Draft Insurance Amendment Bill: Stricter safeguards on cards for life funds

The government has circulated among members of Parliament a new draft of the Amendment of Insurance laws Bill, 2025, proposing stricter safeguards on the utilisation of life insurance funds and other specified insurance business funds, particularly for dividend payouts, bonuses, and servicing of debentures.

 

According to the proposed Bill, life insurers or other notified classes of insurance will not be permitted to directly or indirectly use any portion of the insurance fund for declaring dividends to shareholders.

 

They also can’t pay bonuses to policyholders, or service debentures, except from a surplus disclosed through an actuarial valuation.

 

Such surplus must be reflected in the valuation balance sheet in a format prescribed by the Insurance Regulatory and Development Authority of India (Irdai) and submitted as part of statutory returns.

 

The legislation further bars insurers from artificially inflating surpluses by transferring amounts from reserve funds, unless such contributions have already been recognised as revenue for the relevant insurance class prior to valuation.

 

An exception has been provided where reserve funds are built exclusively from earlier valuation surpluses already reported to the regulator.

 

The Bill also places a cap on payments made from the surplus towards debentures. Payments, including interest, cannot exceed 50 per cent of the disclosed surplus. Additionally, interest paid on debentures is capped at 10 per cent of the surplus, unless such interest is adjusted against interest credited to the insurance fund while determining the valuation assumptions. “Provided that payments made out of any such surplus in service of any debentures shall not exceed 50 per cent, of such surplus including any payment by way of interest on the debentures, and interest paid on the debentures shall not exceed 10 per cent, of any such surplus except when the interest paid on the debentures is offset against the interest credited to the fund or funds concerned in deciding the interest basis adopted in the valuation disclosing the aforesaid surplus,” said the Bill. Importantly, the proposed law limits the share of surplus that can be allocated to shareholders. In the case of participating policies, the shareholders’ share — including any guaranteed dividends — cannot exceed 10 per cent of the surplus, subject to limits specified by the regulator. For non-participating policies, the entire surplus may be allocated as permitted.

 

The Bill proposes amendments to three core pieces of legislation — the Insurance Act, 1938, the Life Insurance Corporation Act, 1956, and the Insurance Regulatory and Development Authority Act, 1999. 

 

The Bill also proposed that the aggregate holding of equity shares by foreign investors, including portfolio investors, in an Indian insurance company may be extended up to 100 per cent of the paid-up equity capital. This measure is intended to accelerate growth in the insurance sector. 

 

The Bill also proposed that the corporation establish a zonal office at each of the following places, namely, Mumbai, Kolkata, Delhi, Kanpur and Chennai. Subject to the previous approval of the central government, it may establish other zonal offices as it thinks fit. Moreover, the Bill mandates the creation of the Policyholders' Education and Protection Fund. This fund will receive money from grants, donations, and sums realised from penalties imposed by the authority.