February 19, 2022

Good morning. Every Saturday, we write about one specific right that you possess as a citizen in our country. In today’s edition of “Know Your Rights”, we look at the rights of insurance policyholders in India.


Rights of Insurance Policyholders

Any news about insurance of late has been about the upcoming LIC IPO. While there’s a discussion to be had on how that affects the insurance sector, it’s the customers, i.e., policyholders, that’s the focus here. 

A healthy insurance sector is vital for any modern economy. The ultimate aim is to make sure policyholders are in a position of strength and not taken advantage of. Per past estimates, the insurance sector in India was estimated to reach a market size of $280 billion in 2020. Then the pandemic happened, and it certainly changed things. 

While lockdowns and travel restrictions were bad news for the overall economy, they were something of a blessing in disguise for the insurance sector as there were fewer claims to report. For example, New India Assurance earned a profit of ₹87.4 crores in its motor portfolio in the second quarter of FY21. 

Insurance Regulatory and Development Authority (IRDA)

Given the sector’s size, growth, levels of sophistication in marketing and selling practices, there’s a need to protect insurance policyholders. In India, the Insurance Regulatory and Development Authority (IRDA) is the entity that protects the consumer in the insurance market. It’s also the regulator of the insurance industry and oversees the functioning of the Life Insurance and General Insurance companies. 

Until 2000, the government was the regulator of the insurance industry. There were calls for a standalone apex body. On the recommendation of the Malhotra Committee in 1999, the IRDA was set up through the Insurance Regulatory and Development Authority Act, 1999. As of September 2020, 31 general and 24 life insurance companies are registered with the IRDA. 

Over the years, there have been some provisions put forward to protect the rights of policyholders. In 2002, the IRDA formulated the Insurance Regulatory and Development Authority (Protection of Policyholders Interests) Regulations. It outlined the need for minimum standards in proposal forms, insurance policies, claims, and handling of grievances.

Unfair terms and personal information

Since 2002, the insurance sector, just like the economy, has changed a lot. To take that into account, the IRDA released a draft on policyholders’ rights in 2014. However, it never became law. In 2017, it made some revisions to the draft, but some rights were excluded. Among them was the right to protection against unfair contract terms and the right to protection of personal information.

Unfair contract terms are a problem when the insurance contract is non-negotiable, and an insurance buyer can’t change the terms. In some cases of life insurance, for example, it’s possible that the kin of a deceased person had no say when terms were being discussed. There could’ve been a third party at play. One example of this happened in Kerala when the wife of a deceased fisherman wasn’t awarded a life insurance claim by United India Insurance. She said the condition of ‘death due to natural cause and diseases, including heart attack’ not being included was unacceptable. 

In 2017, IRDA outlined Cyber Security Guidelines to ensure confidentiality, integrity, availability, and consistency of all data. This doesn’t apply just to the insured but also to their employees, third-party vendors, and business distributors. As Insurtech has gained prevalence, the risk of data breaches increases. Last year, there was a development on this front. It was proposed the data of millions of policyholders will be transferred to the Insurance Information Bureau of India (IIB). Some criticised the move as it would affect data privacy and make IIB a monopoly of insurance data. Given many insurance transactions take place online, data security is important.

Right to be informed

If you’re in the market to get an insurance policy, this is the most important right you have. A potential insurer has the right to be made aware of all the components of a policy. The responsibility rests on the insurance provider to give all the necessary information for the customer to make an informed decision. Given insurance policies can sometimes be complicated, this right is particularly important. 

This was reiterated in the IRDA (Protection of Policyholders’ Interests) Regulations, 2017. Transparency was a part of the regulations. It outlined that insurers should clearly state the terms and conditions for claims and coverage. They should also disclose any specific policy exclusions upfront. Among the components was requiring insurers to amend policy documents per the 2017 rules. 

In cases where an insurer violates norms, they can be fined. For example, SBI Life Insurance Company was fined ₹4 lakhs for violation of norms on advertisement and protection of policyholders’ interest.

Rights on termination of a policy, refunds, and claims

If the policy chosen isn’t satisfactory, the insured has the right to cancel it within the initial 15 days and get a refund. Here is where something called the free-look period comes in. Once a person has opted for a policy, they can cancel it and use the free-look time to assess the policy. One can also exercise the cancellation during this period. However, this free-look period varies from insurer to insurer.

As technology has infiltrated the insurance sector, and the onset of the pandemic, the IRDA decided to make things easier for policyholders. In August 2020, they allowed the issuance of policy documents via e-mail. It even applied to cancellations which would normally require a physical copy given to the insured. An insurance company should accept an electronic copy in this case.

Concerning claims, sometimes things can get tricky, especially for health insurance. Disclosing health conditions is vital to avoid any legal conflicts. One of the most common complaints among health insurance consumers is the rejection of legitimate claims by insurance companies. According to a 2018 paper titled “Fair play in Indian Health Insurance”, India has the highest complaints rate compared to other countries. 

The courts have had their say on this. Last year, the Supreme Court heard a case on a person seeking a claim for treatment expenses in the wake of a heart attack. The insurer rejected the claim citing the insurer’s history of hyperlipidaemia and diabetes, which wasn’t disclosed. The court said the insurer should disclose “those material facts which, in the ordinary course of business, he ought to know”. It ruled that United India Insurance, the insurance provider, in this case, was acting illegally when it refused the claim.

Legal recourse

In any of the above cases, if the policyholder feels cheated or has a dispute, they have legal options. The Commercial Courts Act 2015 defines a commercial dispute to include insurance and reinsurance disputes. An insured can also bring a claim in the consumer courts under the Consumer Protection Act 2019. However, in other countries having higher literacy, lower poverty, and better legal systems, it’s easier to file complaints. That’s not necessarily the case here.

The insurance sector in India has seen disruptions in recent times. External factors like the pandemic and advancements in the financial services and payments space have shaken up the industry. There’s scope for growth thanks in no small part to the under-penetration of the sector. As a KPMG report stated, the insurance industry is expected to grow by 15% in the next three to five years. This only makes it more important for the sector to have a strong legal and regulatory ground to stand on to protect policyholders.