Insurance Act, 1938

What is the Insurance Act, 1938?

The Insurance Act, 1938 (Act 4 of 1938) is the main law governing insurance business in India. It decides who can be an insurer, how much capital an insurer needs, how it must invest and report, what rights policyholders have over nomination, assignment and claims, and how agents and intermediaries are registered and paid. It also lists the offences and penalties for breaking these rules. The Act came into force on 1 July 1939.

The Act was written for a market of private and foreign insurers before nationalisation. It has been amended many times since, most heavily in 2015 and again in 2025, and today it works alongside the IRDA Act, 1999, which created the regulator that enforces it.

How the Insurance Act works today

The Act sets the frame and gives IRDAI the power to fill in detail through regulations under section 114A. The provisions distribution and product teams meet most often are:

An "Indian insurance company" under section 2(7A) must have as its "sole purpose" one of life, general, health or reinsurance business. That one clause is why India has no composite licence and why insurance groups run separate life and general companies.

The 2015 and 2025 amendments

The Insurance Laws (Amendment) Act, 2015 raised the foreign investment cap to 49%, moved agent licensing from IRDAI to insurers, defined health insurance business, and rewrote section 45 on the three-year limit for questioning a policy.

The Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025, in force from 5 February 2026, made the next round of changes:

• Foreign investment in Indian insurers may go up to 100% (new section 3AA).
• The Act now carries its own list of insurance intermediaries, including brokers, corporate agents, TPAs and surveyors, and adds managing general agents and insurance repositories. All register under section 42D, and registrations stay valid until suspended or cancelled, subject to an annual fee. IRDAI's Insurance Intermediaries (Amendment) Regulations of 30 July 2026 put this into effect for corporate agents, brokers, IMFs and web aggregators.
• Section 14 now requires complete records of policies and claims, including assignments and nominations the insurer has notice of, and new sections 14A to 14C govern the processing and confidentiality of KYC and policyholder information.
• Section 47, on paying policy money into court when the insurer cannot get a valid discharge, now applies to any insurance amount due, not only maturing life policies.
• IRDAI may specify limits on commission, remuneration or reward to agents and intermediaries (section 40).
• Prior approval for share transfers applies above 5% of paid-up capital, up from 1%.
• The maximum penalty under section 102 rose to ₹10 crore, and acting as an intermediary without registration now attracts a penalty of ₹1 lakh to ₹10 lakh, with ₹10 lakh to ₹1 crore for anyone who uses such a person.
• Rural and social sector obligations now apply to all classes of insurance.

One change, the wider bar on common directors and officers in section 32A, was kept in abeyance when the rest of the Act commenced. The 2025 Act left sections 38 (assignment), 39 (nomination) and 45 unchanged.

What the Insurance Act means for distribution

• Only licensed people can be paid. Section 40 bars commission or reward to anyone who is not a licensed agent or registered intermediary. Referral fees to unlicensed lead sources, "finder" payments and incentives routed through third parties are the usual breach. After 2025, IRDAI can also cap what licensed people are paid.
• No rebating. Section 41 forbids offering a customer any part of the commission or a premium discount not in the prospectus. Cashback offers by agents, dealer discounts on motor premium and gift schemes fall here.
• Premium before cover. Section 64VB is why a policy cannot be issued on a promise to pay. Field teams that collect cheques must deposit them quickly, because risk starts only when the insurer receives the money.
• Section 45 shapes underwriting. Because a life insurer has only three years to question a policy for misstatement, disclosure at proposal stage matters. Agents who fill in health answers for a customer create claim risk that surfaces later.
• Unregistered selling is now expensive. The penalty under the new section 105BA applies both to the unregistered seller and to the entity that uses one. Insurers and corporate agents should check that every person selling under their name is properly certified.