Irdas draft on standards proposals needs minor tweaks

Written by Prakash Praharaj | Updated: May 4 2012, 05:31am hrs
The Insurance Regulatory and Development Authority (Irda) has brought out a draft regulation on the standard proposal form for life insurance for individuals, to be implemented from September 1, 2012. The proposal form is mandatory for all life insurers and has four sections. While Sections A, C and D are standard and compulsory, Section B is optional.

The objective of the regulation is to understand the need for a particular product and make recommendations to the prospect, based on suitability and transparency. The product should be based on the prospects risk profile, financial situation and investment objectives. The regulation has imposed obligations on the insurers, agents and brokers to determine suitability before selling the products.

An insurer shall establish supervisory procedures to inform the insurance agents and brokers of the requirements on the standard proposal form and need analysis. Insurers, agents and brokers shall maintain record of transactions for five years after the insurance transaction is completed.

Successful implementation

The Irdas initiative will benefit consumers in buying appropriate products. The process must be operationally convenient and the format must contain the basic information for need analysis. Certain information, which is complex, can be avoided. However, industry leaders say around 90% of the customers are disinterested in filling up the forms themselves and more interaction time will be required in getting the details. They also say that the cost of printing lengthy formats will be high and hardly 20% of the agents can be skilled in needs analysis.

The information sequencing under the needs of prospect should be rearranged in the order of affordable contribution, identified life needs (expenses), identified insurance needs and insurance plan details.

The prediction of future affordable contribution may be difficult and, hence, a projected growth rate can be taken instead of year-wise projections.

The classification of expenses under identified life needs can be categorised under living expenses, insurance premium, vacation expenses, childrens education and marriage expenses. The insurance need will be estimated by taking the corpus required to take care of the familys day-to-day expenses to maintain the current standard of living.

Identified insurance needs

The various needs can be linked to the products category and the first step is to look at the affordable contribution. Protection need has priority over savings and investments and, if the affordable annual contribution is just sufficient for term insurance premium, the prospect should be sold adequate protection cover. If there is surplus, then, depending on the goals, risk appetite and expected return, suitable endowment or unit-linked insurance products can be recommended.

If the goals are over 10 years, Ulips can be recommended, but the prospects must be explained market risks. It has to be ensured that the maturity proceeds of savings and investment products sold to the customer are adequate to meet the goals for which the product has been sold. Building adequate retirement corpus is a priority and, hence, suitable retirement plans should be part of the identified insurance need.

In case of liabilities like home loans, a separate term insurance cover can be recommended to cover the outstanding loan liabilities. The healthcare need can be taken care of by fixed benefit plans, which can be supplemental to the reimbursement plans of the general insurance companies.

The needs undergo change with the changes in life stage. The protection need increases with the addition of family members and liabilities and, then, decreases once dependents become independents and loans are closed.

The need for savings and investment is related to the achievement of various financial goals. The need for annuity/regular income arises after retirement. The need for health cover increases with advancing age.

The details of various plans to be recommended with the name of the plan, sum assured, term, premium mode and riders if any. Recommendation will include life stage, protection need, risk appetite, recommended insurance policy, commitment for the current and future years, details of charges and suitability of the product.

The sales force needs to be trained in need analysis. It will be better if the insurers provide online tools for calculation of insurance need which can bring uniformity across the company.

The writer is chief financial planner, Max Secure Financial Planners

Need-based selling

* Protection need has priority over savings and investments

* If the goals are over 10 years, Ulips can be recommended

* Maturity proceeds of savings and investment products are adequate

* Building retirement corpus is a priority and suitable retirement plans

* In case of home loans, a separate term insurance cover can be recommended