Insurance and reinsurance in India: overview
A Q&A guide to insurance and reinsurance law in India.
The Q&A gives a high level overview of the market trends and regulatory framework in the insurance and reinsurance market; the definitions for a contract of insurance and a contract of reinsurance; the regulation of insurance and reinsurance contracts; the forms of corporate organisation an insurer can take; and the regulation of insurers and reinsurers, including regulation of the transfer of risk. It also covers: operating restrictions for insurance and reinsurance entities; reinsurance monitoring and disclosure requirements; content requirements for policies and implied terms; insurance and reinsurance claims; remedies; insolvency of insurance and reinsurance providers; taxation; dispute resolution; and proposals for reform. Finally, it provides websites and brief details for the main insurance/reinsurance trade organisations in India.
To compare answers across multiple jurisdictions visit the Insurance and Reinsurance Country Q&A tool.
This Q&A is part of the global guide to insurance and reinsurance. For a full list of jurisdictional Q&As visit www.practicallaw.com/insurance-mjg.
Market trends and regulatory framework
The Insurance Regulatory and Development Authority of India (IRDAI) was set up in 1999 as an autonomous body to regulate the insurance industry and develop the insurance market, and in August 2000 private competition was permitted with a foreign ownership cap of 26%.
The Indian insurance sector has grown by about 15% to 20% per year since the advent of liberalisation in 2000. There are:
24 life insurers, 28 general insurers and five stand-alone health insurers.
31 third-party administrators, 341 insurance brokers, 11 web aggregators, five insurance repositories, and numerous corporate agents and insurance agents in India.
At present, the government-owned General Insurance Corporation is the only reinsurance company registered in India.
There were growing complaints over the last decade about the relatively low 26% cap on foreign investment. The Insurance Laws (Amendment) Act 2015 (Amendment Act) has now been enacted and it introduces key changes to the Insurance Act 1938, for example:
Increasing the foreign investment cap to 49%.
Permitting overseas reinsurers (who are not admitted in India) to open branch offices to carry out reinsurance business in India.
Facilitating the entry of Lloyd's of London, under regulations yet to be finalised.
As a first step to implement these changes, the Ministry of Finance notified the Indian Insurance Companies (Foreign Investment) Rules 2015 (Rules) on 19 February 2015:
The Rules provide that approval from the Foreign Investment Promotion Board, Department of Economic Affairs, Ministry of Finance (FIPB) will need to be obtained for any foreign investment beyond 26% up to the new limit of 49%.
The Rules have clarified that the increased FDI limit of 49% will also apply to insurance intermediaries, in accordance with the terms in the Rules.
In addition, the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, has notified Press Note No. 3 of 2015 (Press Note) on 2 March 2015 to amend the Consolidated Foreign Direct Investment Policy, to ensure uniformity with the Rules.
2014 also saw continued regulatory investigations and orders against insurers and intermediaries:
The IRDAI, to streamline the regulatory approval process of life insurance products, prescribed a standard filing format.
The IRDAI permitted payments to be made by insurers directly to group policyholders that are financial institutions, as repayment of loans taken by insured members of the group from such financial institutions.
The IRDAI issued clarifications on a number of regulations notified or revised in the previous year relating to, among others, life insurance business, health insurance business, web aggregators, insurance brokers, surveyors, and loss assessors.
The Amendment Act has set the backdrop for several new regulations and significant changes to existing regulations in 2015, which should be undertaken by the IRDAI in the near future.
Insurance and reinsurance companies and insurance intermediaries in India are regulated by the IRDAI (www.irda.gov.in). The primary legislation regulating the Indian insurance sector is the Insurance Act and the Insurance Regulatory and Development Authority Act 1999 (IRDAI Act). Under the powers granted to it by the IRDAI Act, the IRDAI has issued various regulations for governing the licensing and functioning of insurers, reinsurers and insurance intermediaries.
The Indian insurance sector is highly regulated. The regulations issued by the IRDAI govern a wide range of aspects, including:
Registration of Indian insurance companies.
The assets and solvency margins required to be maintained by insurers.
Manner of preparation of financial statements.
Issuance of capital.
Licensing requirements and corporate governance norms for companies operating in the insurance sector.
The regulations issued by the IRDAI govern all insurers, that is:
Stand-alone health insurers.
In addition, the IRDAI regulations govern all insurance intermediaries, that is:
Third party administrators.
Surveyors and loss assessors.
In addition, the Foreign Exchange Management (Insurance) Regulations 2000 (FEMA Insurance Regulations) regulate the manner in which a person resident in India (that is, a person who has been residing in India for more than 182 days in the preceding financial year) can take or continue to hold a general insurance policy or a life insurance policy issued by an insurer outside India.
The Reserve Bank of India (RBI) has also issued the Memorandum of Exchange Control Regulations relating to Life Insurance in India (LIM). This applies to all life insurance companies and provides guidelines on various issues, including issuing policies, collecting premiums, and settling claims. Similarly, the Memorandum of Exchange Control Regulations relating to General Insurance in India (GIM) provides a similar set of rules for general insurance companies.
