Tag Archives: IRDA

Life Insurance Policies Might Get Cheaper Reduced Mortality Charges

Typically, a life insurance policy has two components- protection and savings/investments. IRDA , through their latest guidelines on ULIPs have ensured that the various charges on the savings/investment component of the life insurance policy will become cheaper. But now, a further change is on its way which will benefit policyholders- the mortality charge , ie the premium that a person pays for the life cover- might also reduce.

In India, mortality charges have primarily been defined by the 1994-96 LIC table. For example, the probability of death of a 40 year old was taken as approximately 2 per thousand while that of a 60 year old was taken at about 13 per thousand. Since then, life expectancy has gone up . Data has been collected from LIC and the private insurers and this has been submitted to IRDA. Actuarial departments indicate that the death rates may have come down by 20-25 % in the higher age bracket. This might lead to a reduction of 15-20% in the mortality charges. The new tables has been prepared and takes the variables of gender , age and geography into account. Earlier, the tables only considered gender and age.

The reduction in mortality charges might not be uniform across segments. Our view is that premiums for younger people will reduce more, for middle aged people it would be less changed, and the jump in premium that we used to see for higher age brackets would reduce.

The impact of this reduced charges might be seen most in pure term policies. However, many private insurance companies had started following their own mortality tables and had reduced the premiums for pure term policies aggressively. In the light of the new change brought about by IRDA where life insurance policies have a minimum sum assured of 10 or 7 times the annual premium, this impact will also be felt on the ULIPs which are extremely popular in the market. For traditional policies, the impact could be in the form of a higher declared bonus rates.

Life Insurance Ulips Vs Traditional Products

Until end of August this year, the bulk of the life insurance products sold by insurance companies was ULIPs (Unit Linked Insurance Plans). Almost 70% of the new business premium earned by the life insurance companies was through ULIPs. The entire life insurance distribution machinery touted ULIPs as the ideal investment cum insurance product. While ULIPs were the flavour of the reason, there was a slightly unfortunate reason for them being pushed so much by the distributors- and that was because ULIPs had very high commissions for the person who was selling it, sometimes as high as 70% of the first year premium. Policy administration charges were high, surrender penalty was exorbitant and mis-selling was rampant. And finally, the cookie crumbled- first SEBI came down heavily saying it had a right to regulate ULIPs because they were essentially mutual funds masquerading as Insurance, and then IRDA cracked the whip laying down stringent criteria for the ULIPs. Commission were reduced, charges were minimized, and overall transparency was improved. In an ideal world, ULIPs became a great product for the consumer. But we do not live in an ideal world. While the ULIPs of today are far more aligned to customer interests, we find that there is no zeal and fervour to sell them on the part of the distributors. The very agents who were pushing ULIPs down the throat of unsuspecting customers do not consider ULIPS as the flavour of the season anymore. They have now fallen back upon the traditional products where IRDA has not laid down any guidelines for commission level.

Thus we find that traditional products sales have suddenly taken off. This is primarily because these products now allow the insurance agents and distributors to earn their fat commissions, and not because suddenly traditional products are better for customers than ULIPs. On the contrary, today, a ULIP is a great savings and insurance product.

If we look at the data coming out, we see that 50% of Reliance Lifes product sales are now traditional products, whereas a year ago, only 15% was through traditional products. Birla SunLife now generates 30% of their premium through ULIPS as compared to only 8% through ULIPs a year earlier. In the case of ING Vysya Life insurance, only 10% of their sale is through ULIPs now. All the insurers narrate the same story about how they are trying to reduce their reliance on ULIPs . But the real reason for the decreased importance of ULIPs is because the insurer can not pay enough commissions on ULIPs to keep the distributors happy due to the IRDA guidelines. And thus, they are resorting to selling traditional products. So next time, your friendly neighborhood agent espouses the virtues of a traditional life insurance product, do know that the real reason for the promotion is something completely different!

Traditional Life Insurance Products To Come Under The Scanner

Life Insurance companies have been hit hard by the cap on charges that IRDA has mandated on ULIPs.. Come Sep 1, the surrender charges, administration charges and the commission that Life Insurance companies pay on ULIPs will come down substantially. While this is good for the consumer, the worry is that in the short term, it might become unattractive for the distribution channels, and thus fewer people might have access to life insurance. The percentage share of ULIPs as a part of the overall business of the private life insurance companies is greater than 60%. Under such a scenario, the private life insurance companies have begun focusing on traditional, non guaranteed products as there has been no capping on charges on these products.

But recently, there has been a scare among the life insurance companies that once the ULIPs are out of the way, IRDA would look afresh at the guaranteed products. There have been unconfirmed reports about IRDA looking closely at the charges and commission structures of guaranteed products over the next three months. However, the IRDA chairman has come out with a statement recently that there are no plans on IRDAs front to cap the charges that insurers apply on traditional savings cum insurance products. IRDA is of the view, at least publicly, that the traditional products such as term, money back and endowment are at a mature stage of their life cycle and there is no need to micromanage them by applying the caps on charges.

Public posturing apart, the author is of the view that the regulator will definitely keep a hawk eye on these products to ensure that the insurers, after being stifled on the ULIP front, do not misuse this category of products to go back to the commission and charge levels which IRDA is determined to bring down. IRDA would not want traditional products to provide a loophole to the current regulation that they have painstakingly eked out. On being probed that commissions as high as 80% of the first year premium were being paid on traditional products, IRDA mentioned that they will make sure that such misdeeds are tackled.

In India, because of the rush for business by private life insurers for new business, the system has bred a fat cat distribution system wherein the distributors with higher volumes of business have got used to commission levels as high as 60-70% of the first year premium. It is but natural that these channels will try and protect themselves when these income levels are threatened by the new IRDA regulation. Thus, they will find new ways to beat the system and guaranteed products offer the silver lining to them in this crisis. IRDA would do well to make sure that these products do not become a channel to exploit the average unsuspecting consumer, whose level of awareness and understanding about the life insurance products is quite low.