It may be a little harsh on policyholders who do not pay their premium on time but a uniform definition of lapse of insurance policy by Insurance Regulatory & Development Authority (Irda) is likely to ensure that more covers stay in force.
A committee headed by Irda’s member actuary R Kannan has suggested a grace period of 15 days for policyholders who pay premium on a monthly basis, while a 30 days grace period will be available to those who pay their premium annually, half-yearly or quarterly.
For a large number of policyholders, who at present enjoy a grace period of up to 60 or 90 days, it will mean that they have to pay the premium sooner than they have been used to. In order to ensure a level playing field, both existing and new policyholders are covered under the uniform grace period.
“There is no uniformity between one player and another. There is a huge communication gap as the grace period is not mentioned by the regulator. Irda has taken this step to harmonise the system,” Kannan told Business Standard.
He said that the panel was of the opinion that the move will help companies get high investment yield.
Irda’s recent study on lapsation and its impact on the life insurance industry shows that in terms of premium, the lapse rate increased to 6.95 per cent at the end of 2006-07 from 4.40 per cent in 2002-02. During the same period, the value of the lapsed premium stood at Rs 20,521 crore.
While insurers supported the panel’s recommendation, they are not too enthused about the change in the period during which a policy, on which premium has not been paid, can be revived. At present, an insured person can revive a policy on which premium has not been paid for two-three years. This period is proposed to be raised to two to five years. To revive a policy, the insured can pay the unpaid premium and interest on it during the specified period.
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“Extension of the revival period certainly helps the customer but the insurance company has to be careful that revival is not being sought after health risks surface. Therefore, revival after a long period of lapse should normally be subject to underwriting and possible medical assessment,” said IDBI Fortis Life Insurance Managing Director and Chief Executive Officer G V Nageswara Rao.
“The uniform grace period will help Irda bring about standardisation in the system and easy access to comparable data and in turn provide a benchmark against the industry to find where the company stands,” said Max New York Life Corporate Vice President for product management.
The insurers are of the opinion that it is more necessary to make the payment of premium convenient to the customers to ensure that policies do not lapse. “Along with tightening of grace period, it is also necessary to incentivise the policyholder to pay premium in advance if he so desires. At present, premium paid in advance is allocated only on the due date, which discourages policyholders from paying in advance. If this can be relaxed, it would help in preventing lapses” Rao said.
“Not many policies are revived long after they lapse, so it is unlikely that extending the revival period would have a material effect,” added an executive at ICICI Prudential Life.
Over the last five years lapse rate (insurance policy discontinued by the policyholder) by number of policies has come down to 6.64 per cent in 2006-07 as compared to 7.60 per cent in 2004-05. However this is higher than 5.62 per cent in 2002-03. Lapse rate by premium, increased from 4.40 per cent to 6.95 per cent, increasing year by year except for a small drop in 2006-07.