Insurance In India, With Focus On The Unclaimed Insurance Policies

Key Takeaways

• Insurance is a type of risk management that's primarily used to protect against the risk of a speculative, unpredictable loss.
• Broadly, there are two categories of insurance, which are, life insurance and general Insurance.
• To regulate and develop the insurance industry, the Insurance Regulatory and Development Authority was established in 1999.
• Unclaimed policy money is due in the form of death claims, survival benefits, maturity benefits, premium refunds, premium deposits, or indemnity claims, plus interest.
• The IRDAI issued various directions regarding policyholder unclaimed amounts. All of these directives were consolidated into a master circular dated July 25, 2017.

Introduction

In our dealings with day-to-day banking, we often face questions regarding insurance. Insurance has become a prevalent concept worldwide. Its usage has been developing in India for a long time now. However, there are a lot of ideas surrounding insurance that are usually overlooked. One of such concepts is unclaimed insurance. This article deals with the insurance system in India, as well as, it explains the concept of unclaimed insurance policies with regards to what happens to the amount of the unclaimed insurance policies.

What is Insurance

In insurance, a company or the state agrees to provide a guarantee of compensation in the event of a specified loss, damage, illness, or death in exchange for paying a specified premium. Insurance is a type of risk management that's primarily used to protect against the risk of a speculative, unpredictable loss. An insurer, insurance company, or insurance carrier is a company that sells insurance. An insured party or a policyholder is a person or an entity that purchases insurance.

In exchange for the insurer's promise to compensate the insured party in the event of a covered loss, the insured party assumes a guaranteed, known and relatively small loss in the form of payment to the insurer. The loss can be financial or non-financial, but it must be reducible to monetary terms and involve something in which the insured party has an insurable interest based on ownership, possession, or a prior relationship.

The insured party is given a contract, known as an insurance policy, that outlines the terms and conditions under which they will be financially compensated. The premium is the amount of money charged by the insurer to the insured party for the coverage specified in the insurance policy. If the insured party suffers a loss that may be covered by the insurance policy, the insured party files a claim with the insurer, which is then processed by a claims adjuster.

What are the types of insurance

Broadly, there are two categories of insurance, which are, life insurance and general insurance.

Life insurance is a contract that pays out in the event of death or disability—some life insurance policies even payout after retirement or a set period. Thus, life insurance ensures one's family's financial security even in one's absence. A life insurance policy can be purchased with a single payment or monthly payments. The insurer promises to pay the family a fixed amount in the event of one's death or disability. Life insurance is classified into several types based on its coverage. Such categories are term insurance, whole Life Insurance, endowment policy, money-back policy, Unit-Linked Insurance Plans (ULIPs), child plans, pension plans, and tax benefits.

In the case of United India Assurance v. Laxamma, the defendant had deposited a premium cheque which bounced. When the insured died, the Court ordered that the company must pay the claim amount. The Court stated that they were not informed of the cheque bouncing before the claim was placed. Hence, a claim can also be awarded on humanitarian grounds.

A general insurance contract compensates for losses other than death. A house, car, bike, health, travel, and other liabilities are covered by general insurance. The insurance company promisesto pay a lump sum to cover vehicle damages, medical expenses, theft or fire losses, and even travel expenses. In short, general insurance protects all assets from loss, damage, theft, and other liabilities. It's not like life insurance. Almost anything and everything can be insured. However, there are five primary types: Health Insurance, Motor Insurance, Travel Insurance, Home Insurance, and Fire Insurance.

Some examples of Insurance Companies in India are Bajaj Allianz Life Insurance CompanyLimited; Birla Sun Life Insurance Co. Ltd; HDFC Standard Life Insurance Co. Ltd; Life Insurance Corporation of India; National Insurance Co. Ltd.; Bharti AXA General Insurance CompanyLimited, etc.

Laws Surrounding Insurance in India

The following Acts governs the Insurance Business in India:

• The Indian Stamp Act, 1899
• The Insurance Act, 1938 and Insurance Laws (Amendment) Act, 2015
• The Insurance Rules 1939
• The IRDA Act, 1999
• The Rules and Regulations Framed under Insurance Regulatory and Development Authority IIRDAI) Act, 1999
• The Insurance Amendment Act, 2002
• The Insurance (Appeal to Securities Appellate Tribunal) Rules, 2016
• The Insurance Ombudsman Rules, 2017

Regulations governing/affecting life insurance business in India:

• LIC Act, 1956 and the amendments to LIC Act.

What is the IRDAI

To regulate and develop the insurance industry, the Insurance Regulatory and Development Authority was established in 1999. The IRDAI was incorporated as a statutory body in April 2000.The IRDAIregulates Indian insurance companies. The IRDAI's mission is to protect policyholders' interests and promote a healthy Indian insurance industry. To do business in India, all insurance companies must be registered with the IRDAI.

In addition to insurance companies, IRDAI regulates insurance intermediaries such as corporate agents, insurance brokers, and others by requiring them to obtain a registration certificate before soliciting insurance. The IRDAI has issued many regulations and guidelines under the Insurance Act, 1938. They can inspect, investigate, and stop any insurer or intermediary from doing business if it is in the policyholders' or public interest.

What are unclaimed insurance policy amounts

Unclaimed insurance policy money is the amount due in the form of death claims, survival benefits, maturity benefits, premium owing for refund, premium deposit not adjusted against premium, or indemnity claims, including accrued interest that has remained unclaimed for more than six months after the claim was settled. Incomplete or outdated beneficiary information can make it difficult for the insurance company to locate a beneficiary, resulting in an unclaimed insurance policy.