The Marine Insurance Act 1963 has its basis in the UK Marine Insurance Act 1906. Though the Marine Insurance Act primarily regulates marine insurance, the Indian courts (in a manner akin to the courts in the UK) have extended some of the principles of the Marine Insurance Act to non-marine insurance contracts.
The IRDAI does not currently regulate the group entities of insurers or insurance intermediaries. However there are some restrictions, where the IRDAI has discretion (in some cases) to determine the scope of a group:
An Indian corporate group can have an insurer and an insurance broker in the same group, subject to certain conditions being fulfilled.
Insurance brokers and corporate agents are not permitted in the same group.
Web aggregators and telemarketers cannot be related parties (under Accounting Standard 18 and/or the Companies Act 2013) of an insurer.
There is no express restriction on insurers and surveyors operating in the same group, but in the authors' view the IRDAI is likely to see this as an inherent conflict of interest, as surveyors are professionals that operate at the claims stage.
There is no express restriction on insurers and third party administrators (TPAs) operating in the same group.
Insurers and insurance agents/insurance intermediaries are not permitted to have directors in common.
Though the Amendment Act has introduced many changes to the Insurance Act, the primary insurance regulator continues to be the IRDAI. However, approval from the Foreign Investment Promotion Board (FIPB) will now need to be obtained for any foreign investment beyond 26% up to the new limit of 49% (see Question 1). In addition, appeals from orders issued by the IRDAI can now be preferred before the Securities Appellate Tribunal.
The interplay between these bodies and the impact on the insurance sector remains to be seen.
Regulation of insurance and reinsurance contracts
Indian statutes do not currently provide a specific definition of a contract of insurance. However, the rules and regulations issued by the IRDAI provide detailed guidelines for the essential elements of an insurance policy. Certain essential conditions need to be fulfilled to obtain an insurance policy, including an insurable interest.
The Indian Supreme Court has held that the four essentials of a contract of insurance are the definition of the risk, the duration of the risk, the premium, and the amount of insurance (General Assurance Society Ltd v Chandumull Jain and Anr (AIR 1966 SC 1644)).
The form and content of insurance policies issued by all insurers is highly regulated by the IRDAI (see Question 18).
In relation to reinsurance contracts, the reinsurance regulations issued by the IRDAI define a contract of reinsurance as a legally binding document on all the parties that provides a complete, accurate and definitive record of all the terms and conditions and other provisions of the reinsurance contract. The reinsurance arrangements do not need to be pre-approved by the IRDAI, but they need to be documented and filed with the IRDAI within the stipulated time period.
Under the Insurance Act, an Indian insurance entity can be one of the following:
A public limited company formed under the Companies Act, 2013.
A statutory body established by an Act of Parliament to carry on insurance business.
An insurance co-operative society.
A foreign company engaged in reinsurance business through a branch established in India.
A foreign company has been defined to mean a company or body established under the law of any country outside India, and also includes Lloyd's as established under the Lloyd's Act 1871 (United Kingdom) or any of its members.
Regulation of insurers and reinsurers
All insurers, reinsurers and insurance intermediaries are regulated by the IRDAI. The Insurance Act and the IRDAI Act lay down certain general principles. The specific regulations issued by the IRDAI from time to time govern insurers and intermediaries, depending on the nature of business undertaken by these entities.
There are separate sets of regulations governing reinsurance arrangements of general insurers and life reinsurers. In addition, the IRDAI has issued a circular titled Guidelines on submission of information on Cross Border Reinsurers not having any presence in India (Cross Border Reinsurance Guidelines) which defines cross border reinsurers as those reinsurers who do not have any physical presence in India and undertake reinsurance business with insurers. The Cross Border Reinsurance Guidelines set out requirements for every cross border reinsurer to file certain specified information with the IRDAI by the end of each financial year, to accept any insurance/reinsurance/retrocession from India.
Following the Amendment Act (see Question 1) a host of regulations are anticipated for reinsurers, including establishment of branch offices in India by reinsurers and a framework to govern the entry of Lloyd's into the Indian market.
Insurers and reinsurers must carry on the specific business for which they are licensed. The definition of Indian insurance company as prescribed in the Insurance Act states that the sole purpose of an Indian insurance company is to conduct life insurance business, general insurance business, health insurance business, or reinsurance business. Therefore, insurers are only permitted to undertake those activities that are incidental to or supplement its sole purpose of carrying on insurance business.
The overarching regulatory framework for the reinsurance of general insurance risks is set out in the IRDA (General Insurance-Reinsurance) Regulations 2013 (Reinsurance Regulations). The guiding principle is maximising retention within India, so each insurer must maintain the maximum possible retention commensurate with its financial strength and volume of business. The IRDAI can require an insurer to justify its retention policy, and can give such directions as may be required to ensure that the Indian insurer is not merely fronting for a foreign insurer.
Insurers must comply with various requirements set out in the Reinsurance Regulations, including filing requirements for:
The reinsurance programme.
The reinsurance treaty contract wording and excess of loss cover note.
Every new reinsurance arrangement entered into.
