Guide to Understanding Insurance Law in India – Background | Categories | Regulations

Insurance Law in India governs the regulation and enforcement of insurance practices within the country, ensuring that both insurers and policyholders engage in fair and transparent dealings. Governed primarily by the Insurance Act of 1938, and overseen by the Insurance Regulatory and Development Authority of India (IRDAI), established in 1999, the legal framework is designed to protect the interests of consumers while promoting the stable growth of the insurance sector. The law encompasses various forms of insurance such as life, health, motor, and property, stipulating norms for the issuance of policies, claims settlement, and dispute resolution. It mandates that all insurance companies operating in India must adhere to standardized guidelines concerning policy structure, premium rates, and terms of service.

Table of Contents

1. Nature of Insurance Business
2. Contract of Insurance
3. Contract of Insurance is Uberrimae fidei Contract
4. Insurance Business is Based on Law of Probability
5. Insurance Policy is an Actionable Claim and can be Assigned
6. Categories of Insurance
7. Re-insurance Business
8. Background of Insurance Business in India
9. Life Insurance Business in India
10. General Insurance Business in India
11. Opening of Indian Economy and Entry of Private Sector in Insurance Business
12. IRDAI to Regulate Insurance Sector
13. Regulations Issued by IRDA
14. Company Law Provisions in Respect of Insurance Companies
15. Growth of Insurance Sector
16. Insurance Institute of India
17. Actuary
18. Insurance Agent
19. Lloyd’s
20. FEMA Provisions in Respect of Insurance
21. Restrictions under FEMA in Respect of Life Insurance
22. Restrictions under FEMA in Respect of General Insurance

Check out Taxmann's Insurance Laws Manual which provides comprehensive coverage of the legal framework governing the insurance industry in India. It includes the complete and updated texts of the Insurance Regulatory and Development Authority Act, 1999 (IRDA), the Insurance Act, 1938, and over 50 essential rules and regulations. Additionally, it features important Master Directions on Insurance, such as FED Master Direction No. 9/2015-16.

1. Nature of Insurance Business

‘Insurance’ is an arrangement by which a company or the State undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.

Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and must involve something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.

2. Contract of Insurance

The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster.

3. Contract of Insurance is Uberrimae fidei Contract

In some contracts, all material facts must be disclosed, whether or not asked by other party. These are termed as Uberrimae fidei contracts, i.e. contracts of ‘utmost good faith’. In such cases, non-disclosure may amount to fraud or misrepresentation and contract can be avoided by aggrieved party.

Contract of insurance is Uberrimae fidei – V Srinivasa Pillai v. LIC of India AIR 1977 SC 381 * Contship Container Lines v. D K Lall (2010) 4 SCC 256. A contract of insurance is contract of ‘uberrimae fidei’ and insured person and insurer must disclose all material facts on their own, even if other party does not specifically ask them.

In General Assurance Society Ltd. v. Chandumull Jain 1966 (3) SCR 500 (SC Constitution Bench), it was held that in a contract of insurance, there is requirement of uberrime fidei, i.e. good faith on the part of assured and the contract is likely to be construed contra proferentem i.e. against the insurance company in case of ambiguity or doubt – quoted and followed in United India Insurance Co. Ltd. v. Pushpalaya Printers 2004 AIR SCW 1140 = 51 SCL 331 (SC).

Insurance claim can be repudiated if all material facts were not disclosed – Satwant Kaur Sandhu v. New India Assurance Co. Ltd. (2009) 8 SCC 316.

Fraudulent suppression of material facts vitiates claim under the policy – Mithoolal Nayak v. LIC – AIR 1962 SC 814 – decision not under Consumer Protection Act, but highly relevant. In LIC of India v. Smt. Asha Goel 2001 AIR SCW 161 = 104 Comp Cas 79 (SC), it was observed that insurance contract is uberrimae fidei (of utmost good faith) and there must be utmost good faith on the part of assured. All material facts must be disclosed to insurer. However, it was also observed that approach of LIC in repudiation of contract should be one of extreme care and caution. It should not be dealt with in a mechanical and routine manner.

Insurance claim can be repudiated if all material facts were not disclosed – Satwant Kaur Sandhu v. New India Assurance Co. Ltd. (2009) 8 SCC 316.

3.1 Strict interpretation of terms of insurance contract

In interpreting documents relating to a contract of insurance, the duty of the court is to interpret the words in which the contract is expressed by the parties, because it is not for the Court to make a new contract, however reasonable, if the parties have not made it themselves – General Assurance Society v. Chandmull Jain AIR 1966 SC 1644 = (1966) 3 SCR 500 (Constitution Bench) – quoted with approval in Suraj Mal Ram Niwas Oil Mills v. United India Insurance Co. Ltd. (2010) 10 SCC 567.

