Taking cover. Why the insurance Bill matters to you

Last week, after heated debate, Parliament finally approved the Insurance Laws (Amendment) Bill. Much of the noise centred around insurance companies, who are happy about the foreign direct investment cap being hiked to 49 per cent. Agents are similarly rejoicing as they no longer have to go to the regulator for a licence.

But it’s not just insurance companies who are impacted by the new Bill. Changes in the Bill will affect policyholders too. For example, Section 40A of the Insurance Act 1938, which capped agent commissions on insurance products, does not find mention in the new Bill. On the other hand, there are more penal provisions against agents indulging in mis-selling. Here’s what the new Bill means for you.

Revised insurance laws allow the insurer to challenge a policyholder for mis-representation of facts or a fraud, only in the first three years of the policy. In such cases the insurer must write to the policyholder or his nominee (Section 45).

Fraud is defined as any misrepresentation, omission, or concealment of fact by the insured or his agent. The onus is on the policyholder to prove that the mis-statement or suppression of a fact was not done deliberately. If the policyholder is not alive, the obligation is on the beneficiary to disprove the fraud.

In the earlier Act, insurance companies were allowed to challenge the policyholder in the first two years of the policy term on grounds of fraud. After the first two years, the insurer could still dispute the claim. But in order to do so, the insurer had to prove that the policyholder deliberately committed a fraud.

The new Bill however clearly states that a policy can’t be disputed after the expiry of three years on “any grounds whatsoever”. Therefore, policyholders can now be assured that an insurance company will not reject claims once they complete three years on a policy. In 2013-14, private insurers repudiated as many as 15 per cent of the claims lodged with them.

The next amendment that makes a difference to you is with regard to the hiring of agents. From now on, agents will be appointed by the insurance companies directly and insurers will be held liable for all actions of the agent.

But IRDA, the insurance regulator, has powers to impose stiffer penalties. If the regulator finds out that there has been a violation of regulations in the appointment of the agent, it can penalise the agent with fine up to ₹10,000. The insurance company can be held liable to pay penalty up to ₹ 1 crore.

The second change is with regard to multi-level marketing. In such a model, an insurance agent used to enrol others into a chain scheme with each of these agents in turn, enrolling more distributors in a pyramid structure.

All members of the pyramid earned incentives based on their sales. The new law forbids such multi-level marketing. This is a positive development because it will ensure that every agent who deals with you is directly employed by the insurance company. The Bill also holds that any agent who offers an inducement to a policyholder directly or indirectly to take or renew an insurance policy will be penalised to the extent of ₹10 lakh. This amount was earlier ₹500 (under section 41 (2)).

The third change is the introduction of a new provision, which says that an individual can’t be an agent for more than one life insurance company, or one general, or health insurance company. This is meant to eliminate conflict of interest. But as each agent will only be able to sell products of one insurer, it will be up to the investor to do his own research on product selection.

The Insurance Act of 1938 specified limits on the commission that could be paid to agents. Under Section 40A, the Act specified that in the life insurance business, the commission paid should not exceed 40 per cent of the first’s year premium and 5 per cent of renewal premium in traditional insurance products.

In the new Bill, however, this Section has been omitted. There is now no official cap on commission to agents on traditional products. Such a cap may be decided by IRDA.

ULIPs, however, will continue to have a cap on net reduction in yield — of maximum of 2.25 per cent. So, watch out as the commissions on traditional plans may even go up.