Is Honeymoon over?

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Come September 1 and you will have different ULIPs and pension plan across life insurance companies. Insurance regulatory and development authority has recently issued new guidelines for Unit Linked Insurance Plans and pension plans. New ULIPs will come with a five year lock in period instead of three years. Commission payout will also be restructured and pension plans will look different than older ones. These all steps have been taken to curb mis selling. IRDA has been asking insurers to take necessary steps but it didn’t result in any significant drop in mis-selling. Generally, sales agents apply different tactics to sell life insurance policy which include telling customer that policy can be redeemed in three years and money will be doubled in that period. There are very few sales agents who sell life insurance as life insurance but most of them introduce life insurance products as some fund or saving plans.

Life insurance products are saving plans but for a longer term like ten years and more rather than three or five years. Mutual funds are far better options for shorter terms like three or five years. Life insurance is meant for covering risk and offering some saving over a longer tenure rather than some money doubling scheme. Insurance companies in India have been quite reluctant in taking necessary steps to check these malpractices. In fact, heads of the most life insurance companies comes from sales background who themselves have been practising these tricks to attract customers. Top management of all life insurance companies is well aware of these practises but they don’t bother about customer’s interest.

These practises are bad for insurance companies also as they have resulted in high lapsed ratio and high surrender rates. Clients are buying something which they don’t know. They expect higher rates of returns whereas in initial years of policy, life insurance companies deduct heavy charges from the paid premium due to which they don’t get the expected returns and in the end, they surrender the policy. A life insurance policy take three years to become profitable for the insurer and when these policies are surrender just after attaining surrender values, it doesn’t make any value for the company. Top management of these companies is more concerned about their own interest rather than customer or company’s interest and that is why they allow these things to happen.

Life insurance is a long term business and each company take 8-10 years before they become profitable but if they are going to do business in such a shoddy manner, they are going to take more time. It’s bad for the company and nation’s economy. With these new rules and policies, business of selling insurance can be expected to improve a bit. But as far as insurance companies doesn’t realise that “Insurance is a matter of solicitation” and business should be conducted accordingly, it is not going to help much. Promoters and board should look into the selling and underwriting practises of the companies. Although, much shouldn’t be expected but IRDA has shown the willingness to improve the industry and the move should be welcomed. These new policies will definitely have an impact over life insurance industry in India. Some CEOs have already said that with new policies, it will be difficult to sell policies as now agent will not get high commission over first year premium. We can expect a drop in calls telling that sir your money will be doubled in three years because 1st September 2010 onwards, it will be five years.

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