IRDA Regulations

) By
Krishan Srivastava
(Asst. Professor)
(Jayoti Vidyapeeth Women’s University,
Jaipur)
Krishan_11031985@yahoo.com
 To be effective, regulation and supervision of health
insurance must encompass the following objectives:
 Promoting public interest of ensuring equitable,
affordable and accessible healthcare to the people
at large.

 Establishing requisite procedures for intervention

that safeguard the solvency and financial
soundness of health insurers so that they are in a
position to fulfill the promises they made to the
insured and providing an environment to allow
health insurers to continuously offer health
insurance products and carry health risks on
sustainable bases.
 Establishing and promoting a level playing field among
the carriers of health risk so as to encourage
participation of an optimal number of health insurers in
order to provide most consumers with a variety of
products at reasonable benefits for affordable
premiums.

 Ensuring order in the market through the promulgation

and enforcement of laws and regulations that address
issues such as, the type or types of health policies or
covers that insurers can sell, the manner and
methodology of arriving at equitable product pricing,
the prompt and orderly payment of claims, the contract
terms and conditions including the specification of
standardized definition of certain policy terms,
mandatory minimum policy stipulations and setting
market standards for transacting the business of health
insurance.
 Establishing similar safeguards and/or standards
for the orderly functioning and financial soundness
of other programs that assume health expenditure
risks, such as subscription plans, HMOs, health
plans of mutual benefit associations, cooperatives,
and other community plans. Prescribing
appropriate authorization (registration) and
oversight of entities that carry and manage these
plans in order that public policy objectives of
health insurance are realized and specific market
failures are corrected. It is noteworthy that these
entities operate in the same market as duly
registered, and thus regulated, health insurers
 The Parliament (legislative branch) consisting of
two houses, namely, Lok Sabha (Lower House),
and Rajya Sabha (Upper House) enacts laws
(Acts). An Act passed by the parliament requires
the assent of the President of India and such Act
comes into full force following its notification in
the Official Gazette. Acts are referred to as
“primary legislations”. For insurance, the broad
legal framework is the Insurance Act, 1938, as
amended (Act).
 The Executive Branch, comprising the various
ministries and governmental entities under it, enforces
compliance with the Act. The Act, as recently
amended by the Insurance Regulatory and
Development Authority Act, 1999 (IRDA Act) created
the Insurance Regulatory and Development Authority
(IRDA) and constituted it as the entity or body
(executive) to enforce the provisions of the Act. The
executive (IRDA) is looked upon as possessing the
technical expertise on insurance matters within the
GOI to discharge its powers and obligations for the
prudential oversight of the business of insurance.
 Before the IRDA Act took effect, the Act
authorized the concerned Ministry (executive) to
frame insurance rules and, on the basis of that
legislative authority, the Controller of Insurance,
then under the Ministry of Commerce until it was
transferred to Ministry of Finance, promulgated
the Insurance Rules 1939. These Rules were the
principal secondary legislation governing the
conduct of insurance
 The regulatory body (executive), created and
empowered by the Act to do so, frames and
promulgates regulations. For insurance matters,
the regulatory body is the IRDA. The Act specifies
the areas where regulations can be made. For
instance, where the Act grants power to the IRDA
to make regulations on licensing of agents, such
regulations would describe the qualifications and
practical training required of an agent and specify
the corresponding fee, etc., for a license to be
granted. No Regulation may override the
provisions of the Act.
 The judiciary interprets the law, both primary and
secondary legislation. It hears and decides
disputes between insurers and the policyholders,
protects the insuring public by imposing civil
fines or criminal penalties for violation of the
insurance laws and protects insurers, their agents
and intermediaries by overturning arbitrary or
unconstitutional legislation, rules, regulations or
orders promulgated by the insurance regulator.
 To facilitate dispute resolution, India has also
Consumer Courts (Fora), Insurance Ombudsmen,
Lok Adalats, etc., that address consumer
grievances in summary proceedings. Policyholder
complaints against insurers are mostly dealt with
at the Insurance Ombudsmen and Consumer
Courts. There are also various tribunals dealing
generally with industrial or sector-specific
matters as appellate authorities exercising
specific adjudicatory powers. While these entities
do not fall under the judiciary branch, they are
considered a part of the court system.
 To predicate discussion of the areas of regulation,
it is worth considering whether health insurance
is a line of business included in both life and non-
life business. BearingPoint considers health
insurance a separate category, the third major
branch of insurance business (life and non-life
being the other two). The major lines of health
insurance include medical expense, disability
income protection, and long-term care. All of
these products are included in the current
regulatory definition of health insurance
business.
 Under the Insurance Act, 1938, insurance business is
divided into two classes: (a) life insurance business
and (b) general insurance business. Health insurance
is common to both. Thus:
 Section 3(2AA) of the Act states that: “The
Authority shall give preference to register the
applicant and grant him a certificate of
registration if such applicant agrees, in the
form and manner as may be specified by the
regulation made by the Authority, to carry on
the life insurance business or general insurance
business for providing health cover to
individuals or group of individuals”.
 Health insurance business or health cover is defined as “the
effecting of contracts which provide sickness benefits or
medical, surgical or hospital expense benefits, whether in-
patient or out-patient on an indemnity, reimbursement,
service, prepaid, hospital or other plan basis, including
assured benefits and long term care”.

