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Thursday, June 15, 2017


The Insurance Regulatory and Development Authority, abbreviated as IRDA, operates with the aim of protecting the interests of policyholders. It is an autonomous body which regulates and develops insurance business in India.

In 1990, India faced a major financial crisis in Balance of payments (BOP). The World Bank recommended that India should introduce economic and financial reforms. Going forward, the policy of ‘Globalization, Liberalization and Privatisation’ was adopted by the Government of India.  In 1991, economic and financial reforms started getting implemented. In 1993, Committee on Reforms in the Insurance Sector, headed by Mr. R. N. Malhotra, (Retired Governor, Reserve Bank of India) was set up to recommend reforms. IRDA came into existence with the recommendations of ‘Malhotra committee’ which was constituted by the government of India in Jan 1994. The committee studied the past penetration of insurance in India and future scope for growth and development of the industry. On the basis of that research, some of the reforms recommended were: -
  •     Private sector companies should be allowed to promote insurance companies.
  •     Foreign promoters should also be allowed.
  •     Government to vest its regulatory powers on an independent regulatory body answerable to Parliament.
Based on its recommendations, IRDA Act 1999 was passed in the parliament. In April 2000, it was incorporated as a statutory body.

Functions and Duties of IRDA and its benefit to the customers
1. Registering and regulating insurance companies:  Each and every insurance company has to be registered with IRDA.  As an initial requirement, 100 crore paid up capital is required for obtaining a licence. IRDA ensures that no one enters the industry with mala fide intentions.

2. Protecting policyholders’ interests:  Insurance is a complex financial product and hence IRDA keeps a close watch on the interests of the policy holders.  A number of rules have been set up right from the filling of the proposal form to the disbursement of maturity/death claim. For example, if the policy holder is not satisfied, he/she has the right to claim a refund on the policy within 15 days from the receipt of policy document.
*The point to be noted is that it is not the issuance date but the date when the person physically receives the document.

3. Licensing and establishing norms for insurance intermediaries: Insurance brokers and insurance agents have to obtain a license before selling insurance products. Agents have to undergo a training course and pass an online test. The objective of this function is to ensure that the market intermediaries are well versed in insurance products and are competent in offering the right financial solution to the customers.

4. Promoting professional organisations in insurance: IRDA keeps on issuing guidelines for smooth and efficient functioning of the insurance companies. For example, there is rule that once a person has applied for insurance, the company has a TAT (turnaround time) of 15 days. This means that it will have to decide on whether to issue the policy or reject it in the stipulated time frame. The IRDA has setup an insurance ombudsman (public advocate) for addressing the grievances of the customers. The rules set for the ombudsman are heavily tilted in favour of the customers.

5. Regulating and overseeing premium rates and terms of non-life insurance covers: The customers get the benefit of standard premium rates. Portability of health insurance has also been introduced by IRDA. This helps keep the health insurance companies on their toes and they provide more flexibility in their products and services so that a customer doesn’t contemplate switching to a competing insurance provider.

6. Specifying financial reporting norms of insurance companies: There are quarterly audits of insurance companies and a number of reports have to be submitted by the insurance companies on a monthly basis. This way, the IRDA keeps a check on the financial health of the companies.

7. Regulating investment of policyholders’ funds by insurance companies:  Firstly, no money can be invested outside India and secondly, the money can be invested only in the list of approved sectors/companies in India. Thus, the IRDA ensures that the policy holders’ money is safe and generates good interest.

8. Ensuring the maintenance of solvency margin by insurance companies: Insurance companies need to have sufficient cash to meet out the costs due to claims. Premium paid by customers is very less compared to the offered sum assured (i.e. the value of risk cover). Every life insurer is required to maintain a Required Solvency Margin as per Section 64VA of the Insurance Act 1938. As prescribed by the IRDA, Required Solvency Margin is the amount by which an insurance company's capital exceeds its projected liabilities; effectively a measure of its financial health.

The IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations, 2000 describes in detail the method of computation of the Required Solvency Margin.

The Life Insurance Council explicitly explains how this ratio is computed. 

Thus, by using this Solvency Margin ratio as a yard stick, IRDA monitors the financial health and the statutory obligation of disbursing the claims by the companies to its customers.

9. Ensuring insurance coverage in rural areas and of vulnerable sections of society: Majority of the Indian population is either not insured or under insured. Urban areas have more insurance customers as compared to rural areas. Premium paying capacity is also more in urban areas. Therefore for the benefit of rural customers, IRDA has made it mandatory for insurance companies to generate a minimum 5% of the business from rural market.

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