Monday, 6 June 2011

India’s insurance regulator is working on a plan to reduce the future risk for LIC, which will be saddled with growing annuity payouts because of rising life expectancy.

The Insurance Regulatory and Development Authority, or Irda, may make it mandatory for private insurers to sell annuity plans to their customers.

The immediate concern is about the future demand for annuities from subscribers to the New Pension Scheme, or NPS, which was set up to manage pension funds of civil servants joining after April 1, 2004. The scheme was later opened to private citizens. A subscriber to the New Pension Scheme is required to invest at least 40% of the pension corpus to buy an annuity.

“LIC will be saddled with annuity payouts when subscribers to NPS start buying annuities. So, we need to plan early in the day to de-risk LIC in the medium term,” said Irda Chairman J Hari Narayan.

An annuity is an insurance product that provides annual payment to the buyer at regular intervals, usually after retirement.

State-owned LIC dominates the annuity business with a 95% market share.

It offers a fixed return on its annuity plans, making them far more attractive than rival offerings from private insurers.

NPS has 7.5 lakh government officials as subscribers, according to its website. There are 47,000 subscribers who are described as belonging to the ‘unorganised’ sector as well as 4,000 corporate clients.

Around 5 lakh individuals have joined a variant of the NPS meant for individuals below the poverty line.

The civil servants subscribing to NPS will start retiring two to three decades from now, but private subscribers could leave earlier.

LIC has an asset base of around Rs 12 lakh crore.

Derisking the institution has featured high on the regulator’s agenda after an actuarial valuation of three of its assured return schemes of the 1980s and 1990s vintage reportedly showed them in the red.

This was inevitable as the schemes were launched when interest rates were much higher than they are today.

The increased longevity of Indians is also bound to leave these schemes with a deficit.

Irda now wants to pare LIC’s risks before the spurt in demand from a cohort of pensioners by creating a competitive annuity market.

“Today, private insurers offer annuity plans, but these are only on paper. The rates are so unattractive that customers are forced go to LIC whose pricing is about 200 basis points higher,” says R Kannan, former member actuary, IRDA.

However, GV Nageswara Rao, managing director and CEO of IDBI Federal Life, reckons that private insurers have not focussed on annuities just yet. “The pension business has grown only over the last three to five years and those customers will buy annuities at a much later date,” he said.

SB Mathur, secretary-general of Life Council, an umbrella body for life insurers, argues that in the Indian environment, annuities are closer to bank fixed deposits. “Annuities are less risky here because they do not carry a mortality risk as most people in India prefer an annuity with return of capital. This is quite the opposite in the West”.

One option before the regulator is to make customers stay with private insurers who sell them pension plans.

This means that a person buying a pension product from a private insurance company would not have the option of purchasing an annuity from LIC.

“The catch here is that the customer would be captive to the company and could get gamed by the company. However, in countries such and Japan and Germany, the regulator declares an annuity rate to prevent possible gaming. We need to think through this option carefully,” said Hari Narayan.

Some insurance experts say forcing the customer to stay on with an insurance company is anti-competitive. It would also mean a reversal of existing rules that give customers the flexibility to buy a pension plan from one insurer and annuity plan from another. The pension business contributes to around 30% of the industry’s income.

Wednesday, 17 Nov, 2010

 MUMBAI: IRDA has fined Reliance Life Insurance 10 lakh for paying excess referral fees and selling policies before they have been approved by the regulator.

In a circular issued on Tuesday, the regulator said Reliance Life had been given an opportunity for a personal hearing where Reliance Life president Malay Ghosh and his team were present.

Among the irregularities detected during inspection, Irda has listed:

• The opening of new offices without permission,

• Delay in issue of licence to agents,

• Outsourcing of key jobs,

• Paying high referral fees and

• Violation of the file and use policy for new insurance products

The regulator has issued warnings in a couple of cases but has decided to fine the company 5 lakh for violating the guidelines on referrals fees and for selling products before approval.

In the personal hearing, Reliance informed the regulator that it had not opened any new office without approval but merely generated MIS for locations which were not on Irda list for internal monitoring on sales units, which were identified prior to opening a formal office.

