The Insurance Regulatory and Development Authority (IRDA) hopes to bring out the final guidelines for micro insurance sector in two-three months.
The guidelines will focus on the issues of product design and distribution. IRDA want companies to design products wherein customers can get slightly higher returns than the premium deposited at maturity.
The guidelines would also focus on the distribution channels that can be adopted by insurers to help penetration of the product in remote areas.
Index-Linked Insurance Products (ILIPS) are expected to remain absent from portfolio of life insurers from October onwards. As in tandem with the new product guideline, ILIPS would not be considered as a separate product category. ILIPS are those insurance products whose benefits/returns are linked to benchmark indices.
These products are linked to the ten-year government bonds or equity indices like Sensex and Nifty. While those linked to government bonds are lesser riskier, those linked to equity-based indices would have fluctuations in returns, based on stock market performance.
Presently, some life insurers offer this product to their retail customers. Insurers say that they have seen good consumer interest for ILIPS due to them being linked to government securities.
This product is easy to understand and transparent in terms of the returns. Hence, it has been one of life insurer’s top-selling products. Taking this into consideration, life insurers have approached Insurance Regulatory and Development Authority (IRDA) to allow them to sell the product post October too.
From October 2013, the new product norms for traditional products will be enforced. If insurer’s plea is not considered, life insurers will either have to completely modify the product or discontinue it. Life insurers have requested the IRDA to allow them to sell the product on the premise that these products are linked to government bond yields and hence are not very risky.
In the initial draft guidelines on traditional products, IRDA has talked about Ilips as a new category of life insurance. It had said that insurers will have to provide a benefit illustration for the insurance products, linked to benchmark indices.
The IRDA had said that ILIPS will have benefits that clearly reflect the possible movement of the index to be linked and the value of the benefit to be guaranteed in such a scenario. For example, if there is a change of less than 2% per annum on interest rates, the value of benefits assigned would be 0.25% per annum of the policy account.
The death benefits, lock-in period and surrender norms were similar to ULIPs as per the draft guidelines. However, this product category was excluded in the final traditional product guideline as the industry was apprehensive on the calculation of the charges for the product.
Meanwhile, insurers say that there are limited transactions in this segment. There have not been many transactions happening from wholesale investors.  There have been transactions from the retail investor’s side.
Banks wishing to become insurance brokers might have to segregate a broking arm which would be an independent accountable unit.
The report of the Insurance Regulatory and Development Authority’s (IRDA) committee on insurance broking says that the bank broking unit should have at least two persons with the requisite qualifications, mandatory theoretical and practical training and having passed the examinations required by the examining body.
The report also said that the remaining staff should meet with the training requirements specified under clause of the code of conduct, in addition to participating in relevant insurance seminars, workshops and continuing education programmes organized by the broking association and other stakeholders in the insurance sector.
The report said that banks acting as brokers would enable utilization of the entire network of branches and increase insurance penetration, plus adding to competition in rendering services. Since Reserve Bank of India (RBI) had earlier expressed concern about banks acting as brokers, IRDA says the RBI position needs to be addressed.
Since banks are regulated separately by the RBI, it shall be a measure to enhance the efficiency in the conduct of procurement of insurance business and also accountability to the policyholder as compared to the agency channel, it said.
The report says the bank should have a board-approved policy to address issues with regard to conflict of interest between the bank and clients receiving banking services vis-Ã -vis insurance broking. The said policy has to be filed with the authority at the time of seeking an insurance broking license and the revised policy at the time of renewal.
The banks registered/licensed by RBI could be recognized as an entity to act as a direct insurance broker and be regulated by IRDA for their activities and functions specified in the IRDA insurance broking regulation. Banks will have to keep the following minimum deposit with IRDA’s lien-a direct broker to keep Rs 50 lakh, a reinsurance broker to keep Rs 2 crores and composite broker to keep Rs 2.5 crores.
Banks need not have the additional capital requirement meant for direct brokers but must maintain a fixed deposit for the purpose of running the broking business.
Banks engaged in insurance broking might be required to furnish an internal audit report on the performance of their insurance broking business annually from a chartered accountant or professional body different than the one auditing the non-broking banking operations. Among the other issues, the report said that the annual fees should be reduced to 0.4% of the preceding year’s revenue.
Further, the ceiling on business from a single client is proposed to be increased a flat 50% for any single group. Business emanating from a government body or a public sector unit is excluded from this provision. In terms of the requirement of capital, the report has proposed a new clause on transfer of ownership. It has said the capital should not be pledged and effective ownership and control of the shares must rest with the entity/individual approved by the authority.
