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Towards a disciplined growth

The new guidelines expected in month’s time will change way insurance is being practiced in India

Written by Ritu Kant Ojha | Published: May 28, 2012 2:03:08 am

Timothy Feige,Co-president of Prudential International Insurance,the world’s 13th largest asset management company,is clear in his view that regulators and regulations in all countries go through a natural progression. In the first phase of the industry growth,regulators are focused on ensuring the solvency of the life insurance companies. “As the industry matures,in the second phase,the regulator typically starts focusing on issues of consumer rights and protection. Once the industry enters the maturity phase,regulators start focusing on the business processes and corporate governance,” he had said in an interview to The Indian Express earlier.

India’s insurance sector has now entered the second phase,as described by Feige,where one can expect regulations on product types,distribution costs and disclosures to customers. It’s indeed on the way—a new set of guidelines is top on the insurance regulator’s agenda. “In all these years,the insurance industry was too young but now it is coming to the adolescent age. There is some discipline required for the adolescents,” said J Harinarayan,Chairman,Insurance Regulatory and Development Authority(IRDA).

Change in focus

Experts believe that this focus on the development of the sector led to the neglect of the key issue of regulation which in turn led to rampant mis-selling of high commission insurance products. Realising the anomaly,albeit late,the regulator issued ULIP guidelines in the year 2010 which put a cap on the maximum charges an insurance company could charge from customers. This led to the exit of over three lakh agents in the last 18 months due to the reduced commissions. It hit the margins of the life insurers so badly that most had to do major restructuring of their branch network and employees at the lower and mid-level to cut costs.

Post ULIP guidelines,IRDA came out with another salvo — guidelines on pension products,first making 4.5 per cent return mandatory and then taking it back in

November,2011. The reason for the roll-back was that not even a single insurance company filed a pension product for approval. It replaced the 4.5 per cent mandatory return clause to a “non-zero” return clause which again failed to enthuse insurance companies. This coupled with IRDA not approving insurance products filed with it,led to a huge tension between the insurers and IRDA.

In February,2012,regulator wrote a letter to the Life Insurance Council,body that represents life insurance industry,raising seven critical issues that it had with the industry.

“Lately more complex products are being designed. IRDA has noticed that the features of several products are not in alignment with the best practices and,frequently,lack clarity. The efficiency of product clearance has been constrained by such features,” IRDA wrote to the Life Insurance Council. “In order that clear guidelines can be formulated,the IRDA invites the attention of the Life Insurance Council and its members to this letter and requests their considered response,”it added.

Consensus building

To discuss various issues,IRDA formed a sub-committee comprising its officials and life insurers which met last week. According to the insurers,consensus is building between the industry and the regulator. While the industry is expecting that IRDA will consider its demands,going by the discussions in such meetings,it is likely that the regulator will have the last laugh. “We have to run business at the end of the day. We just want to end this impasse and launch products as soon as possible,” said a chief executive of a private life insurance company.

Based upon the interactions with the industry,IRDA has formulated a set of draft guidelines. There are some positive takeaways for the consumers in the draft norms.

Series/ Tranche of funds within Ulip: Marketing of products labelled as “highest NAV product” should be discontinued.

Par products: The death benefit should not be less than 10 times the annualised premium or 105 per cent of all the premiums paid,along with the accrued bonus.

Non-par products: A sum equal to the premium paying term multiplied by the annualised premium or the return of all the premiums accumulated at an explicit rate stated at the outset till the date of death,or any absolute amount assured to be paid on death.

Limited premium paying term: The minimum premium payment term should not be less than five annual paying terms. Maximum commission on such products should be as follows: 5-9 years: 10 per cent in the first year; 5 per cent subsequently; 10-14 years: 20 per cent in the first year,second and third year 7.5 per cent and 5 per cent subsequently; 15 years or beyond: 25 per cent first year,second and third year 7.5 per cent and 5 per cent subsequently.

Pension products: At the time of surrender or vesting,the policyholder will have to buy the annuity from the same insurer. The insurer should guarantee either a non-zero return on premiums paid or an absolute amount which should result in a non-zero return.

The reason regulator has taken a tough stand is that several categories of insurance products came under severe criticism from various quarters for their lack of transparency,high charges,contract favouring the insurance companies,high commissions and misleading names. The draft guidelines aim to address some of such issues. “Highest NAV product is a dangerous product which is prone to be mis-sold. It brings instability into the market and is too complex a product to be understood by the consumers. It is banned in so many countries,” said Harinarayan.

It will,however,hit companies which have spent money on the creation and marketing of such products. “Highest NAV is a good product. With better disclosures it can be continued,” said Nageshwar Rao,managing director and CEO,IDBI Federal Life Insurance.

“We have given our view to the regulator. Delay in product approvals have hit the industry badly. It now needs to move on,” said SB Mathur,Secretary General,Life Insurance Council. The sector has already witnessed a fall in new premium collection in 2011-12 with ULIPs taking the back seat.

IRDA will announce its new guidelines within a month. If the draft guideline goes through in its current format,it would help make insurance products more attractive and might get the consumers back to the ailing insurance market. While on one hand this would give fillip to the dwindling fortunes of the life insurance companies,on the other it will lead to a disciplined growth for the sector.

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