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Guaranteed surrender values of traditional plans for customers have been defined and increased substantially

WHEN the Insurance Regulatory and Development Authority (Irda) first released the draft regulations to all the insurers in early August last year, it gave a clear message that existing product designs will be looked at primarily from the prism of the policyholder's interests. After almost a year of deliberations and discussions, the final guidelines were gazetted in February this year under which all existing group products were to be withdrawn from July 1 (subsequently deferred to August 1) and all individual products from October 1 (Now January 1, 2014).

Back in 2010, Irda introduced a number of changes to unit-linked insurance policies (Ulips). The changes included increasing the insurance cover, introducing charge caps and lowering surrender charge, making them more transparent and cost-efficient for customers. This time, the focus is on reforming traditional products and finessing some of the issues with Ulips. The insurance regulator has also for the first time provided a detailed `definition and salient features' for each category of conventional product.

So what are those key changes that were brought about on the conventional side and why will they prove to be better proposition to the customer?

First key change is that products will offer a higher minimum sum payable on death. For regular premium products purchased by policyholder of age less than 45 years, it will be higher of 10 times the annualised premium or 105 per cent of all premiums paid on date on death or minimum guaranteed sum assured on maturity, or any absolute amount to be paid on death. For those with age more than 45 years, it will be seven times the annualised premium. The minimum death benefit for single premium policies will be higher of 125 per cent of the single premium, or minimum guaranteed sum assured on maturity, or any absolute amount to be paid on death. For those with age more than 45 years, it will be 110 per cent of the single premium. The minimum death benefit has been broadly aligned to that of Ulips as outlined in the 2010 Ulip regulations. Consequently, the product structure dictates a higher level of protection to the policyholder meeting the objective of a life insurance product. Similarly the minimum level of protection has to be offered in single premium plans.

Secondly, Irda has asked insurers not to offer fund level guarantee in their products, which means withdrawal of the popular `highest NAV' product. The regulator's argument was that such products do not provide the transparency in terms of underlying fund's investments and strategy, which may set unrealistic expectation in the minds of customer leading to mis-communication to the customers on returns.

Existing traditional plans with benefit linked to any external index will be categorised into a new variable insurance products category, which will follow a charge cap regime similar to Ulips, thus making existing products significantly less attractive from the company's perspective. The reason for this change is to bring clarity to the product structure and align the charges to that of Ulips.

Guaranteed surrender values of traditional plans for customers have been defined and increased substantially.

First-year commission payable has been pegged to the term of the policy, that is, in case of regular premium insurance policies, a policy with a premium paying term (PPT) of five years will not pay more than 15 per cent in the first year, 7.5 per cent in the second and third year and 5 per cent subsequently. Products with PPT of 12 years or more will have first year commissions up to 35 per cent in case the company has completed 10 years of existence and 40 per cent for the company in business for less than 10 years. This has been done by the regulator to encourage long-term selling by the insurers.

The new regulations are radical and nudge the industry in the right direction.

As an immediate effect, insurers might see a short-term dip in new business; some might be even forced to rethink their business models due to challenges in maintaining growth and profitability. However, in the long term, the changes will lead to a more stable, transparent and customer-focused product regime ­ this can only lead to improving the prospects of the industry.

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