Draft Insurance Amendment Bill, 2025

Context:

The Union government has circulated the Draft Insurance Laws (Amendment) Bill, 2025 among Members of Parliament, proposing tighter regulatory controls on the utilisation of life insurance funds and other specified insurance business funds, with a strong focus on policyholder protection, actuarial transparency, and financial prudence.

Key Provisions of the Draft Bill

1. Restrictions on Use of Insurance Funds

• Life insurers and notified insurance classes are barred from:
  • Declaring dividends to shareholders
  • Paying bonuses to policyholders
  • Servicing debentures
• These payments can be made only from a surplus:
  • Disclosed through an actuarial valuation
  • Reflected in the valuation balance sheet
  • Submitted as part of statutory returns to IRDAI

2. Safeguards Against Artificial Surplus Creation

• Insurers cannot inflate surplus by transferring amounts from reserve funds
• Exception allowed only if:
  • Reserve funds were created exclusively from earlier valuation surpluses
  • Such surpluses were already reported to IRDAI

3. Caps on Debenture Servicing

• Payments from surplus for debentures (principal + interest):
  • Maximum 50% of disclosed surplus
• Interest on debentures:
  • Capped at 10% of surplus
  • Exception if interest is offset against interest credited to the insurance fund while determining actuarial valuation assumptions

4. Limits on Shareholders’ Share in Surplus

• Participating (Par) Policies
  • Shareholders’ share (including guaranteed dividends):
    • Capped at 10% of surplus
    • Subject to further limits prescribed by IRDAI
• Non-Participating (Non-Par) Policies
  • Entire surplus may be allocated as permitted by regulation

Institutional and Structural Amendments

Laws Proposed to be Amended

• Insurance Act, 1938
• Life Insurance Corporation Act, 1956
• Insurance Regulatory and Development Authority Act, 1999

Liberalisation of Foreign Investment

• Foreign investment cap in Indian insurance companies
  • Proposed increase to 100% of paid-up equity capital
  • Includes foreign portfolio investors
• Objective:
  • Accelerate sectoral growth
  • Enhance capital availability
  • Improve insurance penetration

Policyholders’ Education and Protection Fund

• Mandatory creation of a dedicated fund
• Sources:
  • Grants and donations
  • Penalties imposed by IRDAI
• Purpose:
  • Policyholder awareness
  • Education
  • Protection initiatives