This chapter aims to provide you with an understanding of the importance of insurance regulations. This chapter also provides you with an understanding of the legal status of an insurance agent. You will also learn the various rules and regulations applicable to agents in general; and to insurance agents in particular.
A. Insurance regulations and regulatory framework
B. Regulations and code of conduct applicable to insurance agents
1. Importance of insurance regulations
An insurance agent should always bear in mind that she is selling a promise that the insurance company will pay a certain amount of money if a misfortune occurs. The insured person would undoubtedly have many worries about the insurance that is being purchased.
Some common concerns of an insured would be:
i. Is the insurance legal?
ii. Are insurance agents recognised by law?
iii. Are these insurance companies regulated or supervised?
iv. Is the document given to me by the insurer legally valid?
v. Will the insurance company pay me the money if a loss happens?
vi. Will they pay me the full money that is due to me?
vii. If I do not get a claim, can I go to court based on the documents they have given me?
viii. Are there any hidden provisions in the insurance contract whereby the insurance company can avoid paying me a claim?
ix. Do I have to go through any complicated procedures to get my claim paid?
2. Why are insurance regulations required?
The prime purpose of insurance regulation is to protect the policyholder. The policy holder has paid the money and bought the insurance policy. She should be assured that the insurance policy she bought will be honoured by the insurance company.
i. First and foremost, an insured should understand that insurance is an absolutely legal contract, in compliance with the provisions of the Indian Contract Act and other laws of the country
iii. Regulations made by IRDA are to ensure that insurance companies should exist as financially sound organisations to honour the contracts that they have entered into. IRDA regulates companies from their registration onwards and monitors all their major activities like investments, accounting etc.
ii. The Government is duty bound to protect all its citizens and all entities in the country through its legal and judicial systems.
In specialised sectors of the economy, the Government creates bodies to regulate these sectors. Thus we have bodies like Reserve Bank of India (RBI) to regulate banks and the Securities and Exchange Board of India (SEBI) to regulate the capital market.
Similarly, to regulate the insurance sector, the Government enacted the Insurance Act in 1938, which was amended from time to time to make it relevant to the changes in the industry. Insurance Regulatory and Development Authority (IRDA) Act, 1999, created the IRDA as an independent authority for the purpose of regulating the insurance industry.
All insurance policy wordings, rates and the documents issued by insurance companies are scrutinised and approved by IRDA. The advertisements issued by insurers are also regulated.
There are guidelines about prompt settlement of claims, grievance handling systems in every company and at IRDA level to address complaints at the company and at IRDA level.
IRDA has issued directions to ensure that the insurance company targets rural areas of the country and weaker sections of the population towards providing significant coverage of these segments.
All people dealing with selling and servicing of insurance policies, viz. agents, corporate agents, brokers, surveyors, third party administrators (TPAs) and insurance companies are licensed as well as regulated by IRDA as per various regulations.
Diagram 1: Entities regulated by IRDA
3. Insurance regulatory framework in India
The Insurance Act, 1938 and the Insurance Regulatory and Development Authority Act, 1999 form the basis of insurance regulations in India. There are a few other legislations in the country that are directly or indirectly applicable to insurance business.
a) The Insurance Act, 1938
The Insurance Act, 1938 is the basic insurance legislation of the country, which governs insurance business in India. It was created to protect the interest of insured public, with comprehensive provisions for effective control over the activities of insurers and came into effect on 1st July, 1939. This Act has been amended from time to time to strengthen the legal provisions of the Act.
