Financial exuberance has contributed immensely to the diverse nature of financial products. The traditional financial products have undergone a sea change and now the investor has access to a galore of exotic products in equity, debt as well as insurance products. Despite the wide variety of choices of financial products to choose from, investors find it difficult to select the right product matching their requirements. This leads to investments in unsuitable products by the investors as most of the times investors fall prey to mis-selling. In the insurance industry too, the policyholders find it difficult to choose from various products in the offering which are difficult to understand. For instance, policyholders find it difficult to understand the intricacies of the functioning of ULIPs due to its non-transparent nature.
Thus, to uncomplicated things and revive the insurance industry, the insurance regulator – Insurance Regulatory and Development Authority (IRDA) has agreed to introduce changes enabling faster clearances of products, increasing investment into infrastructure and opening up bancassurance. IRDA has decided to introduce use & file system for certain standard products. So, if the insurance company complies with the conditions attached to the standard product, such products will automatically be deemed approved after 15 days of intimating to IRDA. The Finance Ministry has urged IRDA to expand the list of such standard products.
According to the IRDA, in a country with low spread and penetration of life insurance, the objective of insurers should be to sell simple and easily understood products. Based on the recommendations of the Working Group, the IRDA will issue draft guidelines first on the plans to revive the insurance industry and after consultation, the final guidelines will be issued by the end of November 2012. Post November 2012, (wherein the IRDA will lay down principles underlying the design of insurance product) the IRDA will clear products within 30 days.
Moreover, banking correspondents will be allowed to sell micro insurance products. Though, this facility will apply only to micro insurance products; IRDA will make regulations for this purpose. IRDA has allowed banks to act as broker to be able to sell policies of more than one insurance company. Currently, the policy on bancassurance is one bank one insurance company. According to the Finance Ministry, the bank may sell the products of more than one insurance company thus providing the intended policyholder a bouquet of products from which he / she may chose the appropriate product based on his / her needs and will also prevent mis-selling.
Furthermore, to ease investment norms for the insurance companies, the IRDA may consider relaxing minimum requirement of 75% in AAA instruments. At present, there is a stipulation that 75% of investments in debt, excluding investments in Government Securities (G-Secs). The regulator has decided to include G-Secs in the minimum stipulation. This is expected to release about 12.5% for investments in less than AAA rated debt instruments. Also, to encourage investments in infrastructure, IRDA will allow investments in an infrastructure Special Purpose Vehicle (SPV) floated by any company where the SPV is a Wholly-Owned Subsidiary (WOS) of the parent company. This would be possible when the debt instrument issued by the SPV is guaranteed by the parent company, having due regard to rating criteria. Besides, the Finance Ministry has decided to reduce service tax on first year regular premium as well as single premium policies. Also, investment in some insurance pension products may be included in the separate limit over and above the limit of Rs.1,00,000 under section 80C of the Income Tax Act, 1961 for the purpose of income tax deduction on the premium paid.
We are of the view that, the changes enunciated by the IRDA, if implemented in the right spirit will go a long way in benefitting the insurance industry. Policyholders too, will be benefited from the above mentioned changes as there will be more and more simple and easy to understand insurance products.
However, while relaxing the investment norms care should be taken by the IRDA by keeping in place enough checks and balances to protect the interests of policyholders. There should be also a proper vigil over insurance company’s investments in infrastructure sector as any over exposure to this sector might prove to be hazardous for the financial health of insurance companies.