THE ROAD AHEAD FOR THE LIFE INSURANCE INDUSTRY

Insurance Sector underwent a lot of sea-changes, when it was privatized in 1999 and the Insurance Regulatory & Development Authority of India- IRDAI- came into being. Now one more revolutionary change is sweeping across the Sector once again with the passing of the Insurance Act 2015 by the Government of India. This change has raised the expectations of the customers manifold in the following portfolios:

• More innovative products
• Cheaper & affordable plans
• More improved customer service standards
• An end to the mis-selling of policies by the intermediaries
• Insurers becoming more responsible for the acts of omission and commission by their representatives
• More penetration into Rural & Social Sectors
• Penalty for the insurers for the non-compliance of the Investment Regulations
• Some relief from the stringent provisions of the Section 45 of the Insurance Act 1938 under which the insurers were rejecting death claims of the policies without proper justification
• Customers becoming co-partners in the running of the insurance companies by their participation in the Boards of the insurers, etc etc.

The Role of the IRDAI Before the role of the Regulator in the changed atmosphere, first let us discuss their present functions:

1. Protecting the interests of the policyholders
2. Establishing the guidelines for the operation of the insurers as well as the Brokers
3. Specifying the Code of Conduct, qualifications and training for the insurance intermediaries
4. Promoting efficiency in the conduct of the insurance business
5. Regulating the investment of funds by the insurance companies
6. Specifying the business to be done by insurers in the Rural & Social Sectors
7. Handling disputes between insurers and intermediaries
8. Taking care of the customers’ grievances, both directly and indirectly
9. Insisting on the Required Solvency Margins- RSM-for the insurers so that the interests of the customers are well protected from the dangers of any financial insolvency by any insurer
10. Protecting the interests of the policyholders in case of any take over of an insurer by another insurance company by careful and proper valuation and then only permitting it and seeing to it that the outgoing existing customers are taken care of well by adequate servicing arrangements and
11. Ensuring that the leadership of each insurance company is in safe hands by helping in the selection of a suitable and fit candidate as its CEO.

The Position so far Even before the passing of the Insurance Act 2015, IRDAI has done a commendable job by bringing out the Policyholders’ Protection Guidelines 2002 by incorporating the following benchmarks:

• 10 days’ time for complying to the majority of the requests of the customers like the Change of Address, nomination/ assignment, revival of the policy, loan to be sanctioned, issuance of a duplicate policy, placing any endorsement on the policy etc.
• 15 days’ time for the settlement of any maturity claim of a policy, after receipt of all the necessary requirements
• 30 days’ time for the settlement of a non-early death claim after the receipt of all the requirements
• 60 days’ time if it is an early death claim
• Six months’ time if any investigation is caused into the early death claim.
• Free-look period of 15 days allowed for a customer to return the policy document and claim refund of the premium, if the policyholder is not satisfied with the conditions of the policy is a great revolutionary step taken by the IRDAI.

