Category Archives: Insurance

IRDA Bans Highest NAV Guaranteed Products

Niladri Bhattacharya & Yogini Joglekar, Business Standard 14/5/12


The Insurance Regulatory and Development Authority (Irda) has asked life insurers to stop selling highest net asset value (NAV)-guaranteed products.

In a recent communication to all life insurers, the regulator has said, “The marketing of products labelled as highest NAV product shall not be allowed”. These products contribute almost 20 per cent to the total premium collection of life insurers.

Irda, in the past eight months, had informally expressed its discomfiture with such products at several fora. The regulator’s argument was that such products led to systemic risks associated with the way funds were managed and posed the risk of a heavy sell-off in equities when stock markets fell.

Highest NAV-guaranteed products are those that promise to pay the highest value the fund achieves during a certain period, say, five or seven years. However, to maintain that NAV consistently, insurers have to take risks by investing in stocks aggressively. That could lead to undue risks.

These products had become the largest selling unit-linked life insurance policies (Ulips), after the new guidelines on Ulips came in September 2010.

In another move, the Irda has mandated a minimum death benefit of at least 10 times of the annualised premiums in case of traditional products, as there were some products offering a limited death benefit. The regulator has also discouraged the use of single premium or limited premium payment term polices as these could impact the cash flow management of companies. Accordingly, Irda has proposed all polices have a regular payment option equivalent to the term of the policy.

Single-premium polices might be issued only under special categories.

“In most of these products, customers are being lured with the promise of a decent maturity benefit, but in case of claims (in the event of death), the benefits or the amounts are sometimes lower than the premiums. The basic underlying principle of a life insurance policy is it should have sufficient life risk cover,” said an Irda official.

The regulator has expressed reservations on policies offering “low” or “insignificant” life risk covers. Irda has pointed out three types of traditional plans on such grounds — products where the death benefit is defined as the return of premiums (with or without interest), products in which the initial death benefit is significantly high and reduces subsequently during the currency of the contract and products in which the insurance cover is insufficient/insignificant in relation to the premium i.e. products which are mostly meant for savings. “We would not allow such products. It was clearly a marketing gimmick from the insurers,” said a senior Irda official. In case of unit-linked policies, the Irda mandates a minimum sum assured guarantee of roughly 10 times of the annual premiums (in case of death). However, for traditional plans, there was no such mandate. The Irda is likely to come out with the final guidelines on product design soon, which would include all such details. It is not approving any products until life insurers design products according to the framework suggested.

"Lately more complex products are being designed and filed for F&U (file and use) clearance with the Irda. In the process of clearing these products, the Irda has noticed that features of several products are not in alignment with the best practices and, frequently, lack clarity. The efficiency of product clearance has been constrained by such features,” the Irda said in its communication.



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Charges on ULIPs and Traditional Insurance Plans

While the commissions on Ulips have gone down due to the cost caps, those on traditional plans continue to remain high

Deepti Bhaskaran, Mint 13/3/2012


Tremors were first felt by unit-linked insurance plans (Ulips) in 2009, when the Insurance Regulatory and Development Authority (Irda) decided to clean up the product to make it cost effective. In 2010, a full-fledged earthquake hit Ulips with the regulator cutting costs drastically. The Ulips’ loss, however, became traditional policies’ gain.

Back to traditional

According to Irda’s FY11 annual report, almost 60% of the first-year business was concentrated in traditional plans or what the insurers call non-linked business.

First-year premiums are indicative of the new business or policies procured by the insurers; a tilt towards traditional plans indicates that companies are selling more traditional policies. Agrees Gaurav Rajput, associate director marketing, Aviva India Life Insurance Co. Ltd: “Before the reforms, Ulips constituted 80-90% of the business but since then have come down to about 40-50%.”

The possible reasons: This return to traditional plans has been attributed largely to the consumer psyche of shying away from the volatile stock market and wanting the safety of guaranteed returns that traditional plans offer.

But there is another less visible truth—traditional plans offer agents higher commissions as compared with Ulips. Accepts G.V. Nageswara Rao, managing director and chief executive officer, IDBI Federal Life Insurance Co. Ltd: “The costs in Ulips are capped, hence commissions have shrunk considerably. Relatively speaking, traditional plans fetch higher commissions.”

Commissions in Ulips

In 2010, Irda capped the costs in Ulips as a percentage reduction in yield. So for Ulips with a tenor of at least 10 years, the cap was 2.25 percentage points. In other words, if the fund is performing at say 10% per annum, the final return should not be less than 2.25 percentage points for policies with a tenor of 10 years or more. Further, in order to give you more surrender value in case you decided to hop off mid-way, Irda announced cost caps during each year of the policy tenor.

