Much happened through the year in distribution channels, better products and insurance reforms
Implementation of new product guidelines framed by the Insurance Regulatory and Development Authority (Irda) was one of the most important developments of 2014. More efforts to increase distribution and passage of the Insurance Laws (Amendment) Bill, 2008, were the others. Let’s take a closer look at these.
Irda’s new products guidelines—linked insurance products regulations and non-linked insurance products regulations—are aimed to make policies friendlier for customers. It was mandated that the minimum sum assured be 10 times the annual premium for policies of 10 years or more and for policyholders below 45 years of age. This is also the threshold to become eligible for tax benefits in insurance policies. Irda also mandated that at any point the death benefit will have to be at least 105% of all premiums paid till date.
In terms of costs, Irda also brought Variable Insurance Plans (VIPs) under the same limits as Ulips. VIPs guarantee a minimum rate of return. Additional benefits are either pegged to an index, declared upfront, or come as periodic bonuses. The reduction in yield in these plans will not be more than four percentage points in the fifth year, coming down to a difference of 2.25% 15th year onwards.
One of the biggest benefits of these regulations was that surrender charges were brought down, although these continue to be high for traditional plans. In Ulips and VIPs, for instance, maximum surrender charge is Rs.6,000 in the first year, tapers to Rs.2,000 in the fourth year, and is nil fifth year onwards. But in traditional plans,you become eligible for a surrender value after three years if the premium-paying term is more than 10 years.
The minimum guaranteed surrender value will be 30% of all premiums paid, between the fourth and the seventh year it will be 50% and after the seventh year the insurer has to file a surrender charge and get it cleared by Irda.
However, the industry shifted to selling traditional plans. In fact, many guaranteed products were launched that continued to be opaque—no disclosure of net returns, guaranteed benefits were not comparable, among others.
Some insurers, such as ICICI Prudential Life Insurance Co. Ltd and HDFC Standard Life Insurance Co. Ltd, however, focused on Ulips. A buoyant stock market was one of the reasons behind the growing interest in Ulips. But it’s unlikely that this product will again grow to dominate the market. “Ulips seem to be coming back due to the overall positive economic sentiment. However, one must remember the nature of economic cycles and what happened post-2008. It would, therefore, be more prudent to have a balanced approach.” said Girish Kulkarni, managing director and chief executive officer, Star Union Dai-ichi Life Insurance Co. Ltd.
The year started with some hope on enabling banks to become brokers and sell policies of multiple insurance companies, as opposed to selling policies of just one insurer as a corporate agent.
Becoming a broker would have also ensured accountability from banks as they would then represent the interests of the policyholders.
While this remains work in progress, a report submitted by a select committee of the Rajya Sabha on the Insurance bill has recommended that Irda look into the multiple corporate agency channel. Such a channel would allow corporate agents to sell policies of multiple insurers and continue to represent the interest of insurers.
But there are concerns about following an open architecture in distribution. “This may not really be a good idea. In the past, banks have been hard negotiators for distributor compensation. By allowing them to sell multiple insurers’ products, the balance of power will tilt further. Even under existing corporate agency models, the quality of business from bank channels is not significantly better than that from agency channels. Open architecture runs the risk of this mis-selling increasing further,” said Sanket Kawatkar, principal and consulting actuary, Milliman, a global actuarial firm. “My view has been that the Irda oversight on the existing corporate agency model needs to be further strengthened through measures like inspections and increased levels of fines as opposed to allowing another avenue, given that we can’t even address the problems as of now,” he added.