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IRDA asks insurance companies to cut costs, hints at cap on expense ratio

Aug 10, 2017

Insurance Regulatory and Development Authority of India (IRDA) chairman T.S. Vijayan on Monday hinted at an imminent cap on insurers’ expense ratio, a move that may force insurance firms to reduce the commission paid to agents, offer customers more affordable products and curb misselling.

While speaking at the annual insurance summit organized by the Confederation of Indian Industry (CII), Vijayan urged insurers to start offering cost-effective insurance policies to customers rather than incentivizing insurance agents with commissions and focusing only on increasing profitability.

“The cost has to come down,” Vijayan said.

“We have an insurance information bureau which analyses various ratios and provides bigger data about the industry. I really want insurers to use the analytics of this bureau. There may be a time when IRDA may put some kind of cap on the expenses of managements. It may not happen immediately, but eventually it may happen. So, insurers have to start working on cost-effectiveness now,” he added.

The expense ratio in the insurance industry is a measure of profitability calculated by dividing the expenses associated with acquiring, underwriting and servicing premiums by the net premiums earned by the insurer. The expenses can include advertising, employee wages and commissions for the sales force.

High expense ratios have been a concern for India’s insurance industry for about a decade.

According to a June 2016 analysis by Willis Towers Watson, the overall expense ratio for the life insurance industry (excluding Aviva Life, Sahara Life and Bharti AXA Life) dropped from 16.3% in 2014-15 to 15.5% in 2015-16 as concerted efforts are being made towards expense rationalization. “The size of the company also appears to be a driving factor contributing to an insurer’s overall expense levels, indicative of economies of scale achieved. Amongst the top five private insurers, ICICI Prudential Life, SBI Life, Max Life and Birla Sun Life have recorded an improvement in their expense ratios compared to 2014-15. It’s noteworthy that state-owned LIC (Life Insurance Corp. of India) continues to maintain the lowest expense ratio of 8.5% in the industry,” it said.


New rules about unclaimed insurance money

Aug 10, 2017

According to the Insurance Regulatory and Development Authority of India’s (Irdai) circular, which was released on 25 July, unclaimed monies of insurance companies will move to the Senior Citizens Welfare Fund, which has been created by the government, after lying unclaimed for 10 years from the date it was payable to the policyholder or the beneficiary.

The government had created this fund Through the Finance Acts, 2015 and 2016, to promote the welfare of senior citizens, in which notified institutions have to transfer unclaimed monies. These institutions include: postal savings scheme and Employees Provident Fund schemes. In an amendment in April this year, the government also added insurance companies to this list.

Here we explain what unclaimed money in insurance is and what you can do to claim it.

What is unclaimed money?

Unclaimed amount is money that is due to policyholders or beneficiaries in the form of death claim, maturity claim, survival benefits, premiums refunds or indemnity claims—including accrued interest—but has not been claimed for more than 6 months since the settlement date.

Insurers can invest this money in debt products like money market instruments, liquid mutual funds and fixed deposits; and the investment income needs to be paid to the policyholder or beneficiary if she makes a claim in the future. Any penalty can be adjusted against this investment income. The insurer can deduct a charge from this fund to manage it, but the costs are capped at 20 basis points. In order to make your job easier, insurers now allow you to spot your unclaimed money on their websites, where you need to look under the tab titled unclaimed amount of policyholders. Click the tab and on the page that opens, enter the details such as name of the policyholder, policy number, Permanent Account Number (PAN), Aadhaar number and date of birth to know details of any unclaimed amount. The policyholder’s name and date of birth are compulsory fields, whereas PAN and policy number can be optional. To save the insurers the trouble of putting out details of very small claim, the rules allow companies to publish details only if the unclaimed amount is Rs1,000 or more.

