Solvency, and the Premium Before the Risk
Chapter Thirty-Two
Syllabus topic 3, "Indian Insurance Law – General"
Pages 165 to 169 of 745
In one line
An insurer must at all times have more assets than liabilities by a margin the Act fixes, and it is not on risk on any policy until the premium has actually been received.
In the wording a student can write in an exam: section 64V requires assets to be valued at not exceeding market or realisable value and a proper value to be placed on every liability; section 64VA requires every insurer and reinsurer at all times to maintain an excess of assets over liabilities of not less than fifty per cent of the minimum capital under section 6, failing which it is deemed insolvent; and section 64VB provides that no insurer shall assume any risk in India unless and until the premium payable is received or guaranteed or a deposit is made in advance.
Why solvency is regulated and capital is not enough
Because capital is tested once and liabilities grow every day. An insurer registered with one hundred crore rupees may within three years have written business whose liabilities dwarf it. Section 6 is a gate; section 64VA is a continuing test.
And because the test would be meaningless without rules about valuation. An insurer can satisfy any solvency requirement by valuing its assets high and its liabilities low, so section 64V comes first and fixes how each side is measured.
Valuation: section 64V
Section 64V(1) provides that for the purpose of ascertaining compliance with section 64VA, assets shall be valued at a value not exceeding their market or realisable value, and that certain assets may be excluded by the Authority in the manner the regulations specify.
Two points there. The words are "not exceeding", so an asset may be taken at less but never at more. And the Authority may exclude assets altogether, which is how intangibles, deferred expenses and unrealisable receivables are kept out of the solvency calculation.
Section 64V(2) provides that a proper value shall be placed on every item of liability of the insurer, in the manner the regulations specify.
Section 64V(3) requires every insurer to furnish the Authority, along with its returns, a statement of its assets and liabilities assessed in the manner the section requires, as on the 31st day of March each year, within the time the regulations specify. The statement must be certified by an Auditor approved by the Authority in respect of general insurance business, or by an actuary approved by the Authority in respect of life insurance business.
That split reflects the difference between the two classes. A general insurer's liabilities are mostly claims already reported; a life insurer's are projections over decades, which only an actuary can value.
Solvency, and the Premium Before the Risk
The solvency margin: section 64VA
Section 64VA(1) provides that every insurer and reinsurer shall at all times maintain an excess of the value of assets over the amount of liabilities of not less than fifty per cent of the amount of minimum capital as stated under section 6, arrived at in the manner the regulations specify.
Section 64VA(2) states the consequence in the strongest terms the Act uses. An insurer or reinsurer who does not comply with sub section (1) shall be deemed to be insolvent and may be wound up by the court on an application made by the Authority.
Section 64VA(3) requires the Authority to specify by regulation a level of solvency margin known as the control level of solvency, on breach of which it shall act under sub section (4), without prejudice to any other remedial measure. A proviso allows the Authority, where it is satisfied that compliance would cause undue hardship because of unfavourable claim experience, a sharp increase in the volume of new business, or any other reason, to direct that the sub section applies to that insurer with modifications for a specified period and on specified conditions, provided the modifications do not bring the control level of solvency below what sub section (1) stipulates.
Section 64VA(4) provides that if at any time an insurer or reinsurer does not maintain the required control level of solvency margin, it shall, in accordance with the Authority's directions, submit a financial plan indicating a plan of action to correct the deficiency within a specified period not exceeding six months.
Section 64VA(5) allows the Authority, if it considers the plan inadequate, to propose modifications and to give such directions as it deems necessary, including directions about the business the insurer may transact.
The design is a ladder again. A shortfall against the control level triggers a plan; a shortfall against the statutory minimum makes the insurer deemed insolvent and liable to be wound up on the Authority's application.
Premium before the risk: section 64VB
This is the most examinable provision in Part IIC and it is short.
Section 64VB(1) provides that no insurer shall assume any risk in India in respect of any insurance business on which premium is not ordinarily payable outside India, unless and until the premium payable is received by it, or is guaranteed to be paid by such person in such manner and within such time as may be prescribed, or unless and until a deposit of such amount as may be prescribed is made in advance in the prescribed manner.
Section 64VB(2) provides that in the case of risks for which the premium can be ascertained in advance, the risk may be assumed not earlier than the date on which the premium has been paid in cash or by cheque to the insurer.
Solvency, and the Premium Before the Risk
The Explanation deals with payment at a distance, and it was widened in 2026. Where the premium is tendered by postal money order or by cheque sent by post, or by any online mode, the risk may be assumed on the date on which the money order is booked, or the cheque is posted, or the money is received in the insurer's bank account, as the case may be.
Section 64VB(3) requires any refund of premium due on cancellation, alteration or otherwise to be paid by the insurer directly to the insured by crossed or order cheque or by postal money order, with a proper receipt obtained; and provides that such a refund shall in no case be credited to the account of the agent.
Section 64VB(4) is the agent's duty and it is strict. Where an insurance agent collects a premium on behalf of an insurer, he shall deposit it with, or dispatch it by post to, the insurer, in full and without deduction of his commission, within twenty four hours of collection, excluding bank and postal holidays.
Section 64VB(5) allows the Central Government by rules to relax the requirements of sub section (1) for particular categories of insurance policies, and section 64VB(6) allows the Authority to specify by regulations the manner of receipt of premium.
