MUMBAI: If you realize that you have been a victim of mis-selling by an insurance agent and want render your policy, you are unlikely to miss an important part of the Award paid out.
Irdai proposed new rules to protect policyholders'interests under which insurance companies will have to substantially increase the amount they pay to customers who choose to discontinue their plan at the beginning of the term.
Insurers have a difficult choice to make – lower sales or lower profits – to face premature policy termination. If insurers create room for higher payments by cutting commissions, this could affect sales, and if they withhold commissions or pay more, they will lose profits. As a result, shares of listed private life insurers fell on Thursday – HDFC Life fell 1.9% while ICICI Prudential Life fell 1.8%.

The regulator did not prescribe a limit value, but, for illustration purposes, indicated that the redemption value would have to rise by almost 1.8 times the current level in the second year and 0.8 times more in the fifth year.
According to sources, the objectives behind this measure are to reduce mis-selling by forcing insurers to spread commissions that are currently pooled across the first year and to ensure that insurers do their best to increase persistence.
The new rules are part of Irdai's insurance product regulation proposal, a draft of which has been distributed to insurers. “There will be a defined prize limit for each product, where there will not be any redemption charges imposed on the prize balance beyond these limits, irrespective of the time of redemption,” the draft circular states.
The insurance regulator has proposed a cap on the surrender fees it deducts from policies terminated early. The proposed limit is much lower than what many companies deduct from insurance policies.
Companies deduct a surrender charge because they reserve all the costs of selling a policy in advance. For example, there are cases where 75% of the first year's premium goes towards various costs, the majority of which are predominantly commissions paid to the corporate agent (usually a bank) or an individual agent.
This is not the first time the insurance regulator has pressured insurers over surrender rates. More than a decade ago, the regulator limited the maximum amount that insurers could deduct from unit-linked insurance plans. This followed a turf war with markets regulator Sebi, which accused insurers of selling ULIPs that imitate mutual fund plans. The limit resulted in insurers switching to traditional products.



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