IRDA (Protection of Policyholders‟ Interests)
Regulations, 2002 (life)
S.P. SUBHEDAR
Sr. Advisor, Prudential Corporation Asia Ltd.
22nd January 2003
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Agenda
Background
Identifiable Risks An Individual Faces
How Those Are Addressed By The Regulatory Authority
Protection of Policyholders‟ Interests
Policyholders‟ Reasonable Expectations (PRE)
IRDA Regulations
Safety Net For The Policyholders
Conclusion
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Background
An individual becomes a policyholder after he/she buys a life
insurance product.
Protection of the individual‟s interest starts once he/she gets
interested in buying a life insurance product.
The individual clearly has considerably less knowledge about the
product than the insurer or his intermediary.
People expect to be able to evaluate and buy a product in a truly
competitive market with the confidence that there is a regulatory
system that will provide an environment of trust.
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Identifiable Risks An Individual Faces
While buying a life insurance product, the three identifiable risks
that an individual faces are:
- the insolvency of the insurer;
- a failure to understand the product - hence purchasing
a product that is inappropriate; and
- a failure of the product to meet its forecast or perceived
performance.
For individuals, purchases of life insurance products are rare, and
therefore there is little personal accumulation of experience and
understanding.
Individuals therefore heavily rely on the insurer and its
intermediary for guidance.
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How Those Are Addressed By the Regulatory
Authority
The risk of insolvency of the insurer is addressed by the
regulatory authority through :
- Investment Regulations;
- Appointed Actuary Regulations; and
- Assets, Liabilities Valuation and Solvency Margin
Regulations.
The other two risks are addressed by the regulatory authority
through the Protection of Policyholders‟ Interests Regulations.
This presentation deals with the Protection of Policyholders‟
Interests Regulations from life insurance consumers‟ perspective.
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Protection of Policyholders‟ Interest
The protection envisaged from the perspective of life insurance
services consumer is at the:
- point of sale;
- time of completing the proposal for life insurance;
- proposal processing stage;
- time of policy servicing;
- time of claim settlement;
- grievance redressal stage; and
- in policy wordings.
While the regulatory authority aims at ensuring financial viability
of the life insurers, the policyholders need to have a safety net in
the event of life insurer‟s inability to meet its policy liabilities.
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Policyholders‟ Reasonable Expectations (PRE)
It would be useful here to understand as to what constitutes
Policyholders‟ Reasonable Expectations (PRE).
There is no formal definition of PRE.
The working understanding relates to three main areas, viz.:
- the treatment of with profits policyholders through bonus
declarations;
- the basis on which unit prices are determined for unit linked
business; and
- the exercise of any discretion the company may have, to alter
the terms and conditions applicable to existing policies,
especially in the area of charges under unit linked policies.
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Policyholders‟ Reasonable Expectations (PRE)
(Contd..)
An Appointed Actuary has to ensure that his actions fulfill the
PRE.
The Actuarial Society professional guidance requires that:
“The Appointed Actuary must take all reasonable steps to ensure
that the new policyholders are not misled with regard to their
expectations, e.g. in connection with illustrations at the point of
sale”.
This guidance has been issued with the concurrence of the
Authority.
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IRDA - Regulations - At the Point of Sale
The process at this point of time is regulated by legislation and
also through self-regulatory mechanism created by the life
insurers and intermediary association/s.
The regulations explicitly lay down the norms for various
disclosures so as to facilitate informed decision making by the
customers.
The regulations also lay down that “In the process of sale, the
insurer or its agent or any intermediary shall act according to the
code of conduct prescribed by” :
- the Authority; and
- the self-regulatory bodies of the insurers and intermediaries.
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IRDA Regulations - At the Point of Sale (Contd..)
The illustrations create expectations in the prospective
policyholders and a life insurer has to ensure that those remain
reasonable and are managed.
The regulations are not clear whether “the process of sale”
includes illustration.
The illustrations form an important part of “the process of sale”
and need explicit reference in the regulations.
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IRDA Regulations - At the Point of Sale (Contd..)