For the life insurance business, an additional bonus commission of 5% of the first year’s new business premium earned has been proposed.
The Insurance Regulatory and Development Authority (IRDA) has brought out a guidance note on preparation of investment return wherein detailed procedure for it has been given.
The Assets Under Management (AUM) were around Rs 17.83 lakh crores in 2013. To keep up with this growth in funds, IRDA has proposed the systems and processes, should keep pace.
According to this note, all periodical returns are required to be filed with the authority within 30 days from the end of the quarter.
Non-life insurance companies are struggling to bring their management expenses -wages, dividends and commissions – under the prescribed limit.
Management ratio, or the portion of gross direct premium collection that is utilized for meeting management outlay, was over 24% of the gross premium collected a year ago for non-life insurers, and projected to slide to about 22% this year –still well above the 19.5% prescribed by section 40C of the Insurance Act.
State-owned, Oriental Insurance, New India Assurance, National Insurance and United India Insurance are seeing a drop, albeit just 3-5%, in their management ratios this fiscal.
Experts say that adopting strategies like revision in prices and commission helped the state-owned insurers. Also, in line with the finance ministry’s directives, they steered clear of loss-making portfolios, and cut their exposure to select group health policies. They revised prices in segments like third party and group health policies.
Insurance Regulatory and Development Authority (IRDA), on its part, raised motor third party premiums by 30% in March. It also allowed a few general insurers to modify the prices in segments like retail, group health and property policies.
But, private sector non-life insurers have not been as successful. Private players need to wait till their business picks up. As the business grows, their expenses will come down.
Chief executive and actuaries of the 24 life insurance companies had a meeting on 2 May 2013 with T S Vijayan, Chairman of the Insurance Regulatory and Development Authority (IRDA). It was his first meeting with heads of this segment of the sector after becoming the head of IRDA, in late February.
The discussion centered on the slowing growth of the life insurance segment and what to do about it. The meet discussed the traditional product guidelines and procedures in implementation, new pension norms and means of expanding portfolios.
Vijayan discussed what needs to be done to boost insurance penetration and density. Insurance penetration, measured as the percentage of insurance premiums to gross domestic product, was 4.1% in 2011, compared to 5.1% in 2010. Further, India reported a fall in insurance density for the first time in 2011. The figure fell to $49 or around Rs 2,695 in 2011, from $55.7 or around Rs 3,063 in 2010. Insurance density is calculated as the ratio of premiums to population (per capita premium).
While no major regulatory decision was taken in the meeting, the IRDA Chairman was offered different perspectives on the issue concerning the industry. The meeting helped him to get an overview of insurer’s concerns and steps that need to be taken for it to be resolved.
Recently, T S Vijayan has also held a meeting with general insurers, to discus issues pertaining to that segment.
The finance ministry has asked private sector insurer ICICI Prudential Life Insurance to cough up over Rs 130 crores for alleged evasion through non-payment of service tax.
The Directorate General of Central Excise Intelligence (DGCEI) has issued show-cause-cum-demand-notice recently to the company alleging irregularities including fudging records of commission paid to field agents or channel partners in lieu of policies being sold by them among others.
Officials of the DGCEI, an investigative arm of revenue department under the ministry, verified the accounts book of the company for the last five years (2007-08 to 2011-12) and claimed to have found irregularities vis-Ã -vis adherence to service tax laws.
The officials found non-payment of appropriate service tax on the commission paid to their channel partners for the generation of life insurance business and collection of service tax from their corporate agents without any authority in law and not depositing the same to the government exchequer.
The DGCEI has raised a demand for payment of about Rs 136 crores on account of alleged service tax evasion to ICICI Prudential Life.
ICICI Prudential has said that it will respond to the notice within the stipulated time period.
The DGCEI officials alleged that the company was paying huge sums of money to their channel partners under different heads in lieu of commission, thereby not paying service tax on the correct amount paid.
In some instances, up to 80% of the premium paid by the unsuspecting customers was given to the channel partners as commission for the sale of life insurance products in gross violation of Insurance Regulatory and Development Authority (IRDA) norms.
The DGCEI, which began probe last year to unearth alleged service tax evasion by various life insurance firms, is likely to issue show-cause-cum-demand-notice to other firms as well.
Investigations have found alleged service tax evasion of at least Rs 300 crores by private sector life insurance companies.
The insurance companies under probe are found to be allegedly maintaining wrong data of commission paid and not paying service tax being deducted from their corporate agents.
