Published in Mint on 5th Jan, 2015, Written by Kapil Mehta
The insurance regulation on protection of policyholder’s interests is the industry’s equivalent of the Ten Commandments, a set of principles that insurers must abide by. The original regulation issued in 2002 remains in force even today. Much has happened over the past 13 years in terms of products, selling practices and operating processes. An updated regulation factoring in all the changes has now been proposed by the Insurance Regulatory and Development Authority of India (Irda of India) and is open for public comment till 19 January.
To understand the changes proposed, one must know the existing regulation. Currently, an insurer has to disclose and explain all relevant information at the time of sale; provide specific information in an insurance proposal and policy; establish broad standards of policy servicing and set grievance handling rules.
The proposed regulations build on existing principles but are far more comprehensive. A good surrogate of the enhancements is the number of pages—38 pages in the proposed regulation compared with seven in the existing law. There are five broad changes that have been proposed.
First, seven policyholder rights have been introduced. These are the rights to professional diligence, fair disclosure, suitable advice and protection against unfair market conduct that require insurers and advisers to work honestly, apply standard skill and care with regards to customer interactions and provide complete information on any transaction. All charges, exclusions and conditions need to be properly explained. For instance, a sale without explaining tax provisions or even selling equity-linked unit-linked insurance plans (Ulips) to a retired person when she needs less volatile insurance would go against these rights. The right to protection against unfair contract terms protects customers from an imbalance in rights and obligations vis-a-vis the insurer. This is much needed because insurance contracts are one-sided and mostly non-negotiated. There is little a customer can do to change the contract, and in most cases, the contract is delivered after the insurance begins. Examples of unfair terms will be provided by the regulator but could include the insurer’s power to cancel insurance without justifiable reason or to seek unnecessary warranties from you. The right to protection of personal information will put greater onus on insurers to protect your personal data. Lack of such privacy is the main reason why you get calls from multiple insurers when your motor insurance is up for renewal. Protection from conflict of interest of advisers requires agents and other intermediaries to disclose their compensation. This right will come to the forefront when an adviser pushes you to purchase a traditional life insurance product rather than pure term or encourages you to switch providers unnecessarily.
Second, disclosures and processes have been thoroughly detailed out. The requirement for a key features document and prospectus has been incorporated. The language describing mis-selling is unambiguous. Renewal notices, particularly in general and health insurance, are mandatory through emails or SMS at least 30 days before the due date. Renewal, cancellation and portability conditions have to be spelled out. Grievance redressal and complaint handling processes have been elaborated. A Board’s responsibilities in policyholder protection have been listed as well.
Third, insurers will need to specify service standards and turnaround times for activities involving customers. This builds transparency and encourages insurers to compete in setting higher service benchmarks. The service standards encompasses activities at the time of sale, after sale, claims and complaints. A customer can even legitimately question insurers for delays.
Fourth, some new business areas have been explicitly factored into the regulation. An entire section on micro insurance and the group business has been added. This is good because group business constitutes nearly half the insurance market. Similarly, micro insurance is a priority.
Fifth, the responsibilities of a surveyor have been sharply defined. The surveyor has an important role in claims settlement. Regulations require an insurer to appoint a surveyor within 48 hours (down from 72 hours) of a claim being intimated. Photographs must be taken within 24 hours and a preliminary report submitted within 15 days. Currently, the survey process can be slow and I have seen it taking months. A proposed feature, which I like, is that a copy of the survey report is to be shared with the insured. This makes the process transparent and even forces well-researched and articulated survey findings.
The draft regulations are a good step forward. However, the best regulations can be ineffective if not enforced. How can violation of these regulations be monitored and checked? The Financial Conduct Authority (FCA) in the UK is an example of how that can be achieved. Anyone can report mis-selling, unfair contract terms or perceived violations. The FCA looks into the matter and takes a decision within a specified time. The Irda of India or the insurance councils consisting of insurers should establish such a body. It will provide a much needed complaint point for policyholders and is as important as the regulation itself.
We need a more effective grievance redressal for insurances outside the purview of the ombudsman. Specifically, group insurances or claims of over Rs.20 lakh. A clearer articulation of the cost of closing insurance prematurely is required. Most life insurance policyholders I meet do not understand the surrender costs and long-term commitment that they are making when buying insurance. New regulations should recognize emails as proof of information exchange rather than just paper. Finally, I would like the insurer’s option to cancel insurances mid-term to go. This is an issue, particularly in group medical insurances which insurers can cancel if claims are high.
Finally, what struck me most as I compared the 2002 regulations with the current proposal was the extent of change the industry has seen. We’ve come a long way but there is still ground to cover.