Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III

sem Introduction to life insurance: Insurance and Risk Management

Insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The earliest known instance of insurance dates back to the Babylonian period circa 2250 BC, when the Babylonians developed a type of loan insurance for maritime business. Examples can be found in the Code of Hammurabi. Upon receipt of a loan to fund his shipment, a merchant would typically pay the lender an additional premium in exchange for the lenders guarantee to cancel the loan should the shipment be stolen or lost at sea. In effect, the lender assumed the perils of the goods in transit at a premium rate of interest. The maritime loan therefore cannot be considered a stand - alone insurance contract, although the practice proved effective enough for it to later be adopted by the Greeks, Romans, and Italian city - states. Somewhat surprisingly, codied Roman law gave no recognition of insurance as separate from the maritime loan, but the precedent of life and health insurance could be recognized in the form of organized burial societies.

ROLE OF INSURANCE IN ECONOMIC GROWTH AND PROSPERITY

From its early inception as predominantly a maritime instrument until the present day, insurance has grown signicantly in scope, purpose, and availability. Today the insurance industry contributes to economic growth and national prosperity in various ways. At the macro level, the industry helps strengthen the efficiency and resilience of the economy by facilitating the transfer of risk. At the micro level, it brings benets in all areas of day - to - day life. Insurance helps individuals minimize the nancial impact of unexpected and unwelcome future events, and help them organize their businesses and their lives with greater certainty. Risk-averse individuals are able to enjoy greater utility from their most important assets via the purchase of insurance products. Almost every conceivable asset or activity can be insured through familiar product types, such as motor, travel, and home content insurance, and by business through professional and product liability insurance, cover for business interruption, and many other contingencies. As a vital tool for the management of risk by both individuals and organizations, whether private or public, insurance plays an important role in the economic, social, and political life of all countries. Quantifying the contribution of insurance to economic growth is, however, far from

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

simple. One such attempt was made in 1990 by J. Francois Outreville, who investigated the economic signicance of insurance in developing countries. By comparing 45 developed and developing countries, he was able to show that there is a positive but nonlinear relationship between insurance premiums per capita and gross domestic product per capita, demonstrating that the development of insurance as a nancial instrument clearly plays an important role in assisting a nations economic growth.

Principles
Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be insurable, the risk insured against must meet certain characteristics in order to be an insurable risk. Insurance is a commercial enterprise and a major part of the financial services industry, but individual entities can also insure through saving money for possible future losses. Principle of Utmost Good Faith Insurance is said to be a contract of utmost good faith, in which a higher standard of honesty is imposed on the parties than is imposed under any other ordinary commercial contract. According to the principle,it is the reciprocal duty of the insurer and the proposed to disclose all the relevant facts. The insurance contracts are subject to tdoctine of caveat emptor- buyer or the dealing party be aware. Principle of Insurable interest The proposer should give all data about the risk of the subject matter to the insurer. This information includes the relationship with the person of property i.e., the subject matter of insurance. This relationship is known as insurable interest which is a legally recognized relationship and may arise out of ownership, tenancy, trusteeship, lease, mortgage and any other legally recognizable reason. Principle of insurable interest is the fundamental principle that strongly supports the principle indemnity which holds that an insured must be made good the loss that he has actually suffered. Principle of Indemnity Indemnify means to make good loss. An is related to the payment of an amount on the occurrence of loss due to an insured peril. The payment in such a case can never be more than the sum insured because that is more than the loss happened there. Therefore, it has to be as per the percentage of destruction. This principle is applicable to all other contracts except personal insurance. Proximate cause The doctrine of proximate cause is based on the principle of cause and effect. It says that there is no need to go further after proving the effect of cause. The law doesnt concern itself with the cause of causes. The law provides that the immediate cause should be regarded first. The nearness of cause does not mean in terms of time or place. It means nearness to the reality, predominance and efficiency. In other words, it is the cause which is effectual in producing that result. Principle of contribution

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

This refers to the sharing of loss between co-insurers. Sometimes, one insured takes more than policies against one loss and one interest in a property. This is quite legal. This principle says that the insurer paying the claim has a right upon other insurers to pass of transfer part of his burden. Insurers will in this case share the total loss ratably. Essential s of this principle are: 1. The insured should be the same for all contracts. 2. The policies should be the same for all contracts. 3. The policies should cover the same peril which caused the loss. 4. All protect the same interest of the same insured. 5. All policies should be in force when loss occurs. Principle of subrogation Insurance law says that after an insurer has paid acclaim to the insured, he is entitled to all the rights and remedies of the insured in mitigating the loss. In other words, subrogation means stepping into others shoes. Here, the insurer will get into the shoes of insured and take over the asset/property for which the claim has been paid. Under this principle, the insurer who has indemnified anothers loss is entitled to recover compensation for any liable third party who is responsible. This principle of subrogation is applicable to property insurance only. There are two purposes behind the principle. They are; 1. Insured may recover his loss but not more than that. 2. The insurer after paying for loss should avail of the ways and means open to the insured to reduce his liability