How to claim

Once you have identified the money, you can approach the insurer directly or follow the steps listed on the website. To reduce unclaimed amounts, the regulator has made electronic payments mandatory with the exception of small premium ticket size of up to Rs10,000. Also, the rules make it clear that even after 10 years, insurers will need to display information about any unclaimed amount of Rs1,000 or more on their respective websites.

However, policyholders and beneficiaries are eligible to claim the unpaid dues (unclaimed money) up to 25 years from the date of transfer of the same to the Senior Citizen’s Welfare Fund.

Do note that if no claim is made for a period of 25 years after the transfer, you will have to forfeit the money and it will belong to the government.


Racing Car Insurance: Why do you need insurance for race vehicles?

Aug 10, 2017

Motorsport seems to have taken off in India with more and more powerful cars and bikes being introduced here and a large number of people taking to it not only as a hobby but also profession. There are three FIA-approved racing circuits in the country – Buddh International Circuit, Greater Noida; Irungattukottai Race Track, Sriperumbuddur (Near Chennai); and Kari Motor Speedway, Coimbatore – which hold various car, bike and truck races regularly. However, more popular appear to be car and bike rallies that are held in different parts of India – some in deserts and mountains – throughout the year.

Realising the increasing interest in motorsport, several companies have started providing insurance cover to both racing vehicles and their drivers/riders taking part in races/rallies or any other off-road events. Since third party insurance is mandatory to drive on any public road, you may wonder as to why insurance is required for races and rallies when these are not held on public roads. Besides the obvious reason that these events pose a major risk to the life of the driver and his/her vehicle, there are other reasons as well for taking off-road insurance:

Transit damage cover

Race cars and bikes are not allowed to be driven on city roads and highways. So, you need to transport them in truck or train containers, or aircraft and ships to the race circuit, and that exposes them to damage risk. A comprehensive insurance policy covers the damage caused to a vehicle during transit. Damage caused either to the engine or other parts of the car will be treated like a normal on- road accident and you will get paid the claim amount.

Theft cover

Race cars and bikes are not only expensive vehicles, they are customised as well. Hence, they need to be protected against theft. Although racing circuits provide adequate security to these vehicles, yet you need to get them fully protected through insurance. Also, your vehicle can get stolen from your garage or while being transported from one place to the other. So, it makes sense to get them insured.

Protects the engine

A standard motor insurance policy does not cover engine failure due to oil leaks. But insurers have the provision of an add-on at nominal cost to give protection against engine failure. When you take part in rally sports, the engine of your vehicle is pushed to its limits and, some time, fail at a crucial stage of the rally. So, the engine insurance add-on or a comprehensive motor policy comes handy to avoid any exorbitant engine repair cost.

Fire or explosion cover

Your vehicle suffering minor dents and scratches during a rally is an expected thing, and people do not mind them. But what brings discomfort, both physical and monetary, is a vehicle catching fire due to overheating or fuel leak. So, if you are going to take part in a motorsport event, getting a comprehensive insurance policy is necessary.

Source: Financial Express

New rules to protect policyholders

July 12, 2017

The Insurance Regulatory and Development Authority of India (Irdai) has notified new rules to protect policyholder’s interest. You can read the full notification here. While the regulations work towards ensuring that insurers settle all kinds of claims on time by defining the penalty on delays, there is much left to be desired in addressing better disclosures for the customers. We take you through some key provisions of the notification and also bring you experts’ views on what more could have been included in it.

Penalty on late payments
If an insurer delays claims payments, it has to pay a penalty that’s 2% over the bank rate, which is specified by the Reserve Bank of India, as on 1 April of that fiscal. For instance: in life insurance, after a claim is made, the insurer needs to ask for all the documentation within 15 days and take a decision on the claim and make the payment within 30 days. This is the norm even now. And, if a claim has to be investigated further then the insurer gets up to 90 days for investigating. If the insurer decides to pay, it has to do so within 30 days from when the decision to pay was taken. Insurers will attract penalties for not adhering to these timelines. The notification also clarifies that if a claim is ready for payment but the payment cannot be made due to reasons of proper identification of the payee, the insurer will still pay a penalty. For settlement for maturity proceeds and annuities, insurers have to notify the policyholder in advance or send post-dated cheques or transfer money to the bank account so as to pay the claim on or before the due date. For surrenders, free-look cancellations and withdrawal request, the insurers will have to pay within 15 days of receiving the request, or the last necessary document. A delay in this case will also invite penalty.

