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Five issues that may affect policyholders

Insurance companies, Irda and the ministry of finance are still at the stage of discussion.

Around sixteen insurers along with the Insurance Regulatory and Development Authority (Irda) met the finance minister on 4 September. The agenda was to take stock of the life insurance sector and hear out issues holding back the growth of the industry. From the meeting emerged eight key issues.

Mint Money brings to you five of these key issues that the regulator is likely to take up with the ministry of finance on 26 September.

Tax benefit

Now in order to claim a tax deduction under section 80C and get tax-free maturity proceeds, you need to buy an insurance policy whose sum assured is at least 10 times the annual premium. Earlier this limit was five times.

If you are buying a term plan, you needn’t worry since the sum assured is several times the premium, but for investment-embedded covers, this is a concern.

While unit-linked insurance plans (Ulips) have a prescribed minimum sum assured threshold, Irda is mulling a similar threshold for traditional insurance-cum-investment plans. In the absence of any guidelines yet, the industry has increased the sum assured limit on their traditional policies to make them tax-friendly, but the insurers feel this will impact the returns. Unlike market-linked Ulips, where returns depend on the net asset value (NAV), traditional insurance-cum-investment plans manage both investment and insurance benefits from a pool fund. An increase in the insurance benefit would mean a decrease in the return.

In April this year, Irda presented the suggestion made by Life Insurance Council, a statutory body representing all life insurance companies, to the ministry of finance to link tax benefits to the term of the policy and not the sum assured. Since insurance is a long-term contract, Council had proposed tax benefits be given to policies with a tenor of at least 10 years. Also, the industry has proposed an additional deduction for life insurance plans since the current deduction under 80C gets consumed by other products. Any change in this will directly impact you if you are buying an insurance policy afresh.

Product approval

On average, product clearance from Irda takes at least four months vis-a-vis the stipulated time line of 30 days for complex products and 15 days for defined standard products.

Currently, all products follow the “file and use" procedure, which means they need to be filed with Irda and get its approval before they can be sold in the market. Insurers have proposed the opposite, “use and file" procedure, for simpler products, where they can sell first and then file. Here, simpler products mean those without in-built riders or explicit guarantees or innovative features. These products will adhere strictly to product guidelines. For Ulips, Irda has mandated minimum product standards on cover, charges, surrender value, term, premium paying term and lock-in. It is now mulling over minimum product standard for traditional plans as well. Says Kamalji Sahay, former managing director and CEO, Star Union Dai-ichi Life Insurance Co. Ltd: “I don’t think the use and file method is better because if the regulator has problems with the product it will mean withdrawal of products. The company would incur costs on marketing. The best option is to increase the turnaround time for product approval. So the 30 day rule for clearing products should be followed strictly."

Distributor commissions

The insurance industry saw an exodus of agents after Ulips were capped. But it is not the individual agent that’s facing the heat alone.

Irda is now going after insurers who offered their corporate agents more than what is allowed as commissions by dressing the expenses under different cost heads. The regulation on payments made to corporate agents clearly states that an insurer will not pay any amount other than the permitted agency commissions, whether as administration charge or reimbursement of expenses or profit commission or in any other form to the corporate agent. But the insurers argue that corporate agents should be given more. Insurers also share their infrastructure and corporate agents also help market insurance products.

For these reasons, insurers want that section 40A, which puts a regulatory ceiling on commissions paid to agents, be done away with. Instead they have recommended that insurers stick to the cap on the overall expenses of management including commission as stipulated under section 40B of the Insurance Act, 1938 along with rule 17D of the Insurance Rules, 1939.

Says Kapil Mehta, managing director and principal officer, SecureNow Insurance Broker Pvt. Ltd: “Collapsing all charges under an overall cap on management expenses is a good move. In fact this is followed in developed markets such as the US and Japan. The industry should be given freedom to price the product and without remunerating the distribution channel adequately the industry can’t grow. Market competition will ensure that cost to the customer doesn’t increase."

However, this should be accompanied by significant value add by the distributors. “With cost caps, the customers may not lose out, but I feel the remuneration to agents is not in sync with the value-add they bring. Increasing it further will only mean more agents will join the industry and mis-selling will increase," says N. Varadarajan, executive director, Edventus Business Enhancers Pvt. Ltd, which is into financial education and training.

Bancassurance

In November 2011, Irda had issued draft guidelines on bancassurance in which it allowed for open architecture but in a limited way. It divides the country into three zones and allows each bank to sell products of one life insurance company in a limited number of states.

Insurers however are keen to adopt the recommendation of the bancassurance committee by allowing a bank initially to have two life, two non-life and two stand-alone health insurance companies as corporate agents on a pan-India basis without any zoning concept. They have further recommended that banks do a minimum business for both the companies to discourage incentive-based selling.

However, if the regulator introduces the concept of zones for bancassurance, insurers feel that the bank should be mandated to work with one national level company and in each zone it could have an additional partner. The bank could have a different insurer as the second partner in each zone initially. Adds Mehta: “The concept of zones would have been very difficult to administer. In comparison allowing for a primary insurer and an additional partner is better."

Pension products

Currently, pension products are required to guarantee a minimum non-zero return on the premiums paid. As a result of these guidelines and multiple changes to the guidelines, insurers have not come out with a pension plan and the market has shrunk from 35% in 2010 to zero.

Insurers are finding it difficult to offer equity-linked long-term products because of the guarantee that they need to offer either on maturity or on death. The industry has, therefore, suggested that the customer be given the choice of choosing a pension product with guarantee offered, in which case the investments would largely be in debt products. For customers wanting to invest in equities, there will be no guarantee. If this comes through, customers will have equity-linked pension plans.

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