Also See | The Commission Shift (PDF)

As a result of such strict cost caps, the commissions in Ulips shrunk considerably. According to Irda’s annual report, the average commission in Ulips as a percentage to premiums collected in Ulips was around 9% for the private sector in FY09 as compared with just around 4% in FY11.

Commissions in traditional plans

Compare the Ulip commissions with those of traditional plans and the trend has almost reversed: the average commission in traditional plans as a percentage to premium was around 8.47% in FY09 for the private sector; this increased to around 12% in FY11.

Says Kapil Mehta, managing director, SecureNow Insurance Broker Pvt Ltd: “Since these numbers are as a percentage of total commissions to total Ulips, the difference does not look very huge. But if you were to compare first-year premiums and first-year commissions, this trend will be more stark since commissions are highest in the first year.”

Unlike the cost cap that keeps commissions in Ulips low, commissions in traditional plans are guided by the maximum limit on commissions as defined in section 40A of the Insurance Act, 1938. According to this Act, an insurance company which is less than 10 years old can pay up to 40% of the premium as commission in the first year to an agent. In the second and the third years, the insurance company can pay a renewal commission up to 7.5% of the premium and 5% for the rest of the term of the policy. For companies that are more than 10 years old, the first-year commission is capped at 35%.

While the average first-year commissions in Ulip is about 5-8% because of the cost cap, in traditional plans it can go up to 40%.

Explains Rao: “Typically, short-term policies of less than 10 years have low commissions of up to 15%, but longer term policies typically up to 20 years have a higher commission of up to 35%. This is because the average ticket size of long-term policies is small and it is more difficult to sell long-term products.”

Focus on traditional policies

Since insurers have shifted focus from Ulips (which are not as profitable as they used to be) to traditional policies, it will not be incorrect to say that insurers are now selling high-commission products.

“The traditional portfolio has increased and since insurers are now focusing on long-term products they are selling long-term traditional products. Commissions in long-term products are higher than short-term products,” said an industry source, who didn’t wish to be named.

What it means for you?

Sadly, for traditional plans that double up as investment plans, the costs are not mentioned. But the data establishes a point: commissions in traditional plans are much higher and as insurers continue to do more business in traditional policies, commissions as a percentage to the traditional premium will continue to look up.

Traditional products are expensive investment products that usually give returns less than the inflation rate. In fact, in 2006-07, when the markets were witnessing a bull run and Ulips became very popular, the insurance industry largely condemned traditional products as those with low returns. But now that they are back on the popular demand of “guarantee seeking investors”, you should know that not only are you settling for lower returns but also paying a higher commission.


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Wealth Creation through Insurance

Insurance helps create wealth over long term

Jayant Dua, Financial Chronicle 23/2/2012


We all have dreams and want to achieve key milestones of our lives like building our home, funding education of our children, providing the best lifestyle to our families and many more. In order to achieve these dreams, one should have a financial goal in mind and work towards achieving it.

All of these goals can be achieved over a period of time and, hence, need robust planning. Wealth-with-protection solutions from insurance companies have been designed to ensure that you can save for these long-term goals in a systematic manner to receive the benefit of life cover and provide protection to your family.

Wealth-with-protection solutions play a tripartite role of regular savings, protection and providing tax benefits.

How much insurance does one need? While there may be many ways to protect family against uncertainties of life, none has the charm of insurance products — the surest way to mitigate risk. Not just that, for working individuals, it is the best way to regulate savings. Some of the important things one must consider before investing in any insurance policy are – coverage, benefits in the long run, term and the premium amount to be paid and your income so that you do not face a concern over premiums.

Would it be a good move or a bad move? We need to first talk about fundamentals of insurance and then mull over the policy decisions.

Young professionals, today, are financially independent. They manage their finances and they also support their families, either partially or totally. In such a scenario, planning of your life insurance needs is absolutely critical so that in case of any unfortunate event like an accident or a sudden demise, the family doesn’t go through a financial trauma and plans for the family are not disturbed.

Why should I start planning my wealth savings now? Most people tend to push this investment for their older age, but one must realise that there are many benefits from buying these policies early on. When you opt for life insurance, you qualify for multiple benefits such as tax deductions, protection and capital gains over a longer period of time. It also instills the habit of saving, and builds financial discipline, thus, ensuring peace of mind in the long run.