This explanation was not accepted by Irda. “However, as this is the first time such an instance has been noticed, Irda will merely issue a warning to the company not to repeat such practice,” the regulator said.

On the subject of delay in issue of licences, Reliance Life said the time lag was due to non-submission of certain requirements by the applicants. The company confirmed in more than 90% of cases it has issued the licences within 48 hours of the declaration of results. This explanation was accepted by the regulator.

On outsourcing of key jobs, the life company said co-sourcing of licensing process was a legacy of AMP Sanmar Life Insurance Company, which was acquired by Reliance Life a few years ago. It said it has stopped the outsourcing process after it has transitioned the entire process to Mumbai and since then has not outsourced any of the activities related to licensing.

On paying excess referral fees, Reliance Life admitted the lapse and said the fees were paid in anticipation of business volumes to be generated as per initial commitments. Since this is in violation of the laid down provisions of the guidelines, Irda has directed Reliance Life to pay a penalty of ‘5 lakh for the violation. The regulator also did not accept the company’s argument for selling policies before they were approved and fined them an additional 5 lakh.

 Friday, 5 Nov, 2010

 MUMBAI: The non-life insurance industry has been barred from selling any form of credit insurance, following state-owned insurer Oriental Insurance facing claims up to Rs 400 crore on a cover granted to Paramount Airways.

Companies that provide this cover have termed the reaction knee jerk and fear that it will have repercussions on the economy.

A circular issued by the regulator on Tuesday said soliciting and marketing of all credit insurance policies has been banned. Although Irda had issued a similar order earlier, many companies interpreted that as a ban on providing credit insurance to banks since the order arose following a large claim made by banks who had lent to Paramount.

The new order applies to all insurance companies, except the state-owned export credit and guarantees corporation, whose primary function is to compensate exporters if their buyers default in payments. “This is a knee-jerk reaction. If one company has made a mistake in its underwriting process, the erring company should be taken to task and proper underwriting procedures prescribed rather than ban the product itself,” said an official, who managed the credit insurance portfolio with a private life insurer.

Officials say this order would impact credit insurance business worth over Rs 200 crore. A few hoped that Irda will come out with new guidelines, under which credit insurance business can be carried out by the end of 2010 before existing policies come up for renewal in January.

Oriental Insurance is understood to have been stuck with losses largely because of multiple policies providing credit insurance cover to loans taken by the beleaguered airline. The policy was sold through various branches, which led to a concentration of risk. All companies that ET spoke to feel that the claim was a failure of adequate risk management practice.

The credit insurers were introduced to the banks by the airline which managed to get loans on the back of the credit insurance policy issued by Oriental Insurance. Many banks agreed to lend to Paramount as the policy issued by Oriental meant that any default by the airline would be made good by the state-owned insurance company. Since issuing the policy, Parmaount has failed to meet its loan obligations. As a result, lenders, including state-owned banks have asked Oriental to make good their loss. The fate of these claims is uncertain. Although Oriental does not have enough reinsurance support, it has a large balance sheet. Also, it is likely that the central bank will approve a restructuring policy for airlines.

The ban on credit insurance means that any manufacturer who wishes to sell on credit or any distributor who makes payments to his principal will now have to look at alternate means of risk transfer. This could include guarantees or letters of credit from banks. “India is the only market in the world which is so much dependant on bank guarantees. Worldwide insurance companies take on bulk of the credit risk transfer” said an official.

Another insurance broker pointed out that credit insurance was a mature product tried and tested by companies across the world and in India. They pointed out that since companies who specialise in this business have the capacity to appraise the creditworthiness of various entities, this is a superior mode of risk transfer compared to bank guarantees.

Monday, 23 Aug, 2010

Soon, all insurance companies will withdraw most of their existing unit-linked insurance plans (Ulips) and will issuing a new set of such policies. This is in response to the Ulip guidelines issued by the insurance regulator Irda on June 28, 2010.

Existing policyholders need not worry since the rejig will not affect their current investments in these plans.