The regulations prescribe ceiling on rider premium/benefit:
- health related rider premium ceiling: 100% of premium
under basic product in case of term and group products;
- ceiling in all other cases: 30 % of prem. under basic product
- rider benefit not to exceed the sum assured under basic policy
Possible IRDA concern: If the rider premium are high as compared
to the basic policy premium, the maturity benefits, in the
policyholder perception,might not be considered commensurate
with the premium paid.
This may possibly be changed as the market matures
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IRDA Regulations - Completion of Proposal Form
Proposal information forms the main input for underwriting the
proposal and the proposer shall give all information required by
the insurer to underwrite the proposal.
Since life insurance is a contract of “good faith”, understanding
the provisions of Section 45 of the Insurance Act is very important
for the proposer.
The regulations require a life insurer to “prominently state in the
proposal form the requirements of Section 45 of the Act”.
Regulations require that the life insurers shall endeavor to get the
nomination effected so as to facilitate expeditious death claim
processing.
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IRDA Regulations - Proposal Processing Stage
The regulations require that the proposals are processed with
speed and efficiency.
All decisions must be communicated in writing within a
reasonable period not exceeding 15 days from receipt of proposal.
Perhaps the regulations could require the life insurers to have
transparency in communicating underwriting decisions.
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IRDA Regulations - Policy Document Wording
The regulations require policy wordings to be clear in specifying
the product features and flow of benefits.
The exclusions are required to be clearly stated as also the
special clauses.
The regulations require the insurers to provide “free look” period
of 15 days from the date of receipt of policy document and to
invite the attention of the policyholder to this provision.
The policy wordings needs to be customer friendly. Can the
wordings for certain clauses be standardized ?
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IRDA Regulations - Policy Servicing
The regulations do envisage time-frame for providing various
services by the life insurers.
No mechanism is outlined for ensuring compliance.
The regulations could require the industry to evolve a monitoring
mechanism like that evolved by the Insurance Marketplace
Standards Association (IMSA) in the US.
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IRDA Regulations - Claim Settlement
The regulations require that the policy document “shall state the
primary documents which are normally required to be submitted
by a claimant”.
The regulations also lay down time-frame for various claims
activities.
As in policy servicing, no mechanism is envisaged for monitoring
compliance.
Regulations may require the industry to evolve mechanism like
that evolved by IMSA in the US.
The period of six months, from the time of lodging claim, allowed
for claims investigation is long.
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IRDA Regulations - Grievance Redressal
The regulations require that “Every insurer shall have in place
procedures and effective mechanism to address the complaints
and grievances of policyholders”.
The information about this machinery and about the Insurance
Ombudsman shall be communicated to the policyholders along
with the policy document.
The regulations may require an insurer to associate a person of
eminence from public life to provide transparency to the grievance
redressal process.
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Safety Net For the Policyholders
The principle or subordinate legislation must provide for the
establishment of a statutory body, to be called the Policyholders
Protection Board, to administer the protection schemes.
In the event of liquidation of an insurance company, the Board
shall secure continuity of insurance with benefits restored up to a
specified percentage.
This protection could be funded in two ways:
- by raising a levy on the life insurers‟ premium on an ongoing
basis; or
- by charging a levy on the life insurers‟ premium in the year in
which support is required.
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Safety Net For the Policyholders
In the UK, the second approach is followed. The stipulation is that
the levy:
- may not exceed 1% of the premium income liable to the levy
in any one year; and
- may be imposed to meet expenditure already incurred, or
which is expected to be incurred within a year.
The Authority may consider evolving a „Safety Net‟ structure
similar to the one in the UK.
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Conclusion
The process of consumer protection starts right from the time an
individual becomes interested in buying life insurance product.
People expect the regulatory system to create an environment of
trust in which they can buy with confidence.
The identifiable risks that individuals face while buying life
insurance are addressed by the regulatory system.
Life insurance purchases being rare, prospective buyers have to
heavily rely on the insurers and their intermediaries for guidance.
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Conclusion (Contd..)
Protection of Policyholders‟ Interests Regulations are designed to
ensure that protection is provided at various stages.
Regulatory structure must facilitate meeting of PRE by the
Insurers.
Regulations are comprehensive and would get sharper as the
market matures.
A monitoring mechanism, like IMSA has in the US, needs to be
evolved to ensure compliance.
Regulations must provide for safety net to the policyholders in the
event of failure of insurers.
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Thank you
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