Insurance industry of India is ranked as the 4th in corruption list of top ten corrupt industries. It was followed by financial services such as banking and insurance with 10 per cent. Insurance in India is a flourishing industry, with several national and international players competing and growing at rapid rates.

Thanks to reforms and the easing of policy regulations, the Indian insurance sector been allowed to flourish, and as Indians become more familiar with different insurance products. This growth can only increase, with the period from 2010 – 2015 projected to be the ‘Golden Age’ for the Indian insurance industry.

In the insurance sector, like in any other financial service sector, keeping the vulnerable public protected from unfair practices is of utmost importance. Unfair practices could arise in a scenario of increasing number of insurers, intermediaries and insurance products and severe competition for business.

To address these concerns, IRDA already has in place regulations laid down for intermediaries, which among others address issues relating to the point of sale. IRDA Regulations also address the concept of Needs Analysis in a general way.

There is, however, scope to modify and improve upon the existing provisions in order to ensure that the prospects are guided properly to take informed decisions regarding insurance products. In line with the nation’s approach to economic reforms, the IRDA has initiated reform measures around the principle of sustainable growth along with public accountability. Therefore protecting the interests of policyholders is the main mission of IRDA and the Authority’s efforts have been constantly directed towards this end.

The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. In 2002, the Authority brought out the IRDA (Protection of Policyholders’ Interest) Regulations.

The Regulations define the obligation of insurers and intermediaries and lay down time-frames for compliance that cover the entire life cycle of a product, starting from its sale to servicing, including at the point of claim. On the one hand the insurance market is booming in India with Warren Buffett’s Berkshire Hathaway Inc. entering the Indian insurance market through a retail distribution tie-up with Bajaj Allianz General Insurance, on the other hand policyholders are moving post to pillar to get their genuine claims.

Motor premiums have come down by nearly 40 per cent over last year, after the IRDA allowed insurance companies the freedom to price their policies. As the premiums crashed, almost all the insurance companies are making underwriting losses.

Now, insurance companies have been given the freedom to offer more features. For example, a policy may undertake to pay the full replacement value of a car component. But, the features will come with a cost. As per the new norms which were circulated to general insurance companies by the regulator, the insurers are now permitted to file variations in deductibles set out in the tariffs.

Most non-life insurance products, including health insurance, are essential, but most people don’t like to buy them since they do not give anything in return. Though the ‘simple’ products are rather appealing, not everyone gives them the thumbs up.

The opening up of the insurance sector has given insurers the opportunity to bring about many innovative designs and concepts in product development. Spurred by competition triggered by this opportunity, the market has seen a plethora of new products. This has raised new concerns regarding availability of information to prospects and policyholders.

Need analysis:

Today, the IRDA Regulations address the concept of Needs Analysis in a general way. There is, however, scope to modify and improve upon the existing provisions in order to ensure that the prospects are guided properly to take informed decisions regarding insurance products. Generally, consumers do not have enough information to determine whether the product recommended to them is the ideal one.

Not only would they not know if it was ideal or not, they quite often would not have understood what their commitments to pay premiums/various charges are nor would they have understood how exactly the policy works and what the benefits and or returns would be.

While it is required of intermediaries to give complete information including benefit illustrations about the product recommended at the point of sale, a structured Needs Analysis that takes into account factors such as age, annual income, financial situation and needs, investment objectives, intended use of the policy benefits/returns, financial time horizon, existing assets and insurance policies, liquidity needs, tolerance for fluctuations in value of the fund, tax status etc is necessary to ensure that the product recommended is most suitable for the prospect.

Is it sufficient to require -in a general way- to ensure that the needs of the client are taken care of? Perhaps there is a need to be more specific. There is a need to set standards and procedures for Needs Analysis before an intermediary makes a recommendation to a prospect about a particular product.