The Statistics as on March 2015 on Servicing Parameters The number of agents has fallen to 2068000 in the industry with the number of employees also coming down to 2.5 lacs. The number of days for the settlement of a death claim on an average has increased, as per the following examples: DHFL Pramerica life insurance company- 207 days. Shriram life insurance company- 172 days. Edelweiss Tokyo life insurance company- 77 days. No doubt, there are life insurance companies like the PNB Met life insurance company taking only 15 days and the Star Union Daichi life insurance company taking only 19 days to settle a death claim. Again in the settlement of death claims, Edelweiss Tokyo and the DHFL Pramerica life insurance company settled only 57% of the registered death claims. In the repudiation of the death claims’ front too, the performance of these insurance companies is not very flattering- it is whooping 37%. The number of the policyholders’ complaints is also quite alarming: LIC of India- 81614. ICICI Pru life insurance- 11796 SBI Life Insurance- 12273. HDFC Life insurance company- 31957 Max Life insurance- 16546 Bajaj Allianz life insurance- 19946. Insurance penetration measured as a percentage of premium to the country’s GDP fell to 3.3 % in 2015, compared to 3.9% during 2014. Actually this is the lowest since 2005-06 when it was 3.14%. The average Global penetration is 6.2%. The highest is South Africa- 15.4%, South Korea- 11.9%, & UK- 11.5%. While the Global premium grew by 4.3% for life insurance, India grew only by 1%.   The new Role of the IRDAI IRDAI has given up its role in the training of the intermediaries by ceding the function of recruitment and training of agents to the insurance companies from April 1 2015. Thus the whole licensing system has gone. Only for the mandatory test, the company has to approach the IRDAI. IRDAI has mandated that 25% of the ULIP Funds should be invested in the Government Securities. The Holdings of Equity in an Indian Promoter company held by the FIIs, other than the foreign Promoters of the company, will not be a part of the FDI. IRDAI has issued a circular mandating certain conditions for the advertisements being floated by the insurance companies- The caveat Conditions Apply should have at least 50% font size of the copy of the advertisement- because normally this caveat needs a lens to read it! Foreign Partners will not have any final say in the appointment of the CEO & Directors of the company, decisions on Strategy and Products. IRDAI can impose stiff penalty on the erring insurance companies- already on the SBI Life insurance company, IRDAI has imposed a heavy fine for its mis- selling House Mortgage policies. The penalty for Rebating by the agents has been hiked to Rs 10 lacs and fine for any other misdemeanour by the intermediaries also increased manifold in order to act as a deterrent. On the passing of the New Insurance Act 2015, IRDAI has powers to define expense limit on the cost of the insurance products and also declare a limit on the rate of commission to distributors.   More Initiatives needed in the interest of Customers

• Why there should be a condition of a minimum 3 years’ premium payment before the policy attains the Paid-up value or the Special Surrender value? This is very harsh as the customer loses all the hard-earned money paid, if for any unavoidable financial or other reason, stops paying the premium before the end of 3 years. Especially if it is a large policy, the premium will be considerable. It should be a case of simple refund of all premiums paid, deducting the expenses like the commission paid to the agent, incentives given to the Development Officer, medical fees paid to the Doctor, policy preparation charges including the stamp duty and the premium charged for the risk coverage.
• The Guaranteed Surrender value under a policy is presently 30% of all premiums paid, excluding the first year’s. This is very harsh- it should be at least 80% of all premiums paid by the policyholder.
• The new Insurance Act 2015 has mandated that all the death claims arising after 3 years of taking the policy should not be repudiated but paid. This rule should be followed in letter and spirit. Even when death takes place within a period of 3 years of taking the policy, although the insurer has the right to do all vigilance check, investigation etc, they should be done without harassing the hapless claimant. No doubt, there is always a chance of a Planned Fraud by certain unscrupulous policyholders, in collusion with the agents/ staff/ Development Officers/ medical examiners etc by claiming the sum assured at the end of 3 years in order to avoid the Rejection of the claim by the insurer. Well, the hand of the Law is always longer to nab such culprits but we can’t penalize all innocent policyholders just because there are a few anti-social elements in the society.
• Even within the 3 years of taking the policy, if death takes place, the investigation should be ordered only for big amounts and not for petty amounts. IRDAI may fix the ceiling of Rs 5 lacs or more for such investigations and not for the lower amounts.
• IRDAI Life Member Mr NB Sathe has mentioned that the Regulator will study the pattern of death claims after 3 years of taking the policies for certain time limit of 3/5 years and then decide to approach the Government for any modification in the death claims settlement rule, if any undesirable trends are noticed.
• The insurer should bear the cost of the Service Tax, imposed by the Government of India, instead of levying it on the policyholders, as done hitherto.
• IRDAI has recommended the waiver of Service Tax for the insurance premium on the lines of incentives granted to the National Pension Scheme contribution up to Rs 50000 each year.
• Similarly IRDAI has suggested for the removal of income tax on the maturity value & bonus of life insurance policies, quoting the bank rule of levying income tax on the interest only earned by the customers beyond Rs 10000 every year and not levying income tax on the Principle Deposit.
• There should be continuous customer education campaigns organized not only by the IRDAI- now done to a limited extent- but also all the insurance companies.
• There should be regular Consumer Awareness Meets organized by all the insurance companies.
• Although the methods of premium payment have now improved thanks to Technology like the internet, ECS, ATMs etc, the customer should have the facility of ‘Drop Boxes’ in the important locations of the city/ town, where the cheques are collected every day by the insurer and receipts issued promptly.
• There should be regular customer feedbacks through an external agency like the surveys, service score cards, post-policy questionnaires etc and the Regulator should do surprise checks of them in order to improve the customer service.
• IRDAI may arrange customer meets of all the insurance companies in major towns and also in the rural areas. The invitees for this meet should be randomly selected- not like the present customer meets where the policyholders are tutored and brought. Then only there will be real feedback.
• IRDAI may insist on proper discipline, punctuality and prompt disposal of the pending papers by the staff of the insurance companies by arranging surprise visits. These will make the employees alert.
• IRDAI has correctly defined the role of Banks in the sale of insurance plans in the sense that Banks are answerable to the complaints of the policyholders as Brokers and not show the hand towards the insurance companies as being done hitherto.
• IRDAI may insist on the superior Quality of Service to be rendered to the customers- Service Quality is defined as “ a measure of how well the service level delivered matches customer expectations . Delivering quality service means confirming to customer expectations on a consistent basis”. This only leads to customer loyalty and customer retention.

