Demystifying life insurance

Enough is enough! It’s time to call time on misleading, hyperbolic nonsense that life insurance marketing has become. It’s also time to demystify life insurance and make it simple, easy-to-understand, meaningful and really useful.

If you verbalise the current thinking of the Insurance Regulatory and Development Authority of India (Irda) on the state of life insurance, that is probably how it would read.

The missionary zeal with which the insurance regulator has proposed a set of suggestions and recommendations to the life insurance industry exemplifies the regulator’s intent to bring in more clarity and transparency to the way insurers design life insurance products.

From now on, Irda’s February 16 letter to insurers and the Life Insurance Council said, complicated products are a strict no-no. The way they are peddled now is also a cause for concern, it stated.

What got Irda’s goat was that more and more new “complex products” were lined up for its approval. The products’ features, an irate Irda found, were not in alignment with the prescribed best practices.

Worse, they lacked clarity. Irda did not mince words when it dashed off the said letter. “Greater amount of clarity is required to ensure policy-holders’ protection and sound insurance principles.”

The Irda letter has now become something of a talking point in industry circles.  For, it addresses various issues relating to design and structure of life insurance products. The key points are instructive indeed:

Limited life cover
Certain products like single premium Ulips (unit-linked insurance plans) and endowment plans offer limited life cover in proportion to the premium paid. For instance, these policies provide a sum assured (SA) that is just five or six times the premium paid annually. (Example: if annual premium is Rs1,000, then the SA would be around Rs6,000.) This is laughable, according to Irda. The SA should be at least ten times the premium paid, it believes. Irda also suggests there be a minimum life cover for life insurance policies at the event of death or on completion of term or tenure.

Participating and non-participating policies
Insurance companies file new products with Irda classifying them as either  participating (par) or non-participating. Under par (or with- profit) products, policy-holders are entitled to receive the surplus of the company. Premiums collected from these products are pooled and invested. Policy-holders will be entitled to receive part of the company’s surplus as bonuses. All traditional products other than pure term policies come under this category.

Non-par products are invested in such a manner that the returns are guaranteed and benefits are disclosed upfront. They include pure term plans and Ulips. The regulator is concerned that a few ‘non-par’ products are actually linked to either government securities or some index.

In such cases, due to uncertainties, insurers cannot disclose the return or guarantee before the maturity of the policy. But Irda has made it clear that “some principles must be built up in order to structure par- and non-par polices in line with regulations”.

Group long-term products
The regulator wants to draw a clear distinction between group policies and individual long-term policies. Irda wants to address the issue of limited premium payment terms offered under group policies.

“There are no such mechanisms to address the problem of policy-holders when the agreement gets terminated,” says a senior official at a life insurer.

The regulator has also expressed dissatisfaction with the current structure of highest Net Asset Value (NAV)-guaranteed products offered by life insurers. According to Irda, there should be a minimum equity component for a specified period.

Under highest NAV-guaranteed products, customers have guaranteed returns based on the highest NAV a policy has achieved during the entire term of the insurance plan.

“Products of these kinds are often miscommunicated to the customers. Highest NAV products are in a way conservative products due to their defensive nature on equity participation,” says an industry official.

Illustrations of benefits
The Irda letter expressed apprehensions over the illustrations used in marketing collaterals to highlight benefits of Ulips. “The benefits calculated at 6% and 10% would raise the expectations of the customers and sometimes it (the policy) fails to fulfil the expectations of the customers,” Irda lamented.

To dispel confusion and introduce clarity in illustrations of Ulip benefits, the regulator suggests calculating the benefits at a percentage which is less than the median return of the fund value. It should be calculated on all funds in force during the previous two years.

“Calculation of benefits based on previous fund performances will be effective and realistic,” concurs an industry official.

Reinsurance
The regulator is concerned about heavy reliance on reinsurers by life insurers for small and big claims. Reinsurance is insurance purchased by insurers from other insurers to limit the total loss an insurer might incur in case of a disaster.

Irda wants to wipe out the practice of ‘fronting’, a term for insurers depending more on reinsurers for policies with unlimited life cover. Hence, industry observers say, Irda may restrict the limit of life covers for some policies.

Sensing the regulator’s penchant to cleanse the life insurance segment, the Life Insurance Council is proactively seeking comments and clarifications from insurers. A few interactions between Irda and the industry luminaries might ensue. And then, Irda will likely take a firm stand on the issues discussed above. Watch this space.