When IRDA (Insurance Regulatory and Development Authority) 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 the 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." Hence, 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and discussions, the final guidelines were gazetted in February 2013 under which all existing group products were to be withdrawn from 1 July 2013 (subsequently deferred to 1 August, 2013) and all individual products from 1st October, 2013 (Now Jan 1 , 2014).
Back in 2010, IRDA introduced a number of changes to Unit-linked insurance plans (ULIPs). The changes included increasing the insurance cover, introducing charge caps and lowering surrender charge, making them more transparent and cost efficient for customers. This time, the focus is on reforming traditional products and finessing 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 those key changes that were brought about on the conventional side and why will they prove to be better proposition to the customer?
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% of all premiums paid on date on death or minimum guaranteed sum assured on maturity, or any absolute amount to be paid on death. For those with age more than 45 years it will be 7 times the annualised premium. The minimum death benefit for single premium policies will be higher of 125% of the single premium, or minimum guaranteed sum assured on maturity, or any absolute amount to be paid on death. For those with age more than 45 years, it will be 110% 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 withdrawal of the popular 'Highest NAV' product. The regulator's argument was that such products do not provide the transparency in terms of underlying fund's investments and strategy, which may set unrealistic expectation in the minds of customer leading to mis-communication to the customers on returns.
Existing traditional plans with benefit linked to any external index will be categorized into a new Variable Insurance Products category, which will follow a charge cap regime similar to ULIPs, thus making existing products significantly less attractive from the company’s perspective. The reason for this change is to bring clarity to the product structure and align the charges to that of ULIPs.
Guaranteed surrender values of traditional plans for the customers haves 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% in the first year, 7.5% in the second and third year and 5% subsequently. Products with PPT of 12 years or more will have first year commissions up to 35% in case the company has completed 10 years of existence and 40% for the company in business for less than 10 years. This has been done by the Regulator to encourage long-term selling by the insurers.
The new regulations are radical and nudge the industry in the right direction. The objective is to continue 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 for both the industry and distributors - lower margins, lower commissions, imperative to sell long tenor 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 challenges in maintaining growth and profitability. In the long term the changes will lead to a more stable, transparent and customer focussed product regime – this can only lead to improving the prospects of the industry.
Mr Amitabh Chaudhry has been with HDFC Life since January 2010. HDFC Standard Life is today recognized as the premium brand in the insurance space and is one of the India’s largest private insurers. Before joining HDFC Standard Life, he was the MD and CEO of Infosys BPO Ltd and was also heading the Testing unit of Infosys Technologies Ltd.View Complete Profile
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