  Some thoughts for the life insurance companies

• 1. There should be more concentration on Health Insurance as it is the talk of the day today. This sector has brought in a premium of Rs 20096 crores in 2014-15 compared to the earlier year figure of Rs 17495 crores, thus showing a plus variation of 15%. This sector is going to grow at a steady rate of 18-20% for the next 5 years in view of new products, technology innovations, customer awareness, the increasing cost of hospital treatment, disease burden and regulatory fillip.
  2. The quality of the distributors at all levels- Agents, Banc Assurance, Corporate Agencies- should be improved across the board in order to win the confidence of the customers. This can be done by select recruitment and better training.
  3. The insurance companies should invest in human assets- good exposure to employees, timely and regular training, job rotations, overseas programs- these all will lead to less attrition among employees & officers.
  4. The insurance companies should concentrate on Affinity-based channels as Doctors, CAs, RWAs- Resident Welfare Associations- etc to increase their reach. In USA, there are Associations of Retired People- AARP- Soccer & Rugby clubs.
  5. Prompt and transparent grievance redressal systems in each insurance company are needed for restoring the customers’ faith.
  6. Just as the insurer wants to have a 360 degree of the customer, the customer too wants to have a full view of the insurer. This comes from the personalized experiences providing value, improved service quality, individual care, reduction of customer stress, increased value for money and customer empowerment.

