Reading the Irdai (Insurance Regulatory Development Authority of India) draft on updating regulations for unit-linked insurance plans and traditional policies, you get the impression that somebody gave an aspirin when what was needed was a heart surgery. Product structures in finance are taking on a new importance globally because mis-selling and unsuitable sales can be reduced by taking the tricks and traps out of these products. This simply means that the costs and benefits are better defined and marked so that investors are able to understand the features of the products properly. Product structure rules also deal with early exits and their costs so that investors are not trapped in products they buy. 

The Bose Committee Report 2015 had marked some of these areas clearly and the insurance regulator was under pressure from the ministry of finance to take notice of recommendations that, in a nutshell, said that traditional insurance products should stop being low-return traps that cause household savings to die. The regulator set up a committee to look into some of these issues. The Product Regulations Review Committee had several internal battles over issues relating to three areas. One, showcasing the internal rate of return on a traditional policy—or telling the investor what rate of return she will get. Two, raising the amount of money invested to be returned in case the investor stopped the policy midway. Three, increasing the persistency levels of insurance policies from the sub 50% mark. The December 2017 final report was fairly diluted but the draft regulations that have come 10 and a half months later are even more tepid.

One of the major changes in the draft from current regulations is the reduction of the insurance cover in a bundled policy. Today policies must offer a minimum 10 times of the premium as sum assured (if the premium is 1 lakh, the sum assured must be 10 lakh at least). This has been brought down to seven times, or 7 lakh of sum assured on a 1 lakh premium. Such policies will fall outside the tax benefit rules and will not get the Section 80C ( 1.5 lakh deduction) or the tax-free status of the proceeds of the policy on maturity. The insurance industry is not known to think in terms of investor benefit and this may lead to policies being sold without the buyer knowing about the lack of tax benefit.

The other change gives you slightly more money in a traditional plan if you decide to stop paying premiums after the first two years. Traditional plans cut a hefty part of your investment if you stop paying premiums before the policy matures. I’ve found it fascinating how risk-averse, capital-preserving Indian investors continue to buy and stop funding plans that gobble up their invested money. The new rules say that if you pay two premiums in a traditional plan and then don’t pay the third premium, you will get 35% of your money back. If your premium was 1 lakh a year, then after paying 2 lakh, at the end of the second year, when you don’t pay the third premium, you will get 70,000 back. If you stop the policy near maturity, you will get back 90% of your money. Suppose you stop your 20-year policy in year 18, then you get 17.1 lakh of the 19 lakh invested. Irdai has done little to stop the gobbling of the premium by insurance firms in these plans—you still lose all your money from the first premium if you don’t pay the second premium.

There are baby steps to make the pension product better. You will be able to commute, or withdraw in a lump sum, 60% of your corpus instead of the current one-third. But again, the tax department will have to change their rules so that the entire 60% is tax- free. You will also be able to buy an annuity from any other insurance firm and not just the company that sold you the pension plan. This opens up choice for the annuity seeker and will hopefully see the development of the annuity market.

The draft does point to all operational issues being taken out of the product rules and that means that there may be hope for the regulator to impose persistency targets for insurers. When you read an Irdai circular right after a whiplash Sebi (Securities and Exchange Board of India) circular on products, costs and benefits, the difference is stark. Irdai had an opportunity to make deep changes. But it has dropped the ball. Again.

Monika Halan is Consulting Editor at Mint and writes on household finance, policy and regulation

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