The Finance Secretary

To03.10.2015

The Finance Secretary

Ministry of Finance

Department of Economic Affairs

Government of India

New Delhi.

Subject:Comments on recommendations of Committee to recommend measures for curbing mis-selling and rationalizing distribution incentives in financial products

Dear Sir,

We as representatives of the intermediaries in the field of life insurance consider ourselves as stakeholders in the insurance industry and thank the authorities for seeking the comments and suggestions of the stakeholders on the Report submitted by the above Committee headed by Shri Sumit Bose, former Union Finance Secretary.

We have gone through the Report. The Report contains recommendations under three subheads namely a) Product Structure, b) Costs and commissions, and c) Disclosures.

Before we come to our response to these three aspects, we intend to put forward our views on the insurance market in India and other related issues. Those are being given below.

1)The market of insurance especially life insurance is a complex field. The products are far more complex in comparison to other financial products like NPS, Mutual Funds or Small saving instruments.

2)The advisory role is far more complex and crucial in life insurance than that in other instruments. The role of an advisor starts much before the day when the sale happens and continues much beyond the day the policy matures or gets terminated in the form of an unfortunate death of the policyholder. People in the industry know that there are cases where efforts continue for years (even decades) before a sale happens.

3)Life, even for insurance companies, has not been very comfortable. The lack of growth, the slowdown, multiplicity of rules and regulations and introduction of service tax on insurance premium has made the going really difficult.

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4)The insurance industry has grown manifold since opening up. The concern however remains that the rate of growth is much lower than what was expected by everyone. And, the fact remains that for around last five years the industry has vacillated between marginal growths to marginal de-growths. Who would have expected this?

5)The slowing down of insurance industry may probably be one of the factors for declining savings rates. (As per the RBI Annual Report 2014 the household financial savings rate has declined from 12% in 2009-10 to 7.1% of GNDI-Gross National Disposable Income in 2013-14 source IRDA Annual Report 2014, page-3). Should something be done which will further diminish the market?

6)The penetration of life insurance (premium as percentage of GDP) has come down from 4.6% in 2009 to 3.1% in 2013. Similarly life insurance density (premium per person per year) has come down from $55.7 in 2010 to $41.0 in 2013. Incidentally the density of life premium in Australia is $2056 and in UK it is $1684 (in2013, source IRDA Report 2014). The insurance penetration in India (life premium as percentage of GDP) is almost same as it is in Australia and in the US. This shows the good work done by the life insurance agents, though the problem actually lie with smaller per capita GDP of India. However, can we really compare with these developed markets, now? Other factors like high literacy and awareness levels in those markets cannot be ignored. We also must consider the fact that in some of the geographies insurance of different kinds are made mandatory by statute. Here it is not.

7)The size of insurance policies in India is quite low. The per policy premium remains around as low as Rs. 8,000 for non-single premium policies for LIC. For other insurers also it is not much better.

8)The agents of life insurance companies are not a highly paid group. The average per capita income of life insurance agents is quite low. For agents of LIC it is as low as Rs. 12,000/- per month (calculated as total commission expenses of LIC in 2013-14 divided by number of active agents). The scenario for agents/advisors working for private insurers must be worse as the average productivity per advisor is much lower. The industry average is only around Rs. 8,000/- per month. It is probably lower than the minimum wages defined by the government.

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9)The contribution of insurance industry in Indian economy and in infrastructure building probably need not be over emphasized. It has been the biggest contributor in many ways. Recent commitment by LIC to Indian Railways (of Rs. 1,50,000/- crore) is one such example.

10)The Report emphasizes so much on the pure life cover (term plans). LIC introduced term plans decades back and private insurers, many of them, launched themselves with term plans. The success of term plans has been just limited. (Please remember that the commission structure has been similar as in other traditional plans, not lower.) We must understand the Indian psyche. People do not prefer paying something and not getting anything as maturity value. It is almost a decade now since the online sale of term plan was launched by new entrants in the market. It would have been good if the Committee had discussed the volume sold online (of term products). The numbers definitely are insignificant. The fact remains, even well educated people do not go for term plan, normally. And let us remember, during the same period the e-commerce and online sale of small inconsequential physical items to items worth several lakh of rupees has gained great currency.

11) Another example which will help us in understanding ‘pure-risk-cover-a-waste-phenomenon’ is of non-life insurance of certain kinds. According to a recent report 75% of the two wheelers plying on Indian roads are without insurance cover of any kind. (Source news item in Times of India on 23-05-2015; URL: People simply avoid vehicle insurance (even though made mandatory by law) because the premium paid doesn’t give ‘maturity value’.

12)The returns offered by life insurers have not been bad. Please make comparison between comparable things. Long term endowment plans have given a healthy return in the range of 6 to 7 to 8 percent. And this is in addition to the life cover provided. These plans in fact have helped in developing a habit of savings among the masses. That probably is the reason why insurers are rated and voted as the most trusted organizations.

All the above aspects needs to be kept in view when anything of significance related to life insurance is being discussed.

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Let us discuss the recommendations of the Committee. Our views on the Report are summarized below:

The Product structure:

1)The product structure, under IRDAI supervision, has undergone significant changes in recent years. This has happened more in unit linked insurance plans. In ULIPs as the value of the fund is likely to move significantly with the market movements, the charges are being fully disclosed. There is hardly any point is splitting the product between risk and savings. The consumer sees this as one product and should continue to do that. If split, it will again confuse her, as ‘no maturity value’ sentiments will dominate. The purpose of providing insurance cover and corpus building will get completely defeated.

2)We agree that the insurers should follow the best global practices of the market.

3)Lapsation profits, we agree, should not accrue to the insurance company as profit. However the entire fund has to be treated as a pool belonging to the millions of consumers.