i. Registration of insurance companies and renewal of registrations (Sec. 3 & 70)
ii. Requirement to have sufficient capital for the company and to maintain solvency (Sec. 64 V)
iii. Compulsion that assets of insurance companies should be invested only as per norms prescribed for the same (Sec. 27 & 85)
iv. Requirement to maintain audit and submit returns to the regulator (Sec. 28)
v. Obligations of insurers towards the rural and social sectors (Sec. 32B & 32C)
vi. Rules for assignment and transfer of policies and nominations (Sec. 38 & 39)
vii. Limitations on the expenses of the management (Sec. 40)
viii. Licensing of agents and their remunerations (Sec. 40 to 44)
ix. Prohibition on using rebates as an inducement to any person to take,renew or continue an insurance policy in India (Sec. 41)
x. Solvency (financial strength) of the insurance companies who meet all their commitments to policy holders (64V)
xi. Advance payment of premium (Sec. 64VB)
xii. Need for survey of losses (Sec. 64UM)
b) The Insurance Regulatory & Development Authority Act, 1999
Insurance Regulatory and Development Authority (IRDA) was established in
2000 as an independent authority to regulate and develop the insurance industry by an Act of Parliament (namely Insurance Regulatory & Development Authority Act, 1999).
The preamble of the IRDA Act states:
“An Act to provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.”
IRDA has prescribed regulations for protecting the interests of policyholders stipulating obligations on both insurers as well as intermediaries.
These regulations prescribe insurers’ obligations:
i. at the point of sale,
ii. towards policy servicing,
iii. claims servicing,
iv. control on expenses, investment and
v. financial strength to meet the commitments to policyholders
c) Other legislations
i. The Workmen's Compensation Act, 1923 (amended and renamed as Employees Compensation Act in 2010)
ii. Employees’ State Insurance Act, 1948
iii. Life Insurance Corporation Act, 1956
iv. Deposit Insurance and Credit Guarantee Corporation Act, 1961
v. Marine Insurance Act, 1963
vi. Export Credit Guarantee Corporation Act, 1964
vii. General Insurance Business (Nationalisation) Act, 1972
viii. General Insurance Business (Nationalisation) Amendment Act, 2002
ix. Motor Vehicles Act, 1988
x. Public Liability Insurance Act, 1991
Apart from these general laws, there are many regulations, orders and circulars issued by IRDA from time to time on specific matters relating to the conduct of insurance business and policyholders protection.
Which of the below statements is correct?
I. The prime purpose of insurance regulation is to protect the insurance companies
II. The prime purpose of insurance regulation is to protect the policyholder
III. The prime purpose of insurance regulation is to protect the insurance intermediaries
IV. The prime purpose of insurance regulation is to protect the Government
As per the Insurance Act, 1938 (Section 42), to work as an insurance agent, one must have a licence. IRDA deals with issuance of licences and other matters relating to agents recruitment. There are regulations which must be complied with at all stages in the process.
Some of the important provisions relating to agents stated in the Insurance Act, 1938 and the Insurance Regulatory and Development Authority (IRDA) Act, 1999 are discussed below.
a) The Insurance Act, 1938
An insurance agent has to be licensed under Section 42. Under the Section, an insurance agent receives or agrees to receive “payment by way of commission or other remuneration in consideration of his soliciting or procuring insurance business including business relating to the continuance, renewal or revival of policies of insurance”.
An agent can be individual agent or a corporate agent. An individual agent is an individual representing an insurance company while a corporate agent is other than an individual, representing an insurance company. IRDA has issued separate regulations for the different type of agents.
An agent can be issued licence for doing ‘life’ or ‘general’ insurance or both. Insurance agents who hold licence to act as agent for both a life insurer and a general insurer are called composite insurance agents.
b) Agents for standalone health insurance companies
It has been decided by IRDA to waive the mandated IC-34 certification for life insurance agents desiring to distribute products of a standalone health insurance company.
The standalone health insurers desirous of converting life insurance agents into composite agents to sell their products, based on IC-33 certification, can do so after making such agents undergo an internal training programme on health insurance, which shall cover the basics of health insurance, health insurance terminology, and products etc. for a minimum period of 25 hours. However such composite agents shall not be allowed to transfer general part of their licence to other non-life insurance company without completing IC-34 certification.
