Inadequate cover

The Insurance Regulatory and Development Authority’s new draft regulations for the protection of policyholders’ interests make for disappointing reading. Especially so since the regulator has been additionally empowered under the recent Insurance Laws (Amendment) Ordinance to frame rules for the sector. For the most part, the draft document is devoted to homilies reiterating the basic rights of policyholders — their right to fair disclosure and diligence, right against unfair contract terms, protection against conflicts of interest and so on. But it fails to address the specifics on how these rights will be enforced.

In fact, the draft regulations only reinforce the view that investor protection rules in the insurance sector are in a rudimentary state compared to most other financial products. While shares, bonds or mutual funds cannot be sold without a prospectus containing elaborate risk disclosures, insurance sales are often clinched on the basis of verbal pitches made by agents, with the policy document reaching the consumer only after it has been purchased. This document is far from helpful, given the truckloads of jargon that the industry likes to employ in conveying everything from policy benefits to charges and conditions for premature exit. The IRDA has now mandated a prospectus and a product brief to accompany the sales effort, but the disclosure requirements don’t venture beyond basic product attributes. Traditional and unit-linked insurance plans are in fact the only market-linked financial products today where the seller has no obligation to disclose his track record. They are sold solely on the basis of hypothetical ‘benefit illustrations’; yet the new regulations do nothing to change this practice. Nor is there any attempt to force insurers to disclose agent commissions which create substantial conflicts of interest. The mis-selling of protection products as great ‘investment options’ is rampant, with consumers subjected to unsolicited tele-calling and SMSes that guarantee impossibly high returns. But all the draft regulations do to tackle this is to ask that qualified personnel undertake tele-calling and that agents proffer advice “dispassionately”. The penalty for violations is unspecified, with the onus for tackling mis-selling left mainly to the player’s code of conduct and a ‘policyholder protection’ committee.

If the IRDA is serious about policyholder protection, there are other areas to be tackled on a priority too. Traditional insurance plans have one of the highest cost structures among financial products, with 15 to 40 per cent of the first year premium appropriated as agent fees. This needs to be moderated and the front-ending of fees, which incentivises agents to churn customers, stopped. For products pitched as investment plans, simple and standardised disclosures on investment patterns and charges must be made mandatory, without needlessly complicated clauses on fund value, sum assured, bonuses and death benefits. The IRDA must also continue to pressure the industry to improve its claims settlement record. In 2013-14, private life insurers repudiated 14.5 per cent of claims, with the ratio for some as high as 25-30 per cent. Reducing this is the first step to reviving policyholders’ confidence in insurance products.

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