{"id":5577,"date":"2017-10-10T12:44:57","date_gmt":"2017-10-10T12:44:57","guid":{"rendered":"https:\/\/securenow.in\/blog\/?p=5577"},"modified":"2023-02-17T09:43:27","modified_gmt":"2023-02-17T09:43:27","slug":"cap-exit-penalties-traditional-plans","status":"publish","type":"post","link":"https:\/\/securenow.in\/insuropedia\/cap-exit-penalties-traditional-plans\/","title":{"rendered":"Cap on exit penalties for traditional plans"},"content":{"rendered":"
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Published in Mint on 9th October, 2017.<\/p>\n

High exit penalties on Ulips added to insurance companies\u2019 profits, till they were capped. However, they still exist for traditional insurance plans. We asks the experts if exit loads on traditional plans too need to be capped.
\nSanket Kawatkar, principal and consulting actuary, life insurance (India), Milliman India Pvt. Ltd<\/b>
\nIn the case of unit-linked insurance plans (Ulips) it\u2019s true that surrender profits have come down after the surrender penalties were capped, but the lapse rates haven\u2019t really come down in many insurance companies. So more than the high surrender penalties levied earlier (which were designed to recover the high up-front costs, and to deter policyholders from lapsing early), it was the high levels of lapses that contributed to high lapse profits in the past. And this is primarily related to how the business was sold (or missold). So, it\u2019s not possible to address the issue of misselling by simply capping surrender penalties.
\nComing to traditional plans, currently the implicit surrender penalties on traditional products are high, leading to high lapse profits if lapse rates are high. Of course, in case of participating products, shareholders are entitled to only 10% of such profits. However, given that the issues in the industry have been on \u2018distribution\u2019 front (such as: high up-front costs, misselling resulting into high lapses and low consumer awareness) and given the experience of Ulips, I don\u2019t think it is appropriate to cap the implicit surrender penalties in traditional products in order to improve the persistency levels in the industry. Instead, measures are required to address the problem where it actually belongs: from the \u2018distribution\u2019 side.
\nHigh surrender penalty in life insurance products in itself is not an issue. Low consumer awareness, lack of appropriate level of training to distributor, market conduct of the distributor, resulting misselling and high lapses, high distribution cost are the real issues and we need to address them directly. If these issues are addressed, high surrender penalties wouldn\u2019t actually be an issue because not many policyholders would lapse to begin with.
\nK. S. Gopalakrishnan, chief executive officer, Aegon Life Insurance Co. Ltd.<\/b>
\nFrom a customer\u2019s point of view the comparison is straightforward. If I break a recurring deposit with a bank, I will get my money back with some interest income. Why can\u2019t traditional life insurance plans<\/a> return my money with some interest income?
\nLife insurers incur significant costs in selling the plan and in issuing a policy. If I pay Rs5,000 premium, more than half of it in the first year will go towards distribution costs. And then the life insurer pays stamp duty, incurs processing costs in issuing the policy and also has to pay for any death claims. Thus, the life insurer is probably left with only a small amount at the end of the first year of the policy. The expenses from the second year will be lower and the situation will get better for me as a customer. But it will still take several years before my \u2018account value\u2019 becomes equal to the premiums I have paid.
\nSo if I stop paying premiums any time during the first few years, the life insurer does make some profits in most of the situations and incurs a loss in other situations (particularly when the premium amount is small). In a with profits business (plans where there is a bonus) the profits (and losses) get shared by customers who are continue to pay premiums.
\nThe real issue therefore is the high costs that are incurred in selling and issuing these plans. As a customer, my question is a fair question: what happened to my money? I believe that technology can play a significant role in bringing costs down and also improve transparency of these plans.
\nP. Nandagopal, founder and chief mentor, OpenWorld Insurance Broking Ltd<\/b>
\nWhether rules permit huge surrender charges in traditional par or non-par policies is beside the point. Is it good for the customers or does it just favour the insurer, is the key issue. Traditional investment cum insurance plans are, prima facie, anti-customer. They are non-transparent and hardly provide any meaningful returns, thus eroding value of customers\u2019 hard-earned savings.
