Date : 28th June, 2010
GUIDANCE NOTES ON RECENT REGULATORY CHANGES RELATED TO UNIT LINKED INSURANCE PRODUCTS (ULIPs)
IRDA has, from time to time, taken various initiatives for protecting the interests of policyholders by bringing out Regulations, Guidelines, Circulars etc applicable to insurers and intermediaries covering the various stages in the lifecycle of an insurance product, commencing from solicitation, sale, policy servicing, to claims servicing and grievance redressal.
With expansion of the insurance sector and more and more innovative insurance products, in particular the Unit Linked Insurance Products coming into the life insurance market, IRDA has been sensitive to the changing scenario and the challenges that go with it. In particular, IRDA has been conscious of how these changes have been impacting the policyholder and has taken several steps to bring in changes in the regulatory framework to address various concerns of the policyholder.
IRDA had stipulated that insurers must provide the prospect/policyholder all relevant information regarding amounts deducted towards various charges for each policy year so that the prospect could take an informed decision. Insurers were required to provide Benefit Illustrations giving two scenarios of interest rates, 6% and 10% respectively. The prospect was required to sign on the illustration while signing the proposal form. This was done to ensure transparency and proper disclosures by the insurers.
It is necessary to demystify complex products and ensure that proper product disclosures are made to the prospect/policyholder. Towards this end, IRDA has already come out with an exposure draft on need to issue Key Features Documents. Responses received by the Authority are under examination and the initiative will be taken forward further. Similarly, Needs Analysis is another initiative identified by IRDA as a step in curbing wrong advice and mis-selling. An exposure draft on this requirement is already circulated and responses are coming in. Whilst on mis-selling, IRDA has identified Distance Marketing as yet another area of concern and draft guidelines in this regard have been put up as an exposure note for all stakeholders to respond to.
Mention must be made of what is perhaps the most important step that the Authority has taken keeping in view the interests of policyholders. IRDA set up an exclusive Consumer Affairs Department that focuses on consumer related issues and initiatives including grievance redressal and consumer education through Insurance Awareness Campaigns. With a view to creating a central repository of industry-wide insurance grievance data and facilitating monitoring of disposal of grievances by insurers, IRDA is on the verge of implementing the Integrated Grievance Management System (IGMS). IGMS will not only help monitor the redress systems of insurers but also create a gateway for policyholders to register complaints with insurance companies first and if need be escalate them to the IRDA Grievance Cells. The Consumer Affairs department goes beyond facilitation and works towards taking grievances to their logical end by calling for explanations where required, carrying out enquiries and inspections etc. It is proposed to make the institution of the Insurance Ombudsman handle all types of complaints including those relating to policy sale and servicing rather than just restricting it to claims. IRDA is also shortly making its Call Centre operational for policyholders to lodge their grievances and also seek their status over phone/e-mail.
Further, keeping in view the need for efficient functioning of the insurance sector for protecting the interests of policyholders, it is necessary to have reliable, timely and accurate data relating to insurance. In order to ensure that proper data is collected, processed and disseminated in the manner required, IRDA has set up an independent body, namely the Insurance Information Bureau (IIB). The IIB has started functioning and has already made good progress.
RECENT REGULATORY INITIATIVES
More recently, IRDA has taken a holistic view of the features of ULIPs and addressed issues impacting the policyholders including the way such products are sold/bought; how ULIPs can be better financial instruments for providing risk coverage; how sale by unlicensed personnel and several other malpractices existing in this market may be curbed by plugging legal loopholes and tightening of the regulatory ambit; legal mandate to initiate direct penal action against Corporate Agents etc. IRDA therefore initiated exposure drafts covering these areas and received considerable feedback from various stakeholders on the issues put forth. The issues were then presented to and discussed with the members of the Insurance Advisory Committee as well as the members of the Board of the Authority. The following regulatory initiatives have been approved by the Authority during the Board meeting on 31.05.10.
I. Distribution channel related changes:
1. IRDA has amended the IRDA (Insurance Advertisements and Disclosure) Regulations to remove any scope for the involvement of unlicensed personnel/entities in the sale of insurance products.
2. IRDA has amended the IRDA ( Licensing of Corporate Agents) Regulations to further tighten the Code of Conduct of corporate agents to ensure that the prospect does not deal with any unlicensed person. The Regulations have also been amended to ensure that there is no scope for any kind of remuneration other than commission where sale has been effected. This measure will reduce the expenses of the insurer, thereby lowering premiums to be paid by the policyholder.
