The insurance sector in India opened the New Year with a wide range of largely customer-friendly changes. Originally slated to take effect from 1 October 2013, the Insurance Regulatory and Development Authority (IRDA) provided a three-month extension, making the new effective date 1 January 2014. Now that the new rules are in place, let us examine some of the big changes taking root in the insurance industry this year.
Service Tax on LIC Premiums – The Financial Budget of 2013-14 had brought insurance premiums under the purview of service tax. While private insurers have already been charging service tax on premiums, LIC joined them from 1 January. While this portends an unwelcome rise in LIC premiums, it also means that the LIC will no longer pay service tax to the government from investors’ savings thereby reducing their bonus.
Revised Mortality Rates – Meanwhile, the revision of mortality rates is expected to bring down premium costs. The IRDA has made it compulsory for insurers to use revised mortality rates. For instance, LIC is now switching over from the 1994–96 Ultimate Mortality Rate to IRDA’s Indian Assured Lives Mortality of 2006–08.
Increase in Death Benefits – Traditional life insurance policies will now provide higher mortality benefits. For regular-premium policies, policyholders below 45 years of age will now have a sum assured that is at least 10 times the annual premium; those above 45 years will have a sum assured that is seven times the premium. In the case of single-premium policies, the minimum death benefit will be 125 percent and 110 percent for policyholders below 45 years and above 45 years respectively. Policies with durations of less than 10 years, however, will have a lowered cover of five times the annual premium, but to a minimum of 105 percent of all premiums paid.
Rise in Surrender Value – The surrender value depends on the premium paying term. If this term is over 10 years, the surrender value will be available only after the end of three premium terms, and if the term is less than 10 years, the surrender value will be available after two premium terms. The minimum surrender value will be 30 percent of all premiums paid to date.
Changes to ULIPs – The surrender charges on variable insurance plans (VIPs) and unit-linked insurance plans (ULIPs) are now set to taper away from a maximum of Rs. 6,000 in the first year to Rs. 2,000 in the fourth year. There is no surrender charge from the fifth year onwards. In addition, life insurers will be required to inform customers about growth rate changes in the ULIP on a monthly basis.
Regulation on Agent’s Commission – Another welcome change is linking the agent’s commission to the length of the policy term, which should drive home the need for longer-duration policies and reduce mis-selling. The agent’s commission will now be paid on a diminishing scale with a 15 percent premium allocation in the first year, 7.5 percent in the second year, and five percent in the years that follow.
Insurers will be introducing a slew of new products (as many as 500) in keeping with the new customer-friendly guidelines. The insurance sector is also looking to expand distribution by empowering banks as brokers, among other things.
