Foundation laid for big changes in life insurance

Much happened through the year in distribution channels, better products and insurance reforms

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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.

The insurance regulator also came out with draft guidelines for another distribution channel—insurance marketing firm— that would work like a halfway house between an agent and a broker, and will also be allowed to sell other financial products after obtaining necessary qualifications.

Distribution got further fillip as insurers adopted better technology for their products.

“Insurance distribution was polarized due to regulatory changes as banks were able to adapt to the changes faster while the agency force slowed down. But this year saw the emergence of a more professional agency force as insurers focused on training in a big way. Distribution also saw migration to technology as gadgets such as tablets were used for sale. In that sense, this year has been the foundation and the next will be about transforming the agency force,” said Pankaj Razdan, chief executive officer and managing director, Birla Sun Life Insurance Co. Ltd.

Digitization of policies, an initiative that was launched in September 2013, however, didn’t pick up in a big way. “There are about 370 million policies in force, of which around 25 million would be fresh policies. So far, insurance repositories have digitized about 100,000 policies and opened e-insurance accounts for a little over 200,000 customers,” said S.V. Ramanan, chief executive officer, CAMS Repository Services Ltd.

An insurance repository has to maintain data of insurance policies in electronic form for insurers and open e-Insurance accounts for policyholders. They can take a fee for conversion from the insurer but to the policyholder, the services are free.

A big reason for the slow pace could be lack of awareness. “But Irda is taking steps to increase digitization. It has directed insurers to digitize policies with a ticket size of over Rs.50,000 or the ones bought online. They have even asked insurers to start digitizing motor and health policies,” said Ramanan.

Insurance Bill

Even as the opposition parties didn’t allow Parliament to function smoothly, some progress was made. The government has taken the ordinance route to ammend the insurance Act. An ordinance is a temporary measure and government will still have to get the Bill passed in Parliament when it reconvenes next. The overarching theme of the Bill is to empower the regulator. But one of the most keenly tracked propositions in it is regarding increasing the foreign direct investment (FDI) in Indian insurance companies to 49% (from 26%) and this a composite cap. This means that the composite limit would be inclusive of all forms of FDI and foreign portfolio investments.

“Shareholder restructuring, additional capital raising, entry-exit of insurers and consolidation will become less difficult. In the medium to long term, assuming that the foreign insurance companies will have a greater say in the day-to-day management of businesses, they may aim to steer the companies in the direction of long-term profitable growth, instead of being influenced too much by shorter term goals,” said Kawatkar.

The Bill has also proposed to increase the overall quantum of penalty on insurers from the current Rs.5 lakh per incident of violation to Rs.1 lakh per day per incident, going up to a maximum of Rs.1 crore per incident, whichever is less. Further, it also seems to have accepted the amendment that a life insurer will not deny a claim after three years. 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.

“The clause will discipline companies, who will have to ensure that underwriting standards are robust. It will also increase faith among consumers that their claims will be honoured,” said Rajeev Kumar, chief and appointed actuary, Bharti AXA Life Insurance Co. Ltd.

With major regulatory changes in 2014, much is expected from 2015 as well.

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