For Better Protection

Chandralekha Mukerji | Print Edition: October 2012

Change is constant. This seems to be the motto of the Insurance Regulatory and Development Authority (Irda), the insurance sector regulator. The revamp of the unit-linked plan, or Ulip, structure, portability of health plans and pension plan guidelines have already made the industry customer-friendly.

Now, Irda has released draft guidelines on life and health insurance to take the process further forward.


>> Proposed Change: Increase in minimum death benefit.
The guidelines prescribe a minimum basic sum assured of ten times the annual premium if the age of the policyholder is less than 45 years and seven times the annual premium if it is 45 years and above.

For single-premium products, the life cover must be at least 125 per cent of the premium paid if the person is less than 45 years of age at the time of buying the policy. For others, the figure is 110 per cent.

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To get tax rebate under sections 80C and 10 10(D), the minimum basic sum assured should be ten times the annual premium.

What it means for you:
It gives higher life coverage, plus an increase in premium, particularly for the old and those who fall in the high-risk category due to poor health. Also, those who have sufficient life cover may not benefit.

"The guidelines prescribe a minimum death cover for the entire duration of the policy. Young customers will be assured a minimum protection throughout the policy term. However, older policyholders looking at wealth creation instead of protection will have to unnecessarily bear the cost of higher death cover," says Pavan Dhamija, managing director and CEO, DLF Pramerica Life Insurance.

But given that insurance, not returns, is the primary goal of any life insurance policy, this will benefit the customer.

Irda has also proposed to increase the minimum tenure of a life insurance policy to five years.

"A longer commitment may not suit everybody," says Arvind Laddha, CEO, Vantage Insurance Brokers and Risk Advisors.

>> Proposed Change: Link intermediary commission to policy tenure.
An insurer can pay up to 14 per cent annual premium to agents on policies with tenures of five-nine years, 28 per cent on 10-14 year plans and 40 per cent on policies with tenures of more than 15 years.

Companies which have been in the business for more than 10 years will be allowed to pay up to 35 per cent on policies with tenures of more than 15 years.

What it means for you:
This will benefit customers, insurers as well as agents. While distributors will push long-term products to earn higher commissions, policyholders will get protection for the long term at a lower cost.

"The longer the duration, the higher will be the commission. And because the commission will be distributed over the policy tenure, the impact on pricing will be minimal," says Girish Kulkarni, MD & CEO, Star Union Dai-ichi Life Insurance.

This will increase the possibility that a policy will remain in the insurer's books for a longer term.

>> Proposed Change: Modification in guarantee on surrender value.
The draft guidelines say insurance products with premium-paying terms of 10 years or more will acquire guaranteed surrender value (GSV) after payment of third annual premium.


A Index-linked products are expected to be linked to indices approved by the regulator. Based on the ongoing discussions, we understand that they will be linked to government securities.


MD & CEO, Star Union Daiichi Life Insurance

Policies with a premium-paying term of less than 10 years will acquire GSV after payment of two yearly premiums, while single-premium products will acquire GSV at the end of the first policy year

What it means for you:
At present, only policies where premiums have been paid for at least three years are eligible for GSV. The change will benefit those who are finding it difficult to pay premium.

It will entitle them to surrender value after two years if the premium-paying term is less than 10 years. Irda has also proposed to end loan against Ulips. This will apply to new contracts.

>> Proposed Change: Introduction of index-linked plans.
Indexlinked investment plans (Ilips) will be similar to equity-linked Ulips with a difference that the basket of stocks they will be allowed to invest in will be defined-an investment or economic index.

"Index-linked products are expected to be linked to indices approved by the regulator. Based on the ongoing discussions, we understand that they will be linked to government securities," says Kulkarni.

This means that unlike in case of Ulips, which get a lot of freedom to invest, there will not be any variation in the portfolio. Each policyholder will have a separate account.

"The account value will reflect the premium paid net of mortality charge and interest earned. The policyholder will earn throughout the policy term," says Kulkarni.

What it means for you:
Since the fund will be linked to a benchmark or index, Ilips are likely to be more stable than equity-linked Ulips. They can be a good option for people who can't take too much risk but still want to invest in equity markets.

Also, the insurer will not be allowed to deduct any charge, except the mortality fee. This is unlike Ulips where there are several charges such as policy administration and fund allocation.

>> Proposed Change: Re-allotment of orphan policies; no interest on premiums due.
A recent guideline on serving of orphan policies allows life insurers to re-allot orphan policies where premium has not been paid for at least six months as the agent is inactive. Such policies can be transferred to agents who are still active. The rules for this have already been laid down.

At present, if a customer does not pay premium on time and wants to renew the policy later, the insurer charges an interest on the due amount. Irda plans to get rid of this if the insured applies for reviving the policy.

What it means for you:
This will benefit those who discontinue the policy due to lack of service. This means you will continue to receive after-sale service even if the agent who sold you the policy leaves the organisation.