 However, Section 4, (2) of IRDA Regulations 2002,

Registration of Indian Insurance Companies creates some
ambiguity where it prescribes that “The classes of business of
insurance for which a requisition for registration application
may be made are: (a) life insurance business consisting of
linked business, non-linked business or both; or (b) general
insurance business including health insurance business.”
The mention of health insurance as included in the general
insurance business, while silent as to life insurance business,
is an ambiguity that needs to be clarified by the IRDA,
particularly in light of Section 3(2AA) of the Act, cited above.
 For insurance matters, India has broad laws on
consumer protection including, but not limited
to, those enunciated in the Insurance Act 1938,
Consumer Protection Act 1986, Arbitration and
Conciliation Act 1996 and, to a certain extent, the
Indian Contracts Act 1872. Secondary legislation,
particularly the Insurance Rules 1939, the
Ombudsman Rules 1998 and regulations issued by
the IRDA provide detailed guidelines that further
strengthen consumer protection.
 Broadly, consumer protection is provided through
sound and prudential regulatory oversight of
market conduct; solvency of insurers in
establishing fair and transparent business
practices in the solicitation, servicing and claims
settlement and in providing assurance that health
insurers are able to fulfill their contractual
promises; and effective functioning of adequate
mechanisms for handling and resolving consumer
grievances, complaints and industry related
disputes.
 Section 43 of the Act ensures that agents possess
legal competence and trustworthiness by
requiring that they have capacity to contract, are
free of any criminal conviction with respect to
misappropriation, breach of trust or cheating,
forgery or abatement or attempt to commit any
such offense and have not knowingly participated
or connived at any fraud, dishonesty or
misrepresentation against any insurer or insured,
etc.
 Regulation 2000 on Licensing of Insurance Agents
reinforces Section 43 by prescribing, among
others, minimum educational attainment,
number of hours of practical training, successful
passing of the licensing examination and
adherence to a set code of conduct, all of which
strengthen market confidence and consumer
protection. In similar fashion, such requirements
and codes of conduct are also prescribed
specifically for brokers and corporate agents.
 This regulation requires certain disclosures to be
included in every advertisement to further inform
consumers of the insurance product. It also
requires every insurer and intermediary to
designate its compliance officer as well as the
filing and retention of advertising materials.
However, while defining “unfair or misleading
advertisement” with specificity and clarity, the
regulation does not include a provision
specifically prohibiting the use of “unfair or
misleading advertisement”.
 To date, this is the only IRDA regulation specific
to health insurance. This regulation established
third party administrators (TPA) and the rules for
their licensing as intermediaries in rendering
healthcare for insured beneficiaries and
promoting a “cashless system” with easier access
to and faster settlement of covered benefits of
medical expense covers. The regulation prescribes
high educational and practice standards of
individuals operating and managing a TPA and
requires adherence to a prescribed Code of
Conduct.
 This regulation provides comprehensive standards on
consumer protection describing materials (including
product prospectus) and explanatory statements that
are to be provided at the point of sale, the necessity
and importance of the proposal form, matters to be
stated in a life or general insurance policy, claims
procedures in respect to life and general policies, and
certain standards for the proper discharge of
policyholder services. Except for the absence of a 15-
day period within which a general insurance
policyholder may obtain a return of premium (as
required for life insurance policies), this regulation
may be deemed complete as to life and general
insurance
 The IRDA issued Guidelines on “File and Use” for
General Insurance effective as of 1st November
2006. The guidelines are salutary for property and
casualty (non life) insurance in that they clearly
define and prescribe the requirements and
procedures for the regulatory filing and approval
of general insurance rates and forms, including
emphasis on corporate governance relating to
underwriting, product design and rating, among
others.
 However, to ensure fulfillment of the broad policy
objectives of “creating a health care system that is not
too costly, of good quality and with equitably
distributed burden of health care spending,
intervention through heightened regulation is both
justified and necessary for health insurance.

