In your interest.
Online Personal Finance Magazine
No beating about the bush.
Traditional insurance products are set for makeover from October. Insurers will have to provide the prospective policyholder a customised benefit illustration. It is time that insurers’ offers become transparent, instead of them handing out worthless generic benefit illustrations
Consider a prospective customer aged 50 years wanting to buy a 10-year premium payment term (PPT) LIC Jeevan Anand policy. What is the value if he is shown a benefit illustration for a 35-year old buying a 25-year PPT policy? The generic illustration is a worthless piece of data, as the mortality rates increase steeply with age, and the reversionary bonus rate differs with the PPT. A 50-year old policyholder will pay much higher risk cover charges every year than a 35-year old. The impact of it is that the 50-year old policyholder will have much lower returns at the end of policy term than the 35-year old. But the benefit illustration does not reflect this. Moreover, recently declared LIC bonus rates have Jeevan Anand PPT less than 11 years, giving a bonus of Rs37 per thousand sum assured (PTSA), Rs40 PTSA for PPT 11 to 15 years, Rs44 PTSA for PPT 16 to 20 years and Rs48 PTSA for PPT over 20 years.
A generic benefit illustration is not just worthless but is even prone to mis-selling. Existing traditional products are being phased out by the end of September. New traditional products approved by Insurance Regulatory and Development Authority (IRDA) will hit the market from October. The new guidelines have the requirement of customised benefit illustration: “All insurance products shall provide the prospective policyholder a customized benefit illustration, illustrating the guaranteed and non-guaranteed benefits at gross investment returns of 4% and 8% respectively and as specified by IRDA or Life Insurance Council from time to time. The corresponding net yield shall be demonstrated only with respect to gross investment return of 8% p.a. Such benefit illustration shall be signed by both the prospective policyholder and the intermediary and shall form part of the policy document.”
It means that from next month insurance companies can no longer give generic benefit illustrations for traditional products. Today, LIC has generic benefit illustrations for its traditional products. Some private insurers offer customised benefit illustrations with a few of them offering online customised benefit illustrations. According to one private insurer, “We offer customised benefit illustration for traditional products in most markets. It is difficult to implement it for rural markets. We have raised question to IRDA about difficulty with 100% compliance with the requirement. Ask me to do what I can implement.”
V Manickam, secretary general, Life Insurance Council, says, “Insurance companies will have to comply with the IRDA guidelines on customised benefit illustration. We have not heard from life insurers about difficulty in implementation. There is initiative of common service centers (CSCs) e-Governance Services India Ltd which should help with rural markets.”
Moneylife emailed to eight insurance companies including LIC asking the following questions –
There was no response from any of the insurers except one, who responded “No comments can be offered to your query. As a registered insurer in India, we are bound to follow the guidelines.”
It’s time insurance companies including LIC get proactive about offering transparency to customers. A Harvard Business School study shows that LIC agents have an incentive to recommend more expensive and less suitable products to consumers. The study suggests that the government-owned organisation does not encourage its sales agents to provide better advice and that government ownership does not appear to solve the problem of unsuitable advice.
Lackadaisical approach from some private insurers is also prevalent. Benefit illustrations of many old ULIPs were mis-leading. Agents would present deceptive benefit illustration, sanctioned by the Regulator to seal the deal. Moneylife had written about how one senior citizen relied on the misleading benefit illustration of HDFC Life Young Star product that conveniently ignored the steep mortality charges, which made up for 80% of the premium. The insurance company benefited by keeping the customer in the dark about how much part of the premium really goes towards mortality charges. It is certainly an ingenious way for a life insurance company as they benefit with hefty mortality charges due to higher age of the insured as well as from the expensive Waiver of Premium (WoP) feature. After all the other charges of premium allocation and policy administration charges are deducted, what goes into investment is negligible and hence the corpus after seven years was dismal. HDFC Life child plan sold to senior citizen erodes 96% of investment amount!
Bajaj Allianz Life sold old ULIP (Capital Unit Gain) to a consumer without obtaining his signature on the sales illustration, as mandated by IRDA. Moneylife intervention helped to solve a difficult case that even insurance ombudsman had refused to take up. Bajaj Allianz generously agreed to a settlement of Rs30,000. Bajaj Allianz Life refunds Rs30,000: Another Moneylife Helpline success
Traditional insurance products are set for a makeover from October. While there are some positives with new regulations, insurance agents are mis-selling existing products as a limited time opportunity. LIC agents have an additional incentive of service tax levy to push products before the deadline
From October 2013, Life Insurance Corporation of India (LIC) will charge policyholders service tax on the premium of traditional products. Until now, this tax was absorbed by the insurer. The service tax for traditional products is 3.09% of the first-year premium and 1.545% in subsequent years. In a recent announcement, Insurance Regulatory and Development Authority (IRDA) mandated that service tax will not be included in the contractual premium, but it is to be collected from policyholders separately. It is expected, that with service tax being charged separately from the policyholder, the bonus on the product would improve. But, LIC agents are using the service tax levy as an excuse to push sales before the October 2013 deadline.
