Insurance in India is issued in the form of a contract of indemnity between the insurer and the insured. As most insurance disputes arise out of a contractual term and the interpretation thereof, the coverage and its scope, the disputes are generally civil in nature, but can also be criminal (eg, complaints filed by the insurers for fraud).
The insurance market is primarily governed by:
Other laws governing this industry include:
Provided the insurance policy does not include an arbitration/mediation or any hybrid clause mandating reference to alternative dispute resolution (ADR), disputes arising from insurance contracts can be adjudicated before civil courts, consumer commissions or the Insurance Ombudsman. Each of these has a distinct procedural regime.
For proceedings before the civil courts, the Code of Civil Procedure, 1908 lays out the procedure to be followed. If there is scope for settlement, the matter may be referred to ADR. If not, the matter is adjudicated as a regular suit. The general process is:
If the dispute is taken before the consumer courts, since these are consumer-centric forums, procedural laws are not applicable to ensure consumer-friendly adjudication. Some procedural rules as prescribed under the Consumer Protection Act, 2019 are generally followed.
The procedure before the Insurance Ombudsman is a hybrid system of dispute resolution mechanisms that is not adjudicatory. The process is further illustrated below.
Depending on the dispute and the inclusion of an ADR clause, the matter can be adjudicated before civil courts or consumer courts, or taken to the Insurance Ombudsman.
As per the Indian Limitation Act, 1963, the limitation period to initiate a legal action is calculated from the date when the “cause of action” arises. The limitation period for filing a suit against an insurer commences from the time that the claim made by the insured is denied and the dispute arises. The prescribed limitation period for filing a claim in a civil court or for commencing arbitration is three years, whereas the limitation period for filing a claim in a consumer court is two years and for approaching the Insurance Ombudsman, the limitation period is one year.
In India, the government and the judiciary have time and again emphasised the importance of ADR and, vide the amendment to the Code of Civil Procedure Laws, inserted a provision (Section 89 of the Code of Civil Procedure, 1908) that recognises arbitration, conciliation, mediation, negotiation and Lok Adalat (a mechanism by which disputes are settled by the courts) as forms of ADR. The provision stipulates that whenever there is a possibility of settlement, the court must refer the matter to any form of ADR.
Specifically, with respect to insurance matters, the government of India has created a scheme for individual policyholders to have their complaints settled in a cost-effective, efficient and impartial way: the Insurance Ombudsman scheme. As per this scheme, an ombudsman is appointed who can be approached to redress any grievance as provided for under the Insurance Ombudsman Rules, 2017. The insured individual can approach the ombudsman where the claim amount is less than INR3 million and the insurer was previously approached but the dispute was not settled, or the insurer fails to respond for over 30 days.
Once the ombudsman is approached, they will act as a mediator and attempt to settle the dispute. If a fair settlement is reached, 15 days' time is given for compliance. If there is no settlement within three months of receiving particulars from the individual, an award will be passed that shall be binding on the parties.
Additionally, arbitration is a popular option for parties to resolve their disputes. Furthermore, the Consumer Protection Act, 2019 allows consumers such as insurance policyholders to refer disputes to a mediation cell attached to the consumer courts.
Insurance policies generally contain clauses relating to jurisdiction and governing law of the contract. The clause stipulates the courts that shall have jurisdiction to adjudicate a dispute that may arise from the policy. However, any court that ordinarily has territorial jurisdiction can entertain the dispute because parties cannot exclude the jurisdiction of a court that ordinarily has territorial jurisdiction and confer the same upon a court that does not.
If the policy does not contain a jurisdiction clause, any court upon which jurisdiction has been conferred as per the Code of Civil Procedure, 1908 may adjudicate the dispute.
The governing law clause mentions details about applicable and governing law of the policy/contract. Two Indian parties cannot choose a foreign law as the governing law of the policy. Any dispute related to interpreting the jurisdiction and governing law clause can be settled by Indian courts.
