The Insurance Regulatory Development Authority’s (IRDA) significant move towards adopting a customer-eccentric approach in the Indian life insurance industry has initiated hope for a better tomorrow. But at the same time it has given birth to uncertainties especially in the minds of insurance providers and insurance intermediaries or agents.
About the new regulations
The new regulations ask for a change in both traditional products as well as traditional selling processes. The new IRDA guidelines which were earlier decided to be implemented in October 2013, came into practice from January 2014. The 3-month delay was intentional to give enough time to the insurance companies to adhere to these new norms. According to the new regulation only those products are allowed to be sold which adhere to the new norms. This has also created the need for re-filing of all existing products for approval (Sinha, 2013; Sridhar, 2013).
The new regulations are said to aim at reaping the advantages of Indian demographics, specifically a younger working population. A report by IRIS Knowledge Foundation and UN-HABITAT published in The Hindu recently claimed that by 2020, India is expected to be the youngest country in this world (Shivakumar, 2013). The population of most of the Western countries are aging and markets are saturated, but Indian demographics offers scope for unprecedented growth in the financial sector. Under such circumstances, IRDA introduces new rules for traditional insurance products to bring transparency, protection, customer centrality and long term focus on the Indian life insurance industry. These changes are said to reduce costs for policy holders, raise returns, and increase the cover after death (Viswanand, 2013).
Important features of the new IRDA guidelines
- Agents’ commission: Insurance agents have been selling and promoting only those products which can offer them maximum earnings in the form of commission. They did not focus upon promoting long-term plans as such. Till now, they were eligible to get as high as 35% commission in the first year of policy in some cases. But the new guidelines restrict such commission for all regular insurance policies having a premium payment term of 5 years to 15% in the first year, 7.5% in the second year, and 5% from the third year; against 25%, 7.5% and 5% for first, second and third years as per the old guidelines. Short-term policies will have a lower commission and it will grow with the tenure of the policy (Sinha, 2013).
- Customer-centrality: Until now customers who wanted to surrender the policy before completing the maturity tenure were at the mercy of insurance providers as there were no preset rules regarding the surrender value. In order to improve liquidity, the new IRDA guidelines now provide a minimum 30% surrender value of the already deposited premium amount after completion of 5 years tenure of the policy. This amount can however go to 90% of the premiums paid during the last two years of the policy (Viswanand, 2013).
- Improved protection: To enhance protection cover that forms the core of life insurance, the new regulations provide that the minimum sum assured for all policies has to be 10 times of the annual premium for people aging below 45 years and above 7 times for people aged 45 years and above. The new regulations also says that at any time the death benefit has to be 105% of all the premiums paid till that time (Viswanand, 2013).
- With profit committee: The new IRDA guidelines require every insurance company to set up a ‘with profit committee’ at the board level to approve asset mix for the fund along with the expense allocated for and investment income earned on the fund. This regulation aims at achieving better corporate governance in case of ‘with profit’ policies (Viswanand, 2013).
- Transparency: To ensure transparency, the new regulation provide a customized benefit illustration for all products to the prospective policyholder. Illustrating the guaranteed and non-guaranteed benefits at gross-investment returns of 4% and 8% respectively. This customized benefit illustration has to be signed by the prospective policyholder as well as the intermediary and shall form a part of the policy document. Until now, this was mandatory only in case of Unit Linked Insurance Plans as the prospective policyholders were given a generic benefit illustration. Usually false representation of facts (Pradhan, 2013).
The above stated features give a rough idea of the new IRDA regime however there is a need for in-depth analysis of these features to actually understand the purpose of these regulations.
- Pradhan, R. (September 24, 2013)). “Will life insurers offer customised benefit illustration from next month?” Moneylife. Retrieved from: http://www.moneylife.in/article/will-life-insurers-offer-customised-benefit-illustration-from-next-month/34587.html [Accessed on May 23, 2014].
- Shivakumar, G. (April 27, 2013). “India is set to become the youngest country by 2020.” The Hindu. Retrieved from: http://www.thehindu.com/news/national/india-is-set-to-become-the-youngest-country-by-2020/article4624347.ece [Accessed on May 22, 2014].
- Sinha, S. (October 2, 2013). “IRDA’s new norms to benefit policy-holders but hurt agents.” The Economic Times. Retrieved from: http://articles.economictimes.indiatimes.com/2013-10-02/news/42617670_1_insurance-regulatory-policies-irda [Accessed on May 23, 2014].
- Sridhar, G. (December 22, 2013). “New IRDA norms promise challenging year for life insurers.” The Hindu Business Line. Retrieved from: http://www.thehindubusinessline.com/industry-and-economy/banking/new-irda-norms-promise-challenging-year-for-life-insurers/article5490153.ece [Accessed on May 22, 2014].
- Viswanand, V. (December 6, 2013). “IRDA’s new guidelines on life insurance: Moving towards transparency and efficiency.” The Economic Times. Retrieved from: http://articles.economictimes.indiatimes.com/2013-12-06/news/44864278_1_surrender-value-life-insurance-insurance-regulatory [Accessed on May 22, 2014].
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