It has also been decided by IRDA to allow standalone health insurance companies to avail the services of agents, corporate agents of other life and
/ or non-life insurance companies to distribute their products provided such agents and corporate agents undergo 25 hours training.
However, no agent, corporate agent of life and / or non-life insurance company shall offer his / her services to more than one standalone health insurance company.
IRDA also recognises the fact that the Agriculture Insurance Corporation of India (AIC) is engaged in providing crop insurance with no conflict of interest or competition with the activities of any GIPSA Company in the country. Hence it has decided to permit Agriculture Insurance Company to distribute its own products by utilising the services of agents and corporate agents of other non-life insurance companies. Agents and corporate agents desiring to offer their services, shall submit "No Objection Certificate" obtained from their parent general insurer and enrol themselves with AIC for distributing its products.
A situation could arise wherein an agent or corporate agent works for three non-life insurers. Hence, in all such cases those agents shall achieve in full, the minimum business requirements laid down by their respective parent insurance companies. In case they fail to achieve minimum business requirements laid by their parent insurers, they cannot seek transfer of their licence to any one insurer to whom they are offering services in terms of the circulars and guidelines issued from time to time on transfer of licences of agents from one insurer to other.
The Insurance Act, 1938 mandates that to work as an insurance agent, one must have a licence. Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000 and Insurance Regulatory and Development Authority (Licensing of Insurance Agents) (Amendment) Regulations, 2002 give detailed provisions relating to licensing of agents. These are available at the website of IRDA www.irdaindia.gov.in.
Adverse selection (Anti-selection)
This denotes the insurance firm's acceptance of applicants who are at a greater than normal risk (or uninsurable), but conceal / falsify information about their actual condition or situation. Acceptance of their application has an 'adverse' effect on insurance companies, because normally insurance premiums are computed on the basis of policyholders being in normal or average circumstances (e.g. enjoying good health / employed in non-hazardous environments).
Agents represent insurance companies and they act as the main link between the insurance company and the insured. Their role is to recommend to clients the right products that address the clients’ needs. At the same time, they must act in the interests of the insurance company by understanding the risk insured properly enough so as to avoid any adverse selection against the insurance company.
2. Rules governing licensing of insurance agents
Rules relating to issuance and renewal of licences to insurance agents and the procedures for obtaining the licence are stated in the Insurance Act and regulations, summarised below:
a) Qualifications of the applicant
The applicant must possess the minimum qualification of a pass in 12th Standard or equivalent examination conducted by any recognised Board / Institution, where the applicant resides in a place with a population of five thousand or more as per the last census, and a pass in 10th Standard or equivalent examination from a recognised Board / Institution if the applicant resides in any other place.
b) Disqualifications of the applicant
As per Section 42 sub-section (4) of Insurance Act 1938, there are certain conditions that disqualify an applicant.
The applicant for agent licence is disqualified if she:
i. Is a minor,
ii. Is of unsound mind,
iii. Has been found guilty of criminal misappropriation or criminal breach of trust / cheating / forgery / abetment of / attempt to commit any such offence, by a court of competent jurisdiction,
iv. Has been found guilty of knowingly participating in or has connived at any fraud, dishonesty or misrepresentation against an insurer or an insured,
v. (in the case of an individual) does not possess the requisite qualifications and practical training for a period not exceeding twelve months, as may be specified by the regulations made by the authority,
vi. (in the case of a company or firm, if a director / partner / the chief executive officers / other designated employees)does not possess the requisite qualifications and practical training and have not passed the prescribed examination
vii. Violates the code of conduct as specified by the regulations made by the IRDA
c) Practical training
i. The first time applicant for agency licence shall have completed from an IRDA approved institution, at least, fifty hours’ practical training in life or general insurance business, which may be spread over two to three weeks.
ii. The first time applicant seeking licence to act as a composite insurance agent shall have completed from an IRDA approved institution, at least, seventy five hours practical training in life and general insurance business, which may be spread over two to three weeks.
