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Business News/ Opinion / Irda should stop playing catch up
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Irda should stop playing catch up

Irda playing catch up with the industry brings to light an important concern: it is short of talent

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

Last week, Insurance Regulatory and Development Authority (Irda) ordered SBI Life Insurance Co. Ltd to refund commissions earned by its corporate agents, mainly State Bank of India and its associates, because they mis-sold a group insurance policy about three years ago. This policy, called Dhanaraksha Plus Limited Premium Paying Term, was bought by bank customers to insure their loans: the policy would pay the outstanding loan amount in case the borrower died during the tenor of the loan.

So how was such a straightforward product mis-sold? Well, to begin with, corporate agents sold only the limited premium payment version of the policy even though the policy came with two options—single premium and limited premium payment. Under the single premium payment option, the policyholder had to make a one-time payment to buy this plan, and under limited premium payment option, the policyholder had to pay two premium instalments over two years. Despite the choice, the policy was sold as a limited premium payment plan alone, but both the premiums were collected upfront. According to the Irda circular, the corporate agents collected 93% of second-year premiums in advance along with first-year premiums in FY09, 94% in FY10 and 97% in FY11. Clearly, the policy was sold more like a single-premium plan rather than the two pay plan.

Given that there was a single premium option available, the insurer did wrong by the customers in not disclosing it, for those who were willing to pay upfront would have chosen that option. But what’s more disconcerting is that the two pay option was used to bend the rules and pocket more money as commissions. According to Irda, since these plans were sold as a regular premium plan, the corporate agents took 40% of the first-year premium and an additional 7.5% of the second-year premium as commissions. Under the single premium version of this plan, the commission would have been restricted to 2% of the single premium alone.

For this, Irda penalized the insurer in 2012 with 5 lakh. But to make the penalty bite, it has now ordered the insurer to refund the extra commissions to the affected policyholders or members of the group insurance policy.

The insurer will have to cough up around 275 crore from its shareholder’s account to repay the policyholders. SBI Life, it is learnt, will contest the charges. These policies were sold at a time when insurance rules greatly favoured the insurer rather than the customer. In other words, the rules allowed two-pay products and also allowed the insurer to collect premiums way in advance. Now, of course, there are restrictions on both.

Irda’s order is welcome as it may just serve to be a precursor to many more such directives to compensate policyholders, but it also brings a sense of deja vu. This is yet another instance when Irda had to catch up with the malaise when it should have nipped it in the bud. Why did Irda clear a two-pay product in the first place? And why did it allow such high commissions on the product? Was it so hard to see that this product was tailor-made to circumvent rules to get more commissions?

In 2007, Irda recalled “actuarial funded" unit-linked insurance plans (Ulips) after clearing them because they were too complicated for the buyer. More recently, it banned the “highest NAV guaranteed" Ulip, again, after clearing it. This Ulip got sold as a policy promising the highest return from the stock market even when the product allowed investments in debt.

The fact that Irda is still playing catch up with the industry brings to light a very important concern: it is short of talent. Irda needs a good dose of actuarial skillset to clear insurance products and ask all the right questions to filter out the bad ones, but that’s exactly what it lacks.

To begin with the actuarial department of Irda, one of the most crucial departments that has the wherewithal to clear products, still awaits a head. In fact, this post of member-actuary has been lying vacant for almost three years now. It’s true that the new rules have smoothened most of the rough edges around insurance products, but that alone will not help. There will always be a loophole to exploit. Take for instance, the new crop of guaranteed insurance products that only end up confusing customers because they do not state explicitly the return on investment.

But the ultimate lesson, and it can’t be stressed enough, is that insurance distribution needs serious time and effort. Insurance agents need to be held accountable. So far, Irda hasn’t gone after corporate agents despite the fact that in most of the penalty orders it’s the corporate agents, mainly banks, that are in the wrong. Going after the insurance company is much easier. There is no fear of stepping into someone’s turf, and more importantly, insurers are ultimately responsible for the actions of their agents. But agents can’t carry on with impunity and Irda needs to address this sooner rather than later. What it needs to do now is review the existing distribution landscape and set up a new framework just like it did for products. Instead, the insurance watchdog seems to be in a hurry to expand distribution. I won’t be surprised if in a few years from now, Irda plays catch up again and I scream deja vu, yet again.

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Published: 19 Mar 2014, 06:45 PM IST
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