The plans could be based on either traditional or unit-linked insurance policy (Ulip) platform. Types of wealth-with-protection solutions available in the market are as below:

>> Whole life plans: These plans enable one to meet financial goals and also gives financial security over an entire lifetime.

>> Single premium plans: Single premium plans strive to give a guaranteed return on maturity that is tax-free and the financial security of a life cover. Some plans give customers a choice of the single premium amount they want to invest.

>> Endowment policies: An endowment policy is a life insurance contract designed to pay a lump-sum after a specified term (on its maturity) or on death. Typical maturities are 10, 15 or 20 years up to a certain age limit. Some policies also pay out in the case of critical illness.
Policies are typically traditional with – profits or unit linked (including those with unitised with-profits funds).

>> Highest NAV products: As an informed investor, you appreciate the potential of equity markets to generate wealth over the long term. You also understand that market volatility can impact your investments and, hence, you are looking for investment options that enable you to diversify your risk to suit your investment needs. These policies can lock in your gains and safeguard your investments from potential downsides.

What make these policies so convenient are the other joint benefits that come along. The illustrations in the policies make these policies easy to understand and provide an overview of how your life insurance policy may perform over the years. Apart from creating wealth in the long run, these solutions also offer key benefits like death benefit and survival /maturity benefit. Riders or the special benefits can be availed by the policyholders in addition to the life insurance cover by paying a little additional premium. In some life insurance policies, you can also avail a loan against the life insurance policies.

Plans as per needs: You can avail insurance plans as per your needs and requirements. If you want to save for your child, you can go for children insurance plans providing you with returns at certain important milestones of your children’s life like their education and wedding. If you want to save for your retirement, you can invest in pension plans either in Ulips or in simple endowment plans depending upon your risk appetite.

Multiple investment options: There are two primary investment options within wealth-with-protection solutions in case of a Ulip, self-managed option and guaranteed option. The self-managed option gives you complete access to invest your premiums in well-established suite of investment funds, ranging from 100 per cent debt to 100 per cent equity. Guaranteed option is where your investments are fully managed by your insurance provider. Apart from these conventional options, companies also offer unique choices like trigger portfolio, lifecycle option to best manage your investments.

Begin doing what you want to do now. We are not living in eternity, we have only this moment, sparkling like a star in our hand and melting like a snowflake…wrote philosopher Francis Bacon Sr.

It is said that destiny is not by chance, but by choice. While this may or may not apply to all aspects of life, when it comes to financial security of our near and dear ones, it isn’t very far from the truth. One of the many steps to shape our financial destiny is to provide adequately for the future. That’s where insurance comes in. It is time we take steps to paint a fair picture of what one needs to provide for.

(The writer is a CEO of Birla Sun Life Insurance)


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why IRDA may be feeling Sebi-ish

As the life industry contracts, why Irda may be feeling Sebi-ish

Degrowth in the life insurance industry has brought the knives out. Its finally the industry vs the regulator. And that’s how it should be

Monika Halan, Mint 15/2/2012


The Rs2.9 trillion Indian life insurance industry has, for the first time since privatization in 2000, seen contraction over two consecutive financial years. Fiscal 2010-11 saw a shrinking of 20% and the full year 2011-12, estimates the insurance regulator, will contract 15%. This means that enough of us did not buy an additional policy last year or this year, or did not renew an ongoing policy, or that new investors were not found by insurance sellers.

It is a cause for worry when an industry stagnates. But if there is contraction, the worry changes to a call to action. While in most industries, it is the companies that get active and lobby the government for sops and policy relaxations, when it is the life insurance industry that sees the contraction, the wrinkle is equally on the brow of the government. You wouldn’t have guessed that the Rs1 lakh you did not fork over for another junk policy was going to cost the government its disinvestment plan. And that is partly the reason for the ministerial worry and action. A bit of history first. For decades the life insurance industry in India was synonymous with the Life Insurance Corporation of India (LIC) and being government-owned, this meant that its crores of assets became a sort of a default sovereign wealth fund for the Indian government. Market falling at an inconvenient time would see the call going from North Block to the office of the LIC chairman. The need to drum up interest for a public sector IPO would see help from the defacto investment chest for the government. With the entry of private sector firms, though the market share of the state-owned behemoth has fallen, its clout surely has not within the government in terms of the quantity of assets under management. The falling business numbers in life insurance in general and LIC in particular, therefore, have worried the ministry of finance mandarins enough to call for an industry meeting in Delhi. And the regulator was not invited.