iii. Where the applicant is:
• An Associate / Fellow of the Insurance Institute of India,
• An Associate / Fellow of the Institute of Chartered Accountants of India,
• An Associate / Fellow of the Institute of Costs and Works Accountants of India,
• An Associate / Fellow of the Institute of Company Secretaries of India,
• An Associate / Fellow of the Actuarial Society of India,
• A Master of Business Administration of any Institution / University recognised by any State Government or the Central Government; or
• Possessing any professional qualification in marketing from any Institution / University recognised by any State Government or the Central Government and shall have completed, at least, twenty five hours’ practical training from an approved institution.
d) Examination
The applicant shall have passed the pre-recruitment examination in life or general insurance business, or both, as the case may be, conducted by the Insurance Institute of India, Mumbai, or any other ‘examination body’.
e) Fees payable
The fees payable to the Authority for issue / renewal of licence to act as insurance agent or composite insurance agent shall be Rs. Two Hundred and Fifty or as amended from time to time
f) Procedure to apply for agent’s licence
i. The licensing process usually starts with the insurer sponsoring a candidate for practical training.
ii. On completion of the mandated training, the applicant has to make an application in specified format for undergoing a written exam.
iii. On clearing of her written exam, the applicant will make an application to the “designated person” of the sponsoring insurer.
“Designated person” means an officer normally in charge of marketing operations, as specified by an insurer, and authorised by the Authority to issue or renew licences under the regulations.
Based on meeting all the above requirements and along with the evidence of payment of the application fees to the Authority, the designated persons will issue the licence, along with identity card. The licence is valid for a period of 3 years unless terminated or surrendered.
For any renewal of licence, the agent needs to undergo additional 25 hours of training in life or general as the institution, if the designated person refuses to grant or renew a licence under this regulation, she shall give the reasons therefore to the applicant.
The applications for licence to the ‘designated person’ should be in prescribed forms.
• If the applicant is an individual, application should be in Form IRDA- Agents-VA
• If the applicant is a firm/company, application should be in Form IRDA-Agents-VC
To become a composite insurance agent, two separate applications have to be submitted. The Licence which is issued entitles the applicant to act as insurance agent for one life insurer or one general insurer or both, as the case may be.
g) Cancellation of licence
The designated person may cancel a licence of an insurance agent, if the insurance agent suffers, at any time during the currency of the licence, from any of the disqualifications mentioned in the regulations and recover from her the licence and the identity card issued earlier.
h) Issue of duplicate licence
The Authority may issue a duplicate licence to replace a licence lost, destroyed, or mutilated on payment of a fee of rupees fifty.
IRDA Regulations stipulate that every person holding a licence as an insurance agent shall adhere to the code of conduct specified below:
i. Every insurance agent shall
a) Identify himself and the insurance company of whom he is an insurance agent;
b) Disclose his licence to the prospect on demand;
c) Explain carefully the requisite information in respect of insurance products offered for sale by his insurer and take into account the needs of the prospect while recommending a specific insurance plan;
d) Disclose the scales of commission in respect of the insurance product offered for sale, if asked by the prospect;
e) Indicate the premium to be charged by the insurer for the insurance product offered for sale;
f) Explain to the prospect the nature of information required in the proposal form by the insurer, and also the importance of disclosure of material information in the purchase of an insurance contract;
g) Bring to the notice of the insurer any adverse habits or income inconsistency of the prospect, in the form of a report (called “insurance agent’s confidential report”) along with every proposal submitted to the insurer, and any material fact that may adversely affect the underwriting decision of the insurer as regards acceptance of the proposal, by making all reasonable enquiries about the prospect;
h) Inform promptly the prospect about the acceptance or rejection of the proposal by the insurer;
i) Obtain the requisite documents at the time of filing the proposal form with the insurer; and other documents subsequently asked for by the insurer for completion of the proposal;
