Home / Industry / Banking /  Irda chairman T.S. Vijayan plans to review insurance products in the market

Mumbai: The insurance industry needs to incentivize its distributors so that they can become more efficient and serve the industry longer, which in turn will ensure better persistency ratios and fewer lapses, T.S. Vijayan, chairman of the Insurance Regulatory and Development Authority (Irda), said on Monday.

“Agents have to be treated and incentivized properly. This will help in bringing down lapsation ratios in India since agents are required to serve the customers through the entire term of the policy sold," said Vijayan told the 16th Annual Insurance conference organized by industry lobby group Federation of Indian Chambers of Commerce and Industry (Ficci).

Vijayan added that Irda has proposed removing the cap on first year commissions on life insurance policies. “Removal of the cap will give insurance companies the freedom to set commission. Our thoughts are that what affects the customer is the overall charges that are deducted from the premium."

Vijayan, however, added that the regulator is planning to impose certain regulatory limits on the expenses allowed for an insurer. These expenses, however, are recovered to a large extent from the customers through the premiums fixed for the policy.

Earlier this month, Irda released a draft circular to toughen its stance on the so-called “expenses of management" in life insurance companies. Expenses of management are defined as the overall charges wherever incurred, whether directly or indirectly. They include commission payments of all kinds and any amount of expenses capitalized, among others.

In the circular, Irda proposed that firms should opt for either the expenses as mentioned in the file and use (F&U) filing with Irda or the norms under Rule 17D of the Insurance Rules, 1939, whichever is lower.

Rule 17D suggests that there will be a limitation on expenses of management in the life insurance business and no insurer is allowed to exceed these expenses in any calendar year. It is calculated as a percentage of the premium (first-year and regular premium) and the size of the insurer’s business. On an average, it is capped at 90% of first-year premiums and 15% of renewal premiums if the company has been in operation for 10 years and its in-force business is 10 crore or above. These expenses of the management are part of the premium rates of insurers.

Once the proposals are formalized, insurers will have to choose the lower of the limits allowed by insurance rules and the actual expenses as their expense of management.

Vijayan suggested that for strong and mature firms, variable costs that included distribution and premium costs should be equal to or more than fixed costs. “This is an indication that the company is doing well. In short, companies should concentrate more on distribution. This will give them freedom to spend money and consequently improve themselves," he said, adding that there is a need for protecting agents.

Irda also plans to take a relook at the products the industry has been selling over the past few years, Vijayan said, to ensure that the products are appropriate in the Indian context and really serving the people. “Insurance companies should be responsible to make sure every customer understands the product and how they will benefit from it. Irda is attempting to bring in such transparency into the industry."

There are a number of products in the industry, both life and non-life, which are complex in nature and appear to have benefits that are not discernible to customers, he added.

Vijayan urged the industry to come out with small-ticket life insurance policies with annual premiums of 2,000-3,000 to cater to the larger mass of prospective customers.

“There is tremendous potential for the insurance sector, but at some point of time the industry has lost focus on the customers… if one looked at the number of people in the 0-18 age group and considered 18 as the earning age, nearly 2.5 crore individuals would enter the job market each year for 20 years in Mumbai alone. Add to this the increase in the number of vehicles, houses and other assets, the number of policies that will be sold is phenomenal," Vijayan said.

A report by the Boston Consulting Group released at the conference said that the life insurance industry grew at a compound annual growth rate (CAGR) of 25.8% between fiscal 2003 and 2009. “If presented with a favourable policy framework and an enabling environment in terms of regulations linked to distribution, products, etc., the industry could grow rapidly once again. In fact, India is poised to have the fastest growing life insurance market in the world as per multiple industry reports, with premiums expected to grow at a CAGR of 12-15% over the next few years," said Tarun Chugh, managing director & CEO, PNB MetLife India Insurance Co. Ltd in the BCG report.

“…If FDI norms are relaxed, the industry is expected to attract capital inflows of about 10,000 crore in the near term, and as much as 40,000 crore over the next 10 years. If these projected levels of capital inflows materialize, the industry is likely to expand at a CAGR of about 15% over the next 10 years. This would help the market for new premiums grow four times, to 4.8 trillion..," Chugh added in the BCG report.

Vijayan also said that Irda is working on a centralized KYC (know your client) registration process for customers for simplifying and reducing the burden of multiple registrations needed every time a person intends to buy a policy.

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