B.A. LL.B. (Five Years) Sem 8 Insurance Law 2012 Jun Question Paper with Solutions

Why the State controls insurance

An insurer sells a promise. The policyholder pays now, and the insurer pays later, sometimes forty years later. The policyholder cannot check whether the insurer will still be able to pay. Insurers also hold a large part of the nation's savings. If an insurer fails, thousands of families lose their protection at once.

India learnt this by experience. Many early life offices were set up with little capital and collapsed. Each wave of failures was followed by a stronger law. So State control means the legal powers by which the State decides who may sell insurance and on what terms. It also decides how the money is kept safe.

How control grew

1. 1912. The Indian Life Assurance Companies Act was the first statute of general application. It required deposits and actuarial valuation of liabilities.
2. 1938. The Insurance Act, 1938 became the comprehensive statute. It covered registration, accounts, investments and management, under a Controller of Insurance.
3. 1950. An amendment confined the business mainly to public companies and co-operative societies (section 2C).

2. Registration (section 3). No one may carry on insurance business without a certificate of registration from the Authority for that class of business. The Authority grants it only if the applicant's finances and management are sound and the public interest is served (section 3(2A)).
3. The penalty (section 103). Carrying on business without registration attracts a penalty of up to twenty-five crore rupees and imprisonment of up to ten years.

2. Control over capital and solvency

An insurer must have paid-up equity capital of one hundred crore rupees for life, general or health insurance. A re-insurer needs two hundred crore rupees (section 6). It must also keep assets above its liabilities by a solvency margin (section 64VA). An insurer that fails this test is deemed insolvent and may be wound up on the Authority's application.

3. Control over accounts, records and investments

1. Accounts (section 11). A balance sheet, revenue account and other statements every year, in the form the regulations specify.

5. Control over the conduct of business

1. Social obligations (sections 32B to 32D). Every insurer must write a set share of business in the rural and social sectors, including crop insurance. A general insurer must also write a minimum share of motor third party cover.
2. Commission (section 40). Only agents and intermediaries may be paid for procuring business.
3. Premium first (section 64VB). No risk may be assumed until the premium is received.

6. Penalties and appeal

For failures to file returns, follow directions or keep the solvency margin, the penalty is up to one lakh rupees a day. The maximum is ten crore rupees (section 102). An aggrieved person may appeal to the Securities Appellate Tribunal within forty-five days (section 110).

Control by ownership

For decades the State controlled insurance by owning it. A State insurer is bound by the Constitution. In Life Insurance Corporation of India v. Consumer Education and Research Centre, (1995) 5 SCC 482, the Corporation's cheapest life policy was offered only to people in Government or reputed private employment. The Supreme Court struck down that condition as arbitrary under Article 14. A statutory insurer must frame its terms consistently with the objects for which it was created.

Nationalisation itself has constitutional limits. In Rustom Cavasjee Cooper v. Union of India, (1970) 1 SCC 248, fourteen major private banks were nationalised in 1969. The Supreme Court struck the Act down because it impaired shareholders' rights and the compensation was not just. That judgment is the background against which the insurance nationalisations must be assessed.

Evaluation

State control is meant to make sure that an insurer can keep a promise made decades earlier. Registration, capital, solvency and investment rules all serve that aim. But control has costs. Heavy rules can slow new products, and an insurer bound to rural and social targets may price other business higher. The 2025 Act shifts the balance towards growth, with full foreign ownership, while keeping strong powers of direction and supersession. The courts keep both the State insurer and the regulator within the law.

Conclusion. State control of insurance in India rests on the Insurance Act, 1938 and the IRDA Act, 1999. It controls entry, capital, solvency, investments, management and the conduct of business, enforced by penalties and appeal. The IRDAI regulates, but the Central Government directs policy and can supersede it. State ownership, through the LIC and the public sector insurers, adds another layer of control, bound by Article 14 (Consumer Education and Research Centre). The regulator's own rules remain subject to judicial review (Indian Express).