The Allahabad High Court has asked Irda to scrutinize SBI Life's policies
As a scientist at the National Botanical Research Institute in Lucknow, Virendra Pal Kapoor, now 72, spent years developing eco-friendly, toxin-free, herbal products. Ironically, as an investor, he contaminated his own portfolio by making the cardinal mistake of buying insurance when not needed. To be fair to the scientist, he was taken in by the advice given by his life insurance agent, whom he met in the premises of his bank.
Kapoor, now retired, is a happy customer of State Bank of India and has built a relationship of trust over decades with the bank. “I met this agent at my bank, and since SBI is government owned, I thought that the companies that he represented (SBI Mutual Fund and SBI Life Insurance Co. Ltd) would also be backed by the government,"said Kapoor.
In 2007, at the age of 64-plus, Kapoor bought a unit-linked insurance plan (Ulip) on the advice of his agent. According to Kapoor, his agent, Vinod Kumar Harjai, who is an independent financial adviser (IFA), suggested that he buy SBI Life Unit Plus-II single-premium Ulip for a term of five years. The rationale offered was that the Ulip would not only help Kapoor invest in equities just like mutual funds, but also provide insurance cover at a nominal cost, almost free. So, Kapoor, who didn’t need insurance at all, bought the Ulip and opted for the growth fund with an equity exposure of 40-100%, instead of a mutual fund since the Ulip came with free insurance. “I invest to save on taxes. Before I bought the Ulip, I used to invest in mutual funds, which were also recommended by the same agent. But when he told me about this Ulip that would also give me insurance for free, I was interested. I didn’t need insurance, but since it was free I didn’t see any harm in taking it," said Kapoor.
Harjai said he did not give such advice: “I told him he didn’t need insurance, but he wanted this plan. I only sell term plans but since he had made up his mind, I told him to buy it from me only"
Insurance for a senior citizen is very expensive, but in Kapoor’s case, what added to the burden was that he inadvertently opted for a higher sum assured. “I didn’t know I could choose the sum assured. I was told that this was the standard sum assured that comes with the policy," said Kapoor. So, instead of going for the minimum sum assured of 125% of the premium, Kapoor opted for a sum assured of 625%, or around 3.13 lakh. The result: in five years, his investment of 50,000 was reduced to 248.
Ulips typically come with four cost heads. The first is a premium allocation charge, which is deducted straight from the premium. The other three costs—policy administration charge, fund management charge and mortality charge or insurance charge—get deducted from the invested fund. Mortality charge varies across individuals depending upon age and amount of insurance taken. The older the person, the riskier she becomes and so insurance becomes more expensive. These costs bite more in case of a single-premium plan because no fresh investments are made to offset the burden of costs.
What’s more, since the rules at the time Kapoor bought the policy didn’t mandate a customized benefit illustration to show how the charges would eat into the fund value, he was not made aware of them. So, when he got just 248 in his account, he was shocked.
“With mutual funds, I used to get regular statements. But after I bought this policy, I didn’t get any statement. I had absolutely no idea how my money was doing," said Kapoor. Even communications with the agent didn’t help. “I would ask the agent and every time he would tell me the NAV. But I had no clue about my money," said Kapoor. Net asset value (NAV) can be misleading as it reflects the net value of the underlying asset, while the actual fund value would depend also on the units held by the investor. For instance, if the NAV of a fund is, say, 10 per unit and the investor has 10 units, the fund value will be 100. In an insurance policy, the insurer deducts charges by cancelling the units. So, while the NAV may go up, the fund value may actually come down due to units being used to pay for the charges. In Kapoor’s case, the particular fund’s NAV rose from 17.15 to 19.24 in five years giving an annual return of 2%. For Kapoor, the insurance cost was big—but it didn’t reflect in the NAV, and he didn’t receive any fund value statement either.
In fact, even close to the policy’s maturity, Kapoor didn’t receive any communication from the insurer. So, he approached SBI Life at its Gomti Nagar branch of Lucknow. “I went to their office to remind them that my policy was due to mature. They didn’t tell me my fund value even then. In fact, they kept saying the system had some problem and that they would not be able to tell me the fund value," said Kapoor. “Instead, I was asked to fill up a maturity claim form, and they specifically asked me to keep the amount column blank. After about a week, 248 was credited to my bank account," he added.
From there on it was a battle with the insurer as Kapoor decided to seek an explanation for how his money was reduced to ashes. The insurer wasn’t very forthcoming. “Every time I went there, I was told that the authority concerned was busy," he said. After several harassed visits, Kapoor approached Dhruv Kumar, an advocate and an insurance activist.