3.2 Both insurer and insured must disclose all facts

Principles of Insurance contract are different from other contracts. The insured must disclose all material facts about the property or thing to be insured. Insurance contract is contract of utmost good faith. In United India Assurance Co. v. MKJ Corporation (1998) 92 Comp Cas 331 = (1996) 6 SCC 428 = AIR 1997 SC 408 = 1996 AIR SCW 3787 = (1997) 5 CTJ 649 (SC), it was held that this principle is applicable both to insured as well as insurer. Thus, an insurer cannot change terms of policy without informing the same to the insured. In Modern Insulators Ltd. v. Oriental Insurance Co. Ltd. 2000 AIR SCW 680 = AIR 2000 SC 1014 (SC) also, it was held that utmost good faith and disclosure of all material facts is duty of both the parties, i.e. insured as well as insurer. If the insurer does not inform ‘exclusion clause’ to the insured, the exclusion clause will not be binding on the insured.

3.3 Owner liable if compensation cannot be recovered from driver

If compensation cannot be recovered from driver, the liability to make payment of compensation. This would be so even if driver had no license as it is obligation of owner to take adequate care to see that the driver had appropriate license – Ishwar Chandra v. Oriental Insurance Co. Ltd. (2007) 10 SCC 650 – quoted with approval in Jawahar Singh v. Bala Jain (2011) 6 SCC 425.

3.4 Ambiguity to be interpreted in favour of insured person

In General Assurance Society Ltd. v. Chandumull Jain AIR 1966 SC 1644 = 1966 (3) SCR 500 (SC Constitution Bench), it was held that in a contract of insurance, there is requirement of uberrimae fidei, i.e. good faith on the part of assured and the contract is likely to be construed contra proferentem i.e. against the insurance company in case of ambiguity or doubt – quoted and followed in United India Insurance Co. Ltd. v. Pushpalaya Printers (2004) 51 SCL 331 (SC).

In case of ambiguity in a contract of insurance, the ambiguity should be resolved in favour of the claimant and against the insurance company – New India Assurance v. Zuari Industries (2009) 9 SCC 70. relying on General Assurance Society v. Chandmull Jain AIR 1966 SC 1644 = (1966) 3 SCR 500 (Constitution Bench) * Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd. (2021) 7 SCC 151.

4. Insurance Business is Based on Law of Probability

The insurance business is based on laws of probability which presupposes that only a fraction of the policies issued would result in claims. The total sum insured by an insurance company would be several times its net worth. It is based on this same probability of loss that insurance companies fix the insurance premium. The premiums are fixed in such a manner that the total premium collected would be enough to pay for the total claims incurred after providing for expenses.

5. Insurance Policy is an Actionable Claim and can be Assigned

As per section 3 of Transfer of Property Act, actionable claim means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.

Section 130 of Transfer of Property Act provides that an actionable claim may be assigned for consideration or without consideration. Transfer of actionable claim shall be effected only by execution of an instrument in writing signed by the transferor or his authorized agent. Once transferred, the transferee can sue or institute proceedings for the same in his own name without any consent of transferor or without making him a party thereto.

Basically, actionable claim means a claim for any amount receivable (debt) or claim for benefit of any movable property not in possession for which relief can be claimed in Civil Court. Such claim can be assigned/transferred.

An actionable claim can be enforced only through Court of Law and cannot be bought and sold as goods, though it can be assigned.

6. Categories of Insurance

Insurance can be broadly classified as

1. Life Insurance and
2. General Insurance.

As per section 2(6B) of Insurance Act, 1938, ‘general insurance business’ means fine, marine or miscellaneous insurance business, whether carried on singly or in combination with one or more of them.

As per section 2(11) of Insurance Act, 1938, ‘life insurance business’ means business of effecting contracts of insurance upon human life. The contract is subject to payment of premiums for a term dependant on human life. Life Insurance Business includes granting disability benefit, double or triple indemnity accident benefit, granting of annuities upon human life and granting superannuation allowances and benefit payable out of any fund to a group of persons.

Life Insurance Business includes Unit Linked Insurance Policy, which provides a component of investment and a component of insurance.

Marine Insurance Business means business of effecting contracts of insurance of vessels, cargoes, freights, goods, wares, merchandise and property insured for transit by land or water [section 2(13A) of Insurance Act, 1938].

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. It also includes personal accident cover [section 2(6C) of Insurance Act, 1938].

7. Re-insurance Business

Reinsurance is a process whereby one entity (the reinsurer) takes on all or part of the risk covered under a policy issued by an insurance company in consideration of a premium payment. In other words, it is a form of an insurance cover for insurance companies. Unlike co-insurance where several insurance companies come together to issue one single risk, reinsurers are typically the insurers of the last resort.