“Earlier there was some ambiguity in the way penal interest for delayed settlement of claim was calculated.... But now we have brought about clarity in the rate at which it has to be calculated and the duration for which it has to be paid,” said Nilesh Sathe, member, life, Irdai. “Now, if an insurer is supposed to settle the claim in 30 days, but takes 31 days, then it needs to pay interest for 31 days and not just 1 day,” he added. This would lead to faster settlement of claims. “The timeline mandated for investigation of a death claim has been reduced to 90 days from 180 days. This, along with a penalty on delays, will help in speedier settlement of death claims,” said K.S. Gopalakrishnan, managing director and chief executive officer, Aegon Life Insurance Co. Ltd. “But this alone may not solve all the problems regarding settlement of claims. For instance, the industry has to look at ways of simplifying surrender requests,” he added.

For non-life policies also, there is now a limit of 30 days to settle claims—after insurers get all the documents, including surveyor’s report . And if insurers don’t follow the timeline, they have to pay a penalty. In health insurance, if a claim needs to be investigated, the insurer will need to complete it within 30 days and settle the claim within 45 days from the date of receipt of the last necessary document, or pay a penalty.

For other non-life policies where a surveyor is appointed, the regulations have laid down timelines to appoint the surveyor and submit the report. Further, the surveyor’s report needs to be given to the policyholder if she asks for it—which is important because a surveyor is appointed by the insurer to investigate claims and is the basis on which an insurer takes the decision on a claim. “The notification also mandates insurers to categorise exclusions that are standard, specific to policy, those that can’t be waived and those that can be waived on payment of extra premium. This is important because in motor insurance there are many exclusions such as depreciation or engine loss that can be covered by paying extra,” said Puneet Sahani, head, product development, SBI General Insurance Co. Ltd. “This will also make people aware of add-on covers that take on such exclusions. In motor there are about 20 add-ons that people don’t know much about,” he added. The notification outlines features and other terms and conditions that needs to be stated explicitly in a policy. For instance, in life insurance an insurer needs to state things like the type of policy, features, information on premium payment, riders, exclusions, policy conditions for surrender or discontinuance, revival of the policy and the grievance redressal mechanism. Insurance Regulatory and Development Authority (Irdai) has given the insurers till 31 December to make such changes in their policy documents.

The notification also states that distributors will provide all the material information regarding the policy, and that the insurers will have to obtain a certificate from the policyholder certifying that the proposal form and policy documents have been fully explained and that the policyholder understands the policy.

What it lacks
The notification is missing the ‘key features document’, which aims to simplify the salient features of a policy. Irdai, in its draft released in February 2017, had asked for this document, which would carry the main features of the policy in simple language and in bold and attractive print. This document was intended to make policyholders aware of the most important features.

However, according to Gopalakrishnan, this is still being deliberated upon by the Life Insurance Council, an industry body. “The insurers are jointly working on introducing a simple key features document that will help customers understand what they have bought, including their obligations, in a simpler language,” he said.

According to Kapil Mehta, co-founder, the notification is a baseline that must be built on overtime. “The regulation doesn’t recognize verbal complaints but it’s important that verbal complaints also get recorded and measured. There should be an onus on the insurers to deliver a renewal notices particularly in health insurance,” he said.

For instance, if a policyholder does not pay health insurance premiums on time, she loses all the benefits with regard to the waiting period and has to apply for a fresh policy. “Also, health insurers shouldn’t be allowed to add exclusions when insurances are renewed,” added Mehta. Mint has been stressing on the need for meaningful disclosures and one important step towards this would be to disclose the net return on investment for guaranteed insurance-cum-investment products.