All life insurance companies are required to pay service tax at the rate of 12.36% on the total commission paid to the corporate agents and the individual agents under the reverse charge mechanism, where as brokers and referrals are individually liable to pay service tax at the rate of 12.36% on the commission amount received from the insurance companies.
The Insurance Regulatory and Development Authority (IRDA) is planning to tighten the product approvals process further.
As per the new norms proposed by the IRDA and intimated to the insurers last week, an insurer will now have to demonstrate how its product complies with the regulatory norms.
Insurers need to justify the financial viability of the products and requirement of such a product in the market before filing the product.
Filing of the product will be permitted only after getting the first round of approval.
The scrutiny process may involve detailed examination of products, wherein an insurer will have to justify how the product is suitable for the targeted customers and whether it meets their genuine needs.
Insurers will also be asked to establish the reasonableness in the death cover and the premium charged for the product.
The main objective of this approach is to protect the interest of all stake holders.
The proposal for a new product will also include
Reinsurance arrangement, pricing assumptions, target segment and investment philosophy of the product.
This will be applicable for both life and non-life products.
IRDA believes that these steps will help expedite clearances – to a couple of weeks compared with as long as six months earlier.
These steps will ensure consistency in the products and make the product approval faster.
All this means that insurers will now have to be cautious on proposing the products. Insurers will have to do a lot of homework and market research before floating the product.
With the new mechanism in place, the insurers will have to disclose the amount of business generated in each category of existing insurance products before proposing a new product under a particular category. The regulator will take into account the previous track record of the product before giving a green signal for product filing.
Recently, IRDA put out an exposure draft requiring life insurers to submit a product planner before the beginning of every financial year. This will give the regulator an idea of the number and type of products that will come up for approval during the year.
Pension products might take a little longer to be counted among big contributors to the portfolio of life insurers. These used to be 25% of the total offerings and now down to single digit. While life insurers have started introducing new products in this segment, insurers admit they are at a disadvantageous position, compared to the New Pension System (NPS) by the Pension Fund Regulatory and Development Authority (PFRDA).
In January 2012, the Insurance Regulatory and Development Authority (IRDA) had said that pension products would have to guarantee an assured benefit in the form of a non-zero rate of return, which would need to be disclosed upfront. Further, it said that annuity had to be bought from the same company.
These regulations had led to slower approvals of pension products. Initially, there was a dearth of pension products in the market. However, the gap filled after some private life insurers launched pension products.
Most life insurers feel that the guarantee element has made pension products different from NPS, while their fundamental structures are the same.
Unlike NPS, the service tax is applicable to pension products.
Insurers say that reasons which are restraining life insurers from competing effectively in the pension space include, insistence on annuity being bought from the same insurer, no partial withdrawals allowed etc.
With the current regulations in place, insurers are not comfortable offering non-zero guarantee for pension.
Insurers had shied away from introducing pension products due to the guarantee return requirement. NPS is not mandated to offer these returns. And that skews the pension playing field. So selling pension on the insurance platform is that much more difficult and requires the building of significant pool, say insurers.
Insurers say that they also have to maintain a conservative strategy in terms of investment, to give these non-zero returns.
Insurers say that until these challenges are addressed, pension growth is likely to remain muted.
Life insurers are also planning to take up this issue with the IRDA. Insurers will request the IRDA to make pensions at par with NPS.
However, insurers are hopeful that these issues will get resolved as they move ahead.
With the right nudge, insurance companies can make a significant contribution in pensions since they have the distribution backbone to reach these products to a large audience, say insurers.
The Insurance Regulatory and Development Authority (IRDA) has called for a meeting of the chief executives and appointed actuaries of the 24 life insurance companies on May 2. This is the first time the life insurance sector members would be formally meeting the new IRDA Chairman, T S Vijayan, who took over in February.
The industry will discuss issues related to the new regulations passed by IRDA, mainly the traditional product guidelines, published in February. The guidelines made significant changes in the product structure, surrender charges and commissions payable to the insurance agents.
Life insurers will have to re-file 70-75% of their product suite to conform to the new guidelines. The insurers have been given time till June 30, 2013 and September 30, 2013 to re-file their group and individual products, respectively.
The regulator wants all the life insurance companies to give their opinion about the new guidelines and concerns, if any. IRDA has also asked for details on whether the implementation of these guidelines would have any impact, positive or negative, on business.
The Life Insurance Council, on behalf of the insurers, has already given its view about the new regulations to the regulator. Several provisions of the regulations such as variable insurance products have been termed impractical by the industry.
Among the other issues, areas such as pension product reforms including service tax and guaranteed return, and how to increase the penetration and density of life insurance would be some of the other topics of discussion.