Today, LIC agents are just as busy as they are during the tax-savings season due to additional reason i.e. existing traditional products will be discontinued after September 2013. While there are some positives for customers with new regulations like higher surrender value, lower agent commission and better insurance cover, agents are mis-selling existing traditional products as a limited time opportunity. An insurance agent of any company trying to shove life insurance policy, as a deal worth grabbing, is only talking baloney. After all, reduced agent commissions next month cannot be something agents look forward to.
According to one ethical LIC agent, “There is confusion among agents and hence the strategy is to go for the kill as they are unsure about their effectiveness to sell new traditional products next month. Moreover, we don’t know about the new products LIC has lined-up. But, if I hard-sell to my customers today, then how do I sell them products next month?”
Life Insurance Council, the industry body of life insurers in India, has proposed to Insurance Regulatory and Development Authority (IRDA) an extension of reasonable time for new traditional products regime to take place. V Manickam, secretary general, Life Insurance Council says that he has not asked for specific number of days/months of extension, but looks confident that insurance companies will get reasonable extension. IRDA making an extension before end of September will hardly be a surprise. In March 2013, IRDA had said that ‘standard proposal form’ guidelines would be effective from 16 February 2013. It has already been extended for life insurance companies to 1 April 2014.
There are media reports about LIC portfolio reducing from 52 products to just seven next month plus four new launches. While LIC is tight lipped about new product details to agency force, it may be doing so to mop up as much premium this month as possible, before unveiling the products next month. While insurance companies are in the process of product re-filing, we have to see how many products IRDA can approve.
Here are some important changes for traditional insurance products coming next month:
IRDA's Insurance Repository System is going online. Insurers will save money with the green initiative due to less paperwork, mailing and one-time KYC. But will they pass on the savings to customers?
In a move to lower the costs for insurance companies and bring transparency to policyholders, finance minister P Chidambaram on Monday launched the Insurance Regulatory and Development Authority (IRDA)'s Insurance Repository System (IRS). The System will help insurers to save costs on printing and dispatching policies.
IndiaFirst Life Insurance is amongst the first to offer all life insurance policies in demat format. Its press release states, "The electronic insurance account will do away with the need for KYC norms like address and identity proof for every purchase and will bring in all the benefits of demat to the insurance business, including automatic reminders for premium."
According to IRDA's senior official, Life Insurance Corp of India (LIC) spends Rs600 on storing each policy. With e-insurance, insurance companies will save crores of rupees every year on storing of physical insurance documents, mailing and repeat KYC. According to IndiaFirst press release, "Insurance companies will have a huge cost incentive in encouraging customers to hold their policies in electronic form." But, will the savings be passed to policyholders with increased bonus or lower premium? Unlikely, because insurance companies will be paying the 'insurance repositories' for maintaining the data in an electronic format. The savings on dematerialisation of stocks has not been passed on to customers (i.e. shareholders), so why would it be any different this time?
According to Dr P. Nandagopal, CMD, IndiaFirst Life Insurance, "Going forward, we will also implement the demat format for low cost plans especially micro insurance. In these cases the costs saved will automatically be transferred to the customer. This will be taken into consideration while designing the plan itself."
IRDA recently said that five companies have been given the status of insurance repositories and are provided with a licence that will be valid till 31 July 2014. Insurers can enter into agreements with one or more repositories. The five companies are: NSDL Database Management Limited, Central Insurance Repository Limited, SHCIL Projects Limited, CAMS Repository Services Limited and Karvy Insurance Repository Limited.
The repository will give a unique number to every individual and all his life insurance policies will come under that account. The IRS will also have digitised non-life insurance policies soon. The data maintained by the repository will include history of the claims of the individual. It will also have the names of the beneficiaries, assignees and nominees. There is no trading of insurance policies in demat form and, hence, this facility may be of limited use for the customer.
Procedure for opening an e-Insurance account:
• Download the e-Insurance Account opening form from the IndiaFirst website
• Fill the form and provide the KYC documents (attested)
• Send the filled e-Insurance Account application form to IndiaFirst
• e-Insurance Account form will be sent to the respective IR (Insurance Repository) by IndiaFirst
• IR (Insurance Repository) will generate the e-Insurance Account number on the basis of information in the account opening form and inform the e-Insurance Account number to IndiaFirst Life
• IndiaFirst will credit the policy information in electronic form against the customer e-Insurance account on IR portal
• IR will intimate customer on successful upload of his policy in e-Insurance account