A year of Regulatory tightening for Insurance industry

Here is an article in yesterday's Business Line. True, IRDA has brought in lots of Regulatory changes in this year! I feel lots of changes are in the right direction!! Read on the article, if you have patience & time!!!

A year of regulatory tightening for the insurance industry

The most notable changes were the ones that had policyholder interests in mind — a cap on the expenses of the popular unit-linked insurance plans and allowing life insurers to sell products online.

2009 was a year in which regulators ushered in quite a few changes and proposed as many, for the insurance industry. The most notable changes were the ones that had policyholder interests in mind — a cap on the expenses of the popular unit-linked insurance plans and allowing life insurers to sell products online.

Apart from regulations which have already passed into law, there are others in the proposal stage — such as the Swarup Committee recommendations and the Direct Taxes Code — which may have far reaching implications for players. Here's a look at the changes suggested, implemented and their impact on the industry.

Cap on ULIP expenses

Unit-linked insurance plans (ULIPs) have been long criticised for their high front-end charges, compared to alternative investments such as mutual funds; which depressed the yield to the investor.

It was to address this issue that the Insurance Regulatory Development Authority introduced an upper ceiling on ULIP charges. This cap is expressed in terms of difference between the gross and net yield to customers.

For ULIPs up to 10 years, the yield difference is capped at 300 basis points, and for those running over 10 years, it should not exceed 225 basis points.

Apart from this, the regulator has also imposed a cap on fund management charges at 1.35 per cent annually, within the overall cap, for all products.

Insurance companies voiced their reservation on including the mortality and morbidity charges in the overall cap and upon the representation, IRDA removed these charges from the purview of the cap on expenses.

The new regulation came into effect from October 1 for new products and existing ULIPs are required to meet these criteria by December 31. Responding to this change, a few insurers have already withdrawn some existing products and re-launched them in line with the new regulation.

Online purchases

IRDA has permitted insurers to sell life insurance products online, which allow customers to purchase a life insurance policy without an intermediary.

This is expected to drive down the cost of buying policies with one insurer recently offering a discount of 40 per cent on premia for investors who opted for its online term insurance plan.

Promoters lock-in

IRDA is also ready with the final guidelines on corporate governance pertaining to the insurance industry. According to the guidelines, the promoters of insurance companies would have a lock-in period of five years before they are allowed to transfer the shares of the company to a third party.

In India, AMP Sanmar was the only insurance company to exit the business since the sector was opened up to private players.

However, this regulation is designed to ensure that policyholders enjoy continuity as only players with a long-term view will enter the sector.

Swarup Committee recommendations

The Swarup committee has submitted its proposals for doing away with the agent commission that is embedded in the premium paid by the policyholder, akin to mutual fund entry loads. It has also suggested rationalising the current commission structures of the agent. While the agent force has predictably objected to these recommendations, the insurance regulator, insurers and the life insurance council have also opposed these proposals.

Direct Taxes Code

The draft of the proposed Direct Taxes Code recommended that insurance investments, for long driven by their tax benefits, should be brought under Exempt-Exempt- Tax regime, which would make the final proceeds of insurance policies taxable on withdrawal. Further, it has stated that to get tax exemption, the premium payable during the term of the policy does not exceed 5 per cent of the capital sum assured. If the committee's proposals are accepted, insurance companies may find it hard to sell traditional endowment products that driven largely by tax benefits.

Multiple products

IRDA is considering allowing banks to tie-up with multiple insurance companies, for vending their products. That will give bank customers wider menu of options to choose from, and they can buy insurance products based on their needs.

IPOs from insurers

Initial public offerings (IPOs) from insurance players have been on the anvil for some time now. However, according to IRDA regulations, only those with a 10-year track record are allowed to float public offers.

Reliance Life has approached IRDA to seek its permission to float a public issue, despite a shorter history and the regulator has asked the company to approach the Government. Currently, the Government is considering the request.