Returns on traditional life insurance plans are expected to improve after a recent direction from the regulator mandating better management of their expenses.
The Insurance Regulatory and Development Authority (IRDA) has directed insurers to set up a new four-member board committee — called the with-profit committee — to monitor and manage the expenses involved in participating (par) products.
Par plans are insurance contracts that pay dividends to policyholders based on the insurance company’s earnings. All non-linked plans, such as endowment plans, come under this category.
The move will benefit policyholders, according to experts.
“It is definitely a step in the right direction that will benefit policyholders as well as insurers. This will lead to enhanced transparency, improved governance and fairness in treating various cohorts of participating policyholders,” said Sanchit Maini, chief actuary, Max Life Insurance.
“The immediate impact of these kinds of monitoring will be increased bonuses to policy holders,” said Maini.
An appointed actuary of another private insurance company also stressed that the move will improve transparency. “The move will ensure insurers have an elaborate policy for allocating the expenses on par products without compromising the interest of policyholders. Some amount of uniformity is expected in managing the expenses on these front as it will be highly monitored. Direct benefit to policyholders may differ from company to company, but greater amount of transparency is expected than the currently prevailing system,” he said, choosing not to comment on whether bonuses will go up.
As per IRDA’s exposure draft, the with-profit committee shall be constituted with one independent director of the board and the chief executive officer of the company will be assigned to this post. The other members will be the appointed actuary of the company, one board member and a member from outside the organisation to review the decisions.
“The report of the with-profits committee shall be appended to the actuarial report and abstract,” said IRDA.
The regulator will prescribe the method of allocation of expenses to various funds in consultation with the Institute of Actuaries of India (IoA) and the Institute of Chartered Accountants of India (ICAI).
The regulator has also specified that the appointed actuary of each insurance company will have to determine the asset share of each traditional product in lines with the guidelines that will be issued by the IoA.
The draft also suggests getting the approval of the newly formed committee on the detailed working of the asset share, expenses allowed and investment income earned out of the fund.
The finance ministry’s revival plan for life insurance sector announced last week had suggested reducing the arbitrage between unit linked insurance plans and traditional plans in terms of charges involved in it.
The insurance watchdog is now taking all possible measures to bring down the cost of traditional plans and make them more customer-centric.
The cost structure of the traditional plans are believed to be expensive because of the administration charges and exorbitant commissions paid to the distribution channels.
The charge structure of traditional plans are less transparent than that of linked plans.
“Currently, the appointed actuaries of the companies are monitoring those expenses. The efficacy of managing those expenses will be more with a new proper system in place,” said G N Agarwal, chief actuary, Future Generali Life Insurance.
With this system in place, insurance companies will have greater liberty to manage their expenses on their own. Hence, effective management can bring down the cost of policies too.
Presently, insurance companies have to plan their expenditure (like agents’ commission) as per Section 40B and 40C of the Insurance Act. There is no cap on the amount companies can spend on various heads as long as they adhere to the norms.
But, say insurers, the regulator had issues if it noticed more funds being allocated towards a particular head.
Now, they can spend at will.