Irda’s mulling portability. That’s a good thing

Irda chairman J Hari Narayan, speaking at the CII Insurance summit, announced that the insurance regulator was seriously considering introducing portability of health insurance and car insurance as a consumer-friendly measure — those not happy with the services of their existing provider can vote with their feet and switch their providers.

So what is portability and how does it help consumers get a good deal?

Just think of the home loan example and it will be clear. Customers who have borrowed till 2008 on floating rates are even today paying an interest rate of anywhere between 10-12%, depending on the lender.

The same lenders give loans to new customers at floating interest rates of around 8.25-9% or at attractive teaser rates.

In theory, a customer with a good track record of repayment can shift his/ her loan to another lender who will treat him as a new customer and give him the rates reserved for new customers. In practise, however, things are rarely that simple.

The existing lender is loosing a good, well-paying customer and tries to create as many barriers as possible to the customer migrating to another lender. The best way is lack of co-operation with the new lender that the customer has chosen.

Now remember, the title deeds to the property are still with the existing lender which he will not release till he receives the full payment for the loan. At the same time, the new lender has to disburse the loan without getting any security which is normally released only 15-30 days after receipt of full payment by the existing lender.

So then how do loans get shifted?

In most cases, the new lender requires the existing lender to give a letter listing the title documents that will be released directly to them (the new lender) within a fixed period after receiving full payment. This is where the problems come in.

The existing lender demurs on giving this letter or makes changes in the letter that are unacceptable to the new lender. Only the most determined customer can force the existing lender to give this letter and thus go ahead with the loan shift. Now imagine if the regulator (RBI or National Housing Bank as the case may be) makes it compulsory for the existing lender to provide a letter in a pre-fixed format within a specified time frame after receiving the request from the customer. This one single step will ensure that millions of home loan households are able to enjoy the benefits of portability.

Similar barriers to portability exist in other personal finance products. Now partial portability of mediclaim policies is voluntarily allowed by a few health insurance companies such as Apollo Munich or Star Health or some PSU companies inter-se between the PSU companies.

Yet, it has not taken off due to information barriers similar to those in banking, created by existing health insurance companies. Both these companies require a renewal notice from your existing company that will also indicate the extent of no claim bonus and/ or premium discount. Getting this letter itself becomes a problem. A similar situation is there in car insurance also, where portability is practised the most.

Even here the new insurer requires the claim history certificate from the existing insurer to provide the no claim premium discount (which can be as high as 50% if you have not made a claim for 5 years) benefit to the consumer. From my own personal experience I can tell you that it is not an easy task to get this certificate from your existing insurer. Again, making it mandatory to issue such letters/ certificates within a fixed time frame will make genuine portability possible.

The beauty of portability is that it rewards good consumers and punishes bad consumers (even when portability is made simpler, which new lender will lend if the borrower has defaulted in the past?) and at the same time prevents providers from exploiting their good consumers.

The writer is CEO, Apna Paisa, a price comparison engine for loans, insurance and investments. He can be reached at hrdna@apnapaisa.com