IRDA guidelines impact commission and surrender value of traditional products

The insurance regulator’s guidelines will see a push for selling policies with a term of 12 years or more as it keeps the intermediary commission intact. Surrender value is improved, but it may not be enough considering the gap with ULIP surrender value. Nothing much to cheer for consumers

The Insurance Regulatory and Development Authority (IRDA) has issued guidelines, effective October 2013, for life insurance policies which will have an impact on the commission and surrender value of traditional products (endowment, money-back, whole-life and term plans). Short-term policies will have a lower commission than traditional products with a policy term of 12 years or more. There was no such differentiation till now with agents getting 35%-40% of the first year premium as commission. Life Insurance Corporation of India (LIC) agents will hold protest demonstrations in front of LIC branches across India on 20th March against the reduced commission in IRDA guidelines.


In case of regular premium insurance policies, a policy with a premium paying term (PPT) of five years will not pay more than 15% in the first year, 7.5% in the second and third year and 5% subsequently. Products with PPT of 12 years or more will have first year commissions up to 35% in case the company has completed 10 years of existence and 40% for the company in business for less than 10 years. Don’t be surprised if intermediaries are only interested in selling long-term life insurance products espousing benefits for disciplined savers.


Online policy sales and other direct sales of products will have no commissions and that benefit will be passed on to the policyholder. It is not clear how the benefit is passed to policyholder, if the same product is sold through agent versus direct sales. Will the policyholder buying the product through direct sales get higher bonus due to the saved commission? Otherwise, the customer will still go through agent route due to the prevalent custom of “commission sharing”.


The minimum guaranteed surrender value for traditional plans has been pathetic. The existing guaranteed surrender value is 30% of all the premiums paid minus the first-year premium and is paid only if premiums have been paid for three years. This has been improved to some extent by the guidelines. For traditional plans with PPT of less than 10 years, the guaranteed surrender value will accrue after the second year. For PPT of 10 years or more, there will be a guaranteed surrender value after three years. This guaranteed surrender value will be 30% of total premiums paid. The surrender value becomes 50% between the fourth and the seventh years. The surrender value after seven years will have to be cleared by the regulator.


While the improved guaranteed surrender value is a welcome move, its impact on the returns to the policyholders will have to be seen. This is because if there is higher number of surrenders, the insurance company’s performance will be impacted and hence returns in terms of bonus will be affected. But, if you are buying a traditional product with a thought of surrendering it during the policy term, then you should not be buying it at all. Moneylife does not recommend buying traditional products, as even after the guidelines, it will remain opaque and fetch low returns. While the industry trend has been to move from ULIP to traditional products, it is like jumping from the frying pan into the fire.


The minimum death benefit for single premium policies will be higher of 125% of the single premium, or minimum guaranteed sum assured on maturity, or any absolute amount to be paid on death. For those with age more than 45 years, it will be 110% of the single premium. For regular premium products purchased by policyholder of age less than 45 years, it will be higher of 10 times the annualised premium or 105% of all premiums paid on date on death or minimum guaranteed sum assured on maturity, or any absolute amount to be paid on death. For those with age more than 45 years it will be seven times the annualised premium.



shantipriya sen

4 years ago

Insured must have the right to get back of at least the premiums paid by him. Cost of service including agency commission can not exceed the growth on the funds invested by an insured


4 years ago

I have experienced that when one directly contacts the Insurance company for Policy, the DO assigns an agent. This is specially true when the policy is not avialble online due to Age/Medical test reqts.


Abdul Muktadir

In Reply to SANJAY SINVHAL 4 years ago

Insured must have the right to get back of at least the premiums paid by him. Cost of service including agency commission can not exceed the growth on the funds invested by an insured