The meeting held in Delhi two weeks ago with the life insurance chiefs saw the knives coming out. Unlike other times, this time it is not the media or the capital market regulator that was the target, but the Insurance Regulatory and Development Authority (Irda) itself. For an industry that is wary of going public against the regulator (insurance companies are not even allowed to form an independent association, they need to work through the Life Insurance Council, an Irda-constituted industry body) the mini free-for-all saw a public venting against the regulator. The industry is angry over flip-flops in regulation and knee-jerk reactions to issues. It accuses the regulator of killing the pension product and of not thinking through some of its decisions. A part of the angst has been about the attitude of the regulator that, they say, wants to project itself as a messiah of consumers and sees all companies as offenders. But, says one insurance CEO, hurting the companies may end up hurting the consumers.

I agree that some of the consumer-interest communication that goes out from Hyderabad, where Irda is based, is immature. Take, for instance, the TV ad that showed the consumer being saved by the super-man like regulator or the calls that the regulator’s staff seem to be making to customers to scare them into changing a unit-linked insurance policy (Ulip) to a traditional plan—but to be fair, some part of the clean-up by Irda, that was pushed by the government to do so in 2009, has been good for consumers. The Ulip product has got cleaned up to a large extent and no amount of mis-selling of traditional products will expose investors to the risk of short-term market movements. Given my past run-ins with the regulatory body, I did not think the day would come when this keyboard would bang out words in defence of the insurance watchdog, but I don’t see why Irda should be blamed for the insurance sector shrinking. The contraction has happened because companies greedy for business used the faulty Ulip product to cheat consumers. Twin pressures of losing the trust of investors and of the changed regulatory environment that makes mis-selling the Ulip not worth the effort have caused the dip in revenue and not the regulator.

Since its battle with the Securities and Exhange Board of India (Sebi) two years ago, Irda today may be more empathetic to its elder sibling, the capital market regulator. Accused of causing a decline in mutual fund assets under management two years ago for making mutual funds no-load, Sebi stuck to its stand and eventually the industry has settled down. Irda should remember that once the froth subsides and genuinely consumer friendly rules begin to take over, the business stabilizes and gives the industry a strong base.


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IRDA may Ban Commissions on Insurance

IRDA plans end to deceptive policies, upfront commission

Shilpy Sinha, Economic Times, 24/10/11


The Insurance Regulatory and Development Authority (IRDA) plans to ban misleading products and staggered commission for agents to ensure that policy buyers are not shortchanged.

The insurance industry, which is still evolving a decade after privatisation, needs new rules to ensure that consumers get the best and don’t get carried away by products that only promise high returns on paper, the regulator has said.

"One important problem is that what you mean by highest NAV,” J Hari Narayan, chairman, IRDA, told ET in an interview, referring to many insurers promising highest net asset value of the policy period to holders. "In certain markets, certain products are prohibited. That may be the best way to go.”

Insurance companies, bitten by the slump in sales after new rules curbing the Unit Linked Insurance Policies, are peddling many policies that on close scrutiny could be termed deceptive. One such is the promise of highest net asset value. But what they do not publicise is the calculation behind the NAV. These policies also charge 25 to 75 basis points as additional fees. A basis point is 0.01 percentage point.

"Suppose a company had Tata in its portfolio, over time it may change,” said Narayan. "At the time of maturity, which highest NAV are you talking about – the portfolio, or Tata. One of the major problems with the product is that how do you communicate to the policyholder. He may be thinking of the highest NAV of the Sensex. So, this is the whole issue.”

Prudential ICICI, Birla Sun Life, Bajaj Allianz, SBI Life, Reliance and Aegon Religare are some of the insurance companies that sell policies promising the highest NAV. These policies have tenure of 10 years with limited premium paying term of 5-7 years.

Though the highest NAV guarantee gives the impression that such products are pure equity products and pay the highest return during the course of the tenure, that is not always the case. When a 100 investment gains by 10-15%, a portion of the corpus is shifted to debt. At regular intervals, when there are gains, some funds are shifted to fixed income securities.

In a way, this could be a strategy where investors don’t get the highest NAV they would have received if they had remained invested in equties. The portfolio manager, to avoid liabilities for the company, could actually depress returns for investors.

Another area where investors lose out, commission to agents, could also be plugged.
As high as 40% of the policy premium in the first year on traditional products while 7-12% in Ulips, are paid to agents as commisssion. But once the policy gets running, the agent loses interest in serving the policy holder. So, to ensure that customers are serviced, the commissions could be rear-ended and paid at the later stages of the policy, than in early years.

"Korea has found that front-ending commision has led to unhealthy practices. So, the question is should we rear end it. A lot depends on the sales history and culture of the country,” Narayan added.


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