The recognition and enforcement of foreign judgments and decrees in India are governed by Section 44-A read with Section 13 of the Code of Civil Procedure, 1908. A foreign judgment that is conclusive under Section 13 of the Code can be enforced by instituting execution proceedings under Section 44-A read with Order XXI of the Code of Civil Procedure, 1908 in the case of "reciprocating territories" or by instituting a civil suit on the judgment in the case of other territories.
India does not follow a jury model. All the claims are adjudicated by the judge; rules of pleadings and evidence are very similar to the system followed in other countries. India follows a common law system wherein the primary legislation governing the Indian insurance sector is the Insurance Act, 1938 and the Insurance Regulatory and Development Authority Act, 1999.
The trial is conducted based on the Code of Civil Procedure, 1908. The judge hears testimony and evidence is recorded; subsequently, arguments are heard and judgment is passed, and the decree is drawn up by the judge and not the jury. The judgment or award can be appealed by way of a miscellaneous first appeal before the High Court, which is again subject to challenge before the Supreme Court of India.
Finally, once a decree is passed, separate execution proceedings are to be instituted for executing the decree through various modes, as provided under Order XXI of the Code of Civil Procedure, 1908.
Arbitration clauses in commercial contracts of insurance and reinsurance are enforceable in India. Courts generally enforce the arbitration provision or agreement unless there is a dispute regarding the existence of the arbitration agreement. In the event that the arbitration clause is found to be affected by fraud, courts may refuse enforcement.
As per the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”), an arbitration agreement needs to be in writing to reflect the intention of the parties to submit their dispute(s) to arbitration. An arbitration agreement can come into existence if it is contained in a subsequent exchange of letters, telex, telegrams or other means of telecommunication, including communication through emails that provide a record of the agreement. An arbitration agreement can also be incorporated by reference.
India is a party to the New York Convention and the Geneva Convention, and thus if an arbitration award is made in a jurisdiction that is a signatory to either convention, the courts in India enforce convention awards. The grounds for refusing enforcement of a foreign award in India are limited and are the same as those laid down in the New York Convention; namely:
It is not uncommon for a contract of insurance or a policy to have an arbitration clause and unless the validity of the arbitration clause is disputed, courts tend to refer parties to such a contract to arbitration in the event of a dispute. However, in a Supreme Court judgment (M/s Emaar MGF Land Ltd. v Aftab Singh 2018 SCC Online SC 2945) it was held that the existence of an arbitration clause does not bar the jurisdiction of consumer courts in India. As a result, a policyholder or an insured can approach the consumer courts notwithstanding an arbitration clause in the insurance contract. Furthermore, it is a settled judicial position that when an insured voluntarily executes the discharge voucher in satisfaction of the claim, then any dispute thereafter cannot be referred to arbitration (United India Insurance Co. Ltd. v Antique Art Exports Pvt. Ltd (2019) 5 SCC 362).
Parties are free to agree on any rules to govern the arbitration procedure. As per Indian law, an arbitral award is final and binding, and can be challenged before a relevant court only under certain grounds (Section 34 of the Arbitration Act); namely:
As previously mentioned, an insurance contract/policy is a commercial contract and its formation is subject to the fulfilment of the requirements of a contract defined under the Indian Contracts Act, 1872. Pursuant to the jurisprudence that has developed in India, certain conditions must be satisfied to imply terms into a commercial contract. The conditions include:
Looking specifically into the context of insurance contracts, the terms that could be implied by operation of law are subrogation and the “doctrine of utmost good faith”.
Subrogation is the legal right an insurance company or the insurer has to pursue a legal action against a third party responsible for the damages caused to the insured. The right of subrogation has been statutorily recognised in India and, hence, no separate contractual clause is required to trigger it.
