Changing the way life insurance operates in India

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Insurance regulatory and development authority of India has recently introduced new ULIP guidelines. These guidelines will be affected from 1^st of September 2010. In last few months, IRDA has taken several steps to streamline life insurance business and safeguard consumer interests. Mis-selling has been a huge problem troubling life insurance player in India. New guidelines are meant to check mis-selling and put life insurance products as insurance products rather than investment products. Life insurance players have been selling ULIPs as investment products rather life insurance. After this, it will be strenuous for life insurance companies to selling ULIPs as core investment products. New guidelines have increased the lock in period to 5 years, ask insurance companies to control cost and restructure the commission payments to distributers and agents.

Till now, insurance companies were paying huge commissions on 1^st year or new business premium, but now they can’t pay hefty commissions which will impact the cost of the products. Life insurance companies are also required to pay guaranteed benefit of 4.5 per cent per annum on pension products. Life insurance companies fears that it will severely impact the business. Due to lower commission rates, distributers or sales agent may not be interested in selling insurance products anymore.

Consumer will definitely become a bit apprehensive at the moment after  looking at all the chaos and confusion regarding the new guidelines. As per a member of life insurance council of India, earlier projected was that industry will grow at 15 per cent for current year but now even touching 5 per cent looks difficult. All companies have started working on modifying existing products in order to comply with new guidelines. Experts don’t expect too many new launches in first quarter.

These changes are required in the larger interest of insurance industry and consumers. Indian insurance companies have seen high rates of surrender and lapses, new guidelines will encourage agents to convince customers to renew their policies for at least five years, after which even if a client decide to surrender the policy, as per surrender policy of most of the companies, customer will get 100 per cent of paid premium where as currently if a client surrender policy after three years, most of the companies pay only 50 per cent of the paid premium.

As commission will be less for 1^st year, selling life insurance products won’t be lucrative for insurance agents who do mis-selling and agents who look at the business for long term will be encouraged to sell insurance. New guidelines ensure commission payments for 5 years which will ensure consistent income for the future. It will also drive life insurance players to come up with new distribution network which may be slow at the beginning but in the long run, will be beneficiary for the company and consumer, as well.

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