Insurance watchdog Insurance Regulatory and Development Authority, Irda, has levied a fine of Rs 1.47 crore, among the highest penalty amounts to have been imposed on an insurance company, on HDFC Standard Life Insurance Co. Ltd for paying its corporate agents’ marketing cost that is in violation of Irda guidelines. Also, its home loan product didn’t adhere to the regulator’s directive to remove the exclusion clause of 90 days. Irda has outlined 25 charges and has found the company guilty of five. In conversation with Mint Money, HDFC Standard Life’s managing director and CEO, Amitabh Chaudhry, owes up to the mistakes made in the past and explains the huge costs incurred on the company’s corporate agents.
One of the charges is that you paid your corporate agents a huge sum on account of marketing expenses. For this, you have been held in violation of section 40A of Insurance Act, 1938 and Corporate agents Guidelines issued by Insurance Regulatory and Development Authority (Irda) in 2005. Section 40A describes commission caps and the corporate agents guidelines state that an insurer can’t pay anything more than the commissions. Please comment.
We were paying the bank for the costs of training and skill building, which were not linked to new business premium. We were also within the limits of Rule 17D on expense management.
Amitabh Chaudhry, managing director and CEO, HDFC Standard Life Insurance.
The industry has been requesting Irda to appreciate the efforts to train and certify bank resources. We have been using HDFC Bank franchises and we believe that the money spent on them goes further because people who come to these franchises are more relevant than individuals whom we approach on our own. About 40% of the leads generated through these has led to business.
Note that the latest draft of the bancassurance guidelines suggests that an amount not exceeding 2.5% of the premium may be paid for infrastructure, costs of training and incentives to specified persons, which we think is a realistic assessment of the efforts needed to manage skill building of bank staff. No payment in any form on account of insurance solicitations have been made.
Irda’s second argument was that if HDFC Bank already spends say Rs 100 on marketing, then why do you have to give them Rs 200. Our argument was that it is not comparable because the bank may be using their marketing expenses in a different way.
Even as you say that it is not comparable, don’t you think 200% is too much?
Any large bank has advantages. Their network is typically 5-6 times that of a large insurance company. A bank also has a much larger customer base. These advantages are significant and a bank, therefore, focuses on building these “nodes” of customer attraction or repurchase and allows them to do this at a lower cost.
You have also been fined for using non-licensed agents.
We had availed services of individuals who had completed the mandatory Irda-stipulated training, but were unable to pass the exam and hence not licensed. We used some of them for referring customers, who were serviced by our licensed agents in 2010. Irda asked all insurance companies to discontinue the practice. We haven’t entered into such agreements in the last two years.
The biggest fine for you has been on account of breaching the regulator’s directive to remove the exclusion clause of 90 days from your Home Loan Protection policy. Why didn’t you adhere to the directive?
The letter from Irda asking us to withdraw the exclusion clause was missed. So it wasn’t removed as a policy feature. We made a mistake and we have learnt a lesson. Our claim repudiation ratios as published by Irda are the lowest among private insurers in three of the last four years. In light of our track record, this was an aberration. We are in the process of reaching out to the customers of that policy informing them of the retrospective withdrawal of the exclusion clause. Of the 690 claims, about 21 were made within the 90-day exclusion period, we will honour those claims.
Irda has also penalized you for honouring surrender before the three-year lock-in. For a company as big as yours, shouldn’t the system have caught early surrenders?
There are two points here. First, Irda has mentioned that we have extended the 15-day freelook period, which could be seen as accepting early surrenders. We were accepting surrenders from people who thought they had been missold. As an insurer, it is not in my interest to encourage surrender but that was a feature. Irda has considered our views. Second, some surrenders were not tagged and hence got missed. These are loopholes that we need to plug.
The income from surrender charges is about Rs 184 crore for FY12 whereas the profit is reported to be around Rs 271 crore. More than 60% of profits have come from surrender. Comment.
We actually made a profit of Rs 460 crore comprising profit in the shareholder profit and loss of Rs 271 crore mentioned by you, plus Rs 109 crore used to set off earlier loss in the balance sheet plus Rs 80 crore of unit-linked FFA (funds for future appropriation). Surrender charges of Rs 183 crore are part of Rs 460 crore and not merely of Rs 271 crore.
Insurers make more profits if customers continue in the policy. This is because the insurer can derive all the charges associated with the policy for the entire term. When a customer surrenders, the insurer gets a surrender charge immediately but loses out on future charges. On a net basis, the insurer loses out more charges than it gains. Since the short-term charge is immediately visible in terms of cash flow, you see its impact on the profit and loss account. However, consistent poor performance on surrender and persistency will eventually destroy value for an insurer.
Now coming to your point, I think it will be incorrect to say that more than 60% of our profits are contributed by surrender charges. This is because, as explained above, we lose out on future charges. Any insurer trying to maximize surrender charges is gaining short-term advantage at the cost of long-term value.