Traditional Life Insurance Products to Come under the Scanner..Eventually

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 IRDA’s 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.