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The Indian insurance sector has long been hobbled by poor regulation and rampant mis-selling. The introduction of products such as unit-linked insurance plans (Ulips), aggressive selling tactics of corporate agents and banks, and front-loading of commissions have been the chief bugbears.
However, with the promulgation of the Insurance Laws (Amendment) Ordinance, 2014, under the Insurance Laws (Amendment) Bill, 2008, consumers have something to cheer about. The companies benefit from the increase in foreign direct investment (FDI) cap to 49 per cent from the existing 26 per cent. The ordinance also promises to bring about a number of positive changes, redressing at least some of ills plaguing the sector.
The Insurance Regulatory and Development Authority of India (Irdai) will get more teeth to crack down on errant companies and impose penalties. It will also enable Irdai to regulate key aspects of insurance company operations in areas like solvency, investments, expenses and commissions, in line with global best practices.
Consumers will benefit from a better distribution network, grievance redressal mechanism and faster claim processing, among other things. "The ordinance is geared towards making insurance a hassle-free experience for customers. It gives more clarity and power to insurance regulator Irdai," said K K Mishra, chief executive officer (CEO), Tata AIG General Insurance.
An increase in foreign capital would benefit customers indirectly. "The biggest benefit would be in innovative product offerings that will reach insurance customers as greater equity participation will also bring domain capital from developed markets," said Ashish Vohra, senior director & chief distribution officer, Max Life Insurance. "More capital will mean an opportunity for insurers to invest in distribution and other infrastructure such as technology. This will enhance customer reach, service and engagement."
A few key areas where the ordinance could benefit insurance customers:
Measure: The ordinance allows assignment and transfer of policies.
Impact: These can be useful for transferring investment-oriented life insurance policies from one person to another. Experts are, however, concerned about its ethical use and feel actual operation will need supervision. To curb misuse, a company has been given the right to reject such transfer if not in the interest of the policyholder. The reason for rejection has to be conveyed to the holder within a month.
The new norms will also help recognise partial assignment, transferring a portion of the interest in a life insurance policy to banks or lenders. Let's take an example to understand this. A person takes a Rs 50-lakh loan and simultaneously takes a policy of Rs 50 lakh, and assigns it to the bank. Now, suppose the person dies after repaying the loan amount of Rs 30 lakh for 10 years. This means Rs 20 lakh is due to the bank. As of today, there is ambiguity surrounding the insurance policy money that can be assigned to the bank - does the bank have the right over the full Rs 50 lakh or only the Rs 20 lakh due to it. The new norms, however, clearly state the due amount has to go to the bank and the rest to the nominee.
Measure: The ordinance has done away with two types of nominees, beneficiary and collector. There will be only one nominee.
Impact: Many claims are rejected or delayed due to ambiguity on nominee details. The new norm will reduce delays and leave little scope for litigation. "Earlier, the nominee had no legal right or title, and his role was confined to collecting the money and distributing it among legal heirs. Now, the beneficiary nominees - be it parents, children or spouse - get complete legal rights over the insurance proceeds in case the policy holder dies. So, in future, insurance could be used to create inheritance," said Vighnesh Shahane, CEO, IDBI Federal Life Insurance.
Measure: A company will be responsible for misconduct of an agent and violation of any code of conduct.
Impact: For any misleading information the agent gives you, you can hold the company responsible. "This can act as a big deterrent for mis-selling and you can expect the company to set up a mechanism wherein you are informed of each and every detail of the policy before you buy," said Anuraag Sunder, managing consultant, PwC.
Measure: No claim can be repudiated after three years of the policy issuance under any circumstances.
Impact: Under present regulation, a company cannot reject a claim after two years of policy issuance, except if the insurer is able to prove it as mis-statement or fraud. Now, insurers will have to pay all claims after three years, even if they detect a fraud later. "Companies will have to make their underwriting process airtight and robust to ensure fraudulent claims don't arise after three years. The focus will be to issue policies to those who meet the insurers' criteria," said Shahane.
Measure: Health insurance is now recognised as a separate vertical.
Impact: Earlier, companies selling only health insurance were classified as general insurance firms. Under the new ordinance, non-life health insurers insurers seeking permission to start a new business will need to apply for a health insurance licence. With competition increasing, consumers can expect better products and services in this space. The increase of proposed capital from Rs 50 crore to Rs 100 crore also brings in serious players, which is good news for consumers. "Recognition of health as a separate line of business facilitates allocation of suitable capital, resources and management attention towards aspects such as distribution and product development. Now, agents would be permitted to become agents of health insurance companies, in addition to one general insurance and one life insurance company. This has the potential to unleash more energy into the system." said Sunder of PwC. However, general insurance companies can continue to apply for a general insurance licence and will be permitted to sell health insurance as part of the overall general insurance portfolio.
Measure: Higher penalties on mis-selling.
Impact: Insurance firms may have to pay a penalty of Rs 1 lakh each day, subject to a cap of Rs 1 crore for failing to meet Irdai guidelines. The earlier penalty was capped at Rs 5 lakh per incident of violation. The penalty for rebating, a practice where the agent returns part of his commission to the policyholder, would be increased from Rs 500 to Rs 1 lakh. "The higher penalties will ensure pre-sale and post-sale processes are made more accountable and the turnaround time for processes such as handling claims, complaints and despatching policy documents will be reduced. Need-based selling will increase and a person will be sold policies depending on risk profile, income level, family background and investment timeframe. Today, it's pretty much one size fits all," said Shahane of IDBI Federal Life Insurance.
Measure: Irdai gets powers to cap agents' commissions.
Impact: The ordinance gives Irdai the power to prescribe caps on commission to agents, within the overall cap on expenses of insurers. According to the earlier Act, the first-year commission for companies less than 10 years old was capped at 40 per cent of the first-year annual premium, while second and third-year commissions were capped at 7.5 per cent of the annual premium. The commission for subsequent years is capped at five per cent of the premium amount. For companies more than 10 years in the business, the first-year commission is capped at 35 per cent. The ordinance could give Irdai the freedom to rationalise commissions, which could curb agents' propensity to churn policies after the first year.
DRAFT REGULATIONS: AN EXTRA LAYER OF PROTECTION
- Irdai's revised draft regulations on consumer protection states insurers must place all product info in public domain
- Framework for consumer rights, including right to requirement of fair disclosure, suitable advice and protection against unfair contract terms
- Products should clearly state scope of benefits, extent of cover, and explain warranties, exceptions and conditions of cover
- Life products should mention if it comes with profit or without profits
- Riders on products should be clearly spelt out with regard to scope of benefits
- Insurers should formulate an insurance awareness policy to educate customers
- Companies should set up a policyholder protection committee and formulate grievance redressal mechanism
- Name, address of agent/insurance intermediary should be stated in policy document or any such communication
- Agents, intermediaries shall strictly adhere to Irdai advertisement regulations
- Comments from all stakeholders on draft regulations will be accepted till January 19
