A committee set up by the insurance regulator earlier this month is all set to look into a host of issues, the chief being product structures in traditional life insurance products. There is arbitrage in the market as the unit-linked insurance plan (Ulip) got a cleaner structure in 2010, but the traditional plans (whole life, money back, endowment) continue to be opaque products. The Committee on Design of Life Insurance Products will look into some 17-18 areas including pension products and the highest net asset value (NAV) Ulip plans. On the committee are the chief executive officers of Birla Sun Life, HDFC Standard Life and SBI Life, actuaries of Aegon Religare and Life Insurance Corp. of India and representatives of the Life Insurance Council and Insurance Regulatory and Development Authority (Irda). The first meeting is on 22 May and the report is due in 15 days.
The formation of the committee is a step in the right direction as it signals an end to the era of deep mistrust between the industry and the regulator. The Ulip issue has left deep scars within the regulatory body and its relationship with life insurance companies. The relationship went from being one of deep trust to complete mistrust as the Ulip issue unravelled in 2010. The regulator, believing what the industry said, had been in denial about the scale of Ulip mis-selling and fraud. I’ve been in meetings where the entire top brass of the regulatory body were convinced that the move to check Ulip mis-selling practices was a mutual fund industry machination. The scale of the mis-selling was such that the ministry of finance had to intervene with a clear message to the regulator—you’ve allowed a mess on your watch, clean it up. No wonder the Ulips clean-up rules were implemented in under two months in 2010. The realization within the regulatory body that it had been manipulated, flipped the equation. 2011 saw the earlier bonhomie give way to a police-thief like situation, with the regulator taking out ads that showed insurance companies as crooks. The fallout of this breakdown of trust was a huge backlog in product clearance. The fear of another Ulip happening to the market caused Irda staff to sit on products, specially if they did not understand them. Though the insurance regulator has a “file and use” system, products actually go through three layers of checks before they are approved. The average product delay for a life product was over six months in 2011. But despite sitting on products and the delay, the regulator found itself looking at some dodgy products slipping through that violated the spirit of the law, if not the letter. The highest NAV Ulip, which assures the policyholder the highest NAV that the Ulip hits over its lifetime (product sounds better than it is), has been in the line of fire. Another product that has clearly violated the spirit of the law are is the one that makes the sum assured (the amount you get when the policy ends) and death benefit (what the family gets if you die) two different numbers.
The formation of this working group is a good idea and here are a few suggestions that may make the experience of the life insurance consumer different from one who feels cheated. One, think of a two-track system of products. Track one has the plain vanilla products that are simple in structure, easy to understand and compare across the category and can be fast-tracked. “Innovative” or more complex products will need a higher degree of scrutiny. Two, clean up the traditional product structure now that there is a chance to do it. The structure should allow costs to be seen separately, benefits to be counted easily, and allow for comparability across all products in the same category. Of course, costs should be reduced to match those faced by Ulips to remove intra-industry arbitrage. Three, get benchmarks for market-linked products in place. Four, data reporting should be according to a standard that everybody agrees to. Take the case of reporting on the persistency of insurance policies. Different companies follow different methods to count how many policies are still alive at the end of one-, three- and five-year periods. Trying to compare across products on the basis of some common measuring rod is almost impossible in insurance right now. A cleaner product structure will allow for this. The committee should understand the value of industry aggregators, such as those present in the mutual fund industry, who not only report on the data but also provide good comparative data on products, and make the product structure more amenable to compassion.
The only reason to keep products non-transparent, not structured to facilitate comparison, to keep the data reporting non-standard and opaque would be that the committee recognizes that the investment linked life insurance product is inherently flawed and it takes a mix of very high commissions and deception to sell it. If this is not true, clean up the product.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at firstname.lastname@example.org
Also Read | Monika Halan’s earlier columns