Similarly, the doctrine of utmost good faith, or uberrima fides, governs contracts of insurance. This doctrine has been recognised under statutes and by the Indian courts. The doctrine places an obligation on the insured to voluntarily disclose material facts that are relevant to the risk being insured. Even though a contract of insurance or an insurance policy does not make express mention of the doctrine, they are strictly to be based on the principle.
As mentioned above, the right of subrogation is recognised under Indian law. This right, which permits insurers to receive the benefit of the rights and remedies the insured has against third parties in the event of a damage caused by the third party, is available to an insurer from the inception of the policy.
The COVID-19 pandemic has drastically altered the insured’s requirements with regard to insurance coverage. The market players have taken this opportunity to make the best use of technology to facilitate insureds obtaining the best protection products.
2021 is considered to be the year of standard insurance products. All general and specialised health insurers, on the directions of the IRDAI, have come up with a standard health insurance product; namely, the Arogya Sanjeevani. Later, the regulator guided all life insurers to come up with a standard-term life insurance plan known as Saral Jeevan Bima from 1 January 2021. Later, the regulator asked insurers to come up with a standard personal accident cover and now it has asked insurers to launch a standard travel insurance from 1 April 2021. With the introduction of standard insurance products across all major insurance sectors (health, life and travel), the IRDAI is leaving no stone unturned to increase the insurance penetration rate. The regulator aims to bring the maximum number of people under the insurance umbrella and provide them with maximum financial help.
The IRDAI has constituted a working group to formulate the rules and regulations with respect to title insurance, which is a form of indemnity insurance that insures against financial loss from defects in title to real property. In certain jurisdictions, institutional lenders require title insurance to protect their interest in the collateral of loans secured by real estate. Basically, title insurance provides indemnity to developers, builders and the subsequent property owners (homebuyers) against losses and risks related to defects in the title of the property. It can, however, be beneficial for society homebuyers.
In the past, the most common claims in the Indian insurance markets included life, health, acts of God and motor insurance; however, there seems to be a gradual shift to liability products such as professional indemnity (PI), directors' and officers' (D&O), cyber policies and employment practices liability (EPL). There is a demand for these insurance coverage packages, hence significant claims activity has been witnessed in these sectors. Among the liability products, there has been rapid growth in claims made under PI policies. In fact, PI and D&O claims make up at least half the total claims that this firm has seen being made under liability policies. While PI and D&O claims are likely to continue to hold the largest share, the author believes that cyber claims will grow at a fast pace in the coming years, especially with the transition to remote working and digital transformation across various business sectors. This is also in light of the enactment of the General Data Protection Regulation, the consequences of which are yet to be seen.
Additionally, with the ongoing COVID-19 pandemic, insurance companies found themselves in the centre of the storm. In view of the same, the Insurance Ombudsman scheme was created by the government for individual policyholders to have their complaints settled outside the court system in a cost-effective, efficient and impartial way.
At present, there are 17 Insurance Ombudsmen in different locations and any person who has a grievance against an insurer may themselves – or through their legal heirs, a nominee or an assignee – make a complaint in writing to the Insurance Ombudsman within whose territorial jurisdiction the branch or office of the insurer that was complained against is located, or where the residential address or place of residence of the complainant is located.
The complaint to the ombudsman can be about:
(a) delay in the settlement of claims, beyond the time specified in the regulations, framed under the IRDAI Act, 1999;
(b) any partial or total repudiation of claims by the life insurer, general insurer or health insurer;
(c) any dispute about a premium paid or payable in terms of an insurance policy;
(d) misrepresentation of policy terms and conditions at any time in the policy document or policy contract;
(e) legal construction of insurance policies in so far as the dispute relates to a claim;
(f) policy servicing-related grievances against insurers and their agents and intermediaries;
(g) the issuance of a life insurance policy or a general insurance policy, including a health insurance policy, that is not in conformity with the proposal form submitted by the proposer;
(h) non-issuance of an insurance policy after receipt of a premium in life insurance or general insurance, including health insurance; and
(i) any other matter resulting from the violation of provisions of the Insurance Act, 1938 or the regulations, circulars, guidelines or instructions issued by the IRDAI from time to time or the terms and conditions of the policy contract, in so far as they relate to issues mentioned in clauses (a) to (h).