The Indian regulatory framework prohibits reinsurance arrangements that result in the Indian insurer fronting for reinsurers. There is no statutory or regulatory definition of what amounts to fronting. This is essentially a question of the extent of control exercised by the reinsurer, over functions such as:
Whether to write a risk.
The price to quote for the risk.
The setting of discretionary limits.
The handling of claims.
In addition, the Guidelines on File and Use Requirements for General Insurance Products issued by the IRDAI provide that the insurance product should be a genuine insurance product of an insurable risk with a real risk transfer. Alternate risk transfer or financial guarantee business in any form is not permitted. Similar restrictions apply to life insurers.
Pursuant to the Amendment Act the regulatory framework governing reinsurers may undergo changes, including reinsurers being permitted to set up branch offices in India according to the mechanism to be prescribed by the IRDAI (see Question 1).
Authorisation or licensing
All insurers and insurance intermediaries must obtain the appropriate authorisation and licence from the IRDAI. Any entity applying for a licence from the IRDAI must fulfil certain essential requirements, including:
The form of the entity.
The permissible foreign investment limits.
Minimum capitalisation requirements.
Minimum qualification requirements of directors/principal officers.
Providing adequate documentation on its constitution.
Insurers and reinsurers
To obtain authorisation, the insurer must apply for a certificate of registration from the IRDAI in accordance with the staged process set out in the IRDA (Registration of Indian Insurance Companies) Regulations 2000. An applicant wanting to carry on insurance business in India must make a requisition for registration application in Form IRDA/R1. Upon acceptance of the requisition, the applicant can make an application for grant of certificate of registration in Form IRDA/R2. Both Form IRDA/R1 and Form IRDA/R2 must be accompanied with the specified documentation and requisite details on the background of the applicant.
If the IRDAI is satisfied that the applicant fulfils all the specified criteria and is suitable, it will grant a certificate to the applicant in Form IRDA/R3.
The IRDAI is currently revising the procedures and requirements for granting registration, and has released an exposure draft on the IRDAI (Registration of Indian Insurance Companies) (Seventh Amendment) Regulations 2000 (Exposure Draft) seeking comments from all stakeholders. However the process, as set out in the Exposure Draft, continues to be the staged process as specified above, with certain additional requirements which need to be fulfilled to obtain registration.
Insurance intermediaries must obtain licences under the specific regulations applicable to them, in view of the nature of business they want to undertake.
The IRDAI has issued regulations setting out the licensing requirements and procedures for all recognised intermediaries, including insurance agents, corporate agents and brokers.
Individual insurance agents. An application for a licence as an individual insurance agent has to comply with the conditions provided under the Insurance Act and regulations notified by the IRDAI in this regard. Individual agents are required to have completed practical training and possess the requisite knowledge for soliciting insurance business before applying for a licence. Individual agents are expected to only engage in insurance distribution services. Individual agents are permitted to solicit business for only one insurance company engaged in each class of insurance business.
Corporate agents. Entities eligible to operate as corporate agents include firms, banks, non-banking financial companies, co-operative societies, NGOs and companies. Corporate agents are permitted to engage in any other business as its main business other than insurance distribution. However, if a corporate agent has a main business other than insurance distribution, the corporate agent is not permitted to make the sale of its products contingent on the sale of an insurance product, or vice versa. Corporate agents are also permitted to solicit business for only one insurance company engaged in each class of insurance business. It is, however, proposed that in future each corporate agent may have arrangements with a maximum of three insurers in each category.
Insurance brokers. Insurance brokers are required to exclusively carry on the distribution of insurance products. Any company, limited liability partnership or co-operative society may apply to the IRDAI for grant of an insurance broker licence. Applicants can register as direct brokers, reinsurance brokers, or composite brokers (involved in both direct and reinsurance broking). The minimum capital for direct brokers is INR5 million, INR20 million for reinsurance brokers and INR25 million for composite brokers. All insurance brokers are required to be part of the Insurance Brokers Association of India.
Insurance marketing firms. This form of intermediary has been recently introduced by the IRDAI. Entities that are licensed as insurance marketing firms will be able to distribute insurance products along with mutual funds, pension products and certain other financial products, provided that permissions are in place to distribute those financial products from the respective regulator. IMFs will be permitted to distribute the insurance products of only two life insurers, two general insurers and two health insurers at any point of time, and changing the insurer whose products are to be distributed can only take place with the IRDAI's prior approval. IMFs are required to have a minimum capital of INR1 million. They are also permitted to undertake survey functions through licensed surveyors on its rolls, policy servicing activities, and other activities which are permitted to be outsourced by insurers under the applicable regulatory framework.
Other providers of insurance/reinsurance-related activities
Only licensed insurance agents, corporate agents and other insurance intermediaries can solicit and procure insurance business for insurers. Insurers are also permitted to engage licensed telemarketers and licensed web aggregators for the solicitation and procurement of insurance business and to purchase access to the database of licensed referral companies. Third party administrators, surveyors and loss assessors are also required to be licensed in the Indian jurisdiction and operate under the aegis of comprehensive regulations of the IRDAI.