Kumar worked as a branch manager with United India Insurance Co. Ltd and also got a degree in law. He took voluntary retirement to practice law in 2005. “The biggest challenge for any insurer is to pay the claim. Having being in the business, I saw first-hand how policyholders got harassed with half-baked information. So, I decided to start my own practice as a lawyer," said Kumar. As a first step with Kapoor, he lodged a complaint with insurance watchdog, Insurance Regulatory and Development Authority (Irda).
“Irda gave a routine reply that the complaint had been forwarded to SBI Life and that the company would get back to us," said Kapoor. The insurer did get back to them with an explanation. Sadly, it was even more cryptic than the policy.
“We had asked them in simple words to explain the charges and how 50,000 became 248. They sent us a letter that was very difficult to understand," said Kumar. Unable to make any headway, Kumar took the matter to court; on behalf of Kapoor, he filed a writ petition in Allahabad High Court in September 2013.
The problem was not limited to wrong advice; Kumar found loopholes in the policy itself, which violated regulatory guidelines. For instance, the policy offered two minimum sum assured: 125% and 625% of the premium. Kapoor had no clue about the choice, and the agent opted for the higher sum assured on his behalf.
The second clause in the policy document referred to a safety net. The original policy stated that if anytime during the term of the policy the fund value fell below 10,000, the policy would get terminated and the money would be returned to the policyholder at no extra cost. However, the insurer later amended the clause to just offer a switch to another fund. Irda, which allowed the amendment, asked the insurer to inform policyholders. Kapoor said he didn’t receive the communication, but the insurer stated in the judgement that the information was sent.
Given the manner in which the policy was sold and subsequently serviced, the Allahabad High Court found SBI Life guilty of wrongdoing. In its judgement dated 29 May, the court observed that the insurer could not satisfactorily reply as to whether the terms and conditions of the policy were properly explained by the insurance agent. “In case the calculations were explained, he would certainly not have opted for a policy which would ultimately lead to completely wiped (sic) out his investment. No prudent person, if he was explained the consequence of deduction of mortality charges at 625% risk, would have subscribed to the policy, which in any case, even if the NAV had risen, would not give any return at all," the judgement noted.
The court further ruled that the insurer couldn’t unilaterally make amendments to the policy since it was a contract between the policyholder and the insurer. “Clause provided for termination of the policy, if the investment fell below 10,000. It could not have been changed unilaterally even on the advice of Irda. The written consent of the policyholder was required for deletion of the clause," said the judgement.
It also held Irda remiss in its duties of upholding consumer interest. “Irda completely failed in exercise of its statutory duty in allowing the unilateral amendments in the policy on a mere advice of a switch over option to all the policy holders. …an advice of Irda could not be the basis of change in the policy, which is a contract unless written consent of policyholder was obtained. Irda failed to carry out its statutory duties in allowing such unilateral change by mere information without insisting upon written consent of the policy holder," the judgement noted (edited excerpt).
Kumar added: “SBI Life, being a commercial organization, will aim at profits. But Irda, being a statutory authority, is duty bound to look after the customers and to ensure that they aren’t cheated. However, the regulator supported SBI Life before the high court, despite knowing that it had violated its guidelines. Therefore, the regulator is a bigger culprit."
Calling the policy “unconscionable", the high court has declared the contract illegal and void and has asked the insurer to return 50,000 to Kapoor along with 10,000 towards expenses in filing the writ petition. It has also asked Irda to scrutinise SBI Life’s policies, and if found guilty of a breach, to wind up its business. The court has asked Irda to examine the policies for any hidden terms and charges with an objective to deceive the policyholder, and if found guilty, to direct SBI Life to discontinue such policies and return the entire amount invested to the investors. “In such case, it will be open to the central government to initiate prosecution against the management of SBI Life in accordance with the law," the judgement noted.
Mint Money take
This is a landmark judgement in the interest of policyholders which hasn’t been shy of even pulling up the insurance regulator for being remiss in its duties. “Strict action should be taken by Irda against the intermediary in case of mis-selling or where the policy is sold without considering the risk profile of the policyholder. Also, it’s important that products are simple to understand by a common person," said Pankaj Mathpal, managing director, Optima Money Managers Pvt. Ltd, a financial planning firm. It’s important that complex products such as insurance be sold not only under watertight regulations but also through responsible sellers. Accountability is important so that such products don’t turn toxic by going into the wrong hands.
We contacted both Irda and SBI Life for the story. While Irda didn’t respond, SBI Life officials said they were not in a position to comment as the company has filed a Special Leave Petition in the Supreme Court and the matter is now subjudice.