The Settlement Process
The ombudsman will act as mediator and:
If a settlement by recommendation does not work, the ombudsman will pass an award within three months of receiving all the requirements from the complainant and that will be binding on the insurance company.
Once the award is passed, the insurer shall comply with the award within 30 days of receipt of the award and intimate its compliance with the same to the ombudsman.
In the absence of an arbitration clause in the policy/contract, coverage disputes and disputes arising out of reinsurance contracts are generally resolved before civil courts or consumer redressal forums. In the event that the insured initiates litigation before the civil courts, the dispute will not be maintainable before the consumer redressal forums.
Furthermore, for a speedy resolution of commercial disputes, parties may also approach the commercial courts that were set up in 2015 through the Commercial Courts Act 2015, which defines commercial disputes to include insurance and reinsurance disputes (Section 2(1)(a)(xx)).
Additionally, it is also common for the insured to approach the Insurance Ombudsman, who addresses grievances or disputes pursuant to the powers granted under the Redressal of Public Grievances Rules, 1998. As per statistics published by the IRDAI, over 10,500 disputes were referred to the Insurance Ombudsman in financial year 2019–20 (source: Handbook on Indian Insurance Statistics 2019–20).
It is a settled position in India that the insured party/policyholders are consumers under the Consumer Protection Act, 2019. As mentioned earlier, in the event of a dispute, the insured can approach the consumer redressal forum.
The law in India recognises the principle of privity of contract, which, in effect, would mean that a third party would be unable to bring a direct action against an insurer. However, as per the Motor Vehicles Act, 1988, the rights of an insured under a policy are transferred to a third party claiming against the insured if the insured becomes insolvent. The Act also grants powers to the Motor Claims Tribunal to involve the insurer in a third-party action against the insured if the tribunal feels that the insured has failed to contest the claim.
There have been various decisions passed by courts in India wherein the court has taken the liberty to define bad faith, one being the decision passed by the Hon’ble Delhi High Court in Manish Vij v Indira Chugh (AIR 2002 Delhi 243, 97 (2002) DLT 1) wherein bad faith was defined as something that does not merely imply bad judgement but “the conscious doing of a wrong with a dishonest purpose”.
The concept of bad faith has not been expressly defined in any statute; however, there are references, with the prevailing ones in Sections 17 and 18 of the Indian Contract Act, 1872, which deal with the concepts of fraud and misrepresentation. Section 52 of the Indian Penal Code defines good faith as “Nothing is said to be done or believed in 'good faith' which is done or believed without due care and attention.” This principle has been comprehensively put to effect in commercial and insurance contracts.
In India, the most fundamental principle in insurance law is uberrimae fidei; ie, utmost good faith must, and shall, be observed by the contracting parties. In simple terms, the insured’s duty to disclose material facts and risk is not limited to facts that it is aware or in the knowledge of but shall also include all material information about which the insured ought to have been aware.
Pursuant to the powers granted under the Insurance Act, 1938 and the IRDAI Act, 1999, the IRDAI has formulated the Insurance Regulatory and Development Authority of India (Protection of Policyholders’ Interests) Regulations, 2017.
As per Regulation 14(2) of the Regulations, a life insurer shall pay or reject a death claim within 30 days of receipt of all relevant documents and the required clarifications. However, where the circumstances of a claim warrant an investigation in the opinion of the insurer, the same shall be initiated as early as possible and completed expeditiously, but, in any case, not later than 90 days from the date of receipt of claim intimation, and the claim shall be settled within 30 days thereafter. In the event of any delay on the part of the insurer beyond the deadlines mentioned, the insurer is liable to pay interest at a rate that is 2% above the bank rate from the date of receipt of the last required document.