Why the section matters so much in practice. It is the answer to the commonest factual question in Indian general insurance: a cheque was given, the loss occurred, and the cheque was dishonoured. The premium was never received, so the risk never attached, and the insurer is not liable however sympathetic the facts.
A worked example
Konkan General Insurance has assets valued under section 64V at nine hundred and forty crore rupees and liabilities of eight hundred and ninety crore. Its minimum capital under section 6 is one hundred crore.
| Item | Amount (Rs. crore) |
|---|---|
| Assets, valued under section 64V | 940 |
| Less: liabilities, valued under section 64V | (890) |
| Excess of assets over liabilities | 50 |
| Required under section 64VA(1): 50 per cent of the section 6 minimum capital of 100 | 50 |
| Shortfall | 0 |
It complies, but only exactly. One bad quarter puts it below the statutory minimum, at which point section 64VA(2) deems it insolvent and the Authority may apply to wind it up. Long before that, a breach of the control level of solvency specified by regulation under section 64VA(3) requires a financial plan under sub section (4) correcting the deficiency within a period not exceeding six months.
Now take one of its policies. Ramesh Bhide's factory fire policy is due for renewal on 1 April. He posts a cheque on 29 March and the factory burns on 31 March. On the Explanation to section 64VB(2), the risk may be assumed on the date the cheque was posted, so the insurer is on risk, subject to the cheque being honoured.
Solvency, and the Premium Before the Risk
Change one fact. Suppose the cheque is dishonoured on 4 April. The premium was never received, so under section 64VB(1) the insurer never assumed the risk and the claim fails.
Change another. Suppose Ramesh paid cash to the agent on 29 March and the agent kept it for a fortnight. Section 64VB(4) required the agent to deposit or dispatch it in full, without deducting commission, within twenty four hours. As between Ramesh and the insurer, payment to the insurer's agent is receipt by the insurer, and the agent's default is the insurer's problem under section 42(5).
And suppose the policy is cancelled and a refund is due. Section 64VB(3) requires the insurer to pay it directly to Ramesh by crossed or order cheque or postal money order, obtain a receipt, and in no case credit it to the agent's account.
What it does NOT mean
It does not mean the solvency margin is a fund set aside. It is a measure: the excess of the value of assets over liabilities, both valued under section 64V, against a required figure.
It does not mean a shortfall automatically winds the insurer up. Section 64VA(2) deems it insolvent and allows the Authority to apply to the court; and a breach of the lower control level triggers a plan under sub section (4).
It does not mean cover can never begin before payment clears. The Explanation to section 64VB(2) lets the risk be assumed on the date the cheque is posted, the money order booked or the money received in the insurer's bank account; what defeats the cover is the payment failing altogether.
And it does not mean an agent may deduct his commission. Section 64VB(4) requires the premium to be remitted in full within twenty four hours.
Quick revision
Section 64V: assets at not exceeding market or realisable value, with power in the Authority to exclude some; a proper value on every liability; an annual statement as on 31 March, certified by an approved Auditor for general business and an approved actuary for life business.
Section 64VA(1): an excess of assets over liabilities at all times of not less than fifty per cent of the minimum capital under section 6. (2) Non compliance deems the insurer insolvent and lets the Authority apply to wind it up. (3) The Authority specifies a control level of solvency, relaxable for hardship but never below the sub section (1) figure. (4) A financial plan correcting the deficiency within not more than six months. (5) The Authority may modify the plan and direct what business may be transacted.
Solvency, and the Premium Before the Risk
Section 64VB(1): no risk assumed unless and until the premium is received, guaranteed or deposited in advance. (2) Risk assumed not earlier than payment in cash or by cheque. Explanation: money order booked, cheque posted, or money received in the insurer's bank account for an online payment. (3) Refunds direct to the insured, never to the agent's account. (4) An agent must remit in full, without deducting commission, within twenty four hours. (5) and (6): relaxation by Central Government rules and the manner of receipt by regulations.
Test yourself
1. How are assets and liabilities valued for the solvency test? Assets at a value not exceeding their market or realisable value, with power in the Authority to exclude certain assets; and a proper value placed on every item of liability, both in the manner the regulations specify: section 64V(1) and (2).
2. What margin must an insurer maintain, and what happens if it does not? An excess of assets over liabilities of not less than fifty per cent of the minimum capital under section 6, at all times. Non compliance deems the insurer insolvent and it may be wound up by the court on the Authority's application: section 64VA(1) and (2).
3. What is the control level of solvency? A level specified by the Authority by regulation under section 64VA(3), above the statutory minimum, on breach of which the insurer must submit a financial plan under sub section (4) correcting the deficiency within a period not exceeding six months.
4. State section 64VB(1). No insurer shall assume any risk in India in respect of insurance business on which premium is not ordinarily payable outside India unless and until the premium payable is received by it, or is guaranteed to be paid in the prescribed manner and time, or a deposit of the prescribed amount is made in advance in the prescribed manner.
5. A premium cheque is posted on 29 March and the loss occurs on 31 March. Is the insurer on risk? Yes, subject to the cheque being honoured. The Explanation to section 64VB(2) allows the risk to be assumed on the date the cheque was posted.
6. What must an agent do with a premium he collects? Deposit it with, or dispatch it by post to, the insurer in full, without deducting his commission, within twenty four hours of collection, excluding bank and postal holidays: section 64VB(4).
7. To whom must a refund of premium be paid? Directly to the insured, by crossed or order cheque or postal money order, with a proper receipt obtained; it may in no case be credited to the agent's account: section 64VB(3).
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.