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IRDA came out with numerous initiatives last year including draft life insurance guidelines. The final guidelines may entail lower agent commission, better surrender value and higher insurance cover, but vital issues could be left out of the ambit
The Insurance Regulatory and Development Authority (IRDA) is close to finalising life insurance guidelines, which will have positive steps for customers. It may include lower agent commission, better surrender value and higher insurance cover for traditional products. Insurance companies may have to get fresh approval for most of their traditional policies by 30th June.
There are several other issues which have vexed life insurance policyholders. On 16 May 2012 Moneylife Foundation had submitted Life Insurance memorandum to IRDA chairman, J Hari Narayan, who was the chief guest at the event.
Here are some of the points from the Moneylife Foundation memorandum that may be overlooked in the final life insurance draft guidelines –
• Mis-selling by banks - Banks are often criticised for mis-selling life insurance products exploiting both the trust customers have in their banks and the customers’ financial details banks have access to. It is not just mis-selling of life insurance products by banks, but deliberate push to move bank fixed deposits (FD) savers to go for life insurance products. It has been noticed that when a bank customer goes to the branch for opening a new FD or renewing matured FDs, there is an attempted diversion to life insurance products—especially for senior citizens who really do not need any life insurance.
Action required – Banks may be allowed to set up broking arms to sell products from multiple insurance companies. This will put the onus on banks to have properly trained personnel who can possibly reduce mis-selling. But, will they really go for it when there is an easier option to still remain just a bancassurance partner (corporate agent)? Moreover, are the penalties for mis-selling adequate? According to IRDA chairman, “The malpractice is reducing and penalties are increasing. The level of penalty IRDA can levy is minimal and, hence, there is need for amendment to arm us with sharper teeth.”
Raj Pradhan earlier wrote about how IRDA’s guidelines for health insurance were inadequate. To read the complete analysis, please click here.
• Handling mis-selling cases – There is not much help from IRDA or the insurance ombudsman on cases of mis-selling even though frequently it is really fraud and not just mis-selling. There is no proper redressal for mis-selling cases.
Action required – There has to be a strong debate on this issue—a white paper—which will invite suggestions from all stakeholders. This would involve drawing up clear definitions as to what constitutes mis-selling, frame appropriate guidelines and heavy penalties when cases of mis-selling are proven.
• Insurers are making huge profits from lapsed policies - This is true from the surrender of old ULIPs (sold before Sep 2010) and traditional products. According to Goldman Sachs report, “Lapsed profits have accounted for a wide range of 10%-190% of the total profit after tax for companies under coverage in FY12.” IRDA chairman realised the unhealthy trend and had given following comment at an industry seminar, “Insurance companies profits should not be driven by lapsed policy profits.” It is unfortunate that insurance companies took lapsed profits to their profit and loss (P&L) statements. The lapsed profits should have gone to the policyholder’s fund to be used for policyholder protection.
Action required – The surrender value for endowment/money-back needs to be improved in line with changes made to surrender value of new ULIPs. Little improvement in the existing guaranteed surrender value of 30% of the premium paid minus first-year premium (after the three year lock-in) will not really help customers. If IRDA can have new ULIP regulations (September 2010), protecting the insured for getting back the funds of a discontinued policy after earning bank savings interest rate (4% p.a.) till the lock-in period of five years, why can’t it be made applicable to customers trapped in old ULIPs sold before September 2010? Why do some old ULIPs levy a surrender charge even after having the policy in force for 10 or more years?
Raj Pradhan analysis how IRDA’s consumer redressal system is inadequate and where it can be improved. To read the analysis, please click here.
• Ban Highest NAV products – For over a year, the debate goes without any decision by IRDA. Highest NAV products mislead policyholders with regard to expected returns. Most savers do not understand the difference between highest returns and highest NAV. They usually assume that the policy will capture the highest possible returns, but agents make no attempt to enlighten them.
Action required – Highest NAV products should be banned immediately; just changing the nomenclature and more disclosure may not be enough. The temptation to mis-sell these products is too obvious, given the label they carry.
• Ban Variable Insurance Policy (VIP) - This is a flawed concept similar to the already banned Universal Life Policy (ULP). There is no value offered to the insured and the insurer ends up with huge profits.
Action required – VIP products need to be banned with immediate effect.