IRDA tweaks mortality charge norms

Friday August 21, 02:31 AM , Source: Indian Express Finance

The Insurance Regulatory and Development Authority (Irda) has withdrawn mortality charges from the overall cap on the charges levied by unit-linked insurance plans. The regulator also asked life insurers not to levy any charge on customers if they surrender their policies from the fifth year a move that will put more money in the hands of the investor.
While the move will benefit people who wish to take higher life cover in case of Ulips, it could give insurance companies the leeway to increase administration charges.
"Mortality and morbidity charges may be excluded in the calculation of the net yield," Irda said in a circular on Thursday. Mortality is the probability of death, while morbidity is the probability of disability. Mortality charge is the fee that insurance companies charge to give life cover. It increases with age.
"This allows companies to offer older customers the benefits of life insurance, without crossing the cap," Aviva India CEO and MD TR Ramachandran said.
On surrender charges Irda said, "No surrender charge can be levied by an insurer for policies surrendered from the fifth policy year and thereafter the policyholder will be entitled to receive the full fund value on such surrender." Insurance companies sometimes charge a nominal fee from customers to withdraw their unit-linked policies once the lock-in period ends. Policies withdrawn during the lock-in compulsorily attract a high surrender charge.
A Ulip has five fixed set of charges: premium allocation charge, policy administration charge, fund management charge, surrender charge, mortality charges. While companies have the freedom to decide charges like premium allocation, policy administration, fund management and surrender charge on their own; mortality charges are fixed for the industry.
To rein in high charges taken by the insurance companies, the regulator had mandated that the spread between the gross and net yield should not be more than 300 basis points or 3% for policies of 10-year tenure or less and not more than 225 basis points or 2.25% in case of policies of more than 10 years term.
When various charges levied by insurers are added on to net yield, it becomes gross yield. Irda had also said that fund management charges should not exceed 135 basis points irrespective of the tenor of the contract.
The new norms will come into effect from October 1, 2009 so that all products which are approved by the Irda on or after October 1, 2009 will be governed by the provisions of this circular. All existing products that do not meet the requirements of this circular should be withdrawn or modified by December 31, 2009.
TR Ramachandran, CEO and MD, Aviva India said the decision to exclude mortality charge from the cap is welcome move. This allows insurance companies to continue to provide adequate protection to the policyholders, which is the core objective of a life insurance policy. Moreover, it allows companies to offer older customers the benefits of life insurance, without crossing the cap.
KS Gopalkrishnan, chief financial officer and appointed actuary of AEGON Religare Life Insurance said that Irda's move is a logical move as the charges for insurance component are dependent upon various factors including age of the individual, type of insurance cover and amount of insurance cover.
"We believe this move also helps the life insurance companies in offering a need-based insurance coverage to the customers within the unit linked products. The customers thus get the best of both worlds within a unit linked product an insurance cover to meet their needs and an investment component that has competitive charging structure. The uniform sub-cap on fund management charges eases the administrative complexities,'' he said.
Kamesh Goyal, country manager, Allianz, and MD and CEO, Bajaj (BAJAJAUTO.NS : 2101.05 0 ) Allianz Life Insurance said Irda has taken a customer-friendly steps. Having one FMC limit would certainly bring more transparency in Ulip products.