Insurance Act 1938

There are several acts introduced to guide and govern the functioning of Insurance institutions. From the abundance of acts present, one of the prominent ones is the Insurance Act, 1938. This article will discuss the Act highlighting some important points such as its history and features it holds.

What is The Insurance Act 1938 and its history?

The insurance act was introduced to regulate the activities of insurance companies. This act prevents companies from being speculative and forces them to act on sound actuarial principles. Before the original insurance act 1938, a life insurance company’s act was passed in 1912. The drawback of this act was that there was discrimination between Indian and foreign companies.

Indian companies were required to make deposits with the government. But the foreign companies were exempted from this rule. This led to resentment amongst the Indian companies against the British government. The success of the independence and non-cooperation movement helped the Indian insurance companies. The Indian insurance companies then became the face of the swadeshi movement. The total insurance business grew from 22.44 crores in 1914 to 298 crores in 1938. India also saw an increase in the number of insurance companies from 44 to 176 in the same period.

A committee was appointed by the government of India to study this problem and find solutions. The result of this investigation was the Insurance Act 1938. It was the first comprehensive legislation passed by the government. This act governed both life and non-life companies providing strict control over the insurance business.

Features 

The salient features of the Insurance Act 1938

• Forming a department of insurance to overlook all the insurance business.
• Mandatory registration of insurance companies.
• Compulsory submission of annual financial returns of insurance companies.
• A provision for initial deposits was made to allow only genuine companies in the insurance sector.
• Other important provisions such as the prohibition on rebate, restriction on licensing, and commission payment were introduced in order to instill professionalism into the business.
• Insurance companies had to go through a periodical evaluation to assess their financial stability.
• Policies with a standardized format were introduced.
• Certification of the premium tables through an actuary was made compulsory.

After the implementation of the legislation-

• Promotions were given to those who were worthy.
• Speculative insurance was eliminated and
• Reductions in bankruptcies of insurance companies were notices.

In due course of time, various shortcomings were found in the insurance act. Changes regarding deposits, rebates, and investments were made. But this boom of the insurance industry was hampered by the partition in 1947. Many insurance companies were affected due to the widespread bloodshed. Amongst this situation, the foreign companies found it difficult to function. By 1955 the share of foreign companies in new business was a mere 7 percent. Out of 105 foreign companies, only 15 remained.

In 1950, further amendments were made to the insurance act. The superintendent of insurance was re-designated as the controller of insurance. The controller of insurance even had the authority to check the books of the insurer. Amends were made in provisions relating to investments in life funds. Investments in government and approved securities were brought down to 50%. Restrictions on the nature of investments in balanced funds were imposed. Only 15% of total funds were allowed to be invested in the open market. The Insurance act 1938 played a major role in making insurance a public utility service.