ESSENTIALS .OF A VALID CONTRACT

Section 10 of the Indian Contract Act, 1872 says, a contract to be valid must have the following. Agreement ( Offer and Acceptance): The person who wants to take up cover against particular perils offers his risk through a proposal form to the insurance company. The insurance company may or may not accept risk. Thus offer for entering into contract may generally come from the insured. The insurer may also propose to make the contract but whether the offer comes from insurer or insured the main fact is acceptance. Legal Consideration: The promise promises to pay fixed sum at a given contingency. So the insurer must have some return/consideration for his promise. The premium paid is the consideration and on receipt pf the premium by the insurance company the contract comes into force. Hence, premium being the valuable consideration must be given for starring the insurance contract. The fact is without payment of premium the insurance contract will not come into force. Parties competent to contract: Both the parties must be legally competent to enter into an agreement. An agreement with a mentally unsound person does not form a valid contract. Every person is competent to contract: a) who has attained the age of majority according to the law. b) who is of a sound mind, and c) who is not disqualified from contracting by any other law which he is subjected to:

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem

Insurance and Risk Management

Free consent: there should be complete and unbiased agreement between the insurer and insured regarding the terms of contract. The consent will be free whrn it is not caused by any of these: Coercion Undue influence Fraud Misrepresentation Mistake Legal object: the purpose for which the agreement is entered into should not be illegal. It should not be against the public policy. To make a valid contract the object of the agreement should be lawful. o Not forbidden by law or o Not immoral o Which does not defeat the provision of any law

Difference between Life and Non Life Life Insurance The term Assurance is referred to life insurance business. Here, the loss is certain. Death is bound to happen sooner or later. Human life is the subject matter of life insurance Non Life Insurance The term Insurance is referred to Non- life insurance business. Loss due to risk is not certain loss may or may not happen. Generally, goods or property are the subject matter of non life insurance. It is mostly for one year. Fire, marine and other types of insurance are contracts of indemnity. Insurable interest must be present both at the time of affecting the policy and also at the time of occurrence of loss. It cant be surrendered before its maturity.

Insurance contract is a continuing contract. It is not a contract of indemnity. Since the life cant be returned. Insurable interest must be present at the time of taking out the policy but need not be present at the time of maturity of the policy. Policy can be surrendered before its maturity.

Functions of Insurance:
It provides certainty. It provides protection. It helps capital formation. It shares risk.

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem
It helps prevention of losses.

Insurance and Risk Management

Characteristics of Insurance:
It is a co operative device. It helps risk sharing and risk transfer. Calculates risk in advance. Payment is made on the occurrence of contingency. Number of people insured is large. It is neither charity nor gambling.

LIFE INSURANCE PRODUCTS There are various types of insurance policies. They are issued to meet the varying and special needs of the members of community. 1. Endowment policy: It provides for payment of the sum assured at the end of a specified term of years or at death should it occur sooner. This is the most popular form of life insurance. 2. Whole life insurance: Under this policy, premiums are payable throughout of the life assured. The sum assured becomes payable only on the death. It is the cheapest form of policy. 3. Limited payment life policy: In this case, premiums are payable for a selected period of years or until death if it occurs within this method. The assured knows how much amount he will be required to pay, no matter how long he lives. This policy resembles endowment regards of premiums, the term being fixed in both the cases. But here also, the sum assured will be payable only after the date. 4. Convertible whole life policy: This policy is designed to meet the requirements of young persons who are on the threshold of their career and have prospects of increase in income after some years. In the earlier years, the premiums are payable at a lower rate. Then after the expiry of a certain period, the sum assured is given an option to convert the policy in to an endowment policy. 5. Joint life policy: The sum assured under a joint life policy (on two or more lives) is payable at the end of the endowment term or on the first death of any of the lives assured, if earlier. Partnership firms usually go in for such policies to provide for the capital of the deceased partner. 6. Anticipated policy: This is a policy which provides for payment of the sum assured at the end of specified intervals, say 20 percent at the end of first 5 years, 20 percent at the

