuniary loss’ in the event the insured event takes place.24 The ordinary
principles of offer and acceptance are applicable to insurance contracts, unless specified otherwise in
the policy document.25 Further, the disputes pertaining to the insurance sector are handled through
the ordinary court system – there being a well-developed trajectory of case laws on the insurance
sector to guide the reasoning of the courts.

VIII. CONCLUSION

19
Nishith Desai Associates, supra note 1.
20
‘Not permanently resident – means a person resident in India for employment of a specified duration (irrespective of
the length thereof) or for a specific job or assignment, the duration of which does not exceed three years’.
21
General Assurance Society Ltd. v. Chandumull Jain, AIR 1966 SC 1644.
22
Wheelton v. Haristy, (1857) 8 E and B 232.
23
Life Insurance Corporation v. Smt. G.M. Channabasemma, AIR 1991 SC 392.
24
New India Insurance Company Ltd. v. G.N. Sainani, (1997) 6 SCC 383.
25
National Insurance Company Limited. v. Mrs. Chinto Devi & Others, 2000, SC.A.
As has been seen through the course of the discussions, the Indian insurance sector has a multitude
of legislations, expert bodies and a host of principles dictating the governance of the identified sector.

As is visible in the structuring of the legal regime, the regulatory mechanisms and the case laws, the
Indian insurance sector is influenced, to a large extent, by the English insurance field and has retained
the trajectory of legal development from the English legal system. The Indian insurance market is
mostly inward looking, protecting the domestic players and tightly regulating the field with a strong
regulatory mechanism, thereby ensuring that all aspects of the insurance business are regulated and
are made complaint with the principles of the insurance laws.

The insurance sector in India is thus, highly regulated and qualifies to be a good example of evolved
insurance systems in the world, working to protect the interests of both policy holders and the
insurers.