Late last week, the regulator sent out six draft regulations on standardization of products, product design, investment norms, bancassurance and reinsurance.
The Insurance Regulatory and Development Authority (IRDA) is moving quickly on the directions of the finance minister. Late last week, the regulator sent out six draft regulations on standardization of products, product design, investment norms, bancassurance and reinsurance. The draft guidelines on bancassurance is up on IRDA’s website, but the remaining drafts are with the industry, which is expected to give its feedback in three week’s time.
We discuss four major reforms in product structure that should matter to you.
Product classification
So how is it different from an Ilip? It is different because the costs are capped just like in unit-linked insurance plans (Ulips). Ilips in their previous format did not have any cost caps. So the insurer could deduct any amount as expense and credit your policy account with the balance. But now there is a cap on this expense. Just like Ulips, the reduction in yield, difference between gross yield and net yield, can’t be more than 4% in the fifth policy year coming down to a difference of 2.25% in the 15th year and thereafter.
Products with cost caps: The good news is that the new product category called index-linked insurance plan, or Ilip, has been replaced by variable-linked insurance plan. A variable-linked insurance plan (VIP) is an investment plus insurance product that guarantees a minimum rate of return also called the floor rate and pegs the additional return to an index in case of a variable-linked insurance plan.
Mint Money has always argued for similar cost caps on products such as Ilips that are now classified as variable-linked products. As unbundled products, where costs can be segregated, they should be brought on the same platform as that of Ulips.
Even other categories of non-linked VIPs will have to conform to cost caps. Non-linked VIPs can be of two kinds—participating and non-participating. A distinctive feature of a non-participating product is that the returns are guaranteed upfront. A participating product, on the other hand, gives you a bonus every year depending upon the performance of the participating fund. This bonus gets added to your maturity or death benefit.
Now as VIPs they will have to offer a minimum guaranteed rate of return. On top of it, the insurers can either offer an additional variable interest rate that will have to be stated usually in the beginning of a policy year (for non-participating VIP) or can offer a bonus that will get added to your policy account at the end of the year (for a participating plan).
Products without cost caps: Other categories of products, namely traditional participating and non-participating plans, exist but with no cost caps. A typical traditional participating plan will guarantee you the sum assured or the death benefit either on maturity or on death. Additionally, the plan will declare a bonus depending upon the performance of the participating fund. This bonus gets added to your sum assured.
A non-participating plan, on the other hand, will explicitly tell you at the time of buying the policy what you will get as final maturity or death benefit. “One of the things on the table was to reduce the arbitrage between traditional and non-traditional plans. That hasn’t happened since the costs are not capped in traditional plans. The industry is doing almost 60% of its business in traditional plans and this situation is likely to continue,†says Kapil Mehta, managing director and principal officer, SecureNow Insurance Broker Pvt. Ltd. It is not easy to segregate the charges in a traditional plan since the money from different traditional products is invested in one big fund and the charges and bonuses are paid from that fund. “But we can reduce charges like commissions. Ulips don’t pay more than 6-7% to the agents after the cost caps so the commissions on traditional plans can be brought in line with Ulips,†suggests Mehta.
To get a handle on charges, IRDA has proposed a with-profits committee. “This committee will consist of an independent board director, CEO, appointed actuary and the peer review actuary. The main function of this group would be to monitor expenses in traditional plans. This is a positive step,†says V. Viswanand, director and head (products and persistency management), Max Life Insurance Co. Ltd.
To compare costs look at the benefit illustration that comes with all insurance products. It shows you your final returns after costs have been factored. So while the reduction in yield in a 15-year Ulip can’t be more than 2.25%, there are no caps for traditional plans. “The costs in traditional plans are almost double the costs in Ulips,†says Mehta.
However, unlike the present norm where the reduction in yield is shown for both the illustrative rates of 6% and 10%, IRDA has proposed that reduction in yield be shown only in the case of 6%. “If Ulips are shown at an assumed rate of 10%, traditional plans should also be shown on the same rate of return so the reduction in yield in both cases of 6% and 10% are clearly visible,†says Viswanand.
Product standardization
To fast track product clearance, the finance minister had suggested a list of standard products that could move to a “use and file†system. Currently, all products follow the “file and use†procedure, which means they need to be filed with IRDA and get its approval before they can be sold. Under “use and fileâ€, the insurer will submit its product to IRDA and if the regulator does not raise any objection within 15 days, the insurer will be allowed to market the products. The regulator has come out with a list of 18 standard product categories. These are regular insurance products that conform to the product design and do not have any innovative features or in-built riders or explicit guarantees.
The industry fears that in standardizing the product, IRDA may have tariffed it. “The draft says that pricing of the standard product should be based on the target market and not on a company’s individual assessment of its adequacy and underwriting experience. That implies that the pricing assumptions for a standard product will have to be the same for the target customer set. In other words if we are to offer standard products we will have to offer a fixed premium regardless of our individual underwriting and price assessment of a product, quite similar to a tariff regime,†says Viswanand.
Commissions
IRDA has also reduced commissions on short-term policies. In case of individual insurance policies, the maximum commissions on a single premium policy stays at 2% of the premium. For regular premium policies, a policy with a premium paying term of five years will not pay more than 15% in the first year, 7.5% in the second and third year and 5% subsequently. As the premium paying term increases, the commissions payable in the first year increases up to 35% if the company is more than 10 years old and 40% if the company is less than 10 years old. This maximum commission is applicable on policy terms of 12 years and above.
Surrender charges
The draft guidelines for individual non-linked insurance products have also altered the guaranteed surrender value (GSV). As per the previous draft, you will be eligible for a GSV after two years if the policy tenor is less than 10 years and three years if the policy tenor is above 10 years. However, the benefit has reduced.
Now if you surrender in the second or third years, the GSV will be 30% of the total premiums. In the previous draft, it was 50%. It becomes 50% by the seventh year if the premium paying term is more than 7 years. For surrender beyond the seventh year, the insurer will have to file a surrender charge that will have to be cleared by IRDA. But what you get will be the higher of the guaranteed surrender value and the special surrender value (SSV). SSV reflects the current market value of the assets held against the policy and depends on the sum assured, bonus, policy term and the number of premiums paid.
Though GSV has been reduced, insurers feel it is good for the persistent policyholders. “Increasing the guaranteed surrender value means an insurer will have to account for that guarantee. In other words, reserves for the policy go up. But now the persistent policyholder’s returns won’t suffer,†says Viswanand.
The guidelines are still in the draft stage, but track this space for further developments.
