03 July, 2010

The Ten Commandments from IRDA

After groping in the dark for a while, IRDA has found it’s feet. It is now alive and is competing with SEBI regarding changes it wants to introduce in it’s space; every second day there is some circular about some aspect or other of the insurance policies trickling in. Currently, it is focusing its energies primarily on the Life Insurance space. All these changes are good for the end user, who has been playing Santaclaus, all these days.

The latest circular of IRDA has a nice bouquet of changes on offer.

1. ULIPs to have a lockin period of 5 years: This is good for the client as it clearly orients them for longer term investments and only those kind of people will now come in.

2. Level premiums: There were policies where the first year premium was a much higher figure and the subsequent year’s premium was a minnow beside that. This meant that the first year charges, which is itself high, are recovered on a much higher premium amount. This was an unsavoury practice which has now got addressed with this.

3. Even distribution of charges: This is fair on clients as for a long-term product, the charges should be taken over time – not upfront.

4. Minimum Premium paying term of 5 years: The whole idea seems to be to project ULIPs as a long-term product, instead of investing now and cashing out after three years, like it has been happening until now. This ensures that only people who have a serious long-term investment intent, will come in.

5. Increase in Risk Component: Insurance companies forgot in-between that they were Insurance companies and were competing with investment products. Now, IRDA has mandated that there be at least a life cover of 10 times the annual premium or higher (as per a formula) for people below 45 years of age and 7 times or higher (as per a formula) for people of age 45 or above. The life insurance companies can instead give a health cover too – the higher of 5 times the annualized premium or Rs.1 Lakh for people below 45 and the higher of 5 times the annualized premium or Rs.75,000 for people who are 45 years of age or above. This is a novel introduction by IRDA and shows that it is applying thought (like Wipro calls it).

6. Top-up premiums: Top up premiums also need to have an insurance cover of 125% of the annualized premium for customers of less than 45 years and 110% of the annualized premium for customers of 45 years of age or more.

7. Minimum Guaranteed return for Pension products: A minimum Guaranteed return of 4.5% in Annuity products (including ULIP pension products) is now mandated. This is good for the clients, but can be a challenge for the insurance company, if the interest rate climbs down in the longterm.

8. Surrender of policies: This was addressed in an earlier communique, where it sought to bring down the surrender charges substantially - 15% in the first year coming down to 5% in the fifth year for policy term of more than 10 years and 12.5% in the first year and coming down to 2.5% in the fifth year for policy term of less than 10 years. This ensures that the effects of any misselling is minimized. It also ensures that the agents cannot foist a dud on their clients and scoot. This is a very customer friendly move.

9. Returns from ULIPs: IRDA had previously brought a guideline which stated that the difference in gross yield and net yield at maturity be only 3% or less for terms less than 10 years and 2.25% for terms of 10 years or more. But this was to be applicable on maturity, which effectively left out most, who tend to surrender polices prematurely. Now that anomaly has been corrected. The difference in the yield now applies from the 5th year onwards. It can be 4% in the fifth year reducing progressively to 2.25% from the 15th year onwards.

10. Loans: Maximum loan amount in a ULIP in a product with Equity component of 60% or more can be 40% of the Net Asset Value and 50% of NAV in a product with a 60% debt component.
Besides all these IRDA is working on a Key features document that will help demystify complex products, Needs Analysis is an initiative to curb wrong advice & mis-selling & has set up a Customer Affairs Department for grievance redressal & customer education. That’s quite a broad brush stroke from IRDA – one that is pleasantly surprising, after years of somnolence.

Published in Moneycontrol.com on 30th June 2010

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