Mumbai: In a move that would provide relief to insurance policyholders and help curb mis-selling by agents, India’s insurance regulator plans to cap charges on all traditional life policies, extending a clean-up that began with the controversial unit-linked insurance plans (Ulips) last month.
Under current norms, agents are entitled to a commission of up to 35% of the premium paid in the first year on traditional policies, which include endowment, money-back and term assurance plans. Agents of insurers that are less than 10 years old are allowed to pay as much as 40%; state-owned Life Insurance Corp. of India is the only insurer older than 10.
In July, the Insurance Regulatory and Development Authority (Irda) capped various charges for Ulips, which are hybrid products that combine insurance with investment in equities, in such a way that insurance firms will no longer be able to pay such high commissions to their agents.
Commissions to agents on Ulips could drop by as much as half, benefiting customers because a larger amount of the premium they pay can be invested.
Irda also plans to limit the surrender charges for traditional policies, as it has already done in the case of Ulips.
Surrender charges are levied on a customer when a policy is discontinued or surrendered prematurely. In traditional policies, such charges can be as much as 100% of the fund value (premium paid by a customer and the returns earned).
Graphic: Ahmed Raza Khan / Mint
If such surrender charges are capped, policyholders will receive almost the entire amount back even if they withdraw from the policy before maturity.
A person familiar with the development said an internal Irda panel will prepare draft guidelines on charges for traditional policies in the next two months.
“Irda may cap the surrender charges in traditional non-linked life insurance policies from fourth year in the life of a policy. The charges can be maximum 10% of the fund value, declining progressively every year,” said the person, who didn’t want to be named because of the sensitive nature of the issue.
“The actuarial department along with the consumer affairs department is working on the guidelines over these charges,” the person said.
Traditional life insurance policies, which have been the mainstay of the industry for decades, caught Irda’s attention recently after the regulator discovered that many insurers had been mis-selling such products for high commissions.
The move comes at a time when insurers have started focusing again on traditional policies after the regulator tightened the norms governing Ulips, which were at the centre of a turf war between Irda and the Securities and Exchange Board of India that ended in June with the finance ministry siding with the insurance regulator.
Capping charges will help check mis-selling by agents and ensure customers get most of their money back even if they withdraw policies prematurely.
Traditional policies are those where insurance forms the primary component of the premium and investments are governed by the Insurance Act and not decided by the policyholder, as in the case of Ulips.
According to the existing law, 50% of the premium collected from a traditional policy is to be invested in government bonds and 15% allocated to the infrastructure sector. Up to 35% could be invested in other securities such as equities, non-convertible debentures and mutual funds.
According to industry estimates, there are about 310 million policies in force today, of which close to 220 million are traditional ones.
India has 23 life insurers. The industry collected total premiums close to Rs2.61 trillion in 2010, of which nearly Rs1.5 trillion came from traditional policies, and the rest from Ulips.
According to the Life Insurance Council, an industry lobby, traditional policies contributed Rs22,163 crore of the total renewal premium of Rs32,936 crore during the quarter ended June.
Ulips, however, account for 80% of new business premiums. According to council secretary S.B. Mathur, it may decline to 65% in the next few years. As companies shift their focus to traditional policies, they are likely to raise the incentives for agents selling these products.
Unlike Ulips, the surrender charges for traditional policies cannot be capped right from the first year of the policy as the cost of managing most traditional policies are high in the initial years.
“In three years, an insurance company typically recovers all costs and during this period the surrender charges can go up to 100%. Between the fourth and the 15th year, the surrender charges can go up to 70%. It is unfair to levy such high charges even after recovering all costs during the first three years. Therefore, Irda plans to cap the charges fourth year onwards,” said the person cited above.
Mathur said Irda’s move could hit the government’s borrowing programme in a significant way. At June-end, the assets held in fixed income instruments, including government debt paper, stood at Rs8.35 trillion.
The government borrows money from banks and insurance companies every year to bridge its fiscal deficit.
“Anything done to traditional policies will hit the government’s borrowing, as two-thirds of the money collected in traditional policies goes back to the government in some form or other. The rules have to be tightened very carefully,” Mathur said. “If Irda wants to stop insurers from charging absurd amounts, why can’t it stop such products at the approval stage?”