In fact, for non-guaranteed products that come with benefit illustrations assuming a rate of 4% and 8%, a disclosure of net return is important to understand the costs.

This is already mandated in the case of unit linked insurance plans (Ulips). Such disclosures didn't find a mention in this notification but according to insurers these are being reviewed by the product committee that was set up by the regulator.


GST and the insurance sector

July 11, 2017

The Indian life insurance industry has come a long way indeed, especially in the last decade. Back in the day, people viewed insurance primarily as a tax planning and investment tool, something that people thought gave better returns while saving on pesky taxes.

In a country like ours, where social security doesn’t exist and one cannot boast of viable retirement schemes, seeking protection for the future becomes a compelling preoccupation. And that is where buying insurance comes into play.

Post-liberalization, the insurance sector witnessed significant growth spurred by the joining of private insurers, product innovation, and induction of multiple distribution channels. This was further encouraged by the increase in the foreign direct investment (FDI) limit, from 26% to 49%. Since then, insurance companies, along with the Insurance Regulatory and Development Authority of India (Irdai), have been making concerted efforts to develop the insurance sector in India.

As a result, we see a significant number of private players operating in the market today, and a lot of product innovation catering to specific consumer needs.

In spite of all the progress in the sector, India continues to be a massively under-penetrated market. We are the world’s second most populous nation, and yet we account for less than 1.5% of the world’s total insurance premiums and about 2% of the world’s life insurance premiums.

According to a Swiss Re report, there is a big gap in insurance in Indian households. For every $100 needed for protection, only $7.8 of saving and insurance is in place for a typical Indian household, leaving a massive mortality protection gap of $92.2, says the report.

Given the scenario, how will the goods and services tax (GST) impact the growth momentum of this industry?

Of the four GST slabs—5%, 12%, 18%, 28%—insurance falls under the 18% slab, as against the previous service tax of 15%. The increase in indirect taxation is contrary to the positive measures that have been taken over the last few years to develop this sector.

Governments across the world, even in the more mature markets, are known to make conditions favourable for insurance protection. In many countries, life insurance is outside the purview of GST.

In a few, cash flow system is followed for general insurance, e.g. in countries like Australia, Singapore, and South Africa. For the latter, tax is charged on the premiums received and credit is allowed for claims that are paid.

In the Asia-Pacific, where some countries account for the world’s highest insurance penetration, GST and value-added tax (VAT) are not levied on insurance products. Exceptions would be some cases in China, where policies of less than one year attract a 6% tax and Taiwan and the Philippines, where tax of 2-5% is charged outside GST framework.

Even in the West, countries like Canada, and the European Union, do not tax life insurance. This tells us that these governments understand the need for insurance protection and encourage it by supportive policy.

Under the GST regime in India, taxability on the gross premium for pure risk policies is contrary to the principle of taxing the “value addition”. GST is a tax on value addition and net premium after deduction of claim is the net value addition. It is very difficult to segregate the “savings” component and find a “value” that could be treated as the proper base for tax, particularly for every premium transaction during the life-cycle of an insurance policy.

We have witnessed impressive growth in this sector so far, but there needs to be a sustained effort to retain the growth momentum. Imparting financial literacy, incentivizing Indian households to transfer savings from physical assets to financial assets and taking the distribution network to rural areas are expected to help bring more individuals under the insurance blanket.

The coming years are critical as the policy and regulatory environment and consumer response will govern the growth and stability of this industry.

Buying insurance will continue, provided insurance companies have the right kind of solution-based selling approach and to that extent, a favourable indirect taxation structure would have helped.

Insurance companies in India have strived hard to create financial awareness and increase insurance penetration in the country. As the country strides into a new economic phase, we hope that the industry gets the attention and support that it rightfully deserves.


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