IRDA is reviewing products with low or reducing insurance as it intends to enforce a certain premium-to-sum-assured ratio. Approval of Bajaj Allianz Guaranteed Maturity plan seems to be direct breach of this stated intension

The Insurance Regulatory and Development Authority (IRDA) had stated that it was reviewing products with insignificant sum assured (SA), decreasing SA and products offering SA as specific rate of return on the premium paid. This was confirmed by IRDA chairman J Hari Narayan when Moneylife asked him at CII Insurance Summit in November 2011.

According to the Mr Hari Narayan, “The Direct Tax Code (DTC) will enforce a certain premium-to-sum-assured ratio. We want to ensure traditional insurance products comply with the new requirements.”

Bajaj Allianz Guaranteed Maturity Insurance Plan, which was launched earlier this week, seems to contradict IRDA’s stand. The SA is five times the single premium for the first  policy year and for subsequent years it will reduce to 1.25 times of the single premium for age-at-entry less than 45 years and 1.10 times of the single premium for age-at-entry 45 years and above.

The policy term is 10 years. In short, the SA of five times the single premium in the first year will reduce for the remaining nine years to be only 1.10 to 1.25 times the single premium. How did IRDA approve such a low as well as decreasing SA plan? IRDA intension is only on paper and no action till now. How long does it take to review the insurance component of existing products? What are the chances that IRDA will get rid of existing toxic products with dubious insurance component?

Moneylife cover story (issue dated 1 December 2011) had highlighted toxic traditional product in existence since 2003. It is HDFC Life ‘Savings Assurance Plan’. For starters, there is no real insurance component. In case of death during the first year of policy commencement, a basic benefit of 80% of the premiums received will be paid to the nominee of the life assured. How did IRDA allow such atrocious clause?

In case death after the first year, the amount payable on death will be the ‘lesser of’ (not higher of): The sum assured plus any attaching bonuses or the total of the premiums paid plus interest at 6% annually compounded. The annual premium payable for a sum assured of Rs1 lakh is Rs12,016 for policy term of 10 years. Based on the current bonus level, the customer will earn less than 2% return on investment unless there is decent terminal bonus which is not declared at this time. This is the first product HDFC Life needs to get rid off.

IRDA had also woken up to the ill effects of highest NAV product mis-selling. They were closely looking at all the highest NAV products available in the market. “We are looking at all messages around these products—how these products are sold, what the customer understanding is of the product, etc. We feel there is mis-selling in highest NAV products,” Mr Hari Narayan had said.

Moneylife has maintained all along that ‘highest’ NAV unit-linked insurance plans (ULIPs) give suboptimal results and cause confusion for customers. The most important point to understand is that insurance companies are guaranteeing NAVs and not returns! It created confusion in the minds of customers about the kind of returns which could be expected with these products. Most of the investment would be in debt instruments and the returns no better than any other similar investment.

The progress for scrapping the highest NAV plans seem to be on the back-burner after loud protests from insurance companies, who feel that more disclosure should be the solution instead of showing the door to the plans.

Also read

• IRDA chairman: Highest NAV product is mis-sold

• IRDA chairman admits pension plans were mis-sold