The Insurance Regulatory and Development Authority (IRDA) has asked life insurers to stop selling highest net asset value (NAV)-guaranteed products. In a recent communication to all life insurers, the regulator has said, “The marketing of products labeled as highest NAV product shall not be allowed”. These products contribute almost 20 per cent to the total premium collection of life insurers. IRDA, in the past eight months, had informally expressed its discomfiture with such products at several fora. The regulator’s argument was that such products led to systemic risks associated with the way funds were managed and posed the risk of a heavy sell-off in equities when stock markets fell. Highest NAV-guaranteed products are those that promise to pay the highest value the fund achieves during a certain period, say, five or seven years. However, to maintain that NAV consistently, insurers have to take risks by investing in stocks aggressively. That could lead to undue risks.
These products had become the largest selling unit-linked life insurance policies (ULIPS), after the new guidelines on ULIPS came in September 2010.
In another move, the IRDA has mandated a minimum death benefit of at least 10 times of the annualized premiums in case of traditional products, as there were some products offering a limited death benefit. The regulator has also discouraged the use of single premium or limited premium payment term polices as these could impact the cash flow management of companies. Accordingly, IRDA has proposed all polices have a regular payment option equivalent to the term of the policy.
Single-premium polices might be issued only under special categories.
“In most of these products, customers are being lured with the promise of a decent maturity benefit, but in case of claims (in the event of death), the benefits or the amounts are sometimes lower than the premiums. The basic underlying principle of a life insurance policy is it should have sufficient life risk cover,” said an IRDA official.
The regulator has expressed reservations on policies offering “low” or “insignificant” life risk covers. Irda has pointed out three types of traditional plans on such grounds — products where the death benefit is defined as the return of premiums (with or without interest), products in which the initial death benefit is significantly high and reduces subsequently during the currency of the contract and products in which the insurance cover is insufficient/insignificant in relation to the premium i.e. products which are mostly meant for savings. “We would not allow such products. It was clearly a marketing gimmick from the insurers,” said a senior IRDA official. In case of unit-linked policies, the IRDA mandates a minimum sum assured guarantee of roughly 10 times of the annual premiums (in case of death). However, for traditional plans, there was no such mandate. The IRDA is likely to come out with the final guidelines on product design soon, which would include all such details. It is not approving any products until life insurers design products according to the framework suggested.
“Lately more complex products are being designed and filed for F&U (file and use) clearance with the IRDA. In the process of clearing these products, the IRDA has noticed that features of several products are not in alignment with the best practices and, frequently, lack clarity. The efficiency of product clearance has been constrained by such features,” the IRDA said in its communication.