'New norms don't include incentives for a policy'
S.B. Mathur, Secretary General, Life Insurance Council, tells Sarbajeet K. Sen, how the new products and changes in insurance will impact the consumers and the market.
Life Insurance Council Secretary General S B Mathur
Has the policyholder gained from the regulatory changes in the life insurance sector in 2010?
Last year has indeed been very eventful. While the investor is gaining from the lower charges, on the flip side, the new guidelines do not include any incentives to continue with the policy. Earlier, there were strict penalties to prevent people from exiting. On the one hand, we say insurance products are for the long term, and on the other, we say it's fine if the person exits a policy before maturity.
What about the impact of these changes on the products?
It was during 2009 that Irda introduced the capping of expenses, which became applicable from 1 October 2009 for new products. At the same time, they directed that all existing products be abolished and framed afresh as per the new guidelines. This resulted in companies coming out with new products from 1 January 2010.
Then, in April 2010, the tussle between Sebi and Irda erupted over the jurisdiction of Ulips. This was resolved around June and it was quite evident that the Irda was given a mandate to cut down on margins. So it prescribed new regulations for Ulips from 1 September. Thus, within a span of nine months, the product range was overhauled once again.
On 31 December 2009, life insurers had about 500 products, including a small portfolio of traditional policies. This came down to 250 or so after 1 January. After September, only about 60-70 Ulips and a few traditional products are available. Currently, the total number of products in the market is probably less than 100.
How do you see these regulations affecting life insurers' business?
Businesses registered high growth during the first five months of the current financial year. However, there was a decline in September and October as insurance companies adjusted to the new guidelines. We are hoping that things will settle down during the January-March quarter, which, incidentally, is also the peak season for sale of life insurance products. Almost 55% of the year's business is conducted during this period.
Do you fear more policies will lapse under the new regime?
No. Insurers will now go the extra mile to ensure that policyholders have an incentive to pay the premium on time and continue with their policies.
Do you think that the new guidelines on Ulips and variable insurance products (VIPs) will reduce the incidence of mis-selling?
Mis-selling is a very generic term. It doesn't mean that agents do not give misleading or incomplete information, but at the same time, one must remember that life insurance is a long-term product. The financial needs of a person change over the years. In the case of insurance, you make a judgement on a product for a long period. What is good for me today may not be so after five years, but I will be stuck with the policy for 20 years. To an extent, all this leads to charges of mis-selling.
Are you suggesting that there should be more flexibility in mid-course changes in policy terms?
Yes, there should be flexibility. At the same time, people have to be adequately informed. Under the previous regime, there were regulations aimed at protecting the customers. For example, when the sector was opened up to private companies, it was made mandatory for insurers to provide an illustration in the prospectus on the approximate returns a policyholder would earn over the term of the policy.
They took into account a 10% rate of growth or, if the markets were down, a rate close to 6%. All the charges were explained before the consumer signed up. One couldn't claim one was not aware of the charges. It was another thing if the customer was carried away by his faith in the agent or intermediaries. Secondly, there was the 15-day free-look period. If you were not satisfied with the conditions of the policy and felt that some important provisions had not been explained, you could return the policy within 15 days of receipt.
Are you saying that investors should be better educated?
One should be aware of the product, not just while purchasing insurance, but with regard to any financial product. There should be reasonable checks and balances. Even within the existing framework, where charges are capped, there can be mis-selling if the customer is unaware.
What effect will VIP guidelines have on the way they are sold?
Variable insurance is a complex product. People have to be wellinformed when they go in for this product. It combines elements of Ulip and traditional products. There were some built-in guarantees in the case of all traditional policies. VIPs came into focus when there was a clampdown on Ulips.
Companies argued that these were hybrid products and so charges should be levied on the lines of traditional products. So, the Irda took up the case. We have to wait and see what impact it has.
What will be the impact of the new guidelines on product structuring?
The scope for customisation is reducing because there is capping (of charges) and stipulations on the sum assured.
Were companies customising products earlier for each person?
Not in that way, but there was greater variety. Products could be offered according to a person's needs, likes or dislikes. This doesn't seem encouraging as far as consumers are concerned. When the sector was opened up, one of the arguments was that the Indian customer had no choice other than traditional products doled out by LIC and that the best products in the class were not available.
Opening up the sector would allow the development of a fresh product range. Now we are going back to the days prior to the opening up of the sector.
Were the charges high before the regulations or were there products with balanced costs?
Though I agree that charges in the pre-September era were high, it was not true of all insurance policies. It will be difficult for me to single out products, but there were some where the charges were not exorbitant.
It is well known that insurance is an expensive business and that selling it is difficult. People have to be convinced that they need cover. In this, the insurance agent is also a primary underwriter. This is something that everyone ignores while condemning the sector.
However, if I were to say that the charges were low before the changes, I would be wrong. I guess both sides coexisted.