"This will enable companies to improve their persistency ratio and hence their bottom line," says Dhamija. The 'no interest on premium due' proposal, a positive for customers, has been criticised by some. "It may encourage bad premium-paying behaviour and delays," says Laddha.

Other Proposed Changes

  • Reward Mechanism: Insurers will have to device mechanisms to reward policyholders for buying at an early age, regular renewal and favourable claim experience. All this will have to be declared upfront in the policy document.
  • Multiple Indemnity Plans: If a customer has more than one indemnity policy, the insurance company cannot apply the contribution clause that makes both the insurers liable to pay the claim in the ratio of the sum insured. The policyholder will have the right to choose the insurer with whom he would like to settle the claim.
  • Multiple Fixed-benefit Plans: Fixed-benefit plans will be free from contribution clauses. The claim payments for multiple fixed benefit plans, the insurer would have to settle the claim independent of payments received under other similar plans.
  • Withdrawal of Health Plan: Insurers won’t be allowed to discontinue any plan unless existing customers are offered a suitable alternative.
  • Additional Benefits: Insurers must reimburse at least 50% cost of health check-ups done before the policy is bought. The regulator has also proposed to introduce non-allopathic treatments and HIV/AIDS insurance covers.

>> Proposed Change: New entry, exit rules:
Draft guidelines propose sale of health policies to people up to the age of 65 years and life-long renewal. This will give options to the elderly, who are denied health covers as they are more likely to file claims. However, as age and health decide the premium, these products will be expensive.

"Having the option, even if expensive, is better than having no option or protection. Irda has sought to redress this by allowing insurers to price products according to costs," says Neeraj Basur, CFO, Max Bupa Health Insurance.

However, insurers do not have adequate data for pricing policies for senior citizens, as they were not required to cover the category earlier. "Inadequate data makes pricing a problem. The challenge insurers will face is ensuring a balance between keeping policies affordable and avoiding losses," says Arvind Laddha of Vantage Insurance Brokers and Risk Advisors.

>> Proposed Change: Transparency at the time of purchase, renewal and claim settlement.
Irda has proposed a new set of rules to ensure informed decision-making. The aim is to curb mis-selling of policies. It will make it mandatory for insurers to have a 'policy snapshot', a "one-page information sheet covering benefits, exclusions and grievance mechanisms. In addition, like in life insurance, health insurance products will have a 15-day free-look period during which the policy can be returned.

To ensure that there is no arbitrary increase in premium, Irda has proposed that discounts and loadings (extra charged on renewal) be disclosed upfront in both the prospectus and the policy document. Moreover, insurers will not be allowed to increase premium for one year after the product has been cleared. For any price revision, insurers will have to submit a written justification along with supporting documents.

>> Proposed Change: Quick claim settlement.
All claims will have to be settled within 30 days of submission of all the documents. An insurer will not be allowed to reject a claim for non-submission of documents without an enquiry into the reasons for the delay. In such a case, the insurer will have to prove that the claim, even if filed in time, would have been rejected otherwise as well. Also, the reasons for rejection will have to be given in writing.

Every insurer and third party administrator will need to have a separate channel for senior citizens for grievance and claim settlement.

>> Proposed Change: More flexibility.
Under the 'migration option' in the proposed guidelines specific policies, for instance maternity and student, as well as children covered under family floater policies, will have an option for migration to a suitable plan at renewal or a specified exit age.

It is also proposed to allow insurers to launch three-year plans to reduce operational hassles and lower prices. At present, health insurance is a one-year contract.


There are over 1,000 live insurance products available in the market. It is impossible for any insurance advisor to have knowledge of all of them.

This is where web aggregators or insurance product comparison websites step in and offer Internet users insights into products, premiums and charges and enable comparison of similar products, besides resolving post-purchase dissonances.

Aggregators have helped reduce commissions to almost 0 per cent. Companies have passed on the entire benefit to consumers by way of either reduced premiums in cases of term policies, health and car insurance or higher allocation in case of unit-linked insurance plans.

The regulator came up with guidelines for web aggregators in November 2011 which suggested:

  • Impartial display of products, without any prejudice or on the basis of any ranking or user input.
  • Capping of amount to be charged from an insurer per lead to Rs 10 per lead
  • Restriction of commission payout to brokers/agents for sale of a product to one-fourth of the normal commission
  • No insurance advertisement on pages where premium quotes are shown
  • Display of product information purely on the basis of information furnished by insurers
  • Insurers must be bound to provide information to web aggregators for display on websites.

For customers, the guidelines were a mixed bag. Though the customer is still be able to see the premium and expected returns for comparison, the additional information about what other people are searching and looking for, plus their reviews, are not available.

On the positive side, aggregators have been recognised. Moreover, chances of misinformation and advertisement-driven bias have been reduced. However, we feel that peer reviews should be retained.

Also, analysis of factual information must not be banned. Moreover, information made public by companies and Irda should be usable. The guidelines should benefit both the consumers and businesses.

- By Yashish Dahiya
Co-founder and CEO of Policybazaar.com

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