When it comes to life insurance, the threat of misselling is ever-present, given the complex nature of products. The Insurance Regulatory and Development Authority of India (Irdai), which has taken several measures to control this in the past, recently announced another set of guidelines for life insurance companies to improve transparency and protect the interests of the policyholders against mis-selling.
The Irdai circular mentions the provisions life insurers must follow to ensure fair sales process with relevant disclosures. Note that these provisions are modified versions of the existing regulations with some more details and updates. We tell you what these are and how will they impact policyholders.
Irdai has asked life insurers, agents and intermediaries to collect suitability information of every prospective policyholder and make product recommendations accordingly. However, this does not apply to pure risk and pure health products. According to the circular, the information will include details such as age, income, family status, life stage, financial goals and the already held insurance portfolio.
The online sales process will also have to capture this information, but insurers may give the option to the buyers to bypass the suitability module after taking due declaration. Puneet Nanda, deputy managing director, ICICI Prudential Life Insurance Co. Ltd, said the suitability information clause will ensure a need analysis is conducted for every customer and products are matched with their needs. In case of Ulips, the agent will have to clearly indicate how the premium paid is appropriated towards various charges from the unit fund and the balance fund at the end of the first year and subsequent years.
Regulations stipulate that each insurer must have a policy to ensure product suitability for specific customer profiles, said Abhishek Bondia, principal officer and managing director, SecureNow.in. The solicitation person has to work within this framework. “The paperwork to ensure compliance has to be made retrievable. This will ensure that last-mile information distortion will go down substantially," said Bondia.
Ulips are complex products with multiple allocation options across low- to high-risk funds. “It is important that the customer’s background, goals and expectations are understood well, before the right plan and fund allocation is advised. The regulator has rightly made it mandatory for insurers and intermediaries to understand the profile, needs and goals of the policyholder, before advising any specific investment plan," said Mahavir Chopra, director, health, life and strategic initiatives, Coverfox.com, an online insurance marketplace.
It is already mandatory for insurers to provide benefit illustrations. The regulations have now tweaked and standardized the format and have also insisted that a non-participating plan that offers guaranteed benefit carry a benefit illustration. “Benefit illustration is a customized snapshot of a life insurance plan for the customer to understand the overall terms of the product category and plan in question, including premium payable and frequency, duration, surrender value, details of all charges that will be deducted from the investment made, etc. The document can help the customer get clear visibility of how each paise in their investment will be used and invested," said Chopra.
The benefit illustration is required to be signed by the prospective policyholder as well as the agent or the intermediary.
The regulator has asked insurers to ensure the illustration clearly distinguishes between guaranteed and non-guaranteed benefits in a product and also mentions the quantum of benefits that come with non-guaranteed products. Bondia said various types of life insurance products, including non-participating non-linked products, will now have to provide a detailed benefit illustration. “There would be more consistency in the presentation of benefit illustration with greater transparency on guaranteed and variable benefits," he said.
These guidelines are applicable from December. “The guidelines will help better readability of all applicable charges, year-by-year fund value at assumed growth rates of 4% and 8%, surrender value and life cover," said Tarun Chugh, managing director and CEO, Bajaj Allianz Life Insurance. Also, now benefit illustration will include the net yield, which will be more representative of the returns. “This will be arrived at after deduction of mortality, rider, premium allocation and other fund management charges from the gross yield," said Bondia.
In case of online sale of policies, customized benefit illustration shall be generated before the buyer is directed to fill the form or pay the premium. Portals operated by insurance companies and intermediaries will have to prominently display the benefit illustration. “Benefit illustrations can no more be a mere hyperlink in the journey. Customers will now move forward with the purchase process only after they have accepted the illustration. It will be sent to the customers on their registered email address before the payment of the advance premium," said Chopra.
Note that this is not applicable for policies issued under Irdai’s (Micro Insurance) Regulations 2015, Guidelines on Points of Sales (PoS)-Life Insurance Products, 2016 and Irdai (Insurance services by Common Service Centers regulations) Regulations, 2019.
Life insurers have been asked to compulsorily verify contact information such as email ID and mobile number of policyholders every year and update the changes, if any.
They have also been asked to send a status report of their policies at least once every year. The report must disclose the premium payment status, accrued bonus and other benefits, and paid-up value.
Ulips shall mention the units to the credit of the policyholder, fund value at the NAV (net asset value) applicable and changes in the number of units from the last issued status report. “Having the latest contact information of policyholders will ensure they receive regular updates on their policies. It will ensure that the customer receives all communication. For example, vesting date and options thereof," said Nanda. For linked and non-linked products, fund statements were given annually, and the practice will continue.
Pension products issued by insurers shall disclose an illustrative target purchase price which is essentially the amount policyholders would accumulate, considering premium payment capacity, age and vesting age. Insurers must also disclose the possible risks involved in purchasing the targeted pension or annuity rate. An annual report indicating the current accumulated or available amount, expected accumulated value on the date of vesting based on gross returns and the likely annuity amount based on then prevailing annuity rates must be disclosed, said the Irdai circular. Except for yearly disclosure, all rules for these products are effective immediately.
Training of agents
Insurers have been asked to ensure they impart periodic training to agents and intermediaries before they are allowed to sell Ulips.“The regulator has emphasized on agents and intermediaries having a sound understanding of equity markets, including the risks involved, before they give advice to policyholders . This, if done right, can significantly improve customer experience," said Chopra.
With these modifications and certain new regulations, Irdai seems to be doing all it takes to make life insurance products less complicated and the purchase process more transparent.