Immediate fallout of the latest Ulip guidelines could be that insurance companies may tend to go slow on issuing pension plans. Expect some hesitation from insurers on this front now that the regulator has introduced a minimum guaranteed return of 4.5% on unit linked pension products.

This is to protect lifetime savings of pensioners and to differentiate pension from other investment products. A guarantee of minimum returns would make it difficult for issuers to invest pension funds in riskier financial securities, such as equities.

Equities offer superior long-run investment returns but not without a risk of loss of capital. Hence, insurance companies may face the dilemma while issuing pension products with guaranteed returns. Industry observers feel that there will be very few such pension plans that will be on offer after September. Hence, those interested in unit-linked pension plans may need to hurry.

Another major step taken by Irda was the standardisation of surrender charges. These charges are applicable when a policyholder surrenders the policy before the predetermined lock-in period. Earlier in case of such policy surrender, the return on the investment was dependent on the discretion of the insurer. These charges are now standardised and are also discounted to a large extent.

In a bid to promote Ulip as a long-term product, Irda has increased the lock-in period from three years to five years. This means, in case a policyholder surrenders the policy before five years, the fund value will be returned to him only after this period. To be fair with investors, the regulator has made it mandatory for insurers to pay a minimum of 3.5% interest per annum on the fund value.

For instance, a healthy male opts for a Ulip with premium of Rs 50,000 and decides to discontinue the plan after paying two annual premium installments. Assuming the fund to grow at 6% per annum, the fund value at the time of discontinuation would be Rs 103,000. The insurance company will deduct Rs 4,000 from the fund value as surrender charges. According to the new guidelines the insurer would pay 3.5% interest per annum on the remaining fund for three years. This means the policyholder would receive Rs 109,760 three years after the discontinuation of the policy.

The new guidelines pertaining to surrender of policies give investors the flexibility to surrender a plan without loosing much of their fund value. But there is a caveat – it may also provoke distributors to promote policy churning. In order to earn more commission, distributor may ask policyholder to surrender and opt for a different policy under the pretext of getting higher returns.

Investors need to beware and not fall prey to such attempts of forced churning.

Remember that insurance is a long-term play and one needs to remain invested for long to obtain meaningful returns.

Another point worth noting is that due to the cap on charges according to the latest guidelines, Ulip commission has reduced. But on the traditional products, it remains as high as 30-40%. This may make insurance distributors (agents) focus more on selling traditional products such as term insurance, endowment and money-back policies.

Through the new guidelines, Irda has made it compulsory for agents to disclose the commission earned on the policy offered. Irda has also tried to restructure the grievance cell for the policyholder.

It has made it mandatory for insurance companies to have a help-line number and a grievance redressal officer to tackle complaints of policyholders. One can call or mail their complaint to the insurer. Insurance companies should acknowledge receipt of a complaint and mention the procedure as well as time they would take for redressing the grievance to the customer within three days of receipt of the complaint.

In case the insurer fails to respond within two weeks, one has the option to approach Irda for registering complaints and taking action to resolve them.

 10 Aug 2010

 Insurers as well as the Insurance Regulatory Development Authority (Irda), for the first time, have started to maintain and share a database of hospitals involved in frauds. Insurers have also started to maintain an informal network of customers found to be indulging in wrongdoing (read: false claims), which they have started to circulate among themselves.

It has been estimated that false claims in health insurance is costing the general insurance segment `600 crore every year – about 10-15% of the total claims paid.

The segment has seen very high claims ratios which, coupled with fraudulent claims, have become a matter of concern for insurers.

As per Irda figures, the health insurance industry paid out Rs 4,087 crore in 2008-09 as claims, which was almost double the claims paid in 2007-08 at Rs 2,904 crore. During these two years, the industry recorded a claim ratio of more than 100%, implying that the claims paid exceeded the premium earned.

The main frauds in health insurance pertain to overstating claims or involve manipulating documents of non-existing hospitals, pharmacies etc or to cover-up non-disclosure of facts at the proposal stage. It has been seen that hospitalisation benefit policies and personal accident policies are more subject to frauds.

