IRDA has raised its concern over how products are being sold by insurers without taking in account the interest of policyholder and increasing exposure to risks.
Products assuring unlimited sum assured
IRDA is worried about the products assuring unlimited sum assured as in such products risks are ultimately borne by foreign reinsurers, over whom IRDA has no control.
IRDA also alleged that industry is moving towards fronting the foreign reinsurers. In the lieu of insurance fronting refers to the arrangement in which primary insurers acts as the insurer of the record by issuing the policy and passing the entire risk to the reinsurer in exchange of the commission.
Typically, fronting insurer is licensed to do business in the country where the risk is located but reinsurer is not. In such cases, reinsurers are termed as captive or an independent insurance company that can’t sale insurance directly in a particular country.
As per IRDA every insurance product should have maximum sum assured up to which insurer ought to accept the risk. And by specifying no limit and as a consequence having low retention, raises question whether insurance industry is moving towards fronting.
Every life insurance policy has certain estimated sum assured or a maximum return that a policyholder can expect at the maturity and two components pure risk cover and savings. The risk cover component of the policy is accounted as per the underwriting capability of the insurer.
The risk on the books of the insurer should be in line with the solvency margins. If any part of the risk is passed on the reinsurer, insurer needs to pay certain premium to the reinsurer. Normally, the solvency margin is adequate to bare the risk built into the insurer’s books as a part of it is borne by the reinsurer. However, if the reinsurer defaults due to the credit risk, impact is passed on the books of the insurer which hits its solvency margins.
As per IRDA if a insurer has low risk taking ability and takes the help of foreign reinsurer to offer insurance products, such a firm acts just as a insurance service provider not as a insurer. This means heavy reliance on reinsurer, as they are subject to heavy credit risk, any default by reinsurer can heavily hit the solvency of the insurer.
In India General Insurance Corporation of India (GIC Re) is the only domestic reinsurer while Swiss Re and Munich Re are two main foreign reinsurers.
According to insurers, every insurer should try to retain its own risks because apart from concerns raised by IRDA it also means increasing additional expenses. . Passing the risk to reinsurer involves the premium cost to the insurer. But rates of foreign reinsurer are more competitive than GIC Re. To de-link the risk from possible defaults of foreign reinsurers, there should be another domestic reinsurer as well with competitive rates.
Multiple policies
IRDA is also concerned about the insurers offering multiple policies under the umbrella of single product without additional benefits to the investors.
According to IRDA at the time of clearance, a certain set of funds under the product are indicated. However, very rapidly funds under the product proliferate. This proliferation has little with the size of the fund, this had lead to situation where companies have large number of funds but size of each fund could be small. This creates confusion among the policyholders which can contribute lower returns for them.
As per the insurers apart from addressing all these concerns every fund also needs regular audit.
Highest NAV guaranteed plans
IRDA is also concerned about the Unit-Linked Insurance Plan (ULIPs) that offer guaranteed highest Net Asset Value (NAV) or so called returned guaranteed funds.
Keeping in mind the design of the plan and assurance it carries it is surprising that most of these plans tend towards fixed instruments. Even some products invest their entire corpus in fixed instruments since its inception. Hence, IRDA has recommended minimum equity component for specified period for such products.
As in these products there is likelihood of mis-comunication hence, IRDA is planning to restrict the sales of such products only on multi-pay platform.
ULIPs
IRDA is also concerned about the ULIPs that are not complying with income tax act rules in terms of insurance cover. Hence, it is examining that whether insurers can disclose the maximum possible loss that a policyholder can incur. Currently insurers talks about the possible returns on ULIPs.