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management end of next 5 years, 20 percent at the end of another 5 years and the remaining at the time of maturity. 7. Annuity policy: This is a policy under which the amount is payable by the insurer not in one lumpsum but by monthly, quarterly, half yearly or annual installments after the assured attains a certain age. The assured may pay the premiums regularly over a certain period or he may pay a single premium at the outset. The annuity policy is useful to those who desire to provide a regular income for themselves and their dependants after the expiry of a specified period. 8. Sinking fund policy: This policy is useful for companies for redeeming their debentures or paying off their loans. A fixed amount is paid as premium annually It goes on accumulating at a certain rate of interest. At the end of required period, the amount of the policy is paid to the company. Out of the amount so received, the company redeems its debentures or pays off the loan. 9. Janta policy: It is a policy which covers risk of death by accident for one only. The premium charged is very nominal and incase of a death by accident a fixed amount is payable. RIDERS
The following are the types of riders. Critical illness rider Covers illnesses such as heart attack, stroke, cancer, surgery to coronary arteries. The policyholder is paid the sum assured if he contracts any of the specified illnesses under the rider. Note that the insured would need to survive the specified illness at least 30 days from the date of diagnosis to avail of this benefit. The policy along with all the riders (to the extent of the Rider Sum Assured) is then terminated. But your base policy would continue and you would have to continue to pay premiums on it. Accidental death and dismemberment rider Most insurers pay 100% of the coverage face amount in case of death due to accident. Also, in case of loss of more than one limb, or sight in both eyes, or loss of one limb and sight in one eye, 100% of the coverage amount is paid. In case of loss of one limb or sight in one eye 50%, of the coverage face amount is paid. Rider cover terminates once all or part of the coverage is paid. Term Rider Provides for payment of the coverage face amount in event of death of the life insured Critical Illness Plus Rider Not all insurance companies offer this rider. It covers an additional number of illnesses over and above those covered by the Critical Illness Rider. Will pay the coverage face amount if the insured is diagnosed with one of the conditions specified and survives for at least 30 days from the date of diagnosis.

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

Critical Illness Woman Rider This rider covers 29 illnesses in total. Out of these three are pregnancy-related complications. Waiver of premium rider/ life guardian benefit Premium is waived if you are unable to pay premiums in the event of unforeseen calamities and the policy continues to be alive. Income Benefit Rider In case of death of the life assured during the term of the policy, 10% of the rider sum assured is paid annually to the beneficiary, on each policy anniversary till maturity of the rider.

Occupational hazards
Occupational hazards indicate accidents occurred when workers are on job duties or caused on job-related reasons. That is, determination of occupational hazards has to be based on "performing job duty" and "caused by job duty". Determination of occupational hazards in labor laws can be found in Labor Safety and Health Law and Labor Insurance Act. For employers, occupational hazards insurance is a collective social insurance. When occupational hazards occur, the occupational hazards insurance funds take the majority of the compensation liabilities, employers only need to supplement a minority of the liabilities to secure the normal operation of the business. Types of insurance payment Occupational hazard insurance provides four types of payments including medical benefits, injury or disease benefits, disability benefits and death benefits, plus a missing person allowance. 1. Medical benefits Since the launch of National Health Insurance in 1995, ordinary accident medical benefits are handled by central health competent authorities, while occupational injury insurance is handled by Bureau of National Health Insurance consigned by the Bureau of Labor Insurance based on the instructions of the Executive Yuan and in accordance of the responsibility of employers to compensate for occupational hazards, and the principles of convenience and procedure streamlining. Occupational hazard medical benefits can be categorized as outpatient and inpatient treatment. The insured upon the occurrence of occupational injury or disease treated in the privileged medical facilities of National Health Insurance with a outpatient form or a hospitalization application form based on regulations set forth in the Labor Insurance Act are entitled to be

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

waived of the co-payment and enjoy half of the ordinary meal allowance and ordinary treatment meal allowance within 30 days. In addition, in order to provide an integrated service of diagnosis, treatment, rehabilitation, restructuring and return to work assessment, the Council is now providing subsidies to National Taiwan University Hospital in the north, China Medical University Hospital in central Taiwan, National Cheng Kung University Hospital and Kaohsiung Medical University Hospital in the south, and Tzu Chi Medical Center in the east to establish five occupational hazard treatment centers to be utilized by the insured. 2. Injury and sickness benefits Based on Item 1, Article 34 of the labor Insurance Act, "In case an insured person is not receiving salary payment on account of injury or occupational disease incurred on duty for which he is receiving medical treatment, he shall be paid occupational injury or disease compensation beginning from the fourth day on which he is incapacitated for work." Based on Article 36 of the same Act, "Occupational injury or disease compensation shall be payable at the rate of seventy percent of the average monthly insurance salary of an insured person and payable every half month. In case the insured person has not recovered from the injury or disease after one full year, the compensation shall be reduced to fifty percent of the average monthly insurance salary for the maximum period of one year." 3. Disability benefits Based on Item 1, Article 54 of the labor Insurance Act, "An insured person shall be paid an additional fifty percent of disability benefits calculated on the same category and payment schedule of disability benefits in case he suffers, in the wake of I medical treatment for occupational injury or disease, any residual physical handicap which conforms to the provisions of the Disability Benefits Payment Schedule, and the diagnosis by a hospital operated or specially contracted by the insurer confirms that the insured person will be disabled for the rest of his life. Such disability benefits shall be payable on a lu mp sum basis." Based on Item 2 of the same article, "The provisions refred to in the preceding paragraph shall also apply to an insured who, on the expiration of the period when he received occupational injury or sickness benefits, has not recovered and his residual physical handicap conforms to the provisions of the Disability Benefits Payment Schedule, and the diagnosis by a hospital operated or specially contracted by the insurer confirms that his occupational injury or sickness will be incurable." The payment of disability benefits under the existing occupational injury or occupational disease standards is based on the disability payment schedule. 15 categories are defined in