Last year has indeed been very eventful. While the investor is gaining from the lower charges, on the flip side, the new guidelines do not include any incentives to continue with the policy. Earlier, there were strict penalties to prevent people from exiting. On the one hand, we say insurance products are for the long term, and on the other, we say it's fine if the person exits a policy before maturity.
What about the impact of these changes on the products?
It was during 2009 that Irda introduced the capping of expenses, which became applicable from 1 October 2009 for new products. At the same time, they directed that all existing products be abolished and framed afresh as per the new guidelines. This resulted in companies coming out with new products from 1 January 2010.
Then, in April 2010, the tussle between Sebi and Irda erupted over the jurisdiction of Ulips. This was resolved around June and it was quite evident that the Irda was given a mandate to cut down on margins. So it prescribed new regulations for Ulips from 1 September. Thus, within a span of nine months, the product range was overhauled once again.
| 'People need to be well-informed when they go in for variable insurance products as these are complex, combining the elements of Ulips and traditional products' |
How do you see these regulations affecting life insurers' business?
Businesses registered high growth during the first five months of the current financial year. However, there was a decline in September and October as insurance companies adjusted to the new guidelines. We are hoping that things will settle down during the January-March quarter, which, incidentally, is also the peak season for sale of life insurance products. Almost 55% of the year's business is conducted during this period.
Do you fear more policies will lapse under the new regime?
No. Insurers will now go the extra mile to ensure that policyholders have an incentive to pay the premium on time and continue with their policies.
Do you think that the new guidelines on Ulips and variable insurance products (VIPs) will reduce the incidence of mis-selling?
Mis-selling is a very generic term. It doesn't mean that agents do not give misleading or incomplete information, but at the same time, one must remember that life insurance is a long-term product. The financial needs of a person change over the years. In the case of insurance, you make a judgement on a product for a long period. What is good for me today may not be so after five years, but I will be stuck with the policy for 20 years. To an extent, all this leads to charges of mis-selling.
Are you suggesting that there should be more flexibility in mid-course changes in policy terms?
Yes, there should be flexibility. At the same time, people have to be adequately informed. Under the previous regime, there were regulations aimed at protecting the customers. For example, when the sector was opened up to private companies, it was made mandatory for insurers to provide an illustration in the prospectus on the approximate returns a policyholder would earn over the term of the policy.
They took into account a 10% rate of growth or, if the markets were down, a rate close to 6%. All the charges were explained before the consumer signed up. One couldn't claim one was not aware of the charges. It was another thing if the customer was carried away by his faith in the agent or intermediaries. Secondly, there was the 15-day free-look period. If you were not satisfied with the conditions of the policy and felt that some important provisions had not been explained, you could return the policy within 15 days of receipt.
Are you saying that investors should be better educated?
One should be aware of the product, not just while purchasing insurance, but with regard to any financial product. There should be reasonable checks and balances. Even within the existing framework, where charges are capped, there can be mis-selling if the customer is unaware.
What effect will VIP guidelines have on the way they are sold?
Variable insurance is a complex product. People have to be wellinformed when they go in for this product. It combines elements of Ulip and traditional products. There were some built-in guarantees in the case of all traditional policies. VIPs came into focus when there was a clampdown on Ulips.
Companies argued that these were hybrid products and so charges should be levied on the lines of traditional products. So, the Irda took up the case. We have to wait and see what impact it has.
What will be the impact of the new guidelines on product structuring?
The scope for customisation is reducing because there is capping (of charges) and stipulations on the sum assured.
Were companies customising products earlier for each person?
Not in that way, but there was greater variety. Products could be offered according to a person's needs, likes or dislikes. This doesn't seem encouraging as far as consumers are concerned. When the sector was opened up, one of the arguments was that the Indian customer had no choice other than traditional products doled out by LIC and that the best products in the class were not available.
Opening up the sector would allow the development of a fresh product range. Now we are going back to the days prior to the opening up of the sector.
Were the charges high before the regulations or were there products with balanced costs?
Though I agree that charges in the pre-September era were high, it was not true of all insurance policies. It will be difficult for me to single out products, but there were some where the charges were not exorbitant.
It is well known that insurance is an expensive business and that selling it is difficult. People have to be convinced that they need cover. In this, the insurance agent is also a primary underwriter. This is something that everyone ignores while condemning the sector.
However, if I were to say that the charges were low before the changes, I would be wrong. I guess both sides coexisted.
| WHAT 2011 HAS IN STORE FOR YOU | |
|---|---|
| 1. How 2011 will impact you 2. Buoyant market, bullish returns 3. A roller-coaster year ahead 6. Retail investors should go global 7. Keep pace with changing times 9. Make the best of uncertainty 10. All set for new, improved cover 11. 'New norms don't include incentives' 12. Invest in a house, cautiously |
