In your interest.
Online Personal Finance Magazine
No beating about the bush.
The online term life insurance market is heating up with more players entering the fray. The premium is now similar to personal accident cover offered by non-life insurance companies. Is it sustainable? Are the products priced too aggressively?
Many insurers like LIC, HDFC Life, Bharti AXA Life, Tata AIG life are set to come out with term plans which may be pure online or combined with offline mode of distribution.
Term life insurance used to be almost three times expensive than personal accident cover offered by non-life insurers. Not anymore. It is now at par and if the trend of race to the bottom continues, term life premium can be unsustainable. While personal accident covers disability as well as death, the trigger has to be accidental which needs a lot more documentation like police first information report (FIR), post-mortem report and so on. Term life without a rider will cover death which may or may not be due to accident. The current online term premium rates are a good deal for customers, but the competition is just getting started.
Some of the current online term plans may re-price the products with 10% to15% lower premium for a specific target segment based on lifestyle. Increasingly insurance companies are offering discounted premiums for non-smokers, female policyholders and now will start looking at detailed lifestyle like occupations to arrive at a reduced premium. There may be a proportionate increase in sum assured for existing customers to ensure they get benefit of the re-pricing initiative.
According to Deepak Yohannan, “There are sceptics who scoff at this claiming it to be un-sustainable—that only time can tell. At least it has forced the large players to sit up and play the game with the new rules being set by others. Complete disruptiveness at it best and I think the life insurance industry will see a lot more and it will not all be restricted to pricing.”
A new product ICICI Pru Life iCare tries to address the major hiccup with the online term insurance buying process. The medical tests which online term insurance products require for all (or higher age groups) has been done away with this innovative product. There were issues like premium hike after medical tests which used to catch customers by surprise. This one-of-a-kind product will have no medical tests and no surprises of premium hike. This is online term plan in complete sense.
Recent entrants DLF Pramerica U-Protect and Edelweiss Tokio Life Protection have premiums which are the lowest in offline term plan space. Their premium is Rs5,956 and Rs5,984 respectively for Rs50 lakh sum assured for a 27 year old non-smoker male based in Mumbai for policy term of 25 years. Both the products are offline as of now.
Pension ULIP products will enter the market after 4.5% per annum guaranteed return has been scrapped, but some guarantee will ensure high exposure to debt and hence returns will not even beat inflation. Will customers shy away?
The Insurance Regulatory and Development Authority (IRDA) has announced new pension guidelines for insurance companies. The guidelines need all pension products to explicitly define the assured benefit that the customer would get at the time of surrender or vesting age. At the time of vesting, the annuity shall be provided by the same insurer who contracted the original policy. On surrender of policy post the lock-in period or on the date of vesting, the policyholder can commute to the extent allowed under Income Tax Act (1/3rd at this time) and utilise the remaining amount to purchase immediate annuity guaranteed for life at prevalent annuity rates, or buy a single-premium deferred pension product.
Insurance companies except Life Insurance Corporation of India (LIC) have been reluctant to launch regular premium pension plans post September 2010. Will anything change after the new guidelines? Will the customer really benefit? Gorakhnath Agarwal, chief actuary, Future Generali India Life Insurance, gives a realistic perspective. According to him, “The new guidelines, though appear to be relaxed in terms of guarantee, may still not achieve the objective of reviving sales of pension products.”
In less than two years there have been a lot of changes in pension ULIPs (unit linked insurance products). From allowing high equity exposure due to ‘no guarantee’ to high debt exposure due to ‘4.5% p.a. guarantee’ to possible continuation of high debt exposure due to ‘non-zero guarantee’, pension products have undergone frequent changes. Here are three hiccups in store for customers along with ‘what could have been better option’:
1. High exposure to debt will continue – Mr Agarwal says, “Retirement saving is meant to provide protection against inflation. Any kind of guarantee would restrict investment freedom (insurers will invest in debt products in order to meet the guarantee) and hence may not achieve the objective of providing protection against inflation. This might lead to under provision for retirement.”
‘No-guarantee’ option not on the table – Pension ULIPs prior to 1 September 2010 had no guarantee and hence the policyholder had the flexibility of high equity exposure. According to Amitabh Chaudhry, managing director and chief executive officer, HDFC Life, “Would we have liked an option for no guarantee? Yes, since that would have allowed flexibility for the funds to be invested in equity in a higher proportion which would have meant potential higher returns. But I think the regulator is rightly focused on ensuring capital protection for customers who are saving up in a pension plan for their retirement.”
2. Annuity from same insurer – IRDA may have genuine reasons for enforcing same insurer to continue with annuity phase of the product due to LIC taking 95% burden of it, but where does it leave the customer? According to Gorakhnath Agarwal , “We already offer our deferred pensioners purchase of annuity from our company, but we are still of the view that choice to purchase annuity from any insurer should have continued as it is in the interest of the policyholder and he should be given the opportunity of a competitive deal.”
Annuity at what rate? The captive customers for annuity phase may ensure less motivation for insurers to offer best rate. The annuity rates will be decided at the time of vesting of pension. If at that time another insurer offers better annuity rates, you are struck with your insurer for literally rest of your life. To top if off, annuity in India is taxable which itself is the biggest snag.