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

accordance with the impaired conditions of the disability, the minimum benefit is 1.5 months of the average insured salary, and the maximum is 60 months of the average insured salary. 4. Death benefits Based on Article 64 of Labor Insurance Act, "In case an insured person dies from an occupational injury or disease, not only shall a five-month burial subsidy be paide on the basis of his average monthly insurance salary, but forty-month survivors' benefits shall also be paid to his/her survivors, in case the survivors include his grandparents, parents, spouse, child, grandchild, siblings, irrespective of the length of his insurance coverage period." 5. Missing person allowance Based on Item 3, Article 19 of Labor Insurance Act, "In case an insured person is a full-time fisherman, aviation or navigation worker, or a mine-worker, and is declared missing as a result of an accident which occurred in the course of fishing, aviation, navigation, or mining as the case may be, in addition to the insurance benefit claims under this Act, a special missing-person allowance equivalent to seventy percent (70%) of the person's average monthly insurance salary shall be payable at the end of every three-month period from the day the insured person is declared missing in the census registry until the day prior to (1) his return alive, (2) the expiration of one year after he was declared missing, or (3) he is declared dead by law, whichever happens first." Based on Item 4 of the same article, "In case an insured person has been missing for one year or has been declared dead by law, a claim for survivors' benefits may be made in pursuance to the provisions of Article 64."

NUMERICAL RATING METHOD The Numerical Rating Method is a systematic procedure for assessing the value of risk, which is based on two practical rules, described earlier viz., the hypothesis of unchanging extra mortality and addition of specific rates of extra mortality for various impairments/factors. For this purpose a sub-standard life may be described as on, which presents a special hazard in respect of one or more of the following factors of insurability. 1. Family medical history 2. Personal medical history 3. Present condition of health and habits including build 4. Occupation

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

In addition to the above, the assurance plan and amount of insurance also have a bearing on the value of the risk, in view of the possibility of adverse selection. Further, the place of residence, race and nationality of the life to be assured play a role in selection of risk. The question of moral hazard has also to be given due weightage. Under the numerical rating procedure the value of any special hazard in respect of each of the above factors is measured in terms of an appropriate extra mortality ratings and the extra mortality rating for various factor are then combined to arrive at the value of the risk as an extra mortality. The extra mortality ratings for various common impairments are obtained on the basis of the results of large-scale Medical Actuarial investigations, which have been carried out in Europe and United States of America. The statistics have to be interpreted and adopted for the use of insurance underwriters after taking into account the condition in which the investigation was made and allied medical and demographical statistics and clinical experience of medical practitioners dealing with insurance, etc. The extra mortality ratings so modified are incorporated in comprehensive handbooks prepared by each large reinsurer, which are known as the Rating manuals. These rating manuals have to be updated frequently in the light of most recent statistics and progress in medicine and surgery and of each companys individual experience. The next stage is to translate the extra mortality into an extra premium necessary to compensate there of. For this purpose regularly scaled extra mortality classes are used. The classes, defined by the range of extra mortality, are as follows:

Generally, the extra mortality rating is rounded of to the nearest 5% point and overall extra mortality rating of less than 20% is ignored. After determining the extra mortality class the extra premiums required for that particular mortality class can be read from the Tables of Extra Premiums Prepared for each plan of assurance.

2. ADVANTAGES OF THE METHOD

The main advantage of the method lies in the manner in which it enables us the use to be made directly of the results of the various Medico-Actuarial investigations and reduced the operation of the subjective factor in the underwriting of risk to a minimum. In its turn, by helping the assurers to evolve a uniform underwriting procedure and classify the risk in identical groups, it facilitates the work of building up of new statistics. The basic ratings are continuously reviewed in the light of up-to-date trends in insurance medicine. The method ensures that no factor is overlooked. It makes possible uniform assessment either by several underwriters or by the same underwriter at different times. Difficult and doubtful cases can be analyzed more carefully and with greater confidence. It enables business to be handled with a greater speed. In reviewing a case we may easily see how the decision was arrived at. It is important to realize that contrary to the criticism that has been leveled against it, the numerical rating method is far from being mechanical in its application. The individual judgement, knowledge, experience of the medical officer and the actuary has considerable scope at the stage when the statistical data are interpreted to build up the rating manual. In many cases the rating manual gives only a range of debits (e.g. 25-50%) against certain impairments, and the actual rating depends on the underwriters judgements regarding the several of impairment and other correlated aspects of the risk. Ratings have often to be

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

modified by taking into account the interaction of various aspects of the risk, and in particular, the probable influence on the risk of the occupation, habits, mode of living, socioeconomic status, moral hazard etc., Due weightage may also have to be given to factors like the conscientiousness and the competence of the medical examiner and the agent. The numerical ratings arrived at can be only be regarded as a guide, and the selection of risk depends to a considerable extent on the individual judgement and skill of the underwriter.

