The Insurance Regulatory and Development Authority (Irda) took a number of steps in 2010 to ensure that life insurance products serve its basic purpose. It gave policyholders an option to invest in insurance plans, which were more transparent, less expensive and long-term in nature. Going forward, the regulator is likely to set up a policyholders’ protection fund. The fund will not only work towards protecting the interests of policyholders but also spreading awareness about insurance.
Irda, which got into a spat with market regulator Securities and Exchange Board of India over regulating Ulips (unit-linked insurance plans), changed the look of these products, which accounted for almost 80 per cent of the life insurance industry.
The lock-in period for Ulips was increased to five years and the minimum life cover to 10 times of the sum insured.
|Step in 2010
|Jan: Cap on Ulip charges
||Investible corpus of
|April: Sebi bans insurance companies from selling Ulips; face-off with Irda
||Ulips became more transparent
|Sep: Further cap on charges, increase in lock-in period, life cover, etc.
||Commission dropped, ticket size, tenure went up
|Nov: Ban on ULPs, re-christened to VIPs, guidelines put in place
||Product clarity, guidelines helped policyholders take an informed decision
The outcome of the dispute was in favour of policyholders. To avoid any such row in future, the regulator now closely scrutinises all products and ensures fair play in the system.
Policyholders, who were the victim of high surrender charges, got relief from the cap imposed on it. While insurers earlier used to charge up to 100 per cent of the premium as surrender charge at discontinuance, Irda prescribed a cap of 12.5 per cent for the first year, which could fall every year up to six years.
Responding to the changes, insurers increased the minimum ticket size of these policies and reduced commission.
Subsequently, agents went on to sell less-lucrative policies like money back and endowment. While traditional plans fetch agents up to 40 per cent of the first year premium, Ulips fetch five to seven per cent.
Policyholders’ investible corpus, therefore, increased as all expenses were capped. For those looking to invest less thanRs 10,000 annually, traditional plans became more viable.
Moreover, to ensure higher returns to policyholders, the regulator stipulated even distribution of charges over the initial years.
“Margins have fallen, so profitability is a big challenge. These guidelines are good in long run, but sales are getting impacted now, as it has become less attractive to distributors,” said IDBI Federal Life Insurance Managing Director and Chief Executive Officer Nageswara Rao.
The regulator also went on to plug loopholes in other products like pension and variable insurance plans.
With 4.5 per cent guarantee prescribed on pension plans, insurers either stopped selling pension plans on Ulip platform or came out with single premium pension policies. There was a slew of changes in pension products, too. Two-third of the maturity amount would be invested in annuity.
These steps are likely to stay for a long term. “Pension has lost its sheen. Offering a guarantee with a life cover is not what pension is about. It brings down the return one would offer without any prescription,” said an executive at a large insurance company.
“The industry will get positioned for healthy growth. There was an opportunity that customer could be sold a wrong product, but now, there is no chance. Not only policyholders but also shareholders will benefit from the changes,” said ICICI Prudential Life Insurance Managing Director and Chief Executive Officer Sandeep Bakshi. Sales of new policies have dropped during last three months.
Industry experts say though the regulations are in favour of policyholders, they are likely to adversely affect the companies. Also, some companies have deferred their break-even targets.