Foreign investment and overseas insurers
Approval will now need to be obtained from the FIPB to increase the total foreign investment beyond 26% up to 49% (see Question 1). This applies to both insurers and insurance intermediaries. The exact manner in which the Amendment Act and the FDI Rules may be implemented will be clarified in due course.
Overseas non-admitted insurers cannot write direct insurance business in India. Non-admitted insurers can reinsure risks written by Indian insurers according to the IRDAI's regulations on the reinsurance of life and general insurance businesses. Under the Amendment Act, overseas non-admitted reinsurers are now also permitted to access the Indian market by way of branch offices in India. Lloyd's of London has also been allowed to establish a branch in India.
Indian residents are prohibited from purchasing insurance from overseas non-admitted insurers, unless the purchase falls within a general or specific approval of the RBI.
There are no exemptions or exclusions from obtaining authorisation and licences for insurers, reinsurers, and insurance intermediaries (see Question 9).
Restrictions on ownership or control
Entities in the same corporate group (having common owners) are restricted from acting as insurers and insurance intermediaries, subject to some exceptions (see Question 2). The IRDAI has discretion (in some cases) to determine the scope of a group.
In relation to qualification requirements, the regulations prescribed by the IRDAI for the various insurance intermediaries lay down certain eligibility criteria. These take into consideration the experience and qualification of the concerned person in relation to their appointment as a principal officer, director or partner of the intermediary entity. For instance, the regulations governing surveyors provide that at least two directors on the board of directors of an entity operating in the insurance surveyor business must be qualified surveyors.
The definition of Indian insurance company in the Insurance Act as amended by the Amendment Act provides that at all times the Indian insurance company should be Indian owned and controlled. The term control has been defined as the right to appoint a majority of the directors or to control the management or policy decisions, including through their shareholding or management rights or shareholders' agreements or voting agreements. This definition does not envisage a situation where any person satisfies more than one criterion, and is yet to be tried and tested before Indian courts.
The FDI Rules have defined Indian control of an Indian insurance company to mean control of the Indian insurance company by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens. The term Indian ownership of an Indian insurance company has been defined to mean more than 50% of the equity capital beneficially owned by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens.
Therefore, any insurer or intermediary with share capital held by foreign shareholders will need to be Indian owned and Indian controlled at all times. Until now, all matters relating to insurers and intermediaries, including foreign investment in them, has been regulated by the IRDAI. Now that insurers and intermediaries have to obtain approval from the FIPB to increase foreign investment beyond 26% up to the new limit of 49% (see Question 1), it remains to be seen whether both regulators will adopt the same/similar interpretation of Indian owned and Indian controlled.
Prior approval from the IRDAI is required in case of a change in shareholding of an insurer where, after the transfer, the total shareholding of the transferee is likely to exceed 5% of the total paid-up capital of the company. This also applies to certain intermediaries, that is, third party administrators (TPAs) and insurance brokers.
Similarly, a web aggregator must not register any transfer of its shares without the prior written approval of the IRDAI, if either the:
Total shareholding of the transferee is likely to exceed 5% of the total paid-up capital of the company.
Nominal value of the shares intended to be transferred exceeds 5% of the total paid-up capital of the website aggregator.
In addition, prior approval of the IRDAI must be obtained if the nominal value of the shares intended to be transferred exceeds 1% of the total paid-up capital of the insurer.
The IRDA (Registration of Indian Insurance Companies) Regulations, 2000 also provide a reporting requirement, where every insurer must provide a statement indicating any shareholding changes exceeding 1% of the issued capital of the insurer along with details of its current promoters, within 15 days of the end of every quarter.
The requirement to obtain prior FIPB approval for an increase in foreign investment beyond 26% up to the permissible limit of 49% has also been introduced (see Question 1).
Ongoing requirements for the authorised or licensed entity
The Indian insurance sector is highly regulated. The IRDAI has issued various regulations governing the functioning and compliance requirements of all entities in the insurance sector. The compliance requirements include one-time requirements to obtain approval from or report to the IRDAI and ongoing requirements. One of the key compliance requirements is to obtain approval for all insurance products from the IRDAI.
Insurance products can only be offered if the terms and conditions have been approved by the IRDAI under its file and use procedure. Any amendments to insurance products must also be approved by the IRDAI.
Under the IRDAI rules and regulations, insurers and intermediaries must carry on all core functions themselves. Only non-core activities can be outsourced to external service provides, in accordance with the rules on outsourcing. In addition, there are periodic reporting requirements (with the IRDAI) in relation to agreements entered into for outsourcing any function.
All insurers and reinsurers must comply with public disclosure requirements by publishing key information, including balance sheets and profit and loss accounts on their websites and in newspapers. In addition, appropriate certificates must be filed with the IRDAI by insurers and reinsurers on a periodic basis, confirming compliance with the public disclosure requirements.
Another significant compliance requirement is set out in the Insurance Act and the IRDAI regulations relating to permissible payments by insurers to intermediaries, including the maximum amounts payable as commission to insurance agents. The Amendment Act has repealed certain provisions of the Insurance Act in relation to permissible payments and has provided that these will now be governed by appropriate regulations. The regulations from the IRDAI in this regard are awaited.