Protection of the interest of policyholder:

IRDA has the responsibility of protecting the interest of insurance policyholders. Towards achieving this objective, the Authority has taken the following steps:

IRDA has notified Protection of Policyholders Interest Regulations 2001 to provide for: policy proposal documents in easily understandable language; claims procedure in both life and non-life; setting up of grievance redressal machinery; speedy settlement of claims; and policyholders’ servicing. The Regulation also provides for payment of interest by insurers for the delay in settlement of claim.

• The insurers are required to maintain solvency margins so that they are in a position to meet their obligations towards policyholders with regard to payment of claims.
• It is obligatory on the part of the insurance companies to disclose clearly the benefits, terms and conditions under the policy. The advertisements issued by the insurers should not mislead the insuring public.
• All insurers are required to set up proper grievance redress machinery in their head office and at their other offices.
• The Authority takes up with the insurers any complaint received from the policyholders in connection with services provided by them under the insurance contract.

The Authority is sensitive to the fact that information asymmetry is a reality in the market and that it is necessary for all stakeholders to work towards its removal. In this backdrop, the importance of giving policyholders clear and precise information with regard to insurance products needs no further emphasis. The Authority has brought out the IRDA (Insurance Advertisement and Disclosure) Regulations in 2000 to ensure that asymmetry is addressed. It has been IRDA’s constant endeavor to permit only correct, easily understood depiction of the product features. Apart from the Regulations, IRDA has also issued guidelines in this regard.

Need of utmost transparency:

The insurance sector in India has come full circle from an open competitive market to nationalization to a liberalized market again, over a period of almost two centuries. While the Regulator has made continuous efforts to demystify complex products by requiring insurers to follow certain guidelines relating to disclosures especially in respect of the new breed of products and carry out adequate safeguards while advertising about products etc, there is a need to constantly scale up the efforts to ensure that the required information is made available to prospects and policyholders and that the “information gap” between them and the insurers is reduced or removed.

There is need of utmost transparency at the time of sale and promotion so that the policyholder is made to feel confident that he or she is being given complete information regarding the product. Provision of clear and complete information about products is not only a fundamental expectation but also a necessity to ensure fair treatment to policyholders by insurance companies.

It is a necessary disclosure obligation of insurance companies. Contractual documents developed by insurance companies should take care of the interests of policyholders by giving them the required information in a clear and simple manner. Legal documents are complex and not comprehensible to the insured persons.

It is observed that insurance policy documents are long and run into several pages making it almost impossible for policyholders to read them. While, more than 30% of the Indian population is illiterate, even the literate population will not understand complex legal language. In view of this, providing product information in a simple and easy to understand manner is very crucial.

Rampant malpractices:

Rampant malpractices are bleeding public sector insurance companies and they need to restructure their activities so as to bring about change in the sector. Claims ratio is as high as 150 per cent and malpractices are too much in health sector.

The structural inefficiencies are hampering development of the sector. Insurers need to develop a framework for collecting statistics and databases, develop comprehensive products which are transparent and user-friendly. Health insurance should be made mandatory for all jobs and employees should be encouraged to go in for CGHS schemes as well as policies provided by insurance companies.

The health care sector is estimated at Rs 80,000 crore and is expected to grow by Rs 10,000 crore every year. Expenditure on health insurance is expected to touch six per cent of household income up from current two per cent. Government spending accounts for less than 25 per cent of expenditure on health while in developed countries the figure is in the range of 40 to 60 per cent. Although the insurable population is placed at two million the potential market is placed at 315 million people. Insurance companies too are keen to resolve the stalemate as they do not make money from health insurance. Another key area where business is impacted is in the area of mergers and acquisitions.

Nearly 37 per cent of respondents opined that corruption could impact the valuation of a company thereby denying shareholders of a fair price. Moreover, it could also make it difficult for them to find a suitable business partner, thereby seriously impacting the growth prospects of the business.

