Report No. 190

Some tentative grounds of revision

6.3 Some of the grounds on the basis of which the Law Commission has undertaken present exercising in revising the Insurance Act, 1938 may be set out as under:

I. The Insurance Act, 1938 being a legislation of colonial era, contains provisions that are redundant and accordingly require deletion. For example, provisions regarding provident societies and mutual insurance companies as also principal agents, chief agents and special agents, or references thereof, are no longer required and such provisions need to be deleted.

II. Some of the provisions of the Act, are of transitional nature and should, therefore, be deleted. Further, matters covered in the Regulations framed by the IRDA should be deleted from the Act, in order to avoid duplication. Further, The IRDA Act, 1999 has inserted some provisions in the Insurance Act, 1938, the effect of which was to nullify some existing provisions. They have not been deleted, thus giving rise to anomalies, for example, definitions of the term 'insurance company' [s.2 (8)]. Such provisions require to be deleted.

III. References in the Insurance Act, 1938 to older enactments have to be replaced by references to the corresponding new legislations that have replaced such enactments. For e.g., references to the Indian Companies Act, 1913 have to be replaced by the Companies Act, 1956.

IV. The insurance sector, which earlier covered only a few areas like life and marine insurance, has now expanded to cover various kinds of risk activities. Hence reclassification of insurance businesses is necessary. For instance, insurance business may broadly be classified as 'life' and 'non-life' or 'short term' and 'long term' insurance business. For this purpose, the definition of the term 'insurance' and 'insurer' would have to be amended.

V. The IRDA exercises its powers by and large under the provisions of the principal Act. Therefore, it is appropriate as well as necessary that the relevant provisions of IRDA Act be merged in the Insurance Act, 1938.

VI. The IRDA while regulating the business activities of the insurers exercises quasi-judicial powers, in addition to the administrative powers, e.g., issue, renewal and cancellation of registration certificate to insurers, order in regard to investigation of the affairs of the insurers, making application to the court for the winding up of the insurance companies, grant of licenses to the insurance agents etc. It is felt necessary that there must be a provision of appeal against the decisions of the IRDA to an independent body constituted under the Act itself.

VII. The insurance business has increased several fold even while policy holders have not been entirely satisfied with the manner of functioning of insurance companies, particularly in the area of settlement of claims. Although at present, there is in place of the office of an Ombudsman under the Redressal of Public Grievances Rules, 1998, complaints nevertheless continue to be filed in the consumer fora constituted under the Consumer Protection Act, 1986. In order to provide a more effective grievance redressal missionary, while at the same time, lessening the burden of the consumer fora, it is proposed that there should be a full-fledged grievance redressal mechanism.

VIII. The principle of uberrimae fidei, i.e., of absolute good faith, governs both the parties to a contract of insurance. Though standardized insurance policies prohibit certain misleading contract provisions, problems have arisen with misrepresentation or non-disclosure whenever personal characteristics are collected by insurance agents for risk classification. In this context, the issue is whether a failure to make a disclosure of the material information would render the contract void or voidable. For this purpose, some specific statutory enumerations are required for protecting the interest of policyholders so that unintended minor mistakes in disclosure do not lead to a loss of coverage.

IX. Provisions regarding investments, loans and management need review and revision. The IRDA has made detailed investment regulations, hence provisions are to be revised so as to eliminate inconsistencies and duplication. The term "approved securities" is required to be revised in the context of new economic policy and business practices.

X. At present, there is no provision in the principal Act for motivation or encouragement for insurers to invest in "Research & development" or "Technology up gradation" as regards valuation of assets for the purpose of solvency margin calculations. There is a suggestion that it is appropriate if such provisions for taking a portion of the investment/ expenditure in areas as directed by the IRDA are incorporated in the Act for the purpose of "Solvency Margin" so as to encourage insurers to take up such investments.

XI. The provisions regarding solvency margin of the principal Act have been amended by the IRDA Act, 1999. But these provisions still require revision because they stipulate minimum level of solvency margin without a control level, i.e., a position below which the Authority can get warning signals in respect of a particular insurer. The Principal Act is required to be amended so as to empower the Authority to intervene whenever the solvency margin falls below the control level. IRDA has framed regulations for the determination of the amount of liabilities, solvency margin and valuation of assets. But the provisions regarding solvency margin are still to address the extent of appropriate matching of assets and liabilities.

XII. The Principal Act and IRDA Act empower the Central Government and the Authority to frame rules and regulations. These are to be revised and harmonized with the Act in the context of new regulatory regime.

XIII. The Act provides for penalties in the miscellaneous part of the Act, for contravention or non-compliance of the provisions of the Act or Regulation or rules under sections 102 to 105C. These provisions of the Act are to be reviewed and revised as the amount of fine or penalty provided therein is not adequate enough to be considered now as a fine or penalty. In addition to these provisions, there are other provisions which provide for the punishment along with the other provisions requiring mandatory compliance. It is appropriate that all such specific clauses on penalty may be shifted to the chapter dealing with the penalties.

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