IRDA tightens norms on sale of Ulips

HYDERABAD: The Insurance Regulatory Development Authority (IRDA) has taken the first step to crack the whip on agents misleading customers on unit-linked insurance plans. To start with, it has tightened the norms for sale of actuarial-funded unit-linked products which are on their way out.

This is set to be replicated in other ULIPs as well in due course. The regulator has asked private insurer Bajaj Allianz Life Insurance to ensure that policyholders investing in the actuarial-funded products sign on sales illustration given out by agents. This will form part of the policy document, and IRDA will have the authority to inspect it at a later stage, if need be. The entire exercise is aimed at ensuring that the customer is fully aware of the features of the product.

“We intend asking customers and agents to sign illustrations on the entire gamut of ULIP products offered by insurers. While the features of ULIPs vary from product to product, the onus will be on agents to indicate the explanation that customers have been given on the nature of investment. Agents will also have to give a break-up of the money spent on various expenses. Our objective is to enlarge the scope of disclosures made by agents and such transparency will be in the interest of the entire insurance sector,” said IRDA chairman CS Rao.

For Bajaj Allianz Life Insurance, it will be a major exercise to implement this directive given that the company has close to 2.5 lakh agents. “We will print lakhs of forms and distribute them to our agents. If an agent does not bring in a signed copy of the illustration along with the proposal, we will ask him to go back and get one,” said Bajaj Allianz Life Insurance managing director Sam Ghosh.

The regulator had earlier given an indication that checks would be in place to prevent mis-selling of ULIPs, which have become popular investment instruments. IRDA is understood to have extended the deadline for Bajaj Allianz to phase out its actuarial-funded product or capital unit. The company, which was expected to stop selling these products by the August end, has now been given time up to mid-September, said sources.

IRDA appears to be taking the UK route to tackle mis-selling of policies. In the UK, if an agent is accused of mis-selling, the onus is upon the insurer to prove that the policy was explained. Similarly, insurers in India will now have to retain documentary evidence to prove that the policy was properly explained to the insured. In the UK, the experience has been the complaints of mis-selling emerge after a period when policyholders discover that their investments were performing far worse than they were told to expect.

Acturial-funded products have a complex structure, where the insurance company allocates significant sums to the policyholder’s account in the first year. However, these initial allocations are notional i.e. in the form of actuarial units, which convert into real money only in the future. The downside of such products is that there is not much balance in the policyholder’s account in the initial years.

The regulator has also introduced safeguards to see that acturial-funded products are not sold aggressively while they are being phased out. In the case of Bajaj Allianz, for instance, the regulator has stipulated that the total premium collected under this product between August 2007 and September 15, 2007 should not exceed the average growth in sales posted in the previous quarter of July 31, 2007.

Aviva Life Insurance is the other company that has been asked to withdraw actuarial-funded products. IRDA justified the withdrawal of these products, saying that its objective was to enable the policyholders of ULIP products to compare features and charges across products and companies.