Life cover with a post-2007 SBI home loan? Expect a refund

An increasingly consumer-focused insurance regulator pushed the envelope just a bit further last week. On 5 October, the insurance regulator asked SBI Life to refund 84 crore to policy holders, you can read the order here: http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo1798&flag=1.

The Insurance Regulatory and Development Authority (Irda) rules for group insurance (notified in 2005) mandate that beyond the prescribed limits of commissions, there must be no other payments to agents (as management or documentation expenses, profit commissions or bulk discounts—words used by many insurance companies to pass over commissions in excess of limits) who are individuals or corporates. Irda has found SBI Life guilty of breaking this rule over a period November 2007 to August 2010 for paying its master policy holders (entities who buy the group cover) commission beyond what is allowed under various heads.

From the Irda order the story that emerges is this: SBI Life offers a group term insurance product called Super Suraksha. The product is used by banks and housing finance companies to offer group life covers to their home and car loan customers. Banks also use the product for groups of farmers, self-help groups (SHGs) and depositors—probably the poorest and most vulnerable of all customers. The bank, called the master policy holder, buys the policy from SBI Life and offers to customers for a premium that the customer pays. Embedded in the premium are commissions, administrative charges, mortality costs and other charges. The company it seems gave the master policy holder a commission of 20%. We’re within the law till here. But SBI Life, says the Irda order, does not stop at that, it offers an additional 20% to the master policy holder as administrative fee (paid for by the final customer—the farmer, the SHG tiny borrower or the home loan taker). SBI Life says that this money was paid to the master policy holders as administrative fee for services such as dispatching mailers to customers, collecting membership forms, remitting premia, answering customer queries and facilitating claims. Irda calls these charges wrong and says that majority of the functions stated to have been assigned to them were anyway part of the responsibility of the master policy holder for administering group insurance scheme. This refund is for policies issued between November 2007 and August 2010, though the product has been in the market since 2002.

Of the 84 crore seen as Irda as unfair payment, 52 crore was paid to SBI and another 23 crore to its six subsidiary banks—that is together almost 90% of the total. The rest is split between Dewan Housing Finance, Federal Bank, Kerala Transport Development Finance, Sundaram Home Finance and Union Bank of India. The Irda order wants this extra money paid by policy holders refunded. Who will pay this? SBI Life had pleaded its inability to recover money from its master policy holders in a submission to Irda earlier. The order says that this will be refunded by the shareholders. The cost of regulatory compliance will be borne, says the order, by the shareholders of the life insurance company. It is unclear whose shareholders will bear the cost of the administrative fee claw-back—those of the banks or of the insurance company. In either case, it will be the government of India as the principal shareholder of SBI (that is the main shareholder of SBI Life) that will be liable to pay.

This column has argued for a long time that Indian financial sector regulators should do two things that will deter predatory sales in insurance. One, impose hefty penalties on companies caught breaking rules. Two, offer refunds to policy holders who were mis-sold policies or those who were affected by companies overpaying their agents out of the customer money in the policy. A mix of lack of teeth in imposing large fines (The Insurance Act limits penalties to 5 lakh) and the lack of expertise and experience in this space makes it slow business for the regulator. The SBI Life order may leave very tiny footprints right now, but have broken ground for larger action either by a consumer group or lawyer to take up the fight for policy holders.

End Note: Another column in which I write good things about Irda. Followers of this column know that I have been a vociferous critic of the insurance regulator J. Hari Narayan and his capture by the industry over the past few years. So what has changed? My opinion. Because the stance of the regulator changed and is obviously customer-centric now. The story I hear is that the regulator realized post 2010, when the Ulip rules were actually changed, that the industry had indeed been pulling a fast one on him. Those in the bureaucracy who speak to me on condition of anonymity tell me that such a change in stance is very difficult to see in a seasoned babu. I was told in words that add up to this: You have to give credit where it’s due. I’ve been a severe critic of the man, but I have to appreciate the fact that not only did he understand he was wrong, but has taken steps to change his position.

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 expenseaccount@livemint.com