Nifty, Sensex may find it tough to push higher: Thursday Closing Report

Nifty may get resisted at 5,920-5,950, followed by a significant decline

The market closed in the green, recovering all the losses incurred on Wednesday and snapping its three-day losing spree, on a smart performance by realty, banking and capital goods sectors. The Nifty may get resisted at 5,920-5,950, followed by a significant decline. The National Stock Exchange (NSE) reported a volume of 64.40 crore shares and advance-decline ratio of 744:758.
The market opened flat on unsupportive cues from Asia and on nervousness ahead of the release of February inflation data, later in the day. Markets in Asia were mostly in the red in morning trade as curbs on Chinese property prices banks and real estate developers fell in mainland China and Hong Kong.
The Nifty opened trade five points down at 5,846 and the Sensex started the day at 19,367, up four points over its previous close. Buying in select stocks of realty, healthcare and oil & gas sectors led the market higher in initial trade.
However, selling in select banking stocks after a report of money laundering by some private banks soon pushed the indices lower to touch their intraday lows in the first hour of trade itself. At the lows, the Nifty fell to 5,792 and the Sensex slipped to 19,179.
The fall was temporary as buying at lower levels saw the market making a gradual recovery. Headline inflation for February, which came in at 6.84% from 6.62% in the previous month was brushed aside by investors as the market extended its gains in the noon session.
Banking stocks, which were in the red this morning, recovered in post-noon trade, with the BSE Bankex index emerging as the sectoral leader. A positive opening of the key European indices, ahead of a meeting of EU leaders in Brussels to ponder over austerity measures and rising unemployment, also supported sentiments in the domestic market.
The benchmarks hit their intraday highs in the last hour with the Nifty rising to 5,920 and the Sensex moving up to 19,605. The market closed marginally off the highs, snapping its three-day decline.
The Nifty advanced 58 points (0.99%) to 5,909 and the Sensex surged 208 points (1.07%) to settle at 19,570.
While the Sensex notched gains of over 1% today, the broader indices settled mixed. The BSE Mid-cap index gained 0.48% and the BSE Small-cap index fell 0.09%.
The top gainers in the sectoral space were BSE Realty (up 2.18%); BSE Bankex (up 2.08%); BSE Capital Goods (up 1.34%); BSE Oil & Gas (up 1.26%) and BSE Metal (up 0.89%). BSE Consumer Durables (down 1.45%) was the only loser.
Twenty-four of the 30 stocks on the Sensex closed in the positive. The main gainers were State Bank of India (up 3.51%); Maruti Suzuki (up 3.43%); Tata Power (up 2.86%); ICICI Bank (up 2.29%) and HDFC Bank (up 2.28%). The major losers were GAIL India (down 2.09%); Bajaj Auto (down 2.05%); Sun Pharmaceutical Industries (down 0.93%); Bharti Airtel (down 0.82%) and Hero MotoCorp (down 0.14%).
The top two A Group gainers on the BSE were—Jubilant Foodworks (up 6.26%) and Unitech (up 6.09%).
The top two A Group losers on the BSE were—GAIL India (down 2.09%) and Bajaj Auto (down 2.05%).
The top two B Group gainers on the BSE were—Minaxi Textiles (up 16.67%) and Hiran Orgochem (up 16.28%).
The top two B Group losers on the BSE were—Ortin Laboratories (down 19.97%) and Everlon Synthetics (down 19.18%).
Of the 50 stocks on the Nifty, 38 ended in the green. The key gainers were Maruti Suzuki (up 3.55%); SBI (up 3.47%); Ranbaxy Laboratories (up 3.33%); Tata Power (up 3.16%) and BPCL (up 2.68%), The chief losers were Bajaj Auto (down 2.22%); GAIL India (down 2.03%); Bharti Airtel (down1.23%); Sun Pharma (down 0.88%) and Hero MotoCorp (down 0.44%).
Asian markets recovered from early losses to settle mixed on policy tightening measures in China. On the other hand, hopes of monetary stimulus buoyed sentiments in Japan.
The Shanghai Composite and the Hang Seng both settled 0.285 higher; the Nikkei 225 surged 1.16% and the Seoul Composite rose 0.12%. Among the losers, the Jakarta Composite tanked 1.01%; the KLSE Composite declined 0.33%; The Straits Times fell 0.27% and the Taiwan Weighted settled 0.55% down.
At the time of writing, the key European indices were up between 0.25% and 0.59% and the US stock futures were trading higher, indicating a positive opening for US stocks.
Back home, foreign institutional investors were net buyers of shares totalling Rs303.83 crore on Wednesday whereas domestic investors were net sellers of stocks amounting to Rs434.38 crore.
The Rajasthan government and Hindustan Petroleum Corporation have signed a pact for setting up a 9-MTPA capacity oil refinery-cum-petrochemical complex in Barmer district at an estimated cost of Rs 37,230 crore. The project is expected to take about four years for going on stream after getting necessary approvals. HPCL gained 2.45% to close at Rs307.60 on the NSE.
BGR Energy has withdrawn from a contract, estimated to be Rs800 crore, for supply of power equipment to NTPC’s proposed 1,600 MW Darlipali project in Odisha, citing non-progress of the project. BGR Energy gained 1.17% to close at Rs207.80 on the NSE.
State-run Rural Electrification Corporation (REC) today said it has signed a loan agreement for $250 million with State Bank of India’s Hong Kong branch for lending to the infrastructure sector. The loan carries a floating rate of interest linked to 6-month LIBOR and has a door-to-door maturity of three years. The stock advanced 3.67% to close at Rs223.10 on the NSE.