Insurers are also required to value their assets, determine their liabilities and maintain required solvency margins in the specified manner, the details of which must be periodically filed with the IRDAI.
Penalties for non-compliance with legal and regulatory requirements
Penalties for non-compliance as set out in the Insurance Act have been significantly enhanced under the Amendment Act and new penalties have been introduced, including penalties on intermediaries for receipt of remuneration in breach of the IRDAI's regulations.
The penalty for failure to provide documents, maintain the solvency margin or to comply with other directions has been enhanced from INR500,000 per offence to INR100,000 for each day of such failure/contravention, with a limit of INR10 million. The penalty for conducting insurance business without obtaining the appropriate registration can be up to INR250 million and imprisonment up to ten years.
Similarly, the maximum penalty for failure to comply with investment, third party motor insurance and rural and social sector obligations has been increased from INR500,000 to INR250 million.
Restrictions on persons to whom services can be marketed or sold
The restrictions on persons to whom insurance/reinsurance services and contracts can be marketed or sold are contained in the FEMA Insurance Regulations, the LIM, the GIM and the General Insurance Business (Nationalisation) Act, 1972 (General Insurance Act).
The General Insurance Act prohibits properties in India from being insured by non-admitted insurers except with the permission of the Central Government. Individuals and firms resident in India are not permitted to take insurance cover of any kind with insurance companies in foreign countries without obtaining the prior permission of the RBI and the permission of the Government under the General Insurance Act.
The FEMA Insurance Regulations set out the conditions subject to which a person resident in India can take or continue to hold a general insurance policy/life insurance policy issued by an insurer outside India.
Insurers licensed in India can issue life insurance policies in a foreign currency to resident persons of Indian nationality or origin who have returned to India after residing outside India, subject to certain foreign exchange requirements in the LIM.
Reinsurance monitoring and disclosure requirements
The arrangement between an insurer and reinsurer is governed by the type of reinsurance (treaty or facultative) and the reinsurance contract.
Under the contract, reinsurers commonly have a claims control clause or a claims co-operation clause. They can also have a "follow the settlements" clause, where the reinsurer is required to follow any settlement reached by the insurer with the insured.
The extent to which a reinsurer can monitor a claim or settlement depends on what clauses the contract contains and the effect of the wording is a matter of construction. For example, a well drafted claims control clause will usually require the reinsured to allow the reinsurer to appoint assessors, surveyors or loss adjusters, and to control all negotiations relating to the settlement of the underlying loss.
The cedant company's disclosure obligations flow from the duty of ultimate good faith (uberrima fides) owed in all insurance contracts and, by extension, in reinsurance contracts.
The cedant company must:
Be full and frank when providing information to the reinsurer.
Disclose to the reinsurer all facts material to a reinsurer's appraisal of the risk which are known or deemed to be known to the cedant company.
Not misrepresent facts.
The cedant's notification obligations are governed by the type of reinsurance (treaty or facultative) and the reinsurance contract (see Question 16). For example, if the contract contains a well drafted claims control clause, the cedant company may be required to notify reinsurers of claims arising under the reinsured policy immediately or within a stated time, or as soon as may be reasonably practicable.
Insurance and reinsurance policies
Content requirements and commonly found clauses
All policies contain insuring clauses, general conditions, exclusions and definition sections. The insuring clause, exclusions and definition wording depend on the type of policy being issued and cover requested, though the conditions are fairly standard in that they will include notification, co-operation, consent, changes in material risk and other insurance clauses. Some of these conditions may be classified as conditions precedent, so that the insurer's liability will only attach when the conditions have been satisfied.
These clauses can be deleted or modified by way of endorsements.
In both general insurance and life insurance policy terms and conditions, it is compulsory to include references to:
The insurer's grievance redressal mechanism.
The right of the insured to approach the Insurance Ombudsman, along with contact details of the nationwide Insurance Ombudsman network.
Insurance contract wording is highly regulated.
The former Tariff Advisory Committee, a statutory body that was established under the Insurance Act, issued a standard form of policy terms and conditions relating to fire, marine (hull), motoring, engineering, industrial risks and workmen compensation, which cannot be deviated from by insurers. Recently, there have been proposals to disband the standard form requirements for these classes of insurance.
In all other lines of insurance business (except "mega risks" and other forms of specialised insurance cover), insurers are permitted to issue only those policy terms and conditions, endorsements and other ancillary documentation that have been approved by the IRDAI in advance. No changes are permitted to be made unless the prior consent of the IRDAI is obtained.
In addition, for health insurance policies, the IRDAI has specified a standard set of definitions, standard nomenclature for critical illness, standard pre-authorisation and claim form, and a standard list of excluded expenses. The IRDAI has also specified a number of other conditions for health insurance policies, making these policies highly regulated.
In addition, all condition precedents and warranties must be stated in express terms in the policy documentation. Further, all product literature is required to be in "simple language" and "easily understandable to the public at large", and all technical terms used in the policy wording must be clarified to the insured.
