Essay: An analysis on the Insurance Laws (Amendment) Act, 2015

RESEARCH METHODOLOGY:
Scope and objectives:
This paper seeks to analyse the newly brought in Insurance Laws (Amendment) Act 2015 approved by the Parliament on March 18, 2015. The objective of the paper is to analyse the new provisions in comparison with that of the Insurance Act, 1938 and other allied provisions in which changes have been made.
Sources:
For the purposes of this project, the researcher has mainly depended on the statutes that have been sought to be compared and analysed, along with other secondary resources, such as articles, journals and case laws.
Mode of citation:
The researcher has used a uniform mode of citation.
Chapterization:
(i) Introduction and brief history : This part of the paper gives a brief introduction regarding this paper and also gives a brief history of the legislation that is being sought to be analysed.
(ii) New Definitions and their significance: A number of new concepts have been introduced and a few new types of insurance incorporated by defining those terms and seeking to regulate them through the legislation. These new definitions have been discussed in this part of the paper.
(iii) Changes regarding Capital of Insurance Companies: A major highlight of the amendment is raising of the cap on foreign investment in Insurance companies in India from 26 percent to 49 percent. This aspect, along with a few other matters pertaining to changes with regard to the Capital of a insurance company, have been discussed under this chapter.
(iv) Changes pertaining to Consumer Welfare: Certain important changes keeping in mind the ultimate objective of welfare of the consumer in mind, such as ensuring a robust appellate process, allowing transfer of policy by the insured to a third party have been made. These change have been analysed in this part of the paper.
(v) Increase in the powers of IRDA: The Insurance Regulatory and Development Authority has been equipped with more powers and given a higher responsibility in ensuring a smooth flow of business. These changes have been discussed under this chapter.
 
INTRODUCTION AND BRIEF HISTORY:
Insurance sector in India, though has been existent from more than a century, is still yet to reach a vast majority of the population, which remains uninsured. A high percentage of the Indian populace residing in rural areas, limited number of insurance companies and limited capital or fund raising capabilities of these companies due to various archaic laws and regulations can be said to be some of the reasons for the above mentioned problem. The recent amendments that have been brought in, have in fact been on the back burner for a long time, 7 years to be precise, and has finally been approved by the Indian Parliament on the 12th of March, 2015.  However, it has been in force through the means of an Ordinance from 26th December, 2014.
The Insurance Act, 1938 (Insurance Act) is the law that governs and regulates the business of insurance in India. In the year 1999, the then government, by enacting the Insurance Regulatory and Development Authority Act, 1999 (the IRDA Act) allowed the entrance of private sector into the Insurance sector. At the time of opening up of the insurance sector, India had only six insurance companies, all of them controlled by the government. However, as of today, there are fifty-three companies dealing in the business of Insurance in India.
Thus, it was a culmination of needs that lead to strong calls from both the industry, and the common public which are usually the policy holders of a majority of companies, to revamp the archaic Insurance Act and bring in some much needed changes to the act in order to keep up with the times and also ensure the smooth growing of the Insurance industry in India. Keeping all these issues in mind, the government has finally enacted the Insurance Laws (Amendment) Act, 2015.
The amending act has made a total of 114 clauses, and has made changes in three key legislations, namely the Insurance Act 1938, General Insurance Business (Nationalisation) Act, 1972, the Insurance Development and Regulatory Authority Act, 1992. This paper shall mainly analyse the changes with regard to certain new definitions, Foreign Direct Investment, Reinsurance, certain consumer welfare measures and a few procedural aspects.
NEW DEFINITIONS AND THEIR SIGNIFICANCE:
The amending act has incorporation two important definitions that were absent in the principal act. (Insurance Act, 1938) They are that of health insurance, and that of foreign investors. This section of the paper analyses the definitions in brief and their possible impact.
Health Insurance:
Needless to say, the industry of health insurance has grown significantly from the time of its introduction in India, and also has a great potential for growth. The amending act, by making changes in Section 2 of the Insurance Act 1938, has incorporated the following definition:
“ “health insurance business” means the effecting of contracts which provide for sickness benefits or medical, surgical or hospital expense benefits, whether in-patient or out-patient travel cover and personal accident cover;”
The usage of the words “whether in-patient or out-patient travel cover” suggest that the definition covers both international and domestic travel, but it is yet to be seen how the definition is interpreted by the courts.
