After Ulips, traditional plans come under Irda scanner

After unit-linked insurance policies, the Insurance Regulatory and Development Authority is set to crack the whip on traditional plans as well.

According to Irda sources, the regulator is wary of the low life risk covers associated with some traditional policies and is planning to introduce a minimum death benefit at five times the annual premium.

In the case of unit-linked policies, Irda mandates a minimum sum assured guarantee of roughly 10 times the annual premium (in case of death).

However, for traditional plans, there is no such mandate.

The move comes after a surge in sales of traditional plans across the industry.

Since September last year, when the stringent norms on unit-linked guidelines came into force, insurance companies started focusing more on traditional plans.

As a result, sale of Ulips, which earlier constituted 80 per cent of the total volume, came down drastically.

During April-July this year, life insurance companies collected Rs 26,794 crore (Rs 267.94 billion) by writing new policies and traditional plans accounted for nearly 80 per cent of that.

Irda recently issued letters to all life insurance companies, seeking details on three types of traditional plans: those  where death benefit is defined as a return of premium (with or without interest), products in which the initial death benefit is significantly high and reduces subsequently during the currency of the contract, and products in which insurance cover is insufficient/insignificant in relation to the premium, i.e. products mostly of the savings type.

The regulator has asked insurers to treat the matter as urgent and furnish details within two days.

"This is a kind of camouflage, where customers are being lured with the promise of a decent maturity benefit, but in case of claims (in the event of death),

the benefits or the amounts are sometimes lower than the premiums.

"The basic underlying principle is a life insurance policy should have a sufficient life risk cover," said an Irda official.

For instance, some of the private life insurance companies have launched savings investment plans under the traditional platform, where in case of death the nominees are returned the premiums at a five per cent annual compounded rate.

A case in point is Life Insurance Corporation's Jeevan Astha, which was a single premium policy that collected around Rs 9,000 crore (Rs 90 billion) in 2009.

"Jeevan Astha is a classic example where the death benefit reduces in subsequent years after the first year of the policy. This is not ideal, as the insurance part must be the same for the entire policy term," said an Irda official.

Insurance officials, on the other hand, said if the minimum death benefit clause was attributed in line with Ulips, there would be minimal impact on the industry.

"In case of pure term plans, where the policy holders get the benefit only in case of death, the sum assured is always a multiple of the annual premiums.

It is only in case of other traditional policies, where an insured gets money at maturity, that death benefits are lower," said an LIC official.

However, according to industry experts, Irda is closely watching the insurance companies' product mix, which over the past year increased the weightage in favour of traditional plans (for which the commission can go up to more than 30 per cent).

Similarly, insurers are also increasingly launching products where the sum at maturity is considerably higher than in case of death.

"New products like savings-linked plans are the largest volume drivers in private life insurance plans.

"Agents are now pushing more traditional plans as the commission is much higher; in the case of Ulips, commissions had been capped at five per cent," said an industry expert.