Research reports claims say that 20-30% customers overstate their loss since they believe that insurance companies will always pay lesser than what one claims, even if the damage assessment is true. Manipulation of documents is one of the common means of fraud in the segment. India Forensic Research states that medical bills are the most commonly forged documents.

Some individuals also resort to multiple claims. Holding multiple health insurance policies from various insurers does not amount to fraud. However, in case of an event, the claim amount payable is divided proportionately in the ratio of the sum insured of each of the policies. Attempts to claim the full sum insured on each of the policies is what individuals try and indulge in, which tantamount to fraud.

To top it all, there have been cases where claims are made in the name of the customer, without the policyholder’s knowledge.

There are also instances where a policy is taken in the name of a customer without their knowledge. These are more prevalent in group policies. With the involvement of multiple entities such as hospitals, laboratories, pharmacies, TPAs, etc, the health insurance is prone to frauds.

21 Jul 2010

 Insurance Regulatory and Development Authority’s (Irda) latest proposal to make life insurance agents more responsible while selling policies has elicited mixed reactions from life insurers.

While some are of the opinion that the move is a step in the right direction and will bring in much-needed accountability, others feel the conditions prescribed are too stringent, resulting in many agents winding up their businesses.

The insurance regulator’s proposal, which was placed in the public domain last week, proposes to de-license agents who fail to achieve a persistency ratio of at least 50%. Persistency is defined as the proportion of policies remaining in force at the end of the period, out of the total policies in force at the beginning of the period. It is an indicator of the number of policyholders who have chosen to renew their policies, broadly signifying their satisfaction with the product sold to them.

The move follows widespread complaints of mis-selling by agents who carry out their task with an eye on commissions rather than policyholders’ needs, eventually leading to the latter deserting policies, which typically entail a tenure of more than 10 years, mid-way.

“The move is aimed at ensuring that the agency force acts more responsibly while selling policies. In that direction, we support it. The interests of insurers, distributors and customers have to be aligned, and persistency is a key factor here,” said Max New York Life MD and CEO Rajesh Sud. “The emphasis on persistency will be approved by one and all – agency as well as industry bodies. In our case, we already follow this principle,” added Reliance Life president and executive director Malay Ghosh.

In addition, Irda has put forth certain other recommendations as well. If the draft norms are implemented, an agent will have to sell a minimum of 20 policies every year and bring in a first year premium income of at least Rs 1.5 lakh. Should they fail to fulfil either of the criteria, they will have to achieve proportionately more in either one to make up for the shortfall in the other, states the proposal.

“Agents in India are not full time as most of them enter the agency force as a stop-gap arrangement and the successful ones stay on. After the revision in charge structure, commissions have come down and it has become even more difficult for an individual to earn a living as an agent,” said the CEO of a life company.

“In India, the commission paid to banks and corporate agents are in many cases higher than the commission paid to individual agent. The proposed guidelines will leave individuals at the mercy of banks and corporate agents who have a bad track record in terms of mis-selling. The new guidelines will hurt the agency channel,” he added.

“Some of the conditions seem harsh, considering that nearly 30-35% of agents in the country are unable to sell even 12 policies in a year. If these norms come into play, many agents could go out of business,” pointed out GN Agarwal, chief actuary of Future Generali Life Insurance.

Some also feel that since many agents do not meet the requirements at present, the regulator needs to allow a reasonable transition period to enable companies to train agents and boost their productivity. Irda has set July 31 as the deadline for receiving comments and suggestions on the draft norms from the general public, life insurers and other stakeholders.

19 May 2010 (Wednesday0

Holders of unit-linked policies will in future get more of their money back if for any reason they are forced to surrender their policy within a couple of years.
 

New norms by the Insurance Regulatory & Development Authority (IRDA) now provide very strong incentive to insurers to ensure that policies do not lapse.

Late on Tuesday, the regulator unveiled new regulations on unit-linked insurance plans, capping the surrender charge on policies that are returned after a year at 15%.

This is a huge benefit for the customer as today there are several plans where the customer gets nothing if s/he surrenders her/his long-term policy after paying the first year premium.

