For one, insurers will have to offer a minimum prescribed return. Starting Wednesday, policyholders will get a much fairer deal if they invest in unit-linked insurance plans (Ulips).
The new rules of the Insurance Regulatory and Development Authority (Irda) take effect from September 1. Ulips, which contributed 80 per cent of the total premium collected by private companies, will see a dramatic change. Irda has capped the difference between net and gross yields during the policy term. Insurers will have to offer a minimum prescribed return even if a policyholder withdraws from the fund before maturity. For the fifth year, the cap is fixed at four per cent.
Effective 1st of september 2010, the lock-in period will increase from three years to five years. If a policyholder wants to withdraw in the first year, he will get back the amount invested after deduction of various charges only after the fifth year.
To ensure only acquisition expenses are recovered in the event of the discontinuance of the policy, surrender charges have been capped at a level much lower than what exists at present. The industry had been benefiting from higher lapses. Funds collected from policyholders under lapsed policies are sent to a separate fund and the money is given the the policholder after the company deducts all charges. The charges are as high as 100 per cent in some companies.
Surrender charges have been capped at a level much lower than what exists at present which will ensure that only acquisition expenses are recovered in the event of the discontinuance of the policy.
“We have always maintained that insurance is a long-term contract. Any pre-termination of policy is not good for all stakeholders,” said S B Mathur, secretary general, Life Insurance Council.
“Products are going to be more attractive now. We expect greater customer interest, as charges will be uniform as well as lower,” said G V Nageswara Rao, managing director and chief executive officer, IDBI Federal Life Insurance.Rao added the customer could now expect higher returns, as the amount of funds invested was likely to go up.
Along with these changes, the regulator has set minimum disclosure guidelines for insurers.
“Now agents cannot take policyholders for a ride. They (policyholders) can now see the financial position of the company over the website and do not need to depend on agents,” added Mathur.
On the flip side, though overcharging and misspelling will come down, insurers say product innovation and customisation will be affected. Also, traditional plans will suit those in the lower ticket size segment.