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Life insurance: Lid on churning

Irda seeks to curb practice of misleading customers into surrendering their policies for new ones

In a drive to prevent agents from misleading clients into surrendering their existing life insurance policies at a loss and, then, encouraging them to buy a new policy, the insurance regulator has come out with an exposure draft. No insurance agent, intermediary or insurance company will be permitted to replace a life insurance policy, except if it is in the interest of the policyholder.

The Insurance Regulatory and Development Authority (Irda) has stated that an intermediary or agent will have to make every effort to keep in force the existing life insurance policy or annuity contract. If there is a replacement of a life insurance or annuity policy, the agent or the intermediary will have to obtain a written consent from the policyholder and get all details of the existing contract.

The policyholder will have to give a written declaration stating that he has been advised that there may be certain disadvantages in replacing the policy and he has taken the decision after understanding its financial consequences. The intermediary, agent, or the insurance company official will have to explain the consequences of replacing the existing life insurance policy or annuity cover to the policyholder in writing.

?On examining the existing business practices adopted while soliciting the life insurance business and in order to protect the interests of policyholders by letting them have an informed choice while replacing the existing policies, the authority proposes to issue suitable guidelines,? says the Irda?s draft exposure. Stakeholders have to forward their views to the regulator by July 20 and, thereafter, the final guidelines will be issued.

Analysts say the urgency shown by Irda reflects the fact that churning is very much rampant in the industry. ?Churning schemes just to earn some extra commission has eroded the trust of policyholders in life insurance, which is the second most popular financial products after bank fixed deposits for retail investors,? says Amit Goyal, a financial consultant.

Life insurance policies are beneficial in the long run and replacing the existing policy for a new one will result in paying higher premium for the same sum assured due to advancement of age. The policyholder will have to pay an extra premium because of changes in lifestyles and may even face loss due to withdrawal. The other disadvantage of replacing an existing policy is that the insurance company may deny or not carry forward all accumulated benefits of the existing policy. Agents typically churn unit-linked insurance policies (Ulips) to earn commission by projecting attractive returns from a new scheme.

If the policyholder is not properly guided by the company regarding the withdrawal of the existing policy, he has the right to exercise the restitution of the existing policy within seven days of the receipt of the new policy. Irda has mandated that if the policyholder wants restitution to the existing policy, the insurer will have give back all benefits eligible to him. The Irda’s IGMS data, which track the nature of policyholders? complaints, show that ‘unfair business practice’ constitutes the largest segment. In 2012-13, it accounted for almost half of the total complaints in the life insurance industry compared with 32.5% during 2011-12. Most of the misselling was reported in conventional policies after curbs were placed on Ulips in 2010.

Even the persistency ratio of life insurance policies, which indicates whether it serves the long-term needs of the policyholder, went down as the duration of the policy advanced, especially for private insurers.

A survey done by global consultancy firm EY in 2012 found that switching of life insurance policies in India is the highest in the world. While an average 10% customers have switched providers in life and pensions policies in the last five years across all countries in the survey, in India, however, the figure was higher at 17%. The swing factor in India, according to the report, appears to be the role of the agent. Unlike other markets, Indian consumers cite their agent recommending a new provider (36% of respondents) or agent changing to a different provider (35% of respondents) as the two most frequent reasons why they change the provider.

Other important factors influencing persistency are a change in needs (33%), particularly for bank and direct customers, and poor service (28%) or product performance (28%).

More interestingly, the survey shows that customers in India are increasingly accustomed to having their loyalty rewarded in other industries, either through price discounts or extra value. About 50% of Indian customers feel insurance lags other industries in rewarding loyalty. ?At the point where customers leave, they clearly state that if the provider had given them an incentive to stay, they would have considered doing so. On average, 34% say that they would reconsider the decision to switch if insurers made a better offer on their existing product, while 38% say that providing more personal contact and greater transparency would help to convince them to stay,? the report says.

However, the most worrying part was that as customers become more demanding that products and service meet their evolving needs and expectations, there could be more switching. ?Over the next five years, 33% of customers say that they are likely to switch providers,? the survey notes.

The insurance regulator’s move would help prevent rampant churning and bring in greater transparency about products and performance of life insurance companies.

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First published on: 24-06-2014 at 00:47 IST
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