In respect of claims arising out of general insurance policies, Regulation 15 mandates insurers to settle or reject claims within 30 days of receipt of the final survey report (in cases where surveyors are appointed for assessing the claim) and/or receipt of the last relevant or necessary document. If the claim is not settled within 30 days, insurers are liable to pay interest at a rate that is 2% above the bank rate from the date of receipt of the last relevant and necessary document from the insured/claimant by the insurer till the date of actual payment.
There is no statutory or regulatory provision that directly pertains to how representations made by a broker on behalf of the insured are to be treated. However, whether a representation made by a broker would be binding or not would depend on whether the broker was authorised by the insured to make such a representation. In the absence of such authorisation, it is unlikely that representation made by the broker will be binding on the insured.
It is clear that if the insured affixes their signature to a proposal form or a policy, they need to bear the consequences and liability that may follow.
In India, claims handling authorities are also known as third-party administrators (TPAs), which are a set of companies that provide operational services such as claims processing under contract to the insured.
Insurance companies often outsource their claims processing to third parties to reduce operational and management costs. These companies can act as TPAs once they have been authorised by the IRDAI.
It is important to note that TPAs associated with the insurers are available for processing the insurance claims only. A TPA acts as an intermediary between the insurer and the insured, and facilitates the settlement/processing of insurance claims. A TPA is appointed by the insurance company to act as an intermediary and does not underwrite the claims of a policyholder.
Some of the key aspects of TPAs:
As far as disputes are concerned, the insurance agreement is between the insurer and the policyholder and not with the TPA, the role of which is limited to facilitating the services provided to the insured. Disputes may arise only if there is an unfair repudiation of claims.
The IRDAI, through the IRDAI (Lloyd’s India) Regulation, 2016, recognises constituents of Lloyd's India that include members of Lloyd’s formed collectively as syndicates who delegate authority to service companies located within Lloyd’s India.
In India, there are no mandatory provisions with regard to the insurer's duty to defend the insured, and whether such a duty exists is generally contingent to the terms of the coverage. In most scenarios, the policy outlines whether the insured or the insurer is under the obligation, which shall ideally govern the manner in which a claim is to be addressed. Insurance companies that include the duty-to-defend clause in their policies have the obligation to conduct the litigation process no sooner than they have been notified of the claim. At the same time, insurers have the right to select the defence counsel to be appointed. The insured usually has no control over the choice of defence counsel to be instructed.
The duty-to-defend clause in an insurance policy essentially covers the provisions in relation to a claim being made/initiated against the insured for an alleged wrongful act; the insurance company providing coverage at the time has the duty/obligation to defend the claim, even if it is subsequently found to be groundless, false or fraudulent. Therefore, although the claim lacks merit, the insurer still has an obligation to defend the claim.
However, there are certain insurance covers that are mandatory under law wherein the insurers will be under the obligation to defend claims that may be raised against the insured, which again will be subject to the terms of the coverage.
The following insurance covers are mandatory by law:
As mentioned in 5.1 Main Areas of Claims where Insurers Fund the Defence of Insureds, in India there are no provisions governing the insurer's duty to defend the insured; however, there has been a gradual shift in the approach wherein now an insured need only establish that there is the potential for coverage under a policy to give rise to the insurer's duty to defend. Therefore, the duty to defend may exist even where coverage is in doubt and ultimately does not apply. Implicit in this rule is the principle that an insurer's duty to defend an insured is broader than its duty to indemnify. Moreover, an insurer may owe a duty to defend its insured against a claim in which ultimately no damages are awarded, and any doubt as to whether the facts support a duty to defend is usually resolved in favour of the insured.
With respect to D&O and employment practices liability insurance (EPLI) policies, policies containing explicit "duty to defend" wordings obligate an insurer to assume control of the claim defence process, including selecting counsel and paying legal fees. In contrast, non-duty to defend (or duty to pay) policies require only that the insurer reimburse the insured for funds expended by the insured in defending a claim.
