Come January 1 and the life insurance industry will see a major change in the way business is conducted. Over 400 life insurance schemes currently in the market will be withdrawn and new revised schemes will be launched by companies in the new year as directed by the Insurance Regulatory and Development Authority (Irda) in the new guidelines.
As the insurance regulator pushing for a major restructuring exercise in the life segment with focus on a customer-friendly and transparent approach, the industry which comprises of 24 players is raring to go with the revised set of schemes. Life Insurance Corporation (LIC), the leader, has decided to stop selling as many as 34 policies, including Jeevan Anand, Jeevan Madhur and Jeevan Saral, to comply with new regulatory guidelines. LIC stopped the sale of Jeevan Amrit from December 7, Jeevan Surabhi from December 14 and will end other schemes from December 21 and December 28. The remaining 28 policies will go off LIC’s shelves from December 31. LIC had withdrawn 14 policies including Convertible Term Assurance and Children Deferred Endowment Assurance in November.
“We have cleared about 400 new life products as per the new design norms, and only a few are pending,’’ Sudhin Roy Choudhury, Member (Life), Irda, said. “After September 2013, all companies have shown positive growth. The feel-good factor has come back, driven by the new product regime. There is need for out-of-the-box thinking in the industry,” he said.
Reliance Life Insurance Company chief executive Anup Rau last week said the company received most of the product approvals from Irda and will be launching these over the next three months. “We will largely focus on traditional plans and continue to provide simple and need-based solutions to customers,” Rau told reporters last week.
Irda has issued new guidelines to make policies more customer friendly. The regulator notified changes made to the guidelines on design of life insurance products in the gazette in February 2013. All existing group products should have been withdrawn from July 1, 2013 and all individual products from October 1, 2013. However, Irda extended the deadline to January 1 in order to enable a smooth transition to the new regime as several insurers including LIC approached the regulator with the revised schemes only in the last week of September.
The new guidelines have introduced three broad categories of products — Traditional insurance plans, variable insurance plans (VIPs) and unit-linked insurance plans (ULIPs).
In traditional plans, the product design of traditional plans would remain almost the same. These plans would continue to come in two variants — participating and non-participating plans. For participating polices, the bonus is linked to the performance of the fund and is not declared or guaranteed before. But the bonus once announced becomes a guarantee. It (also called reversionary bonus) is usually paid in the case of death of the policyholder or maturity benefit.
In non-participating policies, the return on the policy is disclosed in the beginning of the policy itself. In both cases, a policyholder should calculate the net return to assess the total costs. New traditional products will have a higher death cover. For regular premium policies, the cover will be 10 times the annualised premium paid for those below 45 and seven times for others. The minimum death benefit in the case of traditional plan is at least the amount of sum assured and the additional benefits, if any.
Irda guidelines say that VIPs should guarantee a certain minimum rate of return, also called the floor rate, at the beginning. Further, additional benefits could either be pegged to an index, declared upfront, or come in the form of periodic bonuses which will be guaranteed once declared. As in the case of ULIPs, VIPs will have to conform to cost ceilings. This essentially means the reduction in yield will not be more than 4 percentage points in the fifth year, coming down to a difference of 2.25 per cent from the 15th year onwards.
On ULIPs, Irda says life insurers will now have to inform policyholders of the reduction in yield of their ULIPs on a monthly basis.
The reduction in yield — difference between gross and net yields — refers to the lowering of investment growth within a fund due to various charges. ULIPS had undergone major changes two years ago.
The new guidelines have also reduced commissions on short-term policies and linked the quantity of commissions to the premium paying period for all products.
As a result, agents of single premium non-pension products will receive remuneration of up to 2 per cent of the premium paid. In the case of regular premium insurance policies, a policy with a premium paying term of five years will pay up to 15 per cent in the first year, 7.5 per cent in the second and third year and 5 per cent subsequently.
As the premium paying term increases to 12 years and above, the commissions payable in the first year increases up to 35 per cent in case the company is at least 10 years old and 40 per cent in case the company is less than 10 years old. The regulator has created the entire format on the basis of tenure of the policies.
- By George Mathew