Page 243 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes Proposal form,
Claim form,
Underwriting manual, and

The system in vogue to review the rates, terms and conditions in future.

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Caution In addition to this, they are required to furnish certificates from advocates and
actuaries that the statements made are true and accurate and are not in violation of any law
and that the policy wordings are simple and easily understandable to a policyholder.

Maintenance of Solvency Margins of Insurers

As per provisions of the Insurance Act and the regulations made thereunder, every life insurer
is required:

(i) To maintain an excess of value of his assets over the amount of his liabilities of not less
than ` 50 crore (` 100 crore in the case of a reinsurer) or
(ii) A sum equivalent based on a prescribed formula, as determined by regulations not
exceeding 5% of the mathematical reserves and a percentage not exceeding 1% of the sum
at risk for the policies on which the sum at risk is not negative, whichever is highest.
Similarly, every General insurer is required to maintain a minimum solvency margin of:
(iii) ` 50 crore (` 100 crore in the case of a reinsurer) or
(iv) A sum equivalent to 20% of net premium income or a sum equivalent to 30% of net
incurred claims whichever is highest, subject to credit for reinsurance in computing net
premiums and net incurred claims.

In addition, at the time of registration all the new insurers have been required to maintain a
solvency ratio of 1.5 times the normal requirements.

Monitoring of Investments of the Insurers

You must remember that investment income is a key determinant in the calculation of premium
rates for any insurance company under the various insurance policies/schemes and for
declaration of bonus by life insurers. It is a core function of an insurance company, which cannot
be outsourced by an insurer.
In the case of general insurance, investment income compensates underwriting losses, if any, of
the insurance company, which in turn enables then to keep their premium rates competitive.
Therefore, insurance companies essentially invest these funds judiciously with the combined
objectives of liquidity, maximisation of yield and safety.
An investment policy has to be submitted to the Authority by an insurer before the start of an
accounting year. Since the insurance companies keep the policyholders money in their fiduciary
capacity they are also required to maintain a minimum level of solvency to meet the reasonable
expectations of the policyholders.
For this, the Authority has mandated the pattern of investment to be followed by the insurance
companies. Investments in Government securities, approved investments and infrastructure
and the social sectors have been prescribed in the Insurance Act, 1938.

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