Life Insurance in India faces a number of issues. Commissions tend to be high, returns tend to be low and customers do not stick with their policies (which they have often been mis-sold), forfeiting the premiums they’ve already paid.
The investment environment has also changed over the past few years with a reduction in interest rates. This has impacted the ability of insurers to generate returns from the interest they earn on government bonds.
To fix these and other major problems in the sector, the insurance regulator Insurance Regulatory Development Authority of India (IRDAI) constituted a panel, Committee on Review of Product Regulations – Life, which has made a slew of recommendations. Some of the major recommendations made by the committee are as follows:
- Lower the mandatory proportions of government securities that insurers are required to hold. This will allow insurers to generate higher returns for policy holders.
- Increase the sectoral cap for the holdings of insurers in the finance and insurance sector. The sector has become a significant component of the broader market indices and the sectoral cap can result in underperformance.
- Allow insurers to lend money against their own insurance policies including ULIPs, over and above the surrender value of those policies.
Increase surrender value for traditional policies in case of failure to pay premiums by either:
- Splitting premiums between risk-based and investment based components and paying back the investment based component at the end of five years.
- Returning 100% of the premium paid after 7 years of the commencement of the policy if at least two years’ premiums have been paid.
Parity with general insurers
Create a level playing field between health benefits offered by life insurers and traditional health insurance policies sold by general insurers, for instance by aligning norms for commissions and risk assessment.
- Referral incentives to persons recommending policies to their relatives or friends.
- Like banks, insurers should be allowed to sell all financial products including mutual funds and mortgages. They should also be allowed to mortgage non-financial products such as utility bill payments, flights and hotel bookings.
- Insurers should be able to sell through channels such as e-commerce portals, social media, departmental stores, petrol pumps or other similar establishments that a customer visits for day-to-day needs.
- In order to enable customers to compare ULIPs with other types of funds, insurers should disclose fund performance in comparison to benchmarks in an annual fund value statement.
- An annual statement disclosing all bonuses including the most recent bonuses be sent to customers.
- A risk meter or colour coding system showing the risk of the fund.
- IRR or Internal Rate of Return of matured policies.
- Asset and portfolio disclosures of pooled funds on the insurer’s website.
- Place the withdrawal structure of pension plans offered by insurers (called ULPPs) on parity with the NPS. Subscribers can withdraw one-third of the accumulated corpus on maturity for these plans compared to 60% for the NPS.
- Allow premature withdrawal from these plans on specified grounds such as medical or other emergencies.
- Create a secondary market in surrender values of life insurance so that people get a higher surrender value.
- End the front-loading of insurance commissions for distributors that do not show a high level of persistency.
- Allow customers to revive insurance policies in installments rather than having to pay several unpaid commissions in one go
- Allow portability which would enable a customer to shift from one insurer to another
Should the regulator accept these recommendations or even a few of them, it can go a long way towards fixing the problems in India’s insurance industry. Investors should stay tuned for further developments in the sector.