Foreign Company
This new definition becomes all the more important because of  the hike in Foreign Direct Investment that has been brought about through this amendment. An elaborate discussion on this aspect has been made in the next part of the paper. However, it becomes important to understand what changes have been made with regard to the definition. The definition of “insurer” given under Section 2(9) has been amended, and under that, foreign company has been defined as a company or body established under the law of any country outside India.
This definition is also important for its reference to Lloyds Insurance, London. Before this amendment, the Act did not define foreign companies, but defined the term “insurer” and that included all those persons who have contracted with Lloyd’s underwriters. So basically, by giving the above mentioned definition through the amendment to foreign companies, the amendment has sought to bring Lloyds under the ambit of foreign companies.
Having analysed the new definitions and their impact, let us now look at the changes with regard to the increase in the cap of foreign direct investment allowed in the insurance sector.
CHANGES REGARDING CAPITAL OF INSURANCE COMPANIES:
Foreign Direct Investment:
The amendment, by making changes in the Insurance Act 1938, has brought in a very important change regarding the capital of a insurance company. After the amendment, insurance companies in India can have upto 49 percent foreign investment. Earlier, the allowed limit was only for 26%. Though this measure was not appreciated by everyone associated with the industry, it was more or less a consensual decision by all major political parties in the Parliament.
The objective of allowing 49% and not more than that is obviouslt to ensure that the management and control lies with the Indian company or its Indian owners. However, we see that many times stakeholders who may not have more than 49% may also end up controlling the company due to a number of reasons. As an appropriate safeguard from such a situation, the amendment has defined the word “control” after Clause 7A of Section 2 of the Principal Act, and has defined control as following:
“ ‘Explanation—The term “control” shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.”
The above mentioned step is of a great significance to the Indian Insurance market, which is said to be suffering from losses and capital crunch. Let us look at some of the possible advantages of raising the cap on foreign investment:
 Shall help the insurance sector to penetrate deeper into India: As has been mentioned earlier in the project, a majority of people residing in villages and small towns are uninsured. Increasing the amount of investment that can be made in insurance companies shall definitely help in more companies coming up and making policies more affordable.
 Shall level the playing field: Even after Privatization of the Indian Economy, 70% of the Life Insurance Market still lies with the Life Insurance Corporation of India, which is a wholly owned subsidiary of the Government. FDI will ensure that the other competitors are in a position to raise adequate funds to compete on a level playing field with the LIC.
 Shall lead to creation of additional jobs: Since the inflow of additional capital will in all likelihood lead the companies to venture into the uninsured or underinsured areas, it will also lead to job creation as the companies will ultimately need more manpower to ensure their policies are sold.
These are some of the advantages. However, it has to be noted that the increase in the cap does not mean that foreign companies can invest 49% in their Indian counterparts directly through the automated route. While only upto 26% is allowed through the automated route, any investment above that should be through the Foreign Investment Promotion Board (FIPB), which issues detailed guidelines regarding foreign investment, voting rights of these investors, control and management etc.
Opening up of General Sector Insurance Companies:
The General Insurance Business (Nationalization) Act, 1972 required that the four general insurance companies in the public sector namely New India Assurance Company Limited National Insurance Company Limited The Oriental Insurance Co. Ltd and United India Insurance Co. Ltd, be 100% state-owned. However, the amendment has done away with this requirement by making the necessary changes in the above mentioned act, and now, these companies will be allowed to raise money in the form of capital either from the general Public or private players with the objective of expansion of the industry into the rural sectors. However, at any given point of time, the equity lying with the Government will not be allowed to go below 51%.
CHANGES PERTAINING TO CONSUMER WELFARE:
The amendment has brought forth a number of changes to ensure that consumers are properly treated by the insurance companies, which includes a robust appellate process, allowing consumers to transfer policies and also by making provisions for the IRDA to impose massive fines on insurance companies if they default. Let us look at some of these changes in detail:
Transfer of policy:
Through Clause 45 of the Amending Act, Section 38 of the Principal Act has been replaced and the new section allows for a policy holder to transfer or assign his rights in a policy to a third person with or without consideration. This amendment is of special significance because of multiple reasons. Firstly, the amendment essentially is allowing third parties with no insurable interest to claim the benefits of a policy. Secondly, this particular aspect of whether a person may transfer his rights in a policy to a person without an insurable interest came before the Bombay High Court in the year 2007 in the matter of  Insurance Policy Plus Service and Others vs. LIC and Others  in which the Bombay high court ruled that a policy is transferable to a third party with no insurable interest. Some of the reasons given by the Bombay High Court was that a policy has been treated to be somewhat of an asset, be it by the fact that banks issue loans on policies, policies may be attached in the event of default etc. This judgement went in appeal to the Supreme Court, but the amending ordinance and subsequently the amending act came into force before the Supreme Court decided on the matter. The Legislature has chosen to imbibe the interpretation given by the Bombay High Court into the legislature. Needless to say, the Supreme Court, in its judgement on the matter  dated December 29, 2015, affirmed the view taken by the Bombay High Court. Thus, in India, after the amendment, a policy holder may, with or without consideration, transfer his/her policy to a third party.