3. Regulations for referrals: IRDA has also addressed the issue of Referrals by bringing out separate Regulations leaving no scope for misuse of the system. Companies which wish to share their database of customers with insurers would need to get approval from IRDA after having conformed to the requirements as laid down in the Regulations. Further, there are restrictions on the business activities of the referral company to ensure that there is no misuse of the system. For instance, the referral company shall not be in any business of extending loans and advances or accepting deposits etc though there are exceptions such as for Regional Rural Banks, Co-operative banks etc. The Regulations cast obligations on the referral company as well as the insurer including submission of data as and when called for by the Authority.
II. ULIP STRUCTURE RELATED CHANGES:
(1) Lock in period increased to five years:
IRDA has increased the lock-in period for all Unit Linked Products from three years to five years, including top-up premiums, thereby making them long term financial instruments which basically provide risk protection.
(2) Level Paying Premiums:
Further, all regular premium /limited premium ULIPs shall have uniform/level paying premiums. Any additional payments shall be treated as single premium for the purpose of insurance cover.
(3). Even Distribution of Charges:
Charges on ULIPs are mandated to be evenly distributed during the lock in period, to ensure that high front ending of expenses is eliminated.
(4). Minimum Premium Paying Term Of Five Years:
All limited premium unit linked insurance products, other than single premium products shall have premium paying term of at least five years.
(5). Increase In Risk Component:
Further, all unit linked products, other than pension and annuity products shall provide a mortality cover or a health cover thereby increasing the risk cover component in such products.
(i) The minimum mortality cover should be as follows:
Minimum Sum assured for age at entry of below 45 years
Minimum Sum assured for age at entry of 45 years and above
Single Premium (SP) contracts: 125 percent of single premium.
Regular Premium (RP) including limited premium paying (LPP) contracts: 10 times the annualized premiums or (0.5 X T X annualized premium) whichever is higher. At no time the death benefit shall be less than 105 percent of the total premiums (including top-ups) paid.
Single Premium (SP) contracts: 110 percent of single premium
Regular Premium (RP) including limited premium paying (LPP) contracts: 7 times the annualized premiums or (0.25 X T X annualized premium) whichever is higher. At no time the death benefit shall be less than 105 percent of the total premiums (including top-ups) paid.
(In case of whole life contracts, term (T) shall be taken as 70 minus age at entry)
(ii)The minimum health cover per annum should be as follows:
Minimum annual health cover for age at entry of below 45 years
Minimum annual health cover for age at entry of 45 years and above
Regular Premium (RP) contracts: 5 times the annualized premiums or Rs. 100,000 per annum whichever is higher,
At no time the annual health cover shall be less than 105 percent of the total premiums paid.
Regular Premium (RP) contracts: 5times the annualized premiums or Rs. 75,000 per annum whichever is higher.
At no time the annual health cover shall be less than 105 percent of the total premiums paid
(6). MINIMUM GUARANTEED RETURN FOR PENSION PRODUCTS:
As regards pension products, all ULIP pension/annuity products shall offer a minimum guaranteed return of 4.5% per annum or as specified by IRDA from time to time. This will protect the life time savings for the pensioners, from any adverse fluctuations at the time of maturity.
(7). RATIONALISATION OF CAP ON CHARGES:
With a view to smoothening the cap on charges, the capping been rationalized to ensure that the difference in yield is capped from the 5th year onwards. This will not only reduce the overall charges on these products, but also smoothen the charge structure for the policyholder.
III. DISCONTINUANCE OF CHARGES:
IRDA has also addressed the issue of discontinuance of charges for surrender of ULIPs. The IRDA (Treatment of Discontinued Linked Insurance Policies) Regulations brought out by IRDA in this regard ensure that policyholders do not get overcharged when they wish to discontinue their policies for any emergency cash requirement. The Regulations stipulate that an insurer shall recover only the incurred acquisition costs in the event of discontinuance of policy and that these charges are not excessive. The discontinuance charges have been capped both as percentage of fund value and premium and also in absolute value. The Regulations also clearly define the Grace Period for different modes of premium payment. Upon discontinuance of a policy, a policyholder shall be entitled to exercise an option of either reviving the policy or completely withdrawing from the policy without any risk cover. Further, the regulations also enable IRDA to order refund of discontinuance charges in case they are found excessive on enquiry.
These regulations are applicable to all new ULIP products approved by IRDA after these regulations are notified.
J Hari Narayan
(i) Draft Regulations:
(ii) The Circular on Structure of ULIPs (No. IRDA/ACT/CIR/ULIP/102/06/2010 dated: 28th June, 2010)