Life insurers await you with a much better deal
Dec 30 2013
New year to see launch of hundreds of customer-friendly products
When Irda first released the draft regulations to all the insurers in early August last year, it set out a preamble as follows: “Life insurance is a mechanism to provide solutions so that enough financial resources are available to an individual or his family when the same is needed during various phases of life. There is no substitute to life insurance and hence it plays a significant part in enabling a financially healthy and self-respectful society. The structural design of an insurance product should therefore be in a manner that policyholders’ financial goals are met first while returns to other stakeholders are generated. To ensure that all the products are designed to meet certain essential criteria in serving policyholder interests, the authority, under Section 14 of the Irda Act, 1999, issued the guidelines.”
Irda gave a clear message to the insurers that existing product designs will be looked at primarily from the prism of policyholder’s interests. After almost a year of deliberations and discussions, the final guidelines were gazetted in February under which all existing group products were to be withdrawn from July 1 (subsequently deferred to August 1) and all individual products from October 1 (now January 1, 2014).
Back in 2010, Irda introduced a number of changes to the unit-linked insurance plans (Ulips). Those changes included increasing the insurance cover, introducing caps on various charge and lowering of surrender charge, making them more transparent and cost-efficient for customers.
This time, the focus is on reforming traditional products and finetuning some of the issues with Ulips. The regulator has also for the first time provided a detailed ‘definition and salient features’ for each category of conventional product.
So what are the key changes being brought about in a conventional life insurance policy and how will it be better proposition for the customer?
The first key change is that products will offer a higher minimum sum payable on death. 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 per cent of all premiums paid on the date of death or the minimum guaranteed sum assured on maturity, or any absolute amount to be paid on death.
For those aged 45 years, it will be seven times the annualised premium. The minimum death benefit for single-premium policies will be higher of 125 per cent of the single premium, or the minimum guaranteed sum assured on maturity, or any absolute amount to be paid on death. For those aged more than 45 years, it will be 110 per cent of the single premium. The minimum death benefit has been broadly aligned to that of Ulips as outlined in the 2010 Ulip regulations. Consequently, the product structure dictates a higher level of protection to the policyholder meeting the objective of a life insurance product.
Similarly the minimum level of protection has to be offered in single premium plans.
Secondly, Irda has asked insurers not to offer fund-level guarantee in their products, which means the popular ‘highest NAV’ guaranteed products are going to be extinct now. The regulator’s argument was that such products do not provide the transparency in terms of the underlying fund’s investments and strategy, which may set unrealistic expectation in the minds of customers, leading to miscommunication to the customers on returns.
Existing traditional plans with benefits linked to any external index will be categorised into a new variable insurance products category, which will follow a charge cap regime similar to the Ulips, thus making existing products significantly less attractive from the company’s perspective. This change will bring clarity to the product structure and align the charges with that on Ulips. The guaranteed surrender values of traditional plans for the customers have been defined and increased substantially.
First-year commission payable has been pegged to the term of the policy i.e. in case of regular premium insurance policies; a policy with a premium paying term (PPT) of five years will not pay more than 15 per cent in the first year, 7.5 per cent in the second and third year and 5 per cent subsequently. Products with PPT of 12 years or more will have first-year commissions up to 35 per cent in case the company has completed 10 years of existence and 40 per cent for the companies in business for less than 10 years.
This has been done by to encourage selling of long-term policies. The new regulations are radical and nudge the industry in the right direction. The objective is to deliver a better value to the customer, build their trust and at the same time attempt to ensure long-term sustainability of the industry.
In the short term, the changes will cause a degree of discomfort to both the industry and distributors — lower margins, lower commissions, imperative to sell long-tenure products, complete relaunch of almost every product and training involved and the time it will take to adjust to this change. As a result, as an immediate effect, insurers might see a short-term dip in new business; some might be even forced to rethink their business models due to the challenges in maintaining growth and profitability.