3. LIMITATIONS
The numerical rating method will not be extended to assess the occupational hazard and the extra risk resulting from certain standard impairments such as the following: 1. Defects and deformities such as amputated arms and legs, partial or total blindness and deafness, mutism, undescended testes, cleft palate, clubfoot etc. 2. Standard impairments such as hydrocele, bleeding piles, caesarean section etc. The total extra to be charged for a given case will be obtained by adding together the extra premium (wherever applicable) for the health/ physical impairment to which the numerical

IRDA FUNCTIONS AND RESPONSIBILITIES

Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA.. Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business. 1. Without prejudice to the generality of the provisions contained in sub-section (1), the powers and functions of the Authority shall include, o issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration; o protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance; o specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents o o specifying the code of conduct for surveyors and loss assessors; promoting efficiency in the conduct of insurance business;

o promoting and regulating professional organisations connected with the insurance and reinsurance business;

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem
o

Insurance and Risk Management

levying fees and other charges for carrying out the purposes of this Act;

o calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organisations connected with the insurance business; o control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938); o specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries; o o o regulating investment of funds by insurance companies; regulating maintenance of margin of solvency; adjudication of disputes between insurers and intermediaries or insurance intermediaries; supervising the functioning of the Tariff Advisory Committee;

o specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organisations referred to in clause (f); o specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and exercising such other powers as may be prescribed.

The Insurance Act, 1932.

Short title, extent and commencement. 1. (1)) This Act may be called Insurance Act, 1938.. (2) It extends to the whole of India. (3) It shall come into force on such date3 as the Central Government may, by Notification in the Official Gazette, appoint in this behalf. Definitions.

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

2. In this Act, unless there is anything repugnant in the subject or context, (1) actuary means an actuary possessing such 3a[qualifications as may be specified by the regulations made by the Authority]; 4[(1A) Authority means the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999;] (2) policy-holder includes a person to whom the whole of the interest of the policy-holder in the policy is assigned once and for all, but does not include an assignee thereof whose interest in the policy is defeasible or is for the time being subject to any condition; (3) approved securities, means(i) Government securities and other securities charged on the revenue of the Central Government or of the Government of a State or guaranteed fully as regards principal and interest by the Central Government or the Government of any State; (ii) debentures or other securities for money issued under the authority of any Central Act or Act of a State Legislature by or on behalf of a port trust or municipal corporation or city improvement trust in any Presidency-town; (iii) shares of a corporation established by law and guaranteed fully by the Central Government or the Government of a State as to the repayment of the principal and the payment of the divided; (iv) securities issued or guaranteed fully as regards principal and interest by the Government of any Part B State and specified as approved securities for the purposes of this Act by the Central Government by notification in the Official Gazette; Indian insurance company means any insurer being a company-

(a) which is formed and registered under the Companies Act, 1956 (1 of 1956); (b) in which the aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, do not exceed twenty-six percent paid-up equity capital of such Indian insurance company; (c) whose sole purpose is to carry on life insurance business or general insurance business or reinsurance business.

Registration

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

3. (1) No person shall, after commencement of this Act, being to carry on any class of insurance business in India and no insurer carrying on any class of insurance business in India shall, after the expiry of three months from the commencement of this Act, continue to carry on any such business, unless he has obtained from the Authority a certificate of registration for the particular class of insurance business: Provided that in case of an insurer who was carrying on any class of insurance business in India at the commencement of this Act, failure to obtain a certificate of registration in accordance with the requirements of this sub-clause shall not operate to invalidate any contract of insurance entered into by him if before such date as may be fixed in this behalf by the Central Government by notification in the official Gazette, he has obtained that certificate: Provided further that a person or insurer, as the case may be, carrying on any class of insurance business in India, on or before the commencement of the Insurance Regulatory and Development Authority Act, 1999, for which no registration certificate was necessary prior to such commencement, may continue to do so for a period of three months from such commencement or, if he had made an application for such registration within the said period of three months, till the disposal of such application: Provided also that any certificate of registration, obtained immediately before the commencement of the Insurance Regulatory and Development Authority Act, 1999, shall be deemed to have been obtained from the Authority in accordance with the provisions of this Act (2) Every application for registration shall be made in such manner as may be determined by the regulations made by the Authority and shall be accompanied by(a) a certified copy of the memorandum and articles of association, where the applicant is a company and incorporated under the Indian Companies Act, 1913 (7 of 1913), or under the Indian Companies Act, 1882 (6 of 1882), or under the Indian Companies Act, 1866 (10 of 1866); or under any Act repealed thereby,] or, in the case of any other insurer specified in sub-clause (a) (ii) or sub-clause (b) of clause (9) of section 2, a certified copy of the deed of partnership or of the deed of constitution of the company, as the case may be, or, in the case of an insurer having his principal place of business or domicile outside India, the document specified in Clause (a) of Section 63; (b) the name, address and the occupation, if any, of the directors where insurer is a company incorporated under the Indian Companies Act, 1913 (7 of 1913), or under the Indian Companies Act, 1882 (6 of 1882), or under the Indian Companies Act, 1866 (10 of 1866), or under any Act repealed thereby, and in the case of an insurer specified in sub-clause (a) (ii) of clause (9) of section 2 the names and addresses of the proprietors and of the manager in India, and in any other case the full address of the principal office of the insurer in India, and the names of the directors and the manager at such office and the name and address of someone or more persons resident in India, authorised to accept any notice required to be served on the insurer;

