Life insurance firms mull riders to take policyholders for a ride

By Venkatachari Jagannathan, IANS,

Chennai : The dirty tricks departments in life insurance firms are busy at work to beat the new regulations for unit-linked insurance policy (ULIP) issued by the regulator, capping the various charges that they can levy on policyholders.

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“As per the latest guidelines issued by the IRDA (Insurance Regulatory and Development Authority), the maximum first-year commission that can be paid to distributors will be around 12 percent,” a senior industry official said.

“Corporate agents who are getting around 70 percent now are naturally unhappy. They want insurers to find new ways of ensuring that their earnings remain intact,” the official, who is an expert in the industry, told IANS.

According to him, life insurers are exploring options like launching riders with savings element on term-assurance products and also increasing commission rates on traditional products such as endowment and money-back policies to keep their till boxes tingling.

“The new norms will put tremendous pressure on corporate distributors. But they have to understand life insurance is a volumes business,” R. Krishnamurthy, managing director for products, distribution and risk consulting with Towers Watson, told IANS.

Insurance policy riders are extension of a basic policy to provide additional covers for more charges. In contrast, term assurance is a pure life insurance policy under which a policyholder gets his/her life covered without any return on the premium paid.

Queried about the stipulation that rider charges should not be more than 30 percent of the premium for the basic policy, another official told IANS: “That cap is applicable only on risk covers and not on the savings element.”

He explained that it will not be surprising if insurance companies launch a Ulip scheme, camouflaged as term assurance, in the markets from this September, so that it will be business as usual for them as well as their distributors.

According to industry officials, some life insurers have already filed such products for approval with the insurance regulator, adding the onus was now on the IRDA to approve the revised products so that companies can sell them from Sep 1.

“IRDA should question these companies if they increase the premium/commission rates on traditional policies,” R. Ramakrishnan, who was a member of the R.N. Malhotra panel on insurance reforms, told IANS.

“If distributors have to be paid higher sums then shareholders of life insurance firms can pay out of their pockets and try to recover the cost when they make profits,” said Ramakrishnan.

In fact, Krishnamurthy said, some companies may be considering such an option, with a differentiated commission structure for the high value policies that are designed for high networth individuals.

“Foreign and private banks can focus their effort on them. But in the current guidelines there no room for such differentiated treatment,” Krishnamurthy, said, adding if public sector banks lead low cost life insurance distribution, others will fall in line.

Officials also said riders should be simple and cover specified risks, without a savings element riding on it to facilitate payment of higher commission.

Another industry veteran said the watchdog should should look into these aspects with a microscope so that prospective policy holders are not taken for a ride. “More so since the time left is short and each company can file up to four products for approval.”

Industry experts conceded that it will be difficult for the private life insurers to match Life Insurance Corp of India’s (LIC) bonus rates on traditional products. But since the profits will be known only eventually, distributors would have made their money by then.

Officials said it was because of the intervention of the Securities and Exchange Board of India, which had asked life insurers to get its approval before selling Ulips, the insurance watchdog had now come out with regulations that favour policyholders.

“It is for the IRDA which has a mandate to protect policyholders to act firm.”

(Venkatachari Jagannathan can be contacted at [email protected])