There are also extraneous rules that impact on policy terms. For example, the Insurance Act gives the policyholder a right to override contrary policy terms in favour of Indian law.
The IRDA (Protection of Policyholders' Interests Regulations) 2002 (Policyholders Regulations) prescribe certain terms to be incorporated into both life insurance and general insurance policies. For life insurance policies, the IRDAI requires insurers to include, among others:
The name of the product.
Whether it is participating in profits and the basis of this.
Benefits payable and the contingencies upon which these are payable.
Details of riders.
Date of commencement of risk.
Premium details, including grace period for premium payment.
Conditions of non-forfeiture.
Revival of lapsed policies.
Provisions for nomination.
Claim documentation requirements.
Communication address of the insurer.
General insurers are required by the Policyholder Regulations to incorporate, among other things:
Name and address of the insured and banks or other persons financially interested in the subject matter of the insurance.
Full description of the property or interest insured.
Location of the property or interest insured.
Period of insurance.
Risks covered and not covered.
Franchise or deductible applicable.
Premium payable and if adjustable the basis for the adjustment.
Policy terms, conditions, and warranties.
Obligations of the insured on the occurrence of claim circumstances.
Pro forma of any communication insurers can seek from the policyholders.
Facultative and treaty reinsurance are both common in India. There is a regulatory expectation that only retail lines of insurance are covered under treaty reinsurance. Facultative reinsurance has been mainly reserved for unconventional risks, project risks, mega risks, and liability lines.
Reinsurance policies in India commonly include:
Claims control/claims co-operation clause.
Follow the fortune clause.
Set off clause.
Ex-gratia payment exclusion clause.
Comprehensive dispute resolution and arbitration clauses.
The terms that may be implied by the applicable law and regulations in relation to an insurance contract are:
Subrogation. There is statutory and judicial recognition of the right of subrogation. No separate contractual clause is required to trigger it. However in practice, policies do contain subrogation clauses. Also, the IRDA (Protection of Policyholders' Interests) Regulations 2002 obligates an insured to assist the insurer in recovery proceedings.
Utmost good faith. An insurance contract is one of utmost good faith and insurers are entitled to a fair presentation of the risk prior to inception. The duty of utmost good faith places an obligation on the insured to voluntarily disclose all material facts which are relevant to the risk being insured. If there has been a misrepresentation or non-disclosure of a material fact, an insurer can avoid the policy from the beginning (ab initio). Even though a policy may not expressly say so, all insurance policies are based on this principle. Accordingly, any material non-disclosure/misrepresentation can be used to avoid the policy, even though such non-disclosure/misrepresentation may be innocent.
Insurance policies are now structured to incorporate comprehensive customer protections that are legally required and typically include the following:
Details of the Insurance Ombudsman, who is appointed by the Insurance Council to address complaints by the insured against the insurer, in relation to the settlement of claims.
The IRDAI requires insurers to formulate a grievance redressal policy and file it with the IRDAI. Policyholders who have complaints against insurers are first required to approach the grievance or customer complaints cell of the insurer.
In case of delay or no response regarding matters relating to policies and claims, the IRDAI cell can take up the matters with the insurers for speedy disposal. Only policyholders, claimants or the insured can approach the IRDAI for these matters, and advocates or agents or other third parties are not allowed to approach the IRDAI.
The IRDA (Protection of Policyholders' Interests) Regulations 2002 provide, among other obligations, that insurers follow certain practices at the point of sale of the insurance policy, to ensure that the insured can understand the terms of the policy properly. They include:
Putting in place proper procedures and mechanisms to hear any grievances of the insured.
Clearly stating the policy terms (such as warranties, conditions, the insured's obligations and cancellation provisions).
Following certain claims procedures to expeditiously process claims.
Paying interest at the rate of 2% above the prevalent bank rate in cases of delayed payments.
On 20 September 2011, the IRDAI issued guidelines for condoning delay in claim intimation and submission of documents in relation to certain types of policies and policyholders, to the effect that insurers should not reject claims based on delayed notification if the delay was unavoidable, unless the insurer is satisfied that the claim would have been rejected in any event.
Following the IRDAI's directions in its Circular of 31 March 2009, general insurers and health insurers can only decline the renewal of a health insurance policy on the grounds of fraud, moral hazard or misrepresentation. Renewal cannot be denied on grounds such as an adverse claims history.
The IRDAI has also directed that all health insurance policies offer portability benefits, whereby policyholders are given credit for the waiting periods already served under previous health insurance policies with that insurer or another Indian insurer.
The IRDAI has introduced standard form definitions for health insurance and critical illness policies, a standard claim form for health insurance policies, and has proposed a standard proposal form for life insurance policies.
Standard policies or terms
Insurance and reinsurance policy claims
Establishing an insurance claim
For a claim to trigger an insurance policy:
The requirements set out in the insuring clause must be met.
None of the exclusions must apply to the stated claim.
The insured must have complied with the policy terms and conditions, including the terms relating to notification and obtaining consent prior to engaging lawyers.
