Amendment to Section 45 of Insurance Act means that all claims will have to be paid after three years. This will help genuine policyholders but will it give a fillip to fraudsters? What can be the impact on you?
Life insurance companies find themselves in a tough situation with the Amendment to Section 45 of the Insurance Act. It can be difficult time ahead for insurers and easier time for genuine policyholders. According to Section 45 of the Insurance Act, 1938, “No life insurance policy can be called into question on grounds of mis-statement or wrong disclosure after two years of the policy coming into force. However, if the insurer is able to prove that the claim was fraudulent, it need not be passed.” This used to give insurers a leeway for making investigation after the death claim was received. The investigation was usually done for early claims within two or three years of the policy purchase. If there was misrepresentation, mis-statement or non-disclosure while buying the policy, then the claim was rejected. Needless to say, if there was fraud detected by the insurer then the claim was rejected too.
Section 45 of the new insurance Bill, states a policy cannot be called in question after three years of it being issued. Insurers will find it almost impossible to repudiate claims after three policy years due to the amendment. It puts the onus on the insurer to do proper checks at the time of underwriting. There will be need for robust underwriting process so that all issues are flagged before the policy inception. The insurer will have three years to raise any objections regarding the insured declarations. The amendment should be a welcome change for the genuine policyholders. It will not allow insurers to reject claim after three years under the garb of any misrepresentation, mis-statement or non-disclosure while buying the policy.
However, what about fraudsters who are out there to defraud life insurers? According to a senior insurance official, there are specific locations in India where insurance fraud is prevalent. “We are wary about underwriting policies from these locations. They work in an organised way with full set of forged documents to cover up the fraud. There can be cases of insurance taken in name of dead person with death certificate forged to put a future date after fraudulently buying the policy,” he said.
A retired senior insurance official, says, “Insurance companies will bleed if they are forced to pay all claims after three years of buying. The amendment should have considered disallowing claims if there is a proven fraud.”
What may be expected in the near future?
Stringent verification process – Insurers will have a higher scrutiny of customers at the buying process. It should be a welcome step for genuine customers who should not be looking for speed in buying, but proper underwriting by insurers. Today, medical tests are not required for insurance up to specific amount and based on age. This can be changed to bring more buyers under the ambit and even for even lower sum assured. Medical tests should not be avoided by the customer.
Premium increase – If there are insurer losses and overall loss by the industry due to claim payment to fraud cases, then the overall premium can increase for all the customers. It means bad news for the customers, but it is the price to be paid for ensuring genuine claims is paid. The premium for life insurance is locked for the policy term and hence it makes sense to buy term plan today rather than waiting for tomorrow.
Claims settlement will improve – The amendment will put pressure on insurers to settle claims when the policy is over three years without doing investigation. It will mean lower death claim rejections. Life Insurance Corporation of India (LIC) has lowest rejection ratio (1.10%) in 2013-14 followed by private insurers like HDFC Life (4.70% rejection ratio) and ICICI Pru (4.98%). But, even 1.10% rejection ratio of LIC equates to 8,387 claims rejected for amount of Rs181.30 crore. With amended section 45, fewer claims will be rejected and hence higher cost to the insurer.
The amendment forces the insurers to do the underwriting at the underwriting stage rather than at the death claim stage. The lax insurers have got a wake-up call. Genuine policyholders have less to worry as the family can be assured of claims payment especially if the death is after three years of policy purchase. Hopefully, the insurers are able to keep the fraudsters at bay with usage of technology and other fraud detection means. The amendment is a boost to make the insured trust the insurer and should help to increase life insurance penetration too. It can be a game changer for helping the underinsured Indians to buy life insurance with faith in claims process.
Will the life insurers and Life Insurance Council be able to reverse the impact of Sec 45 amendment in future is a million dollar question.