For instance, unclaimed life insurance policies may exist because the insurer is unaware that the insured person has passed away. The majority of insurers are only notified of death when a beneficiary files a claim. As per reports of IRDAI, in December 2021, the total amount of unclaimed funds in public and private sector insurance companies was Rs 24,586 crore.

The failure to share the details of the financial lives of the insured with the beneficiaries/nominees is the most common reason for a large amount of unclaimed insurance money in India. Another reason for such large amounts of unclaimed insurance in India is that when a claim is paid by check, any change in the correspondence address causes the claim to be delayed or the cheque returned to the insurer and unpaid. One more usual reason for insurance claims going unclaimed isthat cheques relating to the claim may become time-barred if the claim is filed late or if the insurers take too long to process the claim.However, while most insurers have begun to accept payments via electronic means, it is not yet mandatory for insurers to do so. After policies were issued in 2014, the insurers required an ECS (Electronic Learning System) and a cancelled check for the claim amount.

What Happens to the unclaimed insurance amount

Unclaimed insurance funds may be invested in debt products such as fixed deposits, money market instruments, government bonds, and money market instruments by the insurers. Suppose the policyholder or nominee/beneficiary files a claim in the future. In that case, the income earned on the investment must be paid to the policyholder or nominee/beneficiary along with the claim amount. However, charges for managing unclaimed insurance money, capped at 20% of investment income and any penalties, can be deducted from investment income.

In July 2017, the IRDAI requested that all insurers with unclaimed amounts from policyholders for more than ten years as of September 30, 2017, transfer the funds to the Senior Citizens' Welfare Fund (SCWF) by March 1, 2018. The fund will be used to support senior citizen welfare programmes in accordance with the National Policy on Older Persons and the National Policy on Senior Citizens.

IRDAI Circular

The Authority has issued various directions regarding policyholder unclaimed amounts. All of these directives were consolidated into a master circular dated July 25, 2017. Every year, on or before March 1, all insurers with unclaimed amounts of policyholders for over ten years must transfer them to the Senior Citizens' Welfare Fund (SCWF). Insurers must follow accounting procedures to transfer unclaimed funds to the Indian Government's account. Every financial year, the SCWF Rules 2016 must be followed to transfer unclaimed amounts from policyholders.

The master circular was updated specifically for the monitoring, reporting, and certification of unclaimed amounts. The master circular also facilitates convergence in compliance with the Authority's previous circulars and the SCWF Act and Rules notified thereunder. This master circular supersedes all previous Authority directions on unclaimed amounts.

The updates and directions are:

The Government established a Senior Citizens' Welfare Fund (SCWF) under the 2015 and 2016 Finance Acts. Unclaimed funds held by the notified entities/ organisations must be transferred within ten years of the due date. The Central Government also prescribed the SCWF Rules. The Government amended the rules, requiring life, general, and standalone health insurance companies to transfer unclaimed funds to the SCWF after ten years. As a result, all insurers must hold unclaimed policyholder funds in custody and invest them as directed by the Authority under this circular for ten years. After ten years, unclaimed amounts are treated as notification amounts.

The directions are issued under Section 34 of the Insurance Act, 1938 and Section 14 of the IRDA Act, 1999, and apply to all insurers doing business in India. The circular's directions may be violated, resulting in penalties under the Insurance Act, 1938, Section 102. The Rules also define unclaimed amounts as any amount held by insurers but payable to policyholders or beneficiaries, including interest accrued thereon, that has gone unclaimed for more than six months after the due date or settlement date, whichever comes first. It explains that unclaimed amounts include death, health, maturity, survival, surrender/foreclosure, premium refund, premium deposit not adjusted against premium, and indemnity claims.

The provision also states that in no case shall an insurer appropriate or write back any part of the unclaimed amounts belonging to policyholders/beneficiaries. It is also noted that every insurer shall provide the Authority with details of the action taken and the quantity unclaimed.Along with a certified copy of the minutes of the Policyholder Protection Committee meetings within 60 days of September 30 and March 31 of each year. The Chairman of the Committee shall sign the minutes.

The rules also state provisions for the policyholders/beneficiaries to check the unclaimed amounts. It is noted that every insurer's website must display information about any unclaimed amount of Rs 1000 or more. The display of unclaimed amounts will continue even after ten years. The insurer's website must allow policyholders, beneficiaries, or dependents to check for unclaimed funds. For which, the Policyholder/Beneficiary may enter the following fields in a special window on the website: Policy No.; Policyholder PAN; Policyholder's Name and birthdate. The insurer's website will confirm the Policyholder's name, address, Policy No., and unclaimed amount based on the above information entered.

The rules also suggest that to reduce unclaimed funds, insurers must regularly notify policyholders and beneficiaries of updates, changes, and maturity dates via SMS, email, or any other mode specified by the Authority. The agent/corporate agent/intermediary who sourced the policy shall provide contact details and all necessary assistance to insurers in resolving policy debt issues.

In a recent case before the Karnataka High Court, the petitioners had filed a claim against the IRDAI.The Karnataka High Court division benchordered the IRDAIto ensure that all insurance companies follow its master circular and that unclaimed funds are transferred to the Finance Act of 2015's Senior Citizens Welfare Funds.

Conclusion

As the authorities have been aiming to solve the rise in the unclaimed insurance policy amounts, the general policyholders can also aid in doing so by being aware.Another way to deal with this issue is that the nominees and beneficiaries must also be mindful of the policy and its documents. They must also update any changes to the insurer's contact information. Also, having joint accounts allows the heirs and beneficiaries to manage funds in one's absence. It is always suggested to have the basic knowledge of concepts like these. Hence, the article has aimed to cover all the relevant topics surrounding unclaimed insurances.