Third party insurance claims
There is no equivalent in India of the Third Parties (Rights against Insurers) Act 2010 of the UK. As a general rule, Indian law recognises the principle of privity of contract, so that a third party would be unable to bring a direct action against an insurer. However, in motor claims it is common for third parties to name the defendant's insurer in motor accident-related proceedings.
In addition, the Motor Vehicles Act 1988 (MVA) provides that the rights of an insured under a policy are transferred to a third party claiming against the insured in the event of the insured's insolvency. The MVA also empowers the Motor Claims Tribunal to seek the insurer's involvement in a third party action against the insured if the tribunal believes that the insured has failed to contest the claim.
Claims and circumstances of claims must be notified to insurers within the time period specified in the insurance policy, which could be a specified number of days or as soon as practicable. Also, insurance policies typically require that the notification should be within the policy period or the extended reporting period specified in the insurance policy. This wording and how this condition is expressed in the policy (whether as a condition precedent or as a condition) determines how a claim will be treated if it is made outside of the time limit.
However, courts and consumer forums have strictly applied this condition. For instance, the National Consumer Disputes Redressal Commission has recently held that any delay in the notification of theft to the police or the insurer in motor vehicle policies is fatal to the claim (HDFC ERGO General Insurance Co v Bhagchand Saini (RP No. 3049 OF 2014)).
There is no specific provision permitting the original policyholder or a third party to enforce the reinsurance contract against a reinsurer. However, there is no law preventing an insured from attempting to sue a reinsurer, for example in tort, if the circumstances are such that the reinsurer has assumed liability.
The other exception where an insured can bring a direct action against a reinsurer would be if the contractual arrangements permitted such an action, for instance by way of a "cut through" clause, although no such clause has been tested in the Indian courts so far.
If the insured breaches the terms of an insurance policy, depending on whether the insured has breached a condition, a condition precedent or a warranty, the insurer can claim for damages against the insured, repudiate the insured's claim, or avoid the policy entirely.
Insurers in India usually have an internal grievance redressal mechanism that addresses complaints against the insurer by the insured. If an insurance policyholder feels that the insurer has not adequately addressed his grievance, he can:
Approach the grievance cell of the IRDAI or the Insurance Ombudsman (depending on the nature of grievance).
Initiate formal legal proceedings against the insurer before the consumer protection forums.
Punitive damage claims
Insolvency of insurance and reinsurance providers
Under the Companies Act insolvency is considered to be the inability to pay debts by the concerned company. Although the Companies Act 2013 has replaced the Companies Act 1956, the provisions of the Companies Act 2013 relating to winding up in case of insolvency have not yet been notified, therefore the relevant provisions of the Companies Act 1956 still apply.
The Companies Act 1956 provides that if a company is unable to pay its debt it can be wound up in accordance with the Act. The process of winding up of companies is long and involves compliance with various procedural requirements in the Act, including:
Appointment of an official liquidator.
Realisation of the assets of the company.
Repayment of all the outstanding creditors and other statutory dues owed by the company.
Dissolution of the company.
In relation to repayment of the creditors and outstanding dues of the company, the Act provides that certain dues are required to be paid in priority, including dues to workmen and employees of the company and statutory dues owed to governmental authorities.
The Insurance Act specifically provides that the winding up of an insurer must be in accordance with the procedure in the Companies Act. In addition, the Insurance Act specifies certain other conditions in which the court can order winding up of an insurer.
Further, the Insurance Act provides that the voluntary winding up of insurers is subject to certain restrictions. An insurer cannot be wound up voluntarily except for the purpose of effecting an amalgamation or reconstruction of the company, or on the ground that by reason of its liabilities it cannot continue its business.
An insurer can also be partially wound up, so that a class of its business is wound up but another class continues to operate by itself or through another insurer upon transfer. In this case, a scheme can be prepared and submitted in court which should:
Provide for the allocation and distribution of the assets and liabilities of the company between any classes of business affected (including the allocation of any surplus assets which may arise on the proposed winding-up) for any future rights of every class of policyholders in respect of their policies.
Provide for the manner of winding-up any affairs of the company which are proposed to be wound up.
Contain provisions for altering the memorandum of the company with respect to its objects and such further provisions as may be expedient for giving effect to the scheme.
There is no provision under applicable insurance laws in relation to set-off of mutual debts and credits in an insolvency proceeding.
The rule under section 529 of the Companies Act, 1956 is that there cannot be any set off for unliquidated claims during the winding up of the insolvent company. The rationale behind this is that such claims are not liquidated debts, and it is not possible to ascertain the money demand or amount for the purpose of liquidation. The right to set off is only available where the cross claims are mutual or commensurable.
There is no mutuality of debt and therefore no right of set off if the right arises only after the crystallisation of debt after the appointment of a receiver, or the passing of the winding up order by the appropriate court.
Taxation of insurance and reinsurance providers
Life insurers are subject to special rules under the income tax legislation. Life insurers are taxed on the gross premium charged to the policyholder, and tax deductions are made in respect of amounts allocated for savings and investments of the policyholder.