Areas of concern & solution providers:

Insurance consumers face  problems concerning non-receipt of premium receipt, non-receipt of policy, non-Renewal, cancellation, transfer of policy, wrong plan & term, nomination, assignment of policies, non-payment of surrender value, maturity value, repudiation of claims, delay in settlement of claims, disputes regarding paid/ payable premium, non-receipt of renewal notices, non-availability of motor third party cover only etc.

There are many agencies available for redressal of grievances of insurance consumers. Grievance cell of IRDA, Insurance Ombudsman, Consumer Disputes Redressal Agencies set up under the Consumer Protection Act 1986, Director of Public Grievances under Govt. of India, are some of the important grievance redressal machineries.

Further the safe guards in the interest of insurance consumers, in the form of standing instructions have been provided, for compliance by insurers, under  IRDA’s Protection of Policyholders’ Interests Regulations, 2002.

IRDA has communicated to  all insurance companies that Grievance Redressal Mechanism of insurance companies as well as of Insurance Ombudsman is to be communicated to all policy holders with policy document in a prescribed manner containing addresses, contact no., email ID of office of insurance company, higher official of insurance company and of Insurance Ombudsman.

Grievance Cell of IRDA does not settles the grievances of insurance consumers but it effectively facilitates speedy settlement. Complainant is required to first approach insurer and if not satisfied then to the Grievance Cell of IRDA. Matters regarding delay & non-response pertaining to policies and claims from insurer are taken up by IRDA Cell with the concerned insurer.

Complaints against the public sector insurance companies (LIC, GIC, United India, National, New India, and Oriental) can also be lodged with the Director of Public Grievances (DPG) in the Cabinet Secretariat of Govt. of India

Fine-tuning of provisions:

IRDA is fine-tuning of what has happened so far to form the current infrastructure. A fair amount of steps have already been taken by the insurance regulator. The Regulator’s moves on improving policyholder protection are another step to strengthen its position.

Following widespread complaints about lack of transparency, IRDA asked insurers to disclose the commission and fees that policyholders paid. The Regulator took a number of steps in 2010 to ensure that insurance products serve its basic purpose. It gave policyholders an option to buy the insurance plans, which were more transparent, less expensive and long-term in nature. Going forward, the regulator is likely to set up a policyholders’ protection fund.

The fund will not only work towards protecting the interests of policyholders but also spreading awareness about insurance. Though the regulations are in favour of policyholders, they are likely to adversely affect the companies. Also, some companies have deferred their break-even targets.

IRDA’s Protection of Policyholders’ Interests Regulations, 2002 prescribes that decision on proposal is to be communicated within 15 days of receipt of proposal to the proposer, copy of proposal to be given to insured within 30 days of acceptance, Grievance Redressal procedure and claim procedure to be communicated to insured with policy document.

Life insurance claim to be paid within 30 days of receipt of claim papers otherwise saving bank interest rate to be paid for delay. In non-life claims surveyors to be appointed by insurer within 72 hours of claim intimation, Survey report to be submitted by surveyor within 30 days of date of appointment, Offer of settlement to be given by insurer within 30 days of receipt of survey report and payment of claim to be made within 7 days of receipt of offer of acceptance.

Delays in payment by insurer would result in interest payment 2 % above bank rate. Insurer will respond within 10 days of receipt of insured’s communication regarding matters of change of address, nomination & assignments, information on bonus, loan, disbursement of loan, issue of duplicate policy, issuance of endorsement, guidance on procedure of registration & settlement of claim.

Rejection of insurance claims:

An insurance company can add to the trauma by rejecting the insurance claim filed by the claimant. Companies should not reject an insurance claims without a reason. There’s usually a valid justification for turning down a claim, even though such an action could damage their image.

Typically, insurance claims are rejected because of suppression of information that defines the risk involved in insuring the individual. This could be health-related facts, family history or even the income level of the individual. Advisers and agents, who are the interface between the company and the policyholder, play a vital role here. Most of the time, they are the ones filling up the proposal forms with information provided by the buyer.

