Life insurers oppose major change in provisions

Life insurers have raised objections to a major change in one of the provisions of the revised insurance Bill, likely to be passed in the winter session of Parliament.

Section 45 in the new Bill says no claim can be repudiated after three years of the policy being in force, even if a fraud is detected, has sent life insurers into a tizzy.

According to Section 45 of the Insurance Act, 1938, no life insurance policy can be called into question on grounds of mis-statement or wrong disclosure after two years of the policy coming into force.

However, if the insurer is able to prove that the claim was fraudulent, it need not be passed.

“No policy of life insurance shall, after the expiry of two years from the date on which it was effected, be called into question by an insurer on the ground that a statement made in the proposal for insurance. . .was inaccurate or false,” says the Insurance Act.

This is unless the insurer shows that such statement was on a material matter and that the policyholder knew at the time of making it that the statement was false.

Now, under the proposed Bill, this has undergone changes. Insurers said that in the new Bill, several organised rackets of fraudsters would use the facility to defraud insurance companies. This would mean the life insurer would have the onus of proving that the policy had been taken for false purposes and this has to be done within three years of the policy being taken.

Life insurers have sent a representation through the Life Insurance Council to the Rajya Sabha committee. Further, industry bodies have also taken up the matter with government officials. However, the government is yet to take a final call on this issue.

“There are several organised persons who take fake insurance either on the names of people who do not exist or on dead persons. If this proposal, that says no claim can be rejected after three years, is implemented, we as a industry will face major losses,” said a senior private life insurance executive.

Industry sources said there were several cartels operating in this space that take up policies and make fraudulent claims. They are said to remove all evidence so that a claim is not rejected for fraud.

Senior Irda officials said that whenever there is an opportunity, they would express their opinion on this matter. Irda is on the side of life insurers on this issue.

Overall, industry sources said that while both public and private life insurers would be impacted, public insurer Life Insurance Corporation of India would be heavily impacted since it has a larger volume of policies.

In the earlier version of the Bill that was to be passed in 2008, it was proposed under Section 45 that no life insurance policy could be called into question on grounds of mis-statement or wrong disclosure after five years of the policy coming into force. This has now been revised to bring it to three.

Insurers also fear that this would lead to a rise in litigations, since there could be different interpretations according to the legal system. “A person may want a claim to be paid. However, while after three years even a fraudulent claim will be paid, an insurer may take recourse. We do not know whether it will be either the Act (if passed) or other laws that will hold in the court of law,” said a risk officer with a private life insurance company.

In August, the insurance Bill was referred to a select committee of the Rajya Sabha. The House adopted a motion to refer the Bill to the select committee after Finance Minister Arun Jaitley announced a 15-member panel had been formed. The Bill aims to increase the private equity from 26 to 49 per cent in the insurance sector among several other major provisions.

Industry players said that if the Bill was passed in the currrent format, there would be a higher scrutiny of individuals at the time of policy issuance. Verifications would be made stringent and if heavy losses were reported from fraud claims, and the costs would be passed on to all customers as a premium increase on a gradual basis.

ACHILLES HEEL

• Section 45 of the current insurance Act in force says that no life insurance policy can be called into question after 2 years of it being issued. However, if it is a fraud, the claim will not be passed
• Proposed amendment in Section 45 of the new insurance Bill, to be tabled in Parliament, states a policy cannot be called in question after 3 years of it being issued
• Insurers contend if the Bill is passed in this format, even fraudulent claims will not be be rejected, after 3 years of the policy being issued

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