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

(c) a statement of the class or classes of insurance business done or to be done, and a statement that the amount required to be deposited by section 7 or section 98 before application for registration is made has been deposited together with a certificate from the Reserve Bank of India showing the amount deposited; (d) where the provisions of section 6 or section 97 apply, a declaration verified by an affidavit made by the principal officer of the insurer authorised in that behalf that the provisions of those sections as to paid-up equity capital or working capital have been complied with; (e) in the case of an insurer having his principal place of business or domicile outside India, a statement verified by an affidavit made by the principal officer of the insurer setting forth the requirements (if any) not applicable to nationals of the country in which such insurer is constituted, incorporated or domiciled which are imposed by the laws or practice of that country upon Indian nationals as a condition of carrying on insurance business in that country; (f) a certified copy of the published prospectus, if any, and of the standard policy forms of the insurer and statements of the assured rates, advantages, terms and conditions to be offered in connection with insurance policies together with a certificate in connection with life insurance business by an actuary that such rates, advantages, terms and conditions are workable and sound: Provided that in the case of marine accident and miscellaneous insurance business other than workmen's compensation and motor car insurance the above requirements regarding prospectus, forms and statements shall be complied with only insofar as the prospectus, forms and statements may be available; Requirements as to capital 6. No insurer carrying on the business of life insurance, general insurance or re-insurance in India on or after the commencement of the Insurance Regulatory and Development authority Act, 199, shall be registered unless he has,(i) a paid-up equity capital of rupees one hundred crores, in case of a person carrying on the business of life insurance or general insurance; or (ii) a paid-up equity capital of rupees two hundred crores, in case of a person carrying on exclusively the business as a reinsurer : Provided that in determining the paid-up equity capital specified under clause (i) or clause (ii), the deposit to be made under section 7 and any preliminary expenses incurred in the formation and registration of the company shall be excluded:

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

Provided further that an insurer carrying on business of life insurance, general insurance or reinsurance in India before the commencement of the Insurance Regulatory and Development Authority Act, 1999 and who is required to be registered under this Act, shall have a paid-up equity capital in accordance with clause (i) and clause (ii), as the case may be, within sex months of the commencement of that Act. Requirements as to capital structure and voting rights and maintenance of registers of beneficial owners of shares 6A. (1) No public company limited by shares having its registered office in India, shall carry no life insurance business, unless it satisfies all the following conditions, namely: (i) that the capital of the company consists only of ordinary shares each of which have a single face value; (ii) that, except during any period not exceeding one year allowed by the company for payment of calls on shares, the paid-up amount is the same for all shares, whether existing or new: Provided that the conditions specified in this sub-section shall not apply to a public company which has, before the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), issued any shares other than ordinary shares each of which has a single face value or any shares paid-up amount whereof is not the same for all of them for a period of three years from such commencement. (2) Notwithstanding anything to the contrary contained in any law for the time being in force or in the memorandum or articles of association but subject to the other provisions contained in this section the voting right of every shareholder of any public company as aforesaid shall in all cases be strictly proportionate to the paid-up amount of the shares held by him. (3) No public company as aforesaid which carries on life insurance business shall, after the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), issue any shares other than ordinary shares of the nature specified in sub-section (l). (4) A public company as aforesaid which carries on life insurance business(a) shall maintain, in addition to the register of members to be maintained under the Indian Companies Act, 1913 (7 of 1913~3 a register of shares in which shall be entered the name, occupation and address of the beneficial owner of each share, and shall incorporate therein any change of beneficial owner declared to it within fourteen days from the receipt of such declaration; (b) shall not register any transfer of its shares

