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A committee set up by the insurance regulator earlier this month is all set to look into a host of issues, the chief being product structures in traditional life insurance products. There is arbitrage in the market as the unit-linked insurance plan (Ulip) got a cleaner structure in 2010, but the traditional plans (whole life, money back, endowment) continue to be opaque products. The Committee on Design of Life Insurance Products will look into some 17-18 areas including pension products and the highest net asset value (NAV) Ulip plans. On the committee are the chief executive officers of Birla Sun Life, HDFC Standard Life and SBI Life, actuaries of Aegon Religare and Life Insurance Corp. of India and representatives of the Life Insurance Council and Insurance Regulatory and Development Authority (Irda). The first meeting is on 22 May and the report is due in 15 days.

Shyamal Banerjee/Mint

The formation of this working group is a good idea and here are a few suggestions that may make the experience of the life insurance consumer different from one who feels cheated. One, think of a two-track system of products. Track one has the plain vanilla products that are simple in structure, easy to understand and compare across the category and can be fast-tracked. “Innovative" or more complex products will need a higher degree of scrutiny. Two, clean up the traditional product structure now that there is a chance to do it. The structure should allow costs to be seen separately, benefits to be counted easily, and allow for comparability across all products in the same category. Of course, costs should be reduced to match those faced by Ulips to remove intra-industry arbitrage. Three, get benchmarks for market-linked products in place. Four, data reporting should be according to a standard that everybody agrees to. Take the case of reporting on the persistency of insurance policies. Different companies follow different methods to count how many policies are still alive at the end of one-, three- and five-year periods. Trying to compare across products on the basis of some common measuring rod is almost impossible in insurance right now. A cleaner product structure will allow for this. The committee should understand the value of industry aggregators, such as those present in the mutual fund industry, who not only report on the data but also provide good comparative data on products, and make the product structure more amenable to compassion.

The only reason to keep products non-transparent, not structured to facilitate comparison, to keep the data reporting non-standard and opaque would be that the committee recognizes that the investment linked life insurance product is inherently flawed and it takes a mix of very high commissions and deception to sell it. If this is not true, clean up the product.

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

Also Read | Monika Halan’s earlier columns

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