Festive season failed to boost residential realty sector in Q3, says Liases Foras

Old demons of surging prices, ballooning inventory levels and subdued demand returned to haunt the sector during the third quarter, says the real estate rating and research agency

The third quarter of FY2012-13 saw the residential realty sector slipping into a lull once again. The market did not seem to be enamoured by the festive spirit and the astounding performance of the second quarter proved to be just a flash in the pan, says Liases Foras in a research note.


“Weakness in India’s macroeconomic scenario continued as the Index of Industrial Production (IIP) growth for November fell to a four-month low and current account deficit as a percentage of GDP stood at an unsustainable level of 5.4% for second quarter of FY13. The residential real estate market also mirrored the negative sentiment and witnessed a lacklustre performance in the December quarter of FY13. The old demons of surging prices, ballooning inventory levels and subdued demand returned to haunt the sector in the third quarter,” the report said.

Prices continue to edge higher in Q3


According to Liases Foras, the price of existing supply remains at an elevated level across most of the six major cities, the National Capital Region (NCR), Mumbai Metropolitan Region (MMR), Bengaluru, Chennai, Hyderabad and Pune on an annual as well as sequential basis. This had a cascading effect on the demand and inventory pile-up. Sales in terms of volume and value slipped in most of the cities due to which time required to clear the stock at the existing absorption pace showed a significant rise.


NCR witnessed an uptrend in prices with Faridabad and North Delhi showing 23% and 21% sequential gain. However, the pace of price increase slowed in Q3 2012-13 as against the previous quarter. Bengaluru saw a whopping 10% surge in prices on account of mushrooming IT companies and availability of superior range of products. Moreover, execution of projects at a faster pace has also impacted the upward movement of prices, the report said.

Apparently, MMR is inching towards normalcy as prices have moved southward after three long quarters. Even as the remaining suburbs recorded a 2%-3% quarterly price rise, it is likely that the long due correction could see the light of the day, as the 3% sequential price drop in the Island City could have a rippling effect on the prices across other locations in the city. However, effects of a sudden rise in Ready Reckoner rates in Mumbai, since 1 January 2013, cannot be completely ruled out.


Sales declined marginally except in Mumbai and Hyderabad

In terms of composition NCR, MMR and Bengaluru contribute more that 50% of the total sales in India's residential realty sector. Although, the trend rolled over this quarter, the sales contribution saw a marginal decline across most of the major six cities with an exception of MMR and Hyderabad. NCR, Bengaluru and Chennai lost their respective chunks in the pie both in terms of volume as well as value. On the flipside, MMR, in terms of volume, garnered a market share of 17% compared to 13% in the previous quarter, whereas in terms of business turnover, the region contributed 30% of the sales as against 24% recorded in the September quarter. Treading on the same lines, Hyderabad witnessed an increase in contribution in volume sales and business turnover.


The pace of offtake also slowed across the cities. Chennai witnessed a significant decline in the sales velocity to 1.38% in the Q3 from 2.08% in the previous quarter. In Q3 FY 2012-13, Bengaluru outdid Pune to show the fastest pace of sale across the nation. Sales movement was the slowest in MMR, while Hyderabad saw slight acceleration in its velocity, the report said.

Liases Foras said it is interesting to observe that the market is following a spiral movement, whereas the efficient markets like Pune and Bengaluru are slipping into the inefficient territory. Perceived inefficient markets like Hyderabad and MMR are moving into the efficient zone.


“While, price still remains at elevated levels, new properties being launched at lower price points are a welcome move and generate prospects of moving towards efficiency in the long run. Moreover, announcements made in the Union Budget 2013-14 are also likely to have repercussions on the market and the prevailing sentiment,” the Liases Foras report said.




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