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

(i) unless, in addition to compliance being made with the provisions of section 34 of the Indian Companies Act, 1913 (7 of 1913), the transferee furnishes a declaration in the prescribed form as to whether he proposes to hold the shares for his own benefit or as a nominee, whether jointly or severally, on behalf of others and in the latter case giving the name, occupation and address of the beneficial owner or owners, and the extent of the beneficial interest of each; (ii) where, after the transfer, the total paid-up holding of the transferee in the shares of the company is likely to exceed five per cent. of its paid-up capital or where the transferee is a banking or an investment company, is likely to exceed two and a half per cent of such paid-up capital, unless the previous 2[approval of the Authority] has been obtained to the transfer; (iii) where, the nominal value of the shares intended to be transferred by any individual, firm, group, constituents of a group, or body corporate under the same management, jointly or severally exceeds one per cent of the paid-up equity capital of the insurer, unless the previous approval of the Authority has been obtained for the transfer. Explanation.- For the purposes of this sub-clause, the expressions group and same management shall have the same meanings respectively assigned to them in the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969); (5) Every person who has any interest in any share of a company referred to in sub-section (4) which stands in the name of another person in the register of members of the company, shall, within thirty days from the commencement of the Insurance (Amendment) Act, 1950 (47 of l950), or from the date on which he acquires such interest, whichever is later, make a declaration in the prescribed form (which shall be countersigned by the person in whose name the share is registered) to the company declaring his interest in such share, and notwithstanding anything contained in any other law or in any contract to the contrary, a person who fails to make a declaration as aforesaid in respect of any share shall be deemed to have no right or title whatsoever in that share: Provided that nothing in this sub-section shall affect the right of a person who has an interest in any such share to establish in a court his right thereto, if the person, in whose name the share is registered, refuses to countersign the declaration as required by this sub-section: Provided further that where any share, belonging to an individual who has made any such declaration as is referred to in this sub-section, is held by a company in its name in pursuance of any trust or for the purpose of safe custody or collection or realization of dividend, such individual shall, notwithstanding anything contained in the Indian Companies Act, 1913 (7 of 1913), or in the memorandum or articles of association of the company which has issued the share, be deemed to be the holder of the said share for the purpose of exercising any voting rights under this section to the exclusion of any other person.

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

(6) If the total paid-up holding of any person in the shares of a company referred to in subsection (1) on the commencement of the Insurance (Amendment) Act 1950 (47 of 1950), exceeds two and a half per cent of its paid-up capital where that person is a banking company or an investment company, or five per cent of its paid-up capital in any other case, he shall not be entitled to any vote as a shareholder of the company in respect of such excess holding of shares. (7) Where the total paid-up holding of any person in the shares of a company referred to subsection (1) on the date of the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), exceeds five per cent of its paid-up capital where that person is a banking company or an investment company, or ten per cent of its paid-up capital in any other case, he shall dispose of the excess holding of shares within three years from such commencement or such further period not exceeding two years as may be allowed to him by the Central Government. (8) If, after the expiry of three years or of such further period as may be allowed to any person under sub-section (7), the total paid up holding of any such person has not been reduced to the limits specified in that sub-section, any shares in excess of the limits specified in that sub-section shall vest in the Administrator-General of the State in which the registered office of the company concerned is situate and the Administrator-General shall take such steps as may be necessary for taking charge of any property which has so vested in him and shall dispose of the said shares and the proceeds thereof in such manner as may be prescribed. (9) Subject to the other provisions contained in this section, but notwithstanding anything contained in the Indian Companies Act, 1913 (7 of 1913), or in the memorandum or articles of association of any such company as is referred to in sub-section (1), no such company shall refuse to register the transfer of any shares where the transfer is for the purpose of securing compliance with the provisions of sub-sections (7) and (8). Investment, Loans and Management Investment of assets 27. (1) Every insurer shall invest and at all times keep invested assets equivalent to not less than the sum of(a) the amount of his liabilities to holders of life insurance policies in India on account of matured claims, and (b) the amount required to meet the liability on policies of life insurance maturing for payment in India, less-

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

(i) the amount of premiums which have fallen due to the insurer on such policies but have not been paid and the days of grace for payment of which have not expired, and (ii) any amount due to the insurer for loans granted on and within the surrender values of policies of life insurance maturing for payment in India issued by him or by an insurer whose business he has acquired and in respect of which he has assumed liability, in the manner following, namely, twenty-five per cent of the said sum in Government securities, a further sum equal to not less than twenty-five per cent of the said sum in Government securities or other approved securities and the balance in any of the approved investments specified in subsection (1) of section 27A or, subject to the limitations, conditions and restrictions specified in sub-section (2) of that section, in any over investment. (2) For the purposes of subsection (1), (a) the amount of any deposit made under section 7 or section 98 by the insurer in respect of his life insurance business shall be deemed to be assets invested or kept invested Government securities; (b) the securities of, or guaranteed as to principal and interest by, the Government of the United Kingdom shall be regarded as approved securities other than Government securities for a period of four years from the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), in the manner and to the extent hereinafter specified, namely: (i) during the first year, to the extent of twenty-five per cent in value of the sum referred to in sub-section (1); (ii) during the second year, to the extent of eighteen and three fourths per cent in value of the said sum; (iii) during the third year, to the extent of twelve and a half per cent in value of the said sum; and (iv) during the fourth year, to the extent of six and a quarter per cent in value of the said sum: Provided that, if the Authority so directs in any case, the securities specified in clause (b) shall be regarded as approved securities other than Government securities for a longer period than four years, but not exceeding six years in all and the manner in which and the extent to which the securities shall be so regarded shall be as specified in the direction; (c) any prescribed assets shall, subject to such conditions, if any, as may be prescribed, be deemed to be assets invested or kept invested in approved investments specified in sub-section (1) of section 27A.

