IRDA plans end to deceptive policies, upfront commission

The Insurance Regulatory and Development Authority (IRDA) plans to ban misleading products and staggered commission for agents to ensure that policy buyers are not shortchanged.

The insurance industry, which is still evolving a decade after privatisation, needs new rules to ensure that consumers get the best and don't get carried away by products that only promise high returns on paper, the regulator has said.

"One important problem is that what you mean by highest NAV,'' J Hari Narayan, chairman, IRDA, told ET in an interview, referring to many insurers promising highest net asset value of the policy period to holders. "In certain markets, certain products are prohibited. That may be the best way to go.''

Insurance companies, bitten by the slump in sales after new rules curbing the Unit Linked Insurance Policies, are peddling many policies that on close scrutiny could be termed deceptive. One such is the promise of highest net asset value. But what they do not publicise is the calculation behind the NAV. These policies also charge 25 to 75 basis points as additional fees. A basis point is 0.01 percentage point.

"Suppose a company had Tata in its portfolio, over time it may change,'' said Narayan. "At the time of maturity, which highest NAV are you talking about - the portfolio, or Tata. One of the major problems with the product is that how do you communicate to the policyholder. He may be thinking of the highest NAV of the Sensex. So, this is the whole issue.''

Prudential ICICI, Birla Sun Life, Bajaj Allianz, SBI Life, Reliance and Aegon Religare are some of the insurance companies that sell policies promising the highest NAV. These policies have tenure of 10 years with limited premium paying term of 5-7 years.


Though the highest NAV guarantee gives the impression that such products are pure equity products and pay the highest return during the course of the tenure, that is not always the case. When a 100 investment gains by 10-15%, a portion of the corpus is shifted to debt. At regular intervals, when there are gains, some funds are shifted to fixed income securities.

In a way, this could be a strategy where investors don't get the highest NAV they would have received if they had remained invested in equties. The portfolio manager, to avoid liabilities for the company, could actually depress returns for investors.

Another area where investors lose out, commission to agents, could also be plugged.

As high as 40% of the policy premium in the first year on traditional products while 7-12% in Ulips, are paid to agents as commisssion. But once the policy gets running, the agent loses interest in serving the policy holder. So, to ensure that customers are serviced, the commissions could be rear-ended and paid at the later stages of the policy, than in early years.

"Korea has found that front-ending commissions has led to unhealthy practices. So, the question is should we rear end it. A lot depends on the sales history and culture of the country,'' Narayan added.