Curbing mis-selling

The Insurance Regulatory and Development Authority (IRDA) has introduced a regulation that will help curb the mis-selling menace. Agents henceforth will not be able to sell policies with a hefty first-year premium and smaller subsequent premiums.

IRDA gets cracking How agents mis-sold and how you can benefit now. First-year premium: Rs 5,00,000 Second-year premium So far: Rs 50,000 Now: Rs 3,50,000 First-year commission So far: Rs 1,50,000 (30% of first-year premium) Now: Rs 10,000 (2% of first-year premium) Amount returned to individual as single premium policy: Rs 1,40,000

An IRDA notification states that the premium payments from the second year should be not less than 75 per cent of the first year. In the absence of such a stipulation agents sold with huge first-year premiums and pocketed a hefty commission. Their selling mantra was that you don’t need to pay such huge premiums subsequently.

In 2007, IRDA allowed flexible premium payments from second year onwards as long as there was a minimum balance on an individual’s ULIP account to cover mortality risk.

Here’s how it will work to your advantage. For example, if an agent collects a second-year premium of 50 per cent as against the mandated 75 per cent, the difference 25 per cent is clawed back from the agent’s firstyear commission and this amount will be converted into a single premium policy. A single premium policy has a low agent commission of 2 per cent. The agent’s extra commission will be returned to you, usually in the form of a single premium policy.

This regulation favours the customer and ensures that the agent will sell authentic policies that you require instead of merely maximising his commission. The first-year commissions are the best in most ULIP policies and are in many cases between 25 and 30 per cent or more depending on the product and company.

The new agents' code Insurance agents will have to spruce up their act. Don’t sell ULIPs to maximise first-year premiums and commission Sell long-term insurance and follow up on the subsequent premium payments and regularise the same Explain to the customer during policy sale that the premium has to be sustainable like a traditional life policy Deploy windfall gains into other channels than regular ULIPs, while providing life cover through a pure term plan

Says J Karthikeyan, a certified financial planner, and Director, Finerva Financial Soutions: “Agents sold polices with a sizeable upfront investment knowing well that the investor won’t be able to pay a similar premium the second year. Agents give the assurance that the investor can pay just a fraction of the first-year premium, which is enough to keep up the mortality charges going.”

A ULIP investment works best when there is sustained regular premium paid over usually 10 years. An investor can usually recover his initial costs of commissions in 6-7 years if the market performs well. Says Karthikeyan: “An investor who pays huge sums in the first year and small premiums subsequently, loses out in the ULIP because his investment is channelled more towards overhead expenses. The new regulation will ensure that such mis-selling does not happen.”

The circular has come into effect for policies sold from April 1, 2009. Insurance companies have welcomed the move. Says Anil Singh, Head (Actuarial and Product Development), Bajaj Allianz Life Insurance: “We have ensured that all new ULIPs mandate a minimum collection of 75 per cent from the second year to prevent issues of a claw back.” For individuals, it’s a step in the right direction.