8. Background of Insurance Business in India

Law of Insurance in India is governed by Insurance Act, 1938.

In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then.

Initially, at the time of independence, insurance business was in private sector and there were many private insurance companies.

9. Life Insurance Business in India

An Ordinance was issued in January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.

Life Insurance Corporation of India practically had monopoly in life insurance business, till insurance sector was opened to private sector after liberalisation in 1994.

10. General Insurance Business in India

In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general insurance business was nationalized with effect from 1st January, 1973. At that time, 107 insurers were amalgamated and grouped into four companies, i.e. National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on 1st January, 1973.

During 1973 to 1994, the insurance business was under public sector. General Insurance business was conducted by four insurance companies, all of which were in Public Sector.

11. Opening of Indian Economy and Entry of Private Sector in Insurance Business

After opening of Indian economy and liberalisation stated in 1991, insurance business was opened to private sector. Private players entered into general insurance business though some private players are in life insurance business also.

Presently, there are around 31 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 24 life insurance companies operating in the country.

12. IRDAI to Regulate Insurance Sector

In view of entry of private sector in insurance business, need was felt to regulate the sector. Hence, Insurance Regulatory and Development Authority of India [IRDAI] was constituted under Insurance Regulatory and Development Authority, 1999. The Act received assent of President on 19-4-2000.

The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.

National Insurance Academy, Pune is apex insurance capacity builder institute promoted with support from Ministry of Finance and by LIC, Life & General Insurance Companies.

IRDAI has Head Office at Sy No. 115/1, Financial District, Nanakram- guda, Gachibowli, Hyderabad – 500032. Website – irdai.gov.in.

Services provided by IRDA taxable under GST w.e.f. 18-7-2022 – Services provided by IRDA were exempt upto 18-7-2022 – Sr No. 32 of Notification No. 12/2017-CT (Rate) and No. 9/2017-IT (Rate) both dated 28-6-2017 existing upto 18-7-2022. Now these services are taxable w.e.f. 18-7-2022.

13. Regulations Issued by IRDA

Over the years, IRDA has issued many regulations to regulate various aspects of insurance business. Major among them are given below. It can be seen that regulations have been prescribed for all aspects of insurance business.

• Appointment of Insurance Agents
• Actuarial Report
• Annual Report, Furnishing of Returns, Statements and Other Particulars
• Assets, Liabilities and Solvency Margins of Insurance Companies
• Distribution of Surplus
• Expense Management of Insurers
• Fees for various purposes
• Reinsurance
• Health Insurance
• Insurance Advertisements and Disclosures
• Insurance Surveyors and loss assessors
• Investment
• Issuance of capital
• Licensing of banks as insurance brokers
• Licensing of various intermediaries
• Maintenance of records
• Obligations of Insurers
• Protection of Policy Holder’s interests
• Foreign Reinsurers
• Lloyds
• Amalgamation and transfer of businessSharing of database and common information
• Third-party administrators
• Web aggregators

14. Company Law Provisions in Respect of Insurance Companies

The provisions of Companies Act, 2013 applies to insurance companies, except so far as they are inconsistent with those special Acts [section 1(4) of Companies Act, 2013].

The Financial Statement of a company governed by special Act like Insurance Act, Banking Regulation Act, Electricity Act or the special law governing that company shall be as specified in the special Act governing such class of companies – second proviso to section 129(1) of Companies Act, 2013.

However, insurance company, banking company, electricity company or any other company governed by any special law need not disclose matters which are not required to be disclosed under Insurance Act, Banking Regulation Act, Electricity Act or the special law governing that company – third proviso to section 129(1) of Companies Act, 2013.

15. Growth of Insurance Sector

Insurance Sector is integral part of the financial sector. It plays significant role in India’s economy.

The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long-term funds for infrastructure development at the same time strengthening the risk taking ability of the country.

Insurance penetration means ratio of premium undertaken in a given year to the gross domestic product (GDP). The Insurance penetration which was 2.7% in 2001 increased to 4.2% in 2020 and remained the same in 2021. Life insurance penetration in India was 3.2 per cent in 2021, almost twice more than the emerging markets and slightly above the global average. However, most life insurance products sold in India are savings-linked, with just a small protection component.

The insurance density in India has increased from US$ 11.1 in 2001 to US$ 91 in 2021 (density for Life insurance was US$ 69 and Non-Life insurance was US$ 22 in 2021) in keeping with the relatively faster expansion of the insurance market in India. [Economic Survey 2022-23].

