Standard proposal form faces implementation hurdles

Written by Prakash Praharaj | Updated: May 7 2013, 08:55am hrs
Irda has issued a gazetted notification on a standard proposal form for life insurers with four sections, namely (a) details of life assured; (b) specialised/additional information; (c) suitability analysis; and (d) proposed product.

While sections A and D are mandatory, Section B can be customised. Section C is optional. The objective, among other things, is to understand the need for the product being recommended to protect the prospects interests. We will focus on suitability analysis and proposed product here.

In countries like the UK and Australia, the debate has progressed from suitability to fiduciary responsibility in selling of financial products, which has resulted in stringent standards for intermediaries. The standard proposal form, with inbuilt inputs on suitability analysis, is a step in the right direction in India.

The initiative, to be successful, should get accepted at the ground level for easy implementation. Available feedback suggests that many prospects are reluctant to give adequate time for completing a proposal form. It will be a herculean task to get the proposed lengthy form completed by the prospects. There is scope to reduce the last two sections to a single-page format with the support of online tools. Learning from the experience of professional financial planners, the result of need analysis depends, to a great extent, on the accuracy and quality of the collected data. The current suitability analysis format can be improved by addressing some areas.

Projections

The projections on affordable contribution, income and expenditure up to 25-30 years is fraught with inaccurate estimates. Instead, a projected annual growth rate will be more suitable. Similarly, identified life needs will greatly depend on the current life stage and it may not be possible to project the future needs accurately.

For example, the future needs of a young married couple will depend on the future family size, which cannot be predicted as of now. For this, it is advisable for the intermediaries to nurture a long trusting relationship with the customers and revisit the needs of the insured with life-stage events. Similarly, instead of the options on the working span, the response on proposed retirement age is more convenient.

Need analysis

The ultimate objective of the suitability analysis is to arrive at various insurance needs. The sequencing of information can be current income, expenses, affordable contribution, assets and liabilities. It can be followed by proposed retirement age, expenses on various financial goals like education, marriage, vacation, retirement expenses and health expenses. The life insurers can provide online tools on need analysis and human life value ( HLV) to intermediaries to arrive at the protection needs. HLV will be suitable for a younger persons without dependents where as need analysis will be more suitable for married persons with children and dependents.

Risk appetite

The risk appetite has three components, i.e., willingness, capacity and need to take risk. Willingness to take risk is the psychological tolerance level for downside risk. But it is constrained by the capacity to take higher risk. The intermediaries need to take call on the need to take risk after considering the above two factors and assess the risk appetite as low/medium/high. However, the intermediaries need to be skilled on handling contradictions, i.e., the prospect may have low tolerance with high capacity or high tolerance with low capacity; or there may be a need for recommending a Ulip product for a goal 20 years away even when both tolerance and capacity are low at present. In all cases, the rational of the recommendation has to be explained to the prospect and his/her consent obtained before closing the deal.

Product recommendation

The starting point is affordability, i.e., the surplus available to meet the annual premium payment obligations. The need analysis indicates the total protection need of the prospects, which are best met through term insurance. Prospects with high risk appetite can be sold Ulips with higher equity exposure and persons with low risk appetite can be sold traditional products, which have higher mandated investments in govt securities and bonds. But linked products are best avoided for short-term goals.

The success on implementation will greatly depend on the skills of the intermediaries in understanding the risk profile, financial situation, investment objectives and needs of the prospect and matching them with suitable products. Training will play a vital role in building these skills in the coming days.

what needs to be done

*The projections on affordable contribution, income and expenditure up to 25-30 years is fraught with inaccurate estimates. Instead, a projected annual growth rate will be more suitable

The life insurers can provide online tools on need analysis and human life value (HLV) to intermediaries to arrive at the protection needs

*HLV will be suitable for a younger persons without dependents where as need analysis will be more suitable for married persons with children and dependents

*Prospects with high risk appetite can be sold Ulips with higher equity exposure and persons with low risk appetite can be sold traditional products, which have higher mandated investments in govt securities and bonds. But linked products are best avoided for short-term goals.

The author is chief financial planner with Max Secure