The new product design guidelines, issued by the Insurance Regulatory and Development Authority (Irda), will force insurance companies to modify 70-75% of their traditional products. In a notification sent to insurance firms on Tuesday, the regulator has made significant changes in the designs for traditional life insurance products.
Insurance companies have been asked to cap the commissions on non-participating index-linked traditional products in the same fashion as unit-linked insurance products (Ulips) were governed in 2010. Agent remuneration has been capped at 15% in the first year, 7.5% in the second year and 5% for each year after that.
Traditional products which have benefits linked to indices like government securities yields are called index-linked products. Since such a plan does not participate in the profit of the fund, its called a non-participating product.
?In the same fashion that distributors had lost interest in Ulips because of lower remuneration, they will probably lose it in these products as well. Non-participating products form about 30-40% of the business for private insurers,? said AS Narayanan, chief distribution officer, Bajaj Allianz Life.
Irda has also said that for customers below 45 years of age, the minimum death benefit on non-single premium products needs to be raised to 10 times the annualised premium. Currently, depending upon the plan and the customer?s age, insurers provide death benefit of seven to eight times the annualised premium.
?These moves are likely to bring down margins by 50% for private insurers,? said GV Nageswara Rao, managing director and chief executive officer, IDBI Federal Life.
Other insurers say that this estimate may still be very optimistic. ?The expectation that margins will come down by 50% is after assuming that the volumes would still be the same. But considering that agent commissions have been capped, even volumes will come down,? said another private life insurer.
Irda has also asked insurers to pay a guaranteed surrender value of 50% if the policy is surrendered between the fourth and seventh year. Insurance firms will have to pay a surrender vlaue of 30% if the policy is surrendered between the second and third year.
Sources in the industry confirmed that the Life Insurance Council is in the process of making a representation to the regulator in a few days, asking Irda to put a hold on them till the impact on companies is properly analysed.