Further, provision of insurance is considered a taxable service under Indian law in relation to service tax. Premiums received on account of insurance and reinsurance business attract service tax (currently at 3.06% for traditional products, and 12.36% for unit-linked products). Income tax laws provide deductions to the policyholder on premiums paid for life and health insurance policies.
Entities and individuals providing insurance or reinsurance related services are also liable to pay service tax. In addition, insurers must pay service tax levied on insurance agents for services rendered to them.
Insurance and reinsurance dispute resolution
There are no exclusive procedures or judicial venues for resolution of insurance or reinsurance disputes. Insurance and reinsurance policies are contracts of indemnity and parties can approach a civil court (or arbitration) to claim for a breach of such contracts, as per the appropriate territorial jurisdiction.
The Consumer Protection Act, 1986 lists insurance as a service. As an alternate remedy, the insured can opt for a summary procedure and approach the consumer courts, which are empowered to provide compensation for any deficiency of the insurer in servicing a claim.
As a mechanism of alternative dispute redressal, the insured can also approach the Insurance Ombudsman, which has power to decide insurance disputes under a summary procedure in the Redress of Public Grievance Rules, 1998. However, the Insurance Ombudsman is not a judicial authority and does not have power to enforce its decisions against the insurer.
Arbitration clauses in insurance and reinsurance agreements are enforceable at different stages of the dispute. If either party approaches a civil court when the parties have already agreed to refer the dispute to arbitration, typically the civil court, on application by one of the parties (usually the insurer), will enforce the arbitration clause or agreement, dismiss the pending civil action, and refer the parties to arbitration.
Even if there is no dispute on the enforceability of the arbitration clause/agreement, if the insured or the insurer fails or refuses to appoint an arbitrator, the courts typically enforce the appointment of an arbitrator.
Choice of forum, venue and applicable law clauses in an arbitration agreement in an insurance or reinsurance contract are enforceable, except where both parties are Indian and they elect to derogate from the applicable Indian law by specifying laws of another jurisdiction. The Indian Supreme Court has held that Indian nationals cannot derogate from Indian law, as this would be against its public policy (TDM Infrastructure v UE Development (2008) 14 SCC 271). However, if one of the parties is not Indian, the choice of forum, venue and applicable law would be governed by the terms of the arbitration agreement/contract, which are freely negotiable between the parties.
If the insurer or the insured approaches a civil court in respect of disputes relating to insurance or reinsurance contracts, a choice of forum clause is recognised and enforced, as long as the forum agreed upon also has jurisdiction to hear disputes arising out of the insurance and reinsurance contracts. In a civil court, the law mandates that the venue of institution of proceedings is where the cause of action arises, or where the defendant resides or works for gain. A choice of venue clause is therefore enforced strictly subject to these provisions.
Applicable law clauses in an insurance or reinsurance contract are enforceable in civil court if the foreign law sought to be applied has been pleaded and proved in accordance with the rules of evidence applicable to matters of fact. However, if the insurance/reinsurance contract calls for the application of English law to the disputes arising out of it, this law need not be so pleaded or proved, since Indian courts take judicial notice of English law.
The Amendment Act has now been enacted and brings with it much reform to the present legal framework governing insurance or reinsurance services (see Question 1).
The Amendment Act has paved the way for a significant overhaul of the insurance regulatory framework, with several new regulations and modifications to existing regulations expected in the near future. The expected amendments relate to, among other things:
Ownership and Indian control of insurers.
Remuneration to intermediaries.
Annual registration fees.
Maintenance of policy records.
Solvency margin and accounting of insurers.
Main insurance/reinsurance trade organisations
Life Insurance Council
Main activities. This is a statutory forum that connects the various stakeholders of the life insurance sector. It develops and co-ordinates all discussions between the government, IRDAI and the public.
General Insurance Council
Main activities. This is a statutory forum constituted to facilitate the resolution of key issues affecting the general insurance industry, through co-operation of all stakeholders. It also co-ordinates and facilitates discussions among general insurers, government, the IRDAI, and the public.
Indian Institute of Insurance and Loss Assessors
Main activities. This is an association of Indian surveyors and loss assessors promoted by the IRDAI, with a focus on education, training and certification of surveyors and loss assessors. Compulsory membership with this association is statutorily mandated for all surveyors and loss assessors licensed in India.
Insurance Brokers Association of India
Main activities. This is an association of insurance and reinsurance brokers of India, with an aim to promote interaction among member brokers and represent the interests of Indian insurance brokers before the government, the IRDAI and the general public.
Insurance Regulatory and Development Authority of India (IRDAI)
Description. The official portal of the IRDAI, which contains most of the regulations, circulars and guidelines issued by the IRDAI and other public information on Indian insurers and insurance intermediaries.
Neeraj Tuli, Senior Partner
Tuli & Co
Professional qualifications. England and Wales 1990; India 2000
Areas of practice. Insurance and reinsurance, including coverage, regulatory, product development and dispute resolution.
Celia Jenkins, Partner
Tuli & Co
Professional qualifications. India, 2005.
Areas of practice. Insurance and reinsurance, including regulatory, product development and corporate insurance.