Insurance claims appear to be becoming extremely severe and complex, challenging risk analysts to explore more effective plans and work closely with insurers and other stakeholders. Among other challenges, businesses are facing a spate of so-called nuclear verdicts that exceed historical norms.
These and other trends are prompting insurers to introduce large coverage exclusions in policies, limiting capacity for certain risks, and stifling innovation and growth among insurers. This also means that policyholders must be prepared for more difficult experiences when managing large and complex claims.
To better manage complex claims, risk professionals may collaborate with all stakeholders, including insurers at all levels of their towers and defence counsel, ensuring effective communication among all parties from the beginning. Brokers can play a critical role in facilitating communication, resolving coverage disputes, and providing other expertise.
When a policyholder is liable for any third-party loss or damage, the insurer is liable to recompense the damages and/or loss incurred by the insured subject to the terms of the policy. Liability coverage protects the business/individual from financial turmoil and costs arising out of legal proceedings. The claimant/insured can thus purchase such insurance as it offers legal and financial coverage against any loss or damage caused to a third party subject to the terms of the coverage. Corporations, business owners, industrial and non-industrial operators, manufacturing companies, and organisations across various businesses can avail of these coverages to insulate and/or reduce their exposures from claims initiated by third parties.
The most common liability cover policies that claimants can avail of in India are as follows:
The concept of subrogation is important to understand the relationship between an insurer, an insured and a third party in the event of loss suffered by the insured. Will the insurer be liable to bear the entire loss claimed by the insured?
The principle of subrogation consists of one entity or group replacing another in cases of insurance claims by the transfer of all its rights and duties. According to Black's Law Dictionary, subrogation is “the principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy”.
The theory of subrogation is based on the principle of indemnity.
In Krishna Pillai Rajasekharan Nair (D) by Lrs. v Padmanabha Pillai (D) by Lrs. and Ors., the Supreme Court of India held: “A subrogation rests upon the doctrine of equity and the principles of natural justice and not on the privity of contract. One of these principles is that a person, paying money which another is bound by law to pay, is entitled to be reimbursed by the other. This principle is enacted in Section 69 of the Contract Act, 1872. Another principle is found in equity: ‘he who seeks equity must do equity.'”
The Supreme Court of India has discussed in depth the principles of subrogation in the landmark judgment of Economic Transport Organization v Charan Spinning Mills (P) Ltd. and Ors.
In the event that the insured executes a subrogation-cum-assignment in favour of the insurer, the insurer is entitled to the entire amount recovered from the third party. The terms and conditions contained in the instrument would govern the rights and duties of the insurer and the insured. The insured may also have to forgo all its rights and would no longer be able to initiate action against the third-party defaulter.
The Supreme Court of India has held in a recent case of Taj Mahal Hotel v United India Insurance Co. Ltd. and Ors that an insurer can file a complaint as a subrogee. The court reiterated its decision held in a previous case, namely Economic Transport Organization, wherein it observed that an insurer cannot file a complaint in its own case. However, if the insurer acts as a subrogee and has filed the case in the name of the insured, where the insurer is the power of attorney holder of the insured or the insured and the insurer are co-complainants, the case shall be maintainable.
In another judgment passed by the Supreme Court in Oberoi Forwarding Agency v New India Assurance Co. Ltd. and Ors., it was observed that subrogation or deed of transfer does not entitle the insurer to step into the insured's shoes and avail its legal status to maintain a complaint. Hence, the insurer does not become a consumer even when the insured subrogates their rights in favour of the insurer.
Under no circumstances can the insurer file a complaint in its own name, even if the terms of the letter of subrogation-cum-assignment entered into between the insurer and the insured confers such right upon the insurer. This is one of the primary reasons why the insured must give up their right in favour of the insurer.