j) Render necessary assistance to the policyholders or claimants or beneficiaries in complying with the requirements for settlement of claims by the insurer;
k) Advise every individual policyholder to effect nomination or assignment or change of address or exercise of options, as the case may be, and offer necessary assistance in this behalf, wherever necessary
ii. No insurance agent shall
a) solicit or procure insurance business without holding a valid licence;
b) induce the prospect to omit any material information in the proposal form;
c) induce the prospect to submit wrong information in the proposal form or documents submitted to the insurer for acceptance of the proposal;
d) behave in a discourteous manner with the prospect;
e) interfere with any proposal introduced by any other insurance agent;
f) offer different rates, advantages, terms and conditions other than those offered by his insurer;
g) demand or receive a share of proceeds from the beneficiary under an insurance contract;
h) force a policyholder to terminate the existing policy and to effect a new proposal from him within three years from the date of such termination;
i) have, in case of a corporate agent, a portfolio of insurance business under which the premium is in excess of fifty percent of total premium procured, in any year, from one person (who is not an individual) or one organisation or one group of organisations;
j) apply for fresh licence to act as an insurance agent, if his licence was earlier cancelled by the designated person, and a period of five years has not elapsed from the date of such cancellation;
k) become or remain a director of any insurance company;
iii. Every insurance agent shall
With a view to conserve the insurance business already procured through him; make every attempt to ensure remittance of the premiums by the policyholders within the stipulated time, by giving notice to the policyholder orally and in writing. It means the agent should ensure that premium is paid well in advance on renewal or else the risk will not be assumed by the insurer.
No intermediary is allowed to induce anyone to take a policy. Section 41 of the Insurance Act, 1938 is hence an important section for an insurance agent. It reads as follows:
Section 41 of the Insurance Act, 1938
“41. (1) No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy, nor shall any person taking out or renewing or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer;
Provided that acceptance by an insurance agent of commission in connection with a policy of life insurance taken out by himself on his own life shall not be deemed to be acceptance of a rebate of premium within the meaning of this sub-section if at the time of such acceptance the insurance agent satisfies the prescribed conditions establishing that he is a bona fide insurance agent employed by the insurer.”
“41.(2) Any person making default in complying with the provisions of this section shall be punishable with fine which may extend to five hundred rupees.” This states that an agent cannot offer any rebates on premium as an inducement to the policyholder, except as allowed by the insurer.
Which of the below statement is correct?
I. If agent loses the licence, then no duplicate licence is issued. The agent has to wait till the time of renewal, when another copy is issued
II. If agent loses the licence, then the Authority may issue a duplicate licence free of cost.
III. If agent loses the licence, then the Authority may issue a duplicate licence only after a FIR is lodged and a waiting period of 30 days.
IV. If the agent loses the licence, then the Authority may issue a duplicate licence on payment of a fee of rupees fifty.
• An insurance agent should always bear in mind that she is selling a promise that the insurance company will pay a certain amount of money if a misfortune occurs.
• The prime purpose of insurance regulations is to protect the policyholder.
• Insurance Act, 1938, and Insurance Regulatory and Development Authority Act, 1999 form the basic framework of insurance regulation.
• The Insurance Act 1938 has provisions for monitoring and control of operations of insurance companies.
• Insurance Regulatory and Development Authority (IRDA) was established in 2000 as an independent authority to regulate and develop the insurance industry.
• IRDA has prescribed regulations for protecting the interests of policyholders stipulating obligations on both insurers as well as intermediaries.
• An agent can be an individual agent or a corporate agent.
• To become an agent the prospect should possess minimum prescribed educational qualification, should undergo prescribed practical training, pay the prescribed fees and undertake the prescribed examination.
• IRDA regulations stipulate that every person holding a licence as an insurance agent shall adhere to the specified code of conduct.
• No intermediary is allowed to induce anyone to take a policy.
Key Terms
1. Individual agent
2. Corporate agent
3. Composite insurance agent
4. Rebate
5. Intermediaries