  IRDAI on the rate of Commission for Agents & other Distributors IRDAI brought forward the Draft Guidelines for the commission for Agents: For Bundled products- ULIPs & Traditional Insurance Plans- it is 35% for the first year, 7.5% from second year to fifth year & 5% there afterwards. This is if the policy term is 12 years and more. If the policy term is less than 12 years, the commission is 30% for the first year. Besides the above, the insurer can earmark rewards or incentives directly or indirectly up to 40% of the I year commission for Corporate Agents and 20% for the individual agents. All these are paid out of the premium paid by the policyholders. So in effect, the customers will be paying 42-49% in the first year on Bundled products. Thus the customer is the loser. Instead of the Regulator encouraging the concept of the Trail Model of Commission- where the commission is spread over the life time of the product, instead of bundled up in the beginning of the term or up-fronted – IRDAI is following the old policy of paying high commission in the first year. The Trail Model will motivate the agents in following up with the customers to continue their policies, instead of lapsing them. Now the agents will not be interested in the renewal commission- instead they may resort to ‘ hit & run’ attitude- they will try to grab whatever they can get in the first year without caring about the subsequent commissions. Even the Sumit Bose committee has recommended the Trail Model of commission. Even the figures of the IRDAI for the Persistency Ratio for the year 2013-14 say that only 60% of the policies continue after the I year, whereas the Global average is 90%. At the end of 5 years after taking the policy, the position is worse- not even one third of the policies continue. Coming to Term Insurance products, IRDAI has recommended 50% of the premium as the I year commission, if the term is 12 years and more and 10% in the subsequent years. This has been done in order to encourage selling of Term Insurance products but again the catch is with the premium being drastically lower for Term Insurance plans than the Bundled products, these high percentages may matter very little.   Instead the Regulator should link commission for the Term Insurance plans with the sum assured or coverage, with the result the average sum assured will improve and people will go in for High Risk plans. This is amply proved by the on line sales of the Term Insurance plans- when Rs 2 lacs is the average sum assured through direct selling by agents of the Term Insurance plans, Rs 70 lacs- Rs 1 crore is the average sum assured under the on line selling, thus proving another point that Insurance is bought, never sold. As a matter of fact, 80% of the Term Insurance plans sold are through on line and the Term Insurance market has grown 30% since 2014.   Policy Churning and complicated products result in high lapsation of policies.   Distributors should be penalized for lapsation.   IRDAI Draft has suggested 15% maximum cap for commission for Brokers for retail products and this percentage varies across segments.   The final guidelines will be released in March 2016, to be implemented from April 1 2016.   IRDAI Chairman is in favour of a cap for commission for distributors and it can’t be left to be decided by the market forces, which may lead to a cut throat competition among the Players.   The Regulator in the loop The IRDAI is the link between the insurance companies, their intermediaries and the insurance customers.   The number of agents has drastically come down as on March 2015. There was a time when LIC itself had nearly 30 lacs of the agents- now the number for the entire industry has come down just to 20 lacs and LIC has only 11 lacs of agents. Despite a lot of malpractices prevailing- like the maintenance of bogus attendance registers just to wood wink the Regulator and the help rendered at the examination hall for copying etc- the new aspirants could not get through the mandatory test. It is really a great relief that this mandatory training of 50 hours has been dispensed with by the IRDAI & this job of training has been now left to the insurance companies.   Mis-selling is rampant in the field. This will continue as long as the intermediaries are paid by the insurance companies, because the loyalty of the intermediaries will be with the insurers and not with the customers. Because selling and distribution are different. Seller sells anything that is tangible whereas the distributor sells the financial services which are intangible. Insurance is the only exception where sellers are accepted as distributors. The seller is a fiduciary, who works for a commission whereas a true distributor or advisor operates in the interest of the customer. IRDAI may take steps to slowly remove the element of commission in the area of insurance distribution. Instead, the buyer should pay ‘Service Charges’ for the services rendered, if he/she is satisfied. Then only the evil of mis-selling can be removed.   Conservation of policies or Retention of the policies is another area, which needs the attention of all the insurance companies. In the words of Horstmann ( 1998 ), “ there is a strong and positive relationship between customer satisfaction and loyalty. A Satisfied customer is six times more likely to repurchase a product and share his/her experience with five or six other people”.   Customers are our Stakeholders Stakeholders have a quest for value. Customers need to be in touch with their insurance companies. Their policies have to ‘Stay Sold’- the policyholders need to feel that their premiums are well-cared for and they can always connect with their insurers, if need be. But at the same time, while the Customer is the King, the Distributor is the Enabler since he is the bridge between the insured and the insurer. Even as per Regulation 11 of the Policyholders’ Protection Guidelines 2002, the customers have the responsibility of informing the IRDAI in case they come across any mal-practice, either by the intermediary or the insurer. They can’t turn a blind eye to it, saying that it does not affect them. After all, Eternal Vigilance is the Price of Liberty. The policyholders have to be watchful- they can’t leave everything to the IRDAI. Just as only when 2 hands join together, a clap comes, it is only when the customer and the Regulator join together, Justice prevails. It is the dual and joint responsibility of both the customer and the Regulator. Then there are Great Times ahead for the life insurance industry in general and its policyholders in particular. Let us hope it is not far off.

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R.Venugopal is a Retired Executive Director of the LIC & a Retired Professor, National Insurance Academy Pune. He can be contacted at The email address- [email protected], Mobile 09591256773.