The insurance industry in India experienced double-digit growth until the outbreak of the COVID-19 pandemic. Business premiums were higher than the previous year. COVID-19 has not displaced the insurance sector completely as it has opened new avenues for higher growth but at the same time India has gone back in time with respect to the gains already made.
As per the IRDAI, newly issued policies decreased as people could not afford to buy policies due to reductions in income. Hence the customers started redeeming insurance policies for their cash needs. Therefore, the assets of companies reduced.
In parallel, the COVID-19 outbreak has made people realise the importance of having insurance in the health sector. So the demand for health insurance went up. The IRDAI has also issued guidelines to support the health insurance sector by introducing new products such as Corona Kavach and Corona Rakshak.
The IRDAI, through Circular No 525/IRDAI/HLT/CK/2020-21 dated 6 May 2021, has mandated insurance companies to offer and renew such policies as it came to the notice of the IRDAI that insurers are not offering and renewing the Corona Kavach and Corona Rakshak policies.
Since COVID has left us no option but to digitalise, companies must adjust to artificial intelligence (AI) and in this regard the IRDAI has played a vital role in establishing the IRDAI (Regulatory Sandbox) Regulations, 2019 to facilitate innovation and provide for the testing of new business models and processes; regulations that may not be fully covered in the existing framework. The Sandbox Regulations also aim to reduce the trust deficit gap between insurers and customers.
According to the IRDAI, life insurance claims went up by five to ten times post second wave but on the other hand, the motor insurance sector has taken a dip. But the new policies issued are almost equivalent to pre-COVID times. And business premiums have witnessed 16% year-on-year growth, while the life insurance industry grew 21% in February 2021 compared to February 2020.
Therefore, the pandemic has made a minor dent in the insurance sector. At the same time, we can safely say that its growth has not been significantly affected as new types of insurance policies are entering the market and companies are transforming accordingly by trying to bring out new policies and adapting to the drastically changing circumstances and situation brought about by the pandemic.
In terms of litigation, a policy would traditionally only cover physical damage to the property on the occurrence of an insured risk. Business insurance damage is given due to the loss of revenue on account of physical damage to property. Therefore, due to the closure of many businesses, insureds are presenting claims under business interruption policies, which, however, do not cover loss due to a pandemic as there is no material damage to the property. Hence, it will be interesting to see whether courts will reject such claims, as is generally done.
As stated above, the insurance sector is highly unlikely to be affected much in the coming months. The insurance sector underwent a plethora of changes during the pandemic. Insurance business, of course, was initially battered by the impact of COVID-19 but companies have adapted to the changing scenarios by restructuring their way of functioning and have recovered from the initial losses and are accelerating ahead with double-digit growth.
The life insurance sector captures around 75% of the market share and accounts for 50% of the insurance companies in India. Due to the economic fallout of the pandemic, a large number of citizens have realised the importance of insurance and it is considered more of a necessity now than a luxury, as it was seen in pre-pandemic times.
The life insurance sector is expected to grow in the coming years and since life insurance captures a major share in the insurance market in India, the outlook for the next 12 months appears positive. The Union of India has taken steps to infuse INR30 billion into state-owned general insurance companies to improve their financial health and the Union Budget 2021 increased the foreign direct investment (FDI) limit in insurance from 49% to 74%, thus enabling insurance coverage to reach more citizens.
The pandemic has led to the digitalisation of insurance products, and companies have evolved and introduced new products, especially with respect to health insurance, and with the help of the IRDAI’s Sandbox Regulations, companies have filed and obtained risk cover in special situations for new products. Therefore, with products getting launched online, they will be easily accessible, which should result in wider penetration of policies.
However, there have been coverage issues with respect to health policies that were executed prior to COVID-19 as there is uncertainty around treatment expenses for COVID-19, as most policies executed prior to COVID-19 are associated with infectious illness and epidemics known to man. The claim process has also become unpredictable as COVID-19 treatment is different.