Some agents and advisers fill in incorrect information-either by mistake or deliberately. In many cases, the buyer is unaware of his own condition and, therefore, is not able to provide the information. Insurers too are no sacred cows and often infringe the rules they have themselves put in place.

Towards the fag end of the financial year, when taxpayers are scrambling to buy insurance policies and the insurance companies need to notch up sales targets, some of the proposals are underwritten without adequate scrutiny. The field force is encouraged to somehow grab as much business as possible. The policies that are issued in haste have a high probability of repudiation in case of a claim being raised. Most rejected claims are of policyholders who lodge claim within the proximity period. Such claims are usually investigated thoroughly by the insurance company.

At a strategic level, there is much that can be done to influence political, judicial and public opinion about insurance. Any insurance claims professional, asked to define their mission, is likely to formulate a response focused on paying the right level of compensation to the right people as quickly as possible, consistent with a fair and consistent evaluation of each claim.

Unfortunately that is often not the perception. Whilst entrenched adverse opinions can be hard to alter directly, much can be done by lobbying collectively and coherently on issues where the public interest is very clearly aligned with the interests of the industry. One possible area of influence is in relation to alternative dispute resolution. Insurance industry is a very capital intensive industry and many private players have expanded their business rapidly and hence are in need of more capital to commensurate with business growth.

This can happen only through IPO and consequent listing in the stock exchange. This will bring in lot of transparency in the operations of the insurance industry and create more accountability.

Over a period, mergers and acquisitions will also happen in this industry. Adoption of technology in all the operations is very imperative for all insurance companies as insurers have to deal with lots of data. Public sector companies have lagged behind in this initiative PSU’s are late adaptors of centralized database architecture. Specifically with reference to health insurance, there is a need for better and more seamless coordination between hospitals, third party administrators and insurance companies.

There must be better coordination between all these three important stakeholders and customers as well. There must be standard data protocol via which information flow can happen seamlessly between insurance companies, hospitals and TPAs. Then there must be regular meetings to sort out any thorny issues, keeping in mind the customer’s interests. There must be better regulations on the health service providers.

With increasing competition in the general insurance sector, the superior customer service is the biggest differentiator. Today the differentiator is only the price and the customers are shopping around for the cheapest policy. But as is the case in any consumer industry, the customers will find out that cheapest is not always the best and go for assured customer service.

A lot of progress has been made in the sphere of improving customer service with the introduction of ‘cashless’ service in health insurance and motor insurance claims settlement. But there are reports that in the case of big fire claims, some companies tend to delay payment or avoid the claim which undermines the confidence of the consumer. So, over a period of time, only those companies which give prompt and satisfactory service to its clients in all spheres will succeed. There are a number of possibilities, including agreeing steps which must be taken before proceedings are issued and providing for mediation.

By developing a common position on these issues and offering industry-wide solutions, insurers have the opportunity to improve outcomes for the public at large, help those responsible for the system to enhance their service and their reputation and provide a better environment for the quick and fair resolution of claims.

For this insurers have to ensure fastest and correct settlement of claims, use technology to settle claims under pre-underwritten policies, expand the cashless settlement segment, and have a sturdy grievance redressal system. Framing regulations is no solution. The regulator needs to keep in mind that there is a fine distinction between regulations and controls.

Regulations lay down norms while controls have a propensity to micromanage institutions.  Regulator is taking care to ensure that regulations do not slide into controls.

The basic philosophy underlying the new policy is to improve the products and efficiency of the system.  This is sought to be achieved partly by creating a more competitive environment.

The growth of the insurance industry depends upon the efficiency of the insurance companies.  By detariffing a greater element of competition is being injected into the system.  The rate of growth of the industry in the post liberalization period has been faster.

It has also developed in terms of product innovation and the use of alternative distribution channels.

The mission of the insurance sector in India should be to extend the insurance coverage over a larger section of the population and a wider segment of activities and to provide hassle free claim services. Hence the other side of the coin should not be ignored at all.

By: Jagendra Kumar, Published in Life Insurance Today, June, 2011