The Insurance Act, 1938 and the IRDAI

1. The Insurance Act, 1938: scheme

The Insurance Act is the principal statute on the business of insurance. It does not set out the law of the contract (that is largely judge-made and in the Contract Act), but it controls who may carry on insurance, on what capital, how funds are invested, how agents are paid and how policyholders are protected. Its main parts, as they stand now:

• Definitions (s.2). “Class of insurance business” (s.2(5A)), “health insurance business” (s.2(6C)), “insurance business” and “insurance contract” (s.2(6D)), “Indian insurance company” (s.2(7A)), “life insurance business” (s.2(11)), “insurance intermediary” (s.2(10B), now listing brokers, re-insurance brokers, consultants, corporate agents, third party administrators, surveyors and loss assessors, managing general agents and insurance repositories).
• Who may be an insurer (s.2C) and registration (s.3). No one may carry on insurance business in India without a certificate of registration from the Authority. Under s.3(2A) as substituted in 2025 the Authority registers an applicant only if its financial condition and management are sound, its capital structure and earning prospects adequate, and registration serves the public interest.
• Foreign investment (s.3AA, new). Aggregate holdings of foreign investors, including portfolio investors, in an Indian insurance company may extend up to 100% of paid-up equity, subject to prescribed conditions.
• Capital (s.6), accounts and actuarial reports (ss.11–13; s.12A now requires appointment of an Actuary), records of policies and claims (s.14, now with KYC and policyholder data provisions in ss.14A–14C), investment of assets (s.27 as substituted in 2025) and solvency (s.64VA).
• Policyholder provisions. Assignment (s.38), nomination (s.39), no rebates (s.41), the three-year bar on questioning a life policy (s.45), no risk without advance premium (s.64VB), surveyors and loss assessors (s.64UM).
• Control of management. Directions including disgorgement of wrongful gain (s.34(1) as substituted in 2025), supersession of the Board and appointment of an Administrator (s.52A).
• Penalties (ss.102–105E). Section 102, as substituted, makes an insurer or intermediary that fails to furnish documents, comply with directions, maintain solvency or comply with directions on treaties liable to a penalty of up to ₹1 lakh a day, subject to a maximum of ₹10 crore. New s.105E lists factors the Authority must weigh (gravity, repetition, gain made, loss to policyholders, number affected, proportionality).

2. Insurance agents and intermediaries

Since the 2015 amendment the insurer, not the Authority, appoints agents. Section 42(1) allows an insurer to appoint any person to act as an insurance agent for soliciting and procuring insurance business, provided he does not suffer from the disqualifications in s.42(3) (minority, unsoundness of mind, conviction for criminal misappropriation, breach of trust, cheating or forgery, and the like). An agent of a life insurer may not act for more than one life insurer (s.42(2)), and IRDAI regulations govern the registration, training and conduct of agents appointed by each insurer. Intermediaries such as brokers and surveyors must hold a certificate of registration from the Authority (s.42D; sub-section (2A), inserted in 2025, says no one may act as an intermediary without it), and acting without registration attracts a penalty of ₹1 lakh to ₹10 lakh under new s.105BA.

Commission may be paid only to an agent or intermediary in the manner the regulations specify (s.40), and the 2025 Act lets the Authority cap commission in the interest of policyholders (s.40(2A)). Section 41 forbids anyone to offer a rebate of commission or premium as an inducement to take a policy; the proviso says an agent who accepts commission on his own policy is not taking a rebate, and the 2025 amendment widened it from a life policy on his own life to a policy of any class taken by himself on risks to his own life, health or property.

3. The IRDAI: establishment and composition

Section 3 of the IRDA Act, 1999 establishes the Insurance Regulatory and Development Authority of India as a body corporate with perpetual succession and a common seal. Its head office is at Hyderabad, where the Central Government has placed it.

Under section 4 the Authority consists of:

• a Chairperson;
• not more than five whole-time members; and
• not more than four part-time members,

appointed by the Central Government from persons of ability, integrity and standing with knowledge or experience in life insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration, information technology (added in 2025) or any other useful discipline. Among the Chairperson and whole-time members there must be at least one person each with experience in life insurance, general insurance and actuarial science.

Tenure (s.5). As substituted in 2025, the Chairperson and whole-time members hold office for five years or until they attain sixty-five years, whichever is earlier, and are eligible for reappointment. Part-time members serve up to five years. Removal is under s.6 (insolvency, incapacity, conviction for an offence involving moral turpitude, a prejudicial financial interest, or abuse of position, the last two only after a hearing).

4. Duties, powers and functions: section 14

Section 14(1) gives the Authority the general duty to regulate, promote and ensure orderly growth of the insurance and re-insurance business. Section 14(2) lists particular powers. The ones to write in an answer:

• issuing, renewing, modifying, suspending or cancelling certificates of registration;
• protecting policyholders in matters of assignment, nomination, insurable interest, claim settlement, surrender value and other policy terms;
• specifying qualifications, code of conduct and training for agents and intermediaries, and a code of conduct for surveyors and loss assessors;
• promoting efficiency and professional organisations in the business;
• calling for information, inspection, inquiries, investigation and audit of insurers and intermediaries;
• controlling rates and terms in general insurance;
• regulating investment of funds and the margin of solvency;
• adjudicating disputes between insurers and intermediaries;
• specifying the share of business insurers must do in the rural and social sector;
• imposing penalties under s.102 of the Insurance Act (clause (n) as substituted in 2025).

The 2025 Act added ss.14A to 14E (collection and sharing of policy and claim information, confidentiality of that information) and s.16A, which creates a Policyholders’ Education and Protection Fund into which penalties collected by the Authority are credited. Regulations are made under s.26, and since 2025 the Authority must publish draft regulations for public comment before making them, except in urgent cases.

5. The Insurance Advisory Committee (short note)

Section 25 of the IRDA Act empowers the Authority to establish an Insurance Advisory Committee by notification. It has not more than twenty-five members (excluding ex officio members) representing commerce, industry, transport, agriculture, consumer fora, surveyors, agents, intermediaries, safety and loss-prevention bodies, research bodies and employees’ associations in insurance. The Chairperson and members of the Authority are its ex officio Chairperson and members. Its object is to advise the Authority on making regulations under s.26, and on other matters prescribed. Regulations are made “in consultation with” this Committee (s.26(1)), so it is the route by which users of insurance are heard before rules bind them.

6. The 2025 amendment at a glance

• 100% foreign investment in Indian insurance companies (s.3AA).
• Statutory definitions of class of business, health insurance, insurance business and insurance contract (s.2).
• Foreign re-insurer branches: net owned fund of ₹1,000 crore (s.6(2)).
• Registration requirement and penalty for intermediaries (ss.42D, 105BA); power to cap commission (s.40(2A)).
• Disgorgement directions (s.34), larger daily penalties (s.102), penalty factors (s.105E), subsidiary instructions and Consultative Committees (ss.114B, 114C).
• IRDA Act: IT expertise, age-65 limit, information sharing, Policyholders’ Education and Protection Fund, consultation before regulations.
• LIC Act: zonal offices (s.18(2)) and rules for funds of foreign branches.

How this is examined

“Explain the composition and functions of the Insurance Regulatory and Development Authority” was set in January 2026, June 2025 and February 2025: write ss.3, 4, 5 and 14, then the 2025 changes. “Explain briefly the provisions of the Insurance Act, 1938” (January 2026) is answered from section 1 above. Short notes: the Insurance Advisory Committee (February 2025) and the register and appointment of insurance agents (June 2025), both answered from sections 2 and 5.