 The most important standard for approval of health

insurance policy forms is to ensure that premium
charged under the policy is reasonable in relation to
the benefit provided. This standard is often
implemented by requiring a minimum loss ratio
under a particular policy form. “Rate to loss ratio”
guidelines could be prescribed as a regulatory means
of monitoring and controlling pricing activities of
health insurance
 In the European Union there has been a move towards
solvency regulation and less emphasis on policy
terms, conditions and prices. This philosophy looks
more to ensuring that there is adequate capital
measured against risk underwritten and the presence
of strong management control of risk, appropriate
board oversight and transparency. Ensuring the
solvency of health insurers is an indispensable
requirement to adequate protection of policyholders.
However, regulations that are designed to prevent
insurer insolvencies must be balanced with public
policy goals of providing accessible and affordable
health care.
 This is a challenge for regulators the world over
and particularly in India where IRDA is both the
regulator and developer of insurance.
 The Act prescribes minimum paid up equity capital
for insurers, the maintenance of required solvency
margin (RSM), and the detailed manner by which RSM
is determined under IRDA regulation Margin of
solvency is the excess of an insurer’s assets over its
liabilities. In some jurisdictions this is referred to as
“surplus”. However, the amount of the required
margin of solvency is restricted (appropriated)
surplus, thus not available for policyholders’
dividends or profit distribution. As an added “control”
(intervention level), “IRDA has set a working Solvency
Margin Ratio (ratio of actual solvency margin to the
required solvency margin) of 1.5 for all insurers
 The above provisions of the Act and the
implementing IRDA regulations are conservative
measures to make sure that no insurer operating
in the market is financially distressed. It is a
wholesome assurance of public protection.
However, the RSM relates directly to the policy
liabilities of an insurer and as its business grows
its policy liabilities grow. So also does the
corresponding RSM, which may ultimately strain
the financial resources of the insurer and its
shareholders, leading to inefficient use and/or
immobilization of capital.
 For health insurance business, the determination of
policy liabilities (reserves) follows the systematic
formulae prescribed under IRDA Regulations, 2000 on
Assets, Liabilities and Solvency Margin of Insurers As
noted earlier, standards could be implemented that
require a minimum loss ratio under the policy form
and loss ratio guidelines could be prescribed as a
means of monitoring and controlling the pricing
activities of health insurers. However, since loss
experiences are factored into the determination of
fair, reasonable and adequate premium rates
applicable to the various types of health insurance
products, a regulation prescribing different reserving
rules to apply to specific categories of health
insurance may be necessary.
 In addition, claims characteristics and loss
development of different health insurance
products vary. For example, the determination of
adequate reserves for policy liabilities for the
short-term but renewable nature of medical
expense covers differ from those of the long-term
and permanent nature of contracts for disability
income protection and long-term care.
 Prudential insurance oversight requires that all
insurers file financial reports reflecting their
financial condition and results of operations at least
annually or as frequently as necessary when an insurer
is deemed to have a financial problem. The filing of
financial reports is primarily to determine that the
reporting insurer is at all times maintaining assets
that are enough to cover its current and estimated
prospective liabilities plus the required solvency
margin. These areas are adequately covered under the
current legal and regulatory Framework. In addition,
the IRDA regulations on Appointed Actuaries further
strengthens credibility of the insurer’s financial
statements.
 Laws relating to the handling, resolution and
settlement of disputes and the machinery
through which complaints and disputes can be
addressed are plentiful in India.
 Recourse to the courts is a guaranteed right of
every citizen and for insurance matters, this right
is further emphasized in the Act by giving
policyholders the right to sue for any relief in
respect to his or her policy in any court of
competent jurisdiction. However, judicial
proceedings are normally cumbersome, expensive
and time consuming.
 The Directive Principle of State Policy of the Indian
constitution lays down the principle that the state
should encourage settlement of disputes by
arbitration. Thus the Arbitration and Conciliation Act
1996 established the process of arbitration through
which parties to a dispute present their cases at a
hearing before a mutually agreed upon panel of
disinterested persons (arbitrators) to render decision.
Arbitration provision in insurance policies typically
stipulates that any dispute with regard to the
quantum of claim, liability having been admitted,
shall be referred to arbitration conducted in
accordance with the provisions of the Arbitration and
Conciliation Act 1996. Decisions arrived through
arbitration can be challenged, by way of appeal, by
either or both parties in a proper civil court based on
(limited) grounds specified under the Act.
 The Consumer Protection Act created the consumer
commissions comprised of consumer courts as
accessible forums for inexpensive and speedy redress
of consumer grievances. It is a comprehensive
legislation containing, among others, the definition
and meaning of terms such as “consumer”,
“complainant”, “deficiency in service”, “negligence”
and “unfair and restrictive trade practices” that apply
to all goods and services of all types of companies and
organizations. Insurance is a type of service that falls
under the jurisdiction of the consumer courts. The
consumer protection machinery consists of a three-
tiered jurisdictional system comprised of District
Commission, State Commission and National
Commission.
 Because the (overwhelming) majority of
insurance disputes are handled and resolved
through the ombudsman system, this section
focuses on the ombudsman system and the Rules
promulgated in 1998 on grievance redressal and
dispute resolution and suggests certain measures
to further strengthen it.