Insurers selling other financial products is ultra vires the 2 laws, will lead to problems: Legal experts

Even as some call the Indian government’s proposal to allow insurance companies to sell other financial products as radical, legal eagles say it is ultra vires of the two insurance laws governing the sector and not beneficial for the policyholders.

They also question how such a move would benefit the policyholders and safeguard the policyholders’ funds against any liability claims.

“The proposal goes against the preamble of the two insurance laws viz Insurance Act 1938 and the Insurance Regulatory and Development Authority Act 1999. The government’s proposal is ultra vires of these two Acts that focus on policyholder’s welfare and orderly growth of the sector,” D.Varadarajan, a Supreme Court advocate and a Member of the KPN (K.P.Narasimhan) Committee on Provisions of the Insurance Act, 1938 told IANS.

Varadarajan specialising in company/competition/insurance laws also added: “Allowing insurers to distribute other financial products will beef up the returns for the shareholders fund and will not benefit the policyholders fund. The move does not serve the purpose of policyholders while reducing the insurers to a distributor of financial products.”

The Indian government has come out with far reaching proposals to amend various provisions of the two insurance laws governing the sector.

The proposed amendments include scrapping of the statutory Rs 100 crore startup capital for life and general insurance business and Rs 200 crore for reinsurance business, allowing different kinds of insurers, including captives, composite insurers, changing the investment provisions and allowing insurers to provide services related or incidental to insurance business and distribute other financial products as specified by and subject to regulations.

According to Varadarajan, the proposed amendments cloth the sectoral regulator – Insurance Regulatory and Development Authority of India (IRDAI) with enormous, excessive and unguided powers.

Not only real, but even likely abuse of power would suffice to question such a liberally leeway proposed to be given, he added.

“Be that as it may, it is not to be understood that the Regulator would act harshly or irrationally, but nothing would quell the lurking fear that once the proposals enter the statute book, there might be a possibility of abuse of the process of law at distant date by an adventurous regime,” Varadarajan remarked.

While some of the proposed amendments are welcome and long awaited, allowing insurers to distribute other financial products under one roof makes it unclear on how overlaps with other regulators as well as the safeguards to policyholders’ funds against liability arising fr om such other activities, will be ensured, said Shailaja Lall, Partner, Head of Insurance Practice, Shardul Amarchand Mangaldas & Co.

“Perhaps the devil is in the detail and the regulations in this regard will provide more clarity to address these concerns,” Lall added.

According to Emkay Global Financial Services, allowing distribution of other financial products (including other insurance products offered by other insurers) may likely open up opportunities for insurers with a strong distribution franchise, mostly top life insurers and stand alone health insurers for now.

(Venkatachari Jagannathan can be reached at v.jagannathan@ians.in)

20221202-142005

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