A couple of days ago, the Insurance Regulatory and Development Authority (IRDA) issued a circular that brought in a set of new rules governing unit-linked insurance plans (ULIPs) offered by insurance companies.
ULIPs have been widely criticised (frequently in this column) for charging high costs and paying very high commissions to insurance sales agents. The new rules announced by the IRDA have two parts — a limit on costs and increased transparency. Cost controls mandate that the difference between the ‘gross yield’ and the ‘net yield’ of ULIPs should not exceed 3 per cent for terms shorter than 10 years and 2.25 per cent for longer ones.
I’d love to be able to say that this cost reduction is welcome, but unfortunately, there are too many questions whose answers must be known before that can be said. After reading the IRDA’s circular and scouring the IRDA’s and the insurance companies’ websites, I can’t locate an unequivocal answer to some basic questions. 1) Had the IRDA mandated an earlier, higher limit for the gap between gross and net yield? Or had it left the insurance companies free to charge as much as they pleased? 2) On an industry-wide basis, what is the actual gap between gross and net yield now? Is this 3 and 2.25 per cent a huge reduction, a small reduction or is it actually no reduction at all for some products?
No one is telling and perhaps no one cares. We’re having a lot of song and dance and laudatory headlines about the IRDA cracking down and making insurance cheaper, but there’s zero public information and publicly-discoverable evidence about how much, if any, this cost reduction really is. The insurance companies point to their ‘benefit illustrations’ but those are just hypothetical illustrations designed to aid sales. How much are real customers actually paying? What is actual gross-net gap for the last five years?
The real problem with the insurance industry is actually not high costs. High costs are just a symptom of the underlying disease, which is poor quality of disclosure. India's insurance industry gets away with rampantly abusive practices because its customers can't understand what's going on. If you pick a hundred policyholders at random and ask them to read their insurance account statements and explain what they've been able to figure out is happening to their money, only a small fraction will be able to do so with any accuracy. The goal of transparency has to be that real customers of the kind that actually exist in the Indian market should be able to understand the disclosures accurately.
IRDA’s new rules have moved us somewhat closer to that goal, but a lot more has to be done. For example, it is strange that the most significant improvement in the disclosure has only been done to the statement that the policyholder will receive at maturity. So if your fifteen-year policy starts now, you have to wait only till 2024 to know the full details of what the insurer did with your money in 2009.
Welcome to transparency, as practiced in the Indian insurance industry.
The biggest reform that the insurance industry needs is for the government to start a ‘re-education’ school run by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), and send the IRDA brass to attend courses on how real regulators work.