There has been a tremendous change in the scope of insurance policies. The IRDAI has made various changes to the guidelines on the standardisation of exclusions in health insurance, and it has included various diseases, as well as mental health procedures, genetic disorders, artificial life maintenance and others. For a long time in India, mental illness has been considered as taboo but now it is being treated on a par with physical illness. So mental health procedures and genetic disorders are not excluded. Therefore, because of wider coverage, insurance is going to be more expensive to customers as more citizens are included in the scope of insurance.
Insurance cover and risk go hand in hand; the scope of insurance is for citizens who want to be insured and the appetite for risk is for the company, and thus if the scope of insurance has widened, then the appetite for risk will be high. For instance, now citizens with a genetic disorder can be insured, so the scope for consumers to buy insurance has widened and, at the same time, the risk of the policy provider has also increased.
According to the Lloyd's Underinsurance Report 2018, India has one of the highest underinsurance levels globally, despite certain progress having been made in insurance penetration (0.9% in 2018, compared to 0.7% in 2012). With India being the second most populous country in the world, it is one of the most vulnerable countries to climate change. There is good reason, and a lot of work to be done, to improve insurance penetration in India.
The world is witnessing an increased risk of flooding attributed to the impact of manmade climate change. India is no stranger, either. Recently, the south Indian state of Kerala witnessed one of its worst floods in a century. Nearly 500 people lost their lives and many have gone missing. Officials estimated damages worth USD5.5 billion. Since many were underinsured or uninsured, they were adversely affected and could not make good the loss.
Due to the uncertainties associated with the increasing impact of climate change, underwriters are finding it difficult to evaluate, model and price devastating excess-of-loss covers. Existing models use historical loss data of 100 years to arrive at a result and due to an increased frequency and severity of catastrophic events, the models are proving to be ineffective. As a compromise, using a shorter period of 25 to 35 years is being considered by underwriters.
In respect of how climate change has affected the litigating of insurance risks, there is no readily available data to analyse the effect. Of particular importance in the near future will be the monitoring of legal and coverage developments in the wake of major losses arising out of natural disasters and to analyse the corresponding climate-related litigation more widely.
There have been significant regulatory developments in the Indian insurance sector over the past few years. In 2019, the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2019 were issued by the IRDAI, which increased the limit on FDI in insurance intermediaries such as insurance agents, insurance brokers and third-party administrators from 49% to 100%.
Furthermore, in the same year, to create a regulated sandbox environment, the IRDAI issued the IRDAI (Regulatory Sandbox) Regulations, 2019 and the "Guidelines on operational issues pertaining to Regulatory Sandbox" of 22 August 2019. This may facilitate the testing of new business models and proposals or applications, which, in turn, facilitates striking a balance between innovation and the protection of policyholders’ interest.
Owing to the pandemic, 2020 was also relatively busy for the Indian insurance sector. New guidelines were issued by the IRDAI to facilitate the expeditious settlement of hospitalisation claims related to COVID-19 under medical policies. The guidelines state that:
In March 2021, the Insurance (Amendment) Bill, 2021 was introduced in the Indian Parliament. Once enacted, the Bill would increase the limit on foreign investment in an Indian insurance company from 49% to 74%, and remove restrictions on ownership and control. This change may internationalise the Indian insurance market but could also lead to cross-border disputes.
In March 2021, to enable the speedy and cost-effective resolution of complaints in respect of deficiencies in insurance services, the Indian government made amendments to the Insurance Ombudsman Rules. The amended Rules bring insurance brokers within the ambit of the ombudsman as well. Policyholders can now file their complaints digitally with the ombudsman and a complaints management system will be created to enable policyholders to track the status of their complaints online. Also, the ombudsman can use a videoconferencing facility for hearings. These amendments were made since it was reported (IRDAI Annual Report 2017–18) that 74% of the complaints made to the Insurance Ombudsman were adjudicated as non-acceptable and non-maintainable. This was mainly because the Insurance Ombudsman's centres had a large number of pending cases due to insufficient staff numbers.