Life fund In deficit but they are declaring bonus
16th April 2007
IRDA/F&A/002/Apr-07
Re : Declaration of Bonus under Section 49 of the Insurance Act, 1938
1. Introduction
This is further to Circular No.:F& A/CIR/011/MAR-04 dated 23 rd March, 2004 issued by the Authority on the said subject.
The Authority vide the Circular under reference, had issued instructions to clarify the manner of interpretation of the provisions of section 49 of the Insurance Act, 1938 for the purpose of declaration of bonus in respect of life insurance companies which had set up operations post opening up of the sector.
2. Provisions of Section 49
Section 49 of the Insurance Act, 1938 provides that no insurer shall declare bonus to the policyholders except out of a surplus shown in the valuation Balance Sheet which may arise as a result of actuarial valuation of the assets and liabilities of the insurer; nor shall such surplus be increased by contributions out of any reserve fund or otherwise unless such contributions have been brought in as revenue through the Revenue Account on or before the date of valuation.
3. Relaxation for Life Insurance Companies
With a view to facilitating declaration of bonus by an insurance company, where the Life Fund is in deficit, the Authority has laid down the manner of funding of the bonus and has stipulated conditions which are required to be strictly complied with. This relaxation has been made available to the insurers only during the first five financial years, beginning from the year in which the life insurance company commences operations.
While laying down the stipulated conditions, it was expected that after five years of operations, the operations of the life insurers would have stabilized, thereby enabling declaration of bonus from generation of surplus within the life fund without recourse to contribution from the shareholders.
4. Extension of the Relaxations
The Authority has been receiving representations from life insurance companies for extension of the relaxation for the purpose of declaration of bonus in cases where the Life Fund is in deficit, for a period of another two years, i.e., upto the seventh year of operations of the life insurance company.
After examining the request of the insurance companies, the Authority hereby extends the applicability of the Circular No. F& A/CIR/011/MAR-04 dated 23 rd March, 2004 upto the first seven financial years, commencing from the year in which the life insurance business operations are started.
All conditions as stipulated in the Circular under reference would continue to be applicable and are required to be complied with by the life insurance companies.
/Sd.
(C. S. Rao)
Chairman
link......
http://www.irdaindia.org/Finance_And_Analysis/IRDA-F&A-002-Apr-07.htm