There’s more to the insurance Bill than just hike in FDI
A government with a majority notwithstanding, the Insurance Laws (Amendment) Bill couldn’t make it through Parliament yet again. This time it got stuck in Rajya Sabha, and was subsequently referred to a select committee which would look into the amendments to the Bill, primarily in the foreign direct investment (FDI) limit hike from 26% at present to 49%. The political drama is pivoted on allowing more foreign money into the sector, but what is being held hostage here is the much needed wave of insurance reforms, although it’s good to know that the finance minister is hopeful that the Bill will be passed by the end of the year.The insurance Bill gives more power to the Insurance Regulatory and Development Authority (Irda) to decide on expenses of the insurers. This, among other things, allows the regulator to stitch a new commission structure for distributors. These are currently hard-coded in the Insurance Act of 1938 and any change needs the deliberation of Parliament.
As of now, according to the Insurance Act, agent commission in the first year is up to 40% if the insurer is less than 10 years old. Subsequently, in the second and the third years, the commission drops to 7.5% of the premium, and to 5% for the rest of the term. If the insurer is more than 10 years old, the first-year commission is capped at 35%. Staying within the overall caps, Irda in its product regulations of 2013 pegged the quantum of the first-year commission to the premium payment term: longer the policy, more the commission. The second and the third year commissions, however, remained intact. If the Bill goes through, Irda will have the freedom to institute fresh incentives. It could reduce incentives altogether to be aligned with the structures of other products.
Irda could even change the front-loaded structure: make it even- or back-loaded. A review of the commission structure is important given the havoc a front-loaded product such as insurance, coupled with the industry’s greed for sales, has wreaked upon customers. A fat first-year commission with impunity on a mis-sold policy has tarnished the industry’s reputation.
To this effect, the amendments to the Bill also take a very stringent view on mis-selling. It holds the insurer responsible for the defrauding agent and makes it liable to a penalty of up to Rs.1 crore. “Insurers shall be responsible for all the acts and omissions of their agents including violation of code of conduct. They shall be liable to a penalty of up to Rs.1 crore for such acts and omissions of their agents,” states the Bill.
The industry has seen blatant and unabated accounts of mis-selling but punitive damages on the erring party have been few and far between. Accountability is needed to bring fair market practices to the industry. The Bill puts pressure on the insurer to audit its agents’ sales. It also increases the overall penalty that Irda can impose: from the current Rs.5 lakh per incident of violation to Rs.1 lakh per day per incident of violation going up to a maximum of Rs.1 crore per incident of violation. Irda desperately needs more muscle, and resolve, to bring the erring parties to book.
The regulator has stepped up its inspection capabilities and is able to segregate violations and penalize insurers for each violation, unlike the earlier Rs.5-lakh blanket penalty, which neither hurt nor shamed the penalized. With an increase in quantum, Irda can really make the fine bite, but for that to happen, Irda also needs to be more of a regulator and less of a developer so that customers are not forced to take every battle to court because they perceive Irda to be one with the industry.
The Bill also puts the onus on the insurer to tighten its underwriting norms. Currently, an insurer has a window of two years after a policy is bought to reject a claim on grounds of any mis-statement or fraud. After two years, the insurer can still reject a claim on grounds of fraud such as intentional suppression of material information. The Bill, however, gives insurers three years to establish this, after which the insurer will not be able to reject a claim on any grounds. This will curb the practice of underwriting a customer at the time of claim instead of at the time of buying the policy. At present, many policies are sold with “no medicals” as an attraction. While this saves the customer the hassle of a medical check-up, it comes back to haunt at the time of a claim when the insurer exercises all due diligence before settling the claim. With the insurance Bill, this will change: the insurer will have do all the due diligence when you buy the policy; not when you make a claim.
The Bill and the proposed amendments gives more power to the regulator and brings in several customer-friendly reforms. It defines quantum of penalty on specific violations such as insurance sale through unlicensed entities and clearly prohibits damaging sales practices such as multi-level marketing. But the political focus seems to be centred only around FDI and not on the next big wave of reform in the insurance industry.