16. Insurance Institute of India

The Insurance Institute of India is an insurance education society of professionals established in 1955 in Mumbai for the purpose of imparting insurance education to persons engaged or interested in insurance. It was established for the purpose of promoting Insurance Education & Training in the country. Institute qualifications are held in esteem both by the regulator and the industry.

17. Actuary

Profession of Actuary is regulated under Actuary Act, 2006.

Institute of Actuaries of India constituted under section 3 of Actuaries Act, 2006 regulates the profession of actuary.

As per section 2(a) of Actuaries Act, 2006, “Actuary” means a person skilled in determining the present effects of future contingent events or in finance modelling and risk analysis in different areas of insurance, or calculating the value of life interests and insurance risks, or designing and pricing of policies, working out the benefits, recommending rates relating to insurance business, annuities, insurance and pension rates on the basis of empirically based tables and includes a statistician engaged in such technology, taxation, employees benefits and such other risk management and investments and who is a fellow member of the Institute; and the expression “actuarial science” shall be construed accordingly.

An actuary is a business professional who deals with the measurement and management of and uncertainty. The name of the corresponding field is actuarial science. These risks can affect both sides of the balance sheet and require asset, management, liability management and valuation skills.

18. Insurance Agent

“Insurance agent” means an insurance agent who 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 – Section 2(10) of Insurance Act, 1938.

19. Lloyd’s

Lloyd’s of London, generally known simply as Lloyd’s, is an insurance market located in the City of London, which exists inside London. Unlike most of its competitors in the industry, it is not an insurance company. Rather, Lloyd’s is a corporate body governed by the Lloyd’s Act, 1871 and subsequent Acts of Parliament and operates as a partially-mutualised marketplace within which multiple financial backers, grouped in syndicates, come together to pool and spread risk. These underwriters, or “members”, are a collection of both corporations and private individuals, the latter being traditionally known as “Names”.

The business underwritten at Lloyd’s is predominantly general insurance and reinsurance, although a small number of syndicates write term life assurance. The market has its roots in marine insurance and was founded by Edward Lloyd at his coffee house on Tower Street in 1686. Today, it has a dedicated building on Lime Street, which opened in 1986. Its motto is Fidentia, Latin for “confidence”, and it is closely associated with the Latin phrase uberrimae fidei, or “utmost good faith”.

20. FEMA Provisions in Respect of Insurance

‘Insurance’ is defined as a ‘capital account transaction’ under Foreign Exchange Management Act, 1999 [FEMA], as the commitments are for a very long period. Hence, there are restrictions under FEMA. The restrictions are contained in Foreign Exchange Management (Insurance) Regulations, 2000.

Issuance of insurance policy is regulated under section 47(2) of FEMA and FEM (Insurance) Regulations, 2015.

Provisions in respect of Issuance of insurance are covered under FEM (Permissible Capital Account Transactions) Regulations, 2000.

RBI directions are contained in RBI (FED) Master Direction No. 9/2015-16 dated 1-1-2016.

21. Restrictions under FEMA in Respect of Life Insurance

Life insurance and general insurance business in India can be undertaken by insurance companies registered with IRDA.

Memorandum of Foreign Exchange Management Regulations relating to Life Insurance in India (LIM) has been given in Annexure II of RBI AP (DIR) circular No. 18 dated 17-11-2016.

Foreign Exchange Regulations governing issue of life insurance policies in rupees and foreign currencies to non-residents, collection of premia, settlement of claims, maintenance and operations of foreign currency accounts abroad, reinsurance, investment of surplus funds abroad and allied matters are set out in para 2 of RBI (FED) Master Direction No. 9/2015-16 dated 1-1-2016.

A person resident in India cannot take any life insurance policy issued by an insurer outside India without permission of RBI.

A person resident in India may continue to hold any life insurance policy issued by an insurer outside India when such person was resident outside India. If payment is made by making remittance from India, the maturity proceeds or amount of claim shall be repatriated to India within seven days – Regulation 4 of FEM (Insurance) Regulations, 2015.

22. Restrictions under FEMA in Respect of General Insurance

General insurance business in India is undertaken by insurance companies which are registered with IRDA.

Memorandum of Foreign Exchange Management Regulations relating to General Health Insurance in India (GIM) has been given in Annexure I of RBI AP (DIR) Circular No. 18 dated 17-11-2016.

Foreign Exchange regulations governing general insurance business written in India are set out in para 3 of RBI (FED) Master Direction No. 9/2015-16 dated 1-1-2016.

Directions contained in this Memorandum have been issued under section 10(4) and section 11(1) of FEMA. These relate to both marine and non-marine insurance.

A person resident in India may take or continue health insurance policy issued by insurer out of India. The payment of premium should be within limits of LRS.

Insurance of any property in India, ship or vessel can be taken only with permission of IRDA.