\nThey have no place in the modern financial world unless they bring down their huge hidden costs. The only justification they provide is the so-called guaranteed return. Anyone who understands the intricacies of risk-return rewards would realise that such poor guarantees mean nothing in a long-term investment product. But Insurance companies continue to sell and profit from them because they provide the most lucrative opportunity to create value for their shareholders.
\nThe hidden value for the shareholders in a traditional policy is the sum total of subtractions the company makes from returns earned on customers\u2019 savings. And even when the customer wants to pull out of a policy, the surrender charges make sure insurers are provided with some profits even from surrenders.
\nThis situation is more like: tails the company wins and heads the customer loses. If the customer continues to pay premium each year\u2014the insurance company takes away a sizable value every year, which is unknown to the customer. If the customer likes to exit, then too the company makes money by imposing huge surrender penalties that hardly leave any cash in the hands of the frustrated customer. In my opinion, there is no justification for traditional plans to impose such high exit loads or for such high surrender penalties. A sweeping reform to rationalize the charge structure of traditional plans, like it happened in the case of Ulips is long overdue.
\nKapil Mehta, co-founder, SecureNow Insurance Broker Pvt. Ltd<\/b>
\nAre surrender charges in traditional life insurance fair? Three sub-questions must be understood to answer this. Are reasonable policyholder expectations being met in surrenders? Are surrender-related profits distributed fairly? Does the insurer have an incentive to let surrenders remain high? The answers are no, yes and maybe, respectively.
\nPolicyholder expectations are set through conversations with agents and salespersons, brochures and documents. Surrender will always be low priority at sale and unlikely to be discussed. Therefore, in most cases customers are not aware of the surrender costs. The most common query I get in life insurance is about low surrender values. That\u2019s why the industry and regulator should reduce surrender costs. The industry should consider surrenders similar to Ulips, where there are no surrender costs after 5 years. Alternately, they should allow withdrawals at low cost in emergencies such as death or ill health in the family. It is also important that surrender penalties be highlighted prominently at the time of sale.
\nRegulations ensure that profits are distributed fairly because at least 90% of surplus must be redistributed to policyholders in the case of participating plans. So, the main beneficiaries of profits from lapses are policyholders who do not surrender. This is consistent with the concept of a participating fund and pooling of risk. But in the case of non-participating plans the surrender profits can be taken completely by the insurer and this is where high cost of surrenders hurt customers.
\nFinally, the insurer\u2019s perspective makes a difference in designing life insurance policies<\/a>. Insurers who take decade-long views see more value in retaining and renewing business. Insurers with a short-term orientation may be less concerned about lapses. Public recognition of insurers with high renewals (as well as those with low persistency) can constructively highlight these differences.<\/p>\n","protected":false},"excerpt":{"rendered":"

Published in Mint on 9th October, 2017. High exit penalties on Ulips added to insurance companies\u2019 profits, till they were capped. However, they still exist for traditional insurance plans. We asks the experts if exit loads on traditional plans too need to be capped. Sanket Kawatkar, principal and consulting actuary, life insurance (India), Milliman India […]<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"_lmt_disableupdate":"","_lmt_disable":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[410,319],"tags":[1393,1478],"class_list":["post-5577","post","type-post","status-publish","format-standard","hentry","category-media-coverage","category-media","tag-life-insurance-plans","tag-life-insurance-policies"],"acf":[],"modified_by":"SecureNow","_links":{"self":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts\/5577","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/comments?post=5577"}],"version-history":[{"count":4,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts\/5577\/revisions"}],"predecessor-version":[{"id":25356,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts\/5577\/revisions\/25356"}],"wp:attachment":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/media?parent=5577"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/categories?post=5577"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/tags?post=5577"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}