Consider this example. If the policyholder paid Rs 100 in the first year, a big chunk of around 40% is deducted by way of various charges. The remaining 60% is allocated to the Ulip fund. If for any reason the policyholder fails to pay the renewal premium, the insured would get back 85% of Rs 60 thereafter, i.e., Rs 51 after the lock-in period.

The maximum surrender charges, which is 15% for first year surrenders, reduces year after year and comes down to 5% for the fourth year and 2.5% for the fifth year.

Bajaj Allianz Life Insurance CEO Kamesh Goyal said: “The new guidelines will benefit customers. It also directly incentivises companies to position their product for long-term and improve persistency.” He, however, said the insurance regulator should allow the development of single premium plans as well as look into the large segment of policyholders, who do not want to commit money for the long term.

Some insurers say the only way they can adhere to these surrender charges is by either reducing the allocation for the customer — which will make their products unattractive — or by reducing their own expenses.

The only way insurers would be able to reduce the charges is by bringing down the commissions they pay on the first year premium.

Henceforth, insurers can hope for a profit only if most policies are renewed. Under the new norms, insurers have to refund the amount under a lapsed policy through a cheque or demand draft to the last known address. Although these regulations benefit policyholders, they will hit the bottomlines of life insurers.

Most companies will now have to rework their break-even dates and some may have to drastically rework their business plans. New life insurance companies, which do not have a distribution network of their own, will be hit the worst. By fixing a ceiling on the surrender charges, IRDA has also taken steps against mis-selling.

Henceforth, if an agent mis-sells a regular premium policy by positioning it as a single premium plan, the life insurance company will stand to lose. If the second year premium does not come in, the life company will have to give back money in the policyholder’s account to the customer (after the five year lock-in).

The new norms called ‘Standardisation of terms and condition of Ulip and treatment of lapsed policies’ issued by IRDA are a part of the new guidelines as an adjunct to the IRDA Act.

They will come into force on the date of their publication in the official gazette and shall apply to all contracts of unit-linked life insurance policies. The regulator has said these regulations supersede earlier ones.

30 April 2010

Car market leader Maruti Suzuki is rejigging its insurance business under instruction from insurance regulator IRDA.

The car major, which has been running its insurance business as an agent of six insurance companies, has been asked by IRDA to change its status to insurance broker.

Maruti is currently in the process of dissolving and merging its six wholly-owned subsidiaries into either the parent company or its brand new insurance subsidiary.

The new subsidiary, entitled Maruti Insurance Brokers Ltd, is currently being set with with a paid up capital of Rs 50 lakh. Earlier Maruti had six wholly-owned companies each working as an agent for six separate insurers – National Insurance, New India Assurance, Bajaj Allianz, Royal Sundaram, Iffco Tokio and ICICI Lombard. Each subsidiary had a paid up capital of Rs 15 lakh.

Following the IRDA’s instruction, the six subsidiary agents will be either merged with the parent company Maruti Suzuki or with Maruti Insurance Brokers. The decision will be taken by the Maruti board.

When Maruti started its insurance business in 2002, the norms for insurance brokers were still being formulated. The company decided to set up Maruti Insurance as a brand and acquired a corporate agency licence. Maruti started out with three insurance companies but later expanded to six. With IRDA formulating regulations for insurance brokers, Maruti was asked to change its status as it was handling multiple insurance companies.

People close to Maruti say that the change in status will not affect the end customer. “The Maruti Insurance brand, the premia, the cashless benefits… everything remains unchanged. The only change happens at the back end where instead of six subsidiaries acting as agents, there will be one subsidiary acting as a broker for the six insurance companies,” said a person with direct knowledge of the matter.

IRDA rules don’t allow agents to handle multiple insurance companies. Maruti took the decision to set up a new broking subsidiary a little over a month ago.

Insurance is a crucial related business for Maruti and its total policy size hit Rs 10 crore just a fortnight ago. The insurance business is a crucial value added service for Maruti’s dealers in ensuring customers keep coming back to the brand.

