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Traditional life insurance products will now come with enhanced benefits for policyholders as the insurance regulator has issued final guidelines for makeover of these products.
The Insurance Regulatory Development Authority of India (IRDA) guidelines, which have been notified by the Government, cap commissions, and provide for minimum sum assured and guaranteed surrender value on traditional products sold by life insurers. This could impact insurance companies’ margins.
The guidelines are expected to improve transparency and curb mis-selling of the traditional products.
To ensure that life insurance products are of longer duration, the new guidelines have increased the minimum premium paying term of the policy to five years.
IRDA has also capped the maximum commission that can be paid to agents at 15 per cent in the first year, 7.5 per cent in the second year and 5 per cent from the third year onwards.
“The new guidelines will require insurers to re-file most of their products and overall margins for most of them will come down by around 40 per cent. It will pose a huge challenge for life insurers,” said the CEO of a private life insurer.
To protect the interest of policyholders, the regulator has kept a minimum guaranteed surrender value of 50 per cent of the total premiums paid, if the policy is surrendered in the second or third year while the same would be 75 per cent for the fourth year, and it goes progressively upwards.
The regulator has also asked life insurers to spell out the rate of return to policyholders who may face issues in finding out returns generated by index-linked products.
In 2010, IRDA had revamped unit-linked insurance plans (ULIPs) norms by increasing the lock-in period and lowering commissions on their sale. This led to a massive dip in ULIP sales.
According to IRDA data, in fiscal 2012, life insurers had to pay Rs 71,208 crore on account of surrender of policies. During this period, ULIPs accounted for 68 per cent of the total surrender for LIC, and 97 per cent of the total for private insurers.
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