The Insurance Act and the Role of IRDA

6. The Insurance Act and the Role of IRDA

Because insurance involves collecting large amounts of the public's money against promises to be honoured far into the future, it is one of the most closely regulated industries. The insured must be protected against unfair terms, mis-selling and the risk of an insurer being unable to pay claims; this is why India has both a governing statute and a dedicated regulator.

The Insurance Act, 1938. The Insurance Act, 1938 is the principal, foundational law governing the conduct of insurance business in India. In broad terms it provides for matters such as the registration of insurers, the maintenance of adequate financial reserves and solvency (so that insurers can actually meet their claims), the investment of insurers' funds, the licensing and conduct of agents and intermediaries, restrictions to protect policyholders' interests, and the powers needed to supervise the industry. It has been amended many times to keep pace with changes in the market, and it remains the backbone of insurance law in the country even today.

Why a separate regulator was created. For several decades the life and general insurance businesses in India were nationalised (carried on by public-sector bodies). When the sector was later opened up to private and foreign participation, a strong, independent regulator became necessary — to license new companies, set prudent rules, protect policyholders and, at the same time, help the industry grow in an orderly way.

The Insurance Regulatory and Development Authority (IRDA/IRDAI). The IRDA was established under the Insurance Regulatory and Development Authority Act, 1999 as an autonomous, statutory body to regulate and develop the insurance industry in India. (Following a later amendment, its formal name is the Insurance Regulatory and Development Authority of India, IRDAI; the two names refer to the same regulator.) Its twin objects are captured in its very name — to regulate the industry (protecting policyholders and ensuring fair, sound conduct) and to promote its orderly development and growth. IRDAI is headed by a Chairperson together with whole-time and part-time members, and its head office is at Hyderabad.

Main functions and role of IRDA/IRDAI. Its principal functions include:

1. Registration and licensing — granting, renewing, modifying, suspending or cancelling the registration (licence) of insurance and re-insurance companies, and of intermediaries such as agents, brokers and surveyors.
2. Protecting policyholders' interests — laying down rules on the disclosure of terms, the settlement of claims, surrender values, the assignment and nomination of policies, and the fair treatment of policyholders, and providing a grievance-redressal framework.
3. Setting prudential and conduct standards — prescribing the qualifications, code of conduct and training of intermediaries; regulating the investment of insurers' funds and requiring the maintenance of adequate solvency margins so that insurers stay financially sound.
4. Regulating premiums, terms and products — supervising the terms and conditions offered by insurers and the general working of the market, to keep it fair and competitive.
5. Promoting development and efficiency — encouraging the orderly growth of the insurance industry (including the spread of insurance to rural and social sectors), promoting professionalism, and calling for information, undertaking inspections and conducting enquiries as needed. …