3. Enforced annuity – Pension ULIPs, prior to September 2010, did offer lump-sum payment (taxable). This option was removed post September 2010 regulatory changes. The window of opportunity was left in traditional pension products, but it is now closed. While one-third of the corpus can be taken out tax free at the time of vesting, the remaining two-third will be forced into annuity. Even if you surrender the policy before the policy term, the annuity is mandatory. Mr Agarwal says, “While we appreciate the need of annuitisation of pension corpus, making it compulsory in all cases may lead to problems. The examples are—surrender value is generally too small to buy the pension or the policyholder might be suffering from some critical/ terminal illness, etc. In such cases lump-sum should have been allowed. In other countries including the UK, lump-sum is permitted in such cases which, of course is subject to tax.
Exit option – Taxable lump-sum withdrawal used to be an exit option, though there are valid arguments against it. Mr Chaudhry adds, “Pensions are meant to accumulate a corpus during your productive years that can be then utilised in a systematic way during your non-productive years. A complete withdrawal leaves the customer open to risk of choosing another investment vehicle based on the right advice at a particularly vulnerable stage in her life. While a lot of us might differ on forcing an option on the customer, I think we should consider the maturity of our market and see this as the right move in the interest of the customer.”
The million dollar question is whether customers will get attracted to non-zero guarantee even if the returns are low, annuity from same insurer and enforced annuity? A veteran LIC agent summarizes it accurately. He says, “What is the real incentive for customer to go for pension product anymore? They can as well take regular life insurance policy and get the corpus on maturity as tax free. If they wish to lock money in annuity, immediate annuity is an option. If they do not want to lock anywhere, invest in any other instrument. There is flexibility here for high equity exposure in life insurance policy, choosing any insurer for immediate annuity, tax benefits and not worry about locking money forever at any stage.”
Moneylife view is that pension ULIPs prior to September 2010 did not have anything harmful (except for high charges). As the saying goes, “If it ain’t broken, don’t fix it”.
IRDA may allow agents to sell products of more than one company similar to opening bancassurance to two insurers. Will it help agents increase remuneration or confuse customers and undermine the intension of the change? Will it increase mis-selling?
Insurance Regulatory and Development Authority (IRDA) plans to allow agents to sell products of more than one insurance company just as they are considering opening bancassurance to allow selling insurance products of two companies. There are arguments from both sides, but private insurers will stand to benefit more than LIC.
An official from the Life Insurance Corp of India (LIC) said, “Customer buys LIC product due to trust in the company. If agents sell insurance products of more than one company, they will be seen as mere individual and no longer carry the goodwill of LIC. The customer will get suspicious and not make buying decision. Even if 2% of the agents indulge in mis-selling to earn higher commission, it will ruin the whole system. As such, insurance is push product in India and takes lot of efforts by the agents to make a sale.”
Private insurers on the other hand have lot to gain as they may be able to tap into the huge pool of about 13.5 lakh agents of LIC. Their interest will mainly be the big agents of LIC who can drive volumes and help penetration. There has been steep decrease in the number of agents in life insurance business and opening of tied agency will only help private insurers. According to Life Insurance Council, “The number of agents came down from 3 million in 2009-10 to 2.65 million in 2010-11.”
Amitabh Chaudhry, managing director and chief executive, HDFC Life, said, “I know the regulator has brought this up in a recent interaction with media. However, I think it is a bit early to comment without getting to know more about this. On the face of it, such a move will help agents to offer more choice, which is good for the customer. It might also help bring agents back to the industry since the completion of a licensing process will enable them to get two licenses which is a positive for the agent”.
“We have seen almost three lakh agents have gone out of the pool in the last year since the economics of life insurance business doesn't enable them to go out and connect with customers, provide right financial advise and service the customer over the long term. The small and mid-sized agents who were instrumental in spreading life insurance across the country are not willing to get into the industry. Will allowing agents to sell products of two life insurance companies redress that? Also, will we have safeguards against unintended consequences of such a move like agents churning the customer portfolio between two insurers? I don't think we can answer these till we have a more detailed proposal from the regulator. If it does manage these issues, I am sure the industry and the agents will welcome it,” Mr Chaudhry added.
The bigger question is whether IRDA will really open the tied agency model? According to a life insurance agent, “IRDA talked about it when it came in existence. Due to opposition from LIC they (IRDA) put it off for 10 years. Over 90% of LIC agents work part-time and allowing them to sell other insurer products will help in increasing their remuneration. Ultimately, the choice should be left to customer and agent. Today, agent cannot talk about products from other insurance company and hence cannot offer best insurance to a customer. Moreover, if brokers are allowed to sell all insurance company products, why not agents?”
“General insurance agent association had in the past recommended to IRDA about allowing agents to sell mediclaim and other general insurance products from more than one insurance company. IRDA argument in the past for not allowing was about insurance company spending on agent training. At that time they were thinking of opening of tied agents if they had completed certain number of years in the business,” said another agent who sells general insurance products.
Life and general insurance agents also sell other financial products like mutual funds and there may be no real need for them to be tied to one insurance company. In UK the tied agency model has vanished. Are there any local circumstances that prevent from India to adopt the same?
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