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem
(3) In computing the assets referred to in subsection (1), (a) any investment made with reference to any currency other than the Indian rupee which is in excess of the amount required to meet the liabilities of the insurer in India with reference to that currency, to the extent of such excess; and (b) any investment made in the purchase of any immoveable property outside India or on the security of any such property, shall not be taken into account: Provided that nothing contained in this sub-section shall affect the operation of sub-section (2): Provided further that the Authority may, either generally or in any particular case, direct that any investment, whether made before or after the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), and whether made in or outside India, shall, subject to such conditions as may be imposed, be taken into account, in such manner as may be specified in computing the assets referred to in sub-section (1) and where any direction has been issued under this proviso copies thereof shall be laid before Parliament as soon as may be after it is issued. (4) Where an insurer has accepted reassurance in respect of any policies of life insurance issued by another insurer and maturing for payment in India or has ceded reassurance to another insurer in respect of any such policies issued by himself, the sum referred to in subsection (1) shall be increased by the amount of the liability involved in such acceptance and decreased by the amount of the liability involved in such cession. (5) The Government securities and other approved securities in which assets are under subsection (1) to be invested and kept invested shall be held by the insurer free of any encumbrance, charge, hypothecation or lien. (6) The assets required by this section to be held invested by an insurer incorporated or domiciled outside India shall, except to the extent of any part thereof which consists of foreign assets held outside India, be held in India and all such assets shall be held in trust for the discharge of the liabilities of the nature referred to in sub-section (1) and shall be vested in trustees resident in India and approved by the Authority, and the instrument of trust under this sub-section shall be executed by the insurer with the approval of the Authority and shall define the manner in which alone the subject-matter of the trust shall be dealt with.

Insurance and Risk Management

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

The Life Insurance Corporation Act, 1956 1. Short title and commencement. (1) This Act may be called the Life Insurance Corporation Act, 1956. (2) It shall come into force on such date

Establishment and incorporation of Life Insurance Corporation of India. (1) With effect from such date1 as the Central Government may, by notification in the Official Gazette, appoint, there shall be established a Corporation called the Life Insurance Corporation of India. (2) The Corporation shall be a body corporate having perpetual succession and a common seal with power subject to the provisions of this Act, to acquire, hold and dispose of property, and may by its name sue and be sued. as the Central Government may, by notifications in the Official Gazette, appoint.

4. Constitution of the Corporation. (1) The Corporation shall consist of such number of person not exceeding [sixteen] as the Central Government may think fit to appoint thereto and one of them shall be appointed by the Central Government to be the Chairman thereof. (2) Before appointing a person to be a member, the Central Government shall satisfy itself that the person will have no such financial or other interest as is likely to affect prejudicially the exercise of performance by him of his functions as a member, and the Central Government shall also satisfy itself from time to time with respect to every member that he has no such interest; and any person who is, or whom the Central Government proposes to appoint and who has consented to be, a member shall, whenever required by the Central Government so to do, furnish to it such information as the Central Government considers necessary for the performance of its duties under this sub-section. (3) A member who is in any way directly or indirectly interested in a contract made or proposed to be made by the Corporation shall, as soon as possible after the relevant circumstances have come to his knowledge, disclose the nature of his interest to the Corporation; and the member shall not take part in any deliberation or discussion of the Corporation with respect to that contract.

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management

5. Capital of the Corporation (1) The original capital of the Corporation shall be five crores of rupees provided by the Central Government after due appropriation made by Parliament by law for the purpose, and the terms and conditions relating to the provision of such capital shall be such as may be determined by the Central Government. (2) The Central Government may, on the recommendation of the Corporation, reduce the capital of the Corporation to such extent and in such manner as the Central Government may determine.

6A. Power to impose conditions etc. (1) In entering into any arrangement, under Section 6, with any concern, the Corporation may impose such conditions as it may think necessary or expedient for protecting the interest of the Corporation and for securing that the accommodations granted by it is put to the best use by the concern. (2) Where any arrangement entered into by the Corporation under Section 6 with any concern provides for the appointment by the Corporation of one or more directors of such concern, such provision and any appointment of directors made in pursuance thereof shall be valid and effective notwithstanding anything to the contrary contained in the Companies Act, 1956( 1 of 1956), or in any other law for the time being in force or in the memorandum, articles of association or any other instrument relating to the concern, and any provision regarding share qualification, age limit, number of director-ships, removal from office of directors and such like conditions contained in any such law or instrument aforesaid, shall not apply to any director appointed by the Corporation in pursuance of the arrangement as aforesaid. (3) Any director appointed as aforesaid shall(a) hold office during the pleasure of the Corporation and may be removed or substituted by any person by order in writing by the Corporation; (b) not incur any obligation or liability by reason only of his being a director or for anything done or omitted to be done in good faith in the discharge of his duties as a director or anything in relation thereto;

Acharya Institute Of Graduate Studies Hesarghatta Road, Soldevanahalli, Bangalore -90 Department of Management, Nimesh Raval MFA III sem Insurance and Risk Management (c) not be liable to retirement by rotation and shall not be taken into account for computing the number of directors liable to such retirement.