Appellate process:
The amending act of 2015 has made a comprehensive change to the process of appealing against the order of the Insurance Regulatory and Development Authority. Before the amendment, an aggrieved consumer had two choices; either approach the Insurance Ombudsman or approach consumer courts. The insurance ombudsman is a grievance redressal authority that was set up under the Redressal of Public Grievance Rules  and consumer courts were set up under the Consumer Protection Act .  However, the Insurance Ombudsman lacked the capacity of involving itself in a high number of dispute resolution, and the consumer courts had a huge backlog of cases already. Though the idea of creating a new adjudicatory body was ruled out, the lawmakers have decided to strengthen the present mechanism, and with that in mind, have for appeals against the orders of IRDA to lie with the Securities Appellate Tribunal which was set up in 1992 under the Securities and Exchange Board of India Act.  Thus, SAT is now empowered to hear appeals against the orders of IRDA.
One important point to be noted under this section is that the appeal is not just by consumers, but also by insurers or insurance intermediaries against the orders or decisions of IRDA.
Other Consumer Welfare Measures:
Some of the other consumer welfare measures include the empowering of the IRDA to ensure strict compliance on the part of insurance companies and their agents to the act and the rules that have been framed under. This includes the power to impose penalties on insurance companies or their intermediaries for mis-selling of policies or misconduct/misrepresentation by the agents or the intermediaries.
INCREASE IN THE POWERS OF IRDA:
Another major change is the increase in the number of powers given to the IRDA. In addition to the above mentioned powers of imposing penalties, some of the specific powers that have been granted to the IRDA are –
 The power of regulating the qualification, eligibility and other related aspects of agents in insurance companies has been given to the IRDA. The idea behind this is to ensure that suitably competent people are appointed as agents in order to reduce the chances of agents mis-selling policies with false promises etc
 The regulatory power of IRDA has also been increased. It can, after the amendment, make appropriate regulations regarding management expenses of companies and also the payment of commission to employees.
 As regards loss assessors and surveyors, the IRDA can now regulate the way in which they formulate code of conduct and also their specific functions. This is because the definition of intermediaries has been expanded in the amendment and it now includes brokers, consultants, loss assessors, surveyors etc.
 Earlier, for a property in India to be insured by a foreign insurer, the prior permission of the Central Government was required. However, after the amendment, the power of issuing this prior permission lies with the IRDA.
REINSURANCE:
Clause 16(B) has been added after Clause 16 of Section 2 of the Insurance Act to define the word “re-insurance”, and it defines it in the following words:
“ “re-insurance” means the insurance of part of one insurer’s risk by another insurer who accepts the risk for a mutually acceptable premium;
On a careful observation of the definition it becomes clear that a reinsurer can only insure a part of another insurer’s risk, and a single insurer cannot take up the entire risk from a policy. This has been done keeping in mind the fact that allowing taking over the entire risk from a policy will also create an opportunity for companies to act as front companies for other companies. However, this again is an important change as the business of reinsurance was not really regulated by the existing statute.
Foreign re-insurers:
After the amendment, the IRDA has been empowered to allow foreign companies to register with it, for the purpose of opening branches in India. However, all such companies are suppose to have a minimum capital of 5000 crores. As has been discussed earlier in the paper, the definition of foreign company has been specifically broadened to include Lloyd’s of London. The idea is that allowing Lloyd’s, which is the world’s largest insurance company, would ensure a higher level of competition and ultimately benefit the customers.
Currently, India has only one company in the business of re-insurance, which is the General Insurance Corporation. This being the only company, foreigner re-insurance companies such as Berkshire Hathway, Swiss Re, Scor Re etc wanted to begin business in the Indian market as there is huge potential for business of re-insurance in India. But before the amendment, they weren’t allowed to set up branches in India. Now, these companies can take up the business of re-insurance in India.