According to the company website, 86 customers out of 100 buying Maruti cars, choose Maruti Insurance. In all 1.5 million policies were issued by Maruti Insurance in FY 06-07.

Maruti Insurance provides insurance cover for Maruti vehicles only (third party policies are not issued) and is available to customers through Maruti’s dealer network across India. Maruti Insurance provides cover only to those Maruti vehicles that are up to 7 years old though once insured the vehicle can remain under comprehensive cover for rest of its life.

17th Mrach 2010,
The chances of an Indian life insurer going bust would not be more than once in two centuries. Sounds incredible, but this is the essence of the insurance regulator Irda’s new model, for life insurers to assess risks and compute the capital needed to cover them.

A life insurer that adopts this model economic capital in jargon has a 99.5% chance of remaining solvent with the financial strength to pay claims of policyholders.

The new model allows insurers to factor in various types of risks, quantify each of them and charge capital accordingly.

The amount of capital that the company needs to set aside would depend on the type of business it underwrites.
More work for actuaries, but the spin offs are many. The insurance company will have a clearer understanding of its risks and would be able to quantify such risks better. This, in turn, would improve efficiency in capital allocation and allow the company to review its pricing decisions.

If more capital is released, it would help the insurer grow, boost profitability and lend more financial stability to the business.
Stability of financial institutions has dominated the agenda of regulators the world over, after the global financial crisis in 2008. India is no exception, though its financial institutions were insulated from the crisis.

US insurer AIG’s insurance joint ventures in India with the Tatas, for instance, did not feel the ripples of the crisis that saw AIG borrow from the Fed Reserve to meet its collateral obligations.
To Irda’s comfort, the solvency margin the excess of assets maintained by an insurer in the interest of policyholders of most domestic life insurers is well over the prescribed norm of 150%. Now, the regulator wants insurers to move beyond this regime and adopt solvency-II norms that would allow them to assess their own capital needs. One size fits all will not work.
The reasons are simple. The current solvency regime does not make a distinction between a risky and a not-so-risky portfolio, whereas the new model would do so. It would factor in various types of risks including insurance, operational, market, credit and liquidity risks.
The fund management fee, for instance, could take a hit when equity markets are choppy, putting pressure on a company’s profitability.

Economic capital would ensure a safe level of capital to counter such cycles. The companies need capital to grow and to meet unexpected claims, expense over-runs and investment losses.

Currently, if the solvency margin of an insurer is, say 200%, the extra 50% can be used to write new business. However, if the insurer’s business projection crosses this threshold, the company has to bring in extra capital to maintain solvency.
Economic capital would provide a cushion for companies to pay policyholders claims in turbulent times. Its impact on domestic life insurance companies would depend on their product portfolio. Broadly speaking, the capital requirement will be higher for products with a guaranteed return and lower for products that offer no guarantees like the unit-linked insurance plans, one of the hottest products in a bull run.

Globally, banks have been ahead of insurance companies in computing the exact level of risks and setting aside capital against such risks. According to global audit firm PwC, Citigroup, ANZ and Barclays use economic capital computations as input for strategic decisions.

Once an insurer identifies the risks, it can strategically position its policies to address and mitigate them. The difference between actual capital available, economic capital and solvency capital will determine the policy of the insurer to take on extra risks to write new business. Ultimately, we have to move towards risk-based supervision and the other side of this coin is risk-based capital, reckons Dr R Kannan, Irda member and head of the panel that scripted roadmap for the new model.
Life insurers have to compute economic capital from end-March 2010. The timing is apt as some insurers, including Reliance Life, have announced their plans to float an IPO.

Economic capital requirements would give prospective investors a clear view of a company’s performance and help them make comparisons across companies.

It would also improve the comfort level for foreign promoters of insurance joint ventures that are expected to bring in more capital after the government amends the insurance law to hike the FDI cap from 26% to 49%.

The new model is a good start for life insurers in India whose business hinges on the expectation of making money in future. Other emerging economies that plan to open up insurance sector could take a cue from the Irda, if the model helps provide a safety net for policyholders.

http://www.irda.gov.in/Defaulthome.aspx?page=H1