4)We also are of the opinion that exit or surrender loads should be within reasonable limits. We however are also of the opinion that the consumer should be encouraged to continue the policy for long term as that is in her benefit and interest. She should continue to get the benefit of insurance cover. Some unscrupulous operator should not induce her to unnecessarily churn from one plan to another to another.

Costs and commissions:

1)The surrender charges, need to be within reasonable limits, as discussed above. However the consumer must also be encouraged to continue the policy for long term.

2)A cap on expenses is definitely desirable as it is in the interest of the consumer. The global practices we understand do differ widely in this regard.

3)We are of the clear opinion that there is absolutely no need for splitting the product into mortality and investment. It will simply kill the product. The product and the industry will not be able to survive this assault. And the consumer will be the ultimate loser. She will lose the opportunity to go for long term risk cover as well as the opportunity for long term investments.

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4)No upfront commission for the product or part of the product again is an idea that not only appears to be short sighted but also probably intends to simply assault the industry. The insurance agent, who works on selling a difficult idea to a probably not very insurance aware consumer, needs some reasonable compensation. The agent spends not only time but also incurs expenses in the process, upfront. And again kindly remember that his work only begins with the sale, doesn’t end there as is the case with sellers of other financial instruments. The commission structure as is in practice now must be allowed to continue. Anything like removing upfront commission will put the agent to massive upfront loss and will make the profession itself unviable.

5)It appears that it has been presupposed that the life insurance industry has grown to the current levels only on the basis of mis-selling. Nobody can deny that there have been multiple instances of mis-selling, more so in the cases of unit liked products. But we also must realize that the phase of loose controls and initial hiccups are behind us. IRDAI has brought in effective mechanism by introducing controls and penalties, some of them are real harsh.

6)The instances of rebating, yes, must be dealt with very strongly and harsh punishments should be meted out.

Disclosures:

1)Insurance policies are legal contracts, therefore, all the required information must be disclosed including the costs of different kinds. However displaying the premium of a pure life cover policy alongside any insurance product is stretching the things too much. It will only help in confusing the consumer. It may be desirable only if the purpose is to scare away the consumer from the manufacturer who is most trusted by her and who has stood the test of the times and make her fall in the lap of the hawkish vendors who have otherwise failed to cajole her till now. This is absolutely undesirable and against the welfare of the consumer.

2)Benefit illustrations, yes, should give likely returns the consumer may get. As normally there no guarantees any longer (except the sum assured), the consumer should be made aware of this. It will also prevent any chance of promising the moon. The benefit illustrations should be documented and signed by the intermediary and the consumer.

3)The annexure to the Report showing UK Benefit Illustration is quite simple and we can adopt the similar pattern.

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4)The word bonus is used in life insurance parlance for the amount which is paid in addition to the guaranteed (assured) amount of sum assured. It is not supposed to indicate the ‘return’ as mentioned in the Report. We are surprised that the Report finds it objectionable and compares with the IPO vs NFO example.

Finally we would summarize our opinion with the following:

1)The Committee Report’s basic premise that life insurance is a product at par with mutual fund, NPS and others is inherently and deeply flawed. Life insurance is a medium of social and financial security for vast millions of Indian populace and this reach has been made possible by the life long and dedicated efforts of LIC agents and now advisors of private insurers have joined in in this. Life insurance being an intangible product is very difficult to sell and the agent has to undertake a lot of efforts, visits (which involve expenses) and persuasion to convince a prospect to take care of her own well-being.

2)It will be pertinent to compare the reach of mutual fund and life insurance in India. As on date there must be 25 crore life insurance policyholders (all insures together) thereby providing security cover to at least 50 crore people. As per Committee’s Report itself the number of mutual fund folios is 3.95 crore (there may be multiple folios by one individual and also many inactive/ defunct folios). The reach of mutual funds does not go beyond metros and major cities. Therefore if the Committee’s report is implemented it will deal a severe blow to government’s agenda of financial inclusion leaving the semi urban and rural areas without any social and financial security.

3)The idea of upfront commission only on mortality premium (which will be a very miniscule amount) is entirely misplaced. When the agent incurs upfront expenses why should his remuneration be trail ended?

4)Life insurance agency is a whole time profession based on relationship and trust, with the customers. As per estimates about 22 lakh of insurance agents are fully dependent on this profession earning their livelihood while spreading the message of life insurance. This class will become extinct if the recommendations of the Committee are implemented.

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Certainly it is not the agenda of the Government to further aggravate the already grave unemployment situation in the country.

5)In the Committee’s Report the traditional insurance plan has been much vilified. However the fact remains that these plans have, over the years, offered safe and reasonably assured returns to the policyholders along with liquidity in family exigencies. They have encouraged the habit of thrift and offered risk cover as well. Pure life cover plans, though conceptually sound, do not appeal much to Indian customers as they also want to build up a corpus along with risk cover. Insurance endowment plans are so popular not without any reason.

6)Mis-selling of insurance products can be tackled by other means than by killing the goose itself. Better product design by insurers, a prompt redressal machinery, better regulatory control, sound investment practices and strong penal measures against those who indulge in mis-selling can address the issue effectively rather than shutting down an entire industry itself in the name of curbing mis-selling. Moreover the incidence of mis-selling increased manifold due to the unethical practices followed by some life insurance companies who unleashed an army of part time and fly by night agents in the first decade of liberalization. The community of fulltime, committed and honest agents should not be punished for the misdeeds of others.

7)At present LIC meets close to 30% of borrowing program of the Government apart from investing heavily in infrastructure and other government projects. Will it be able to do so if life insurance industry has to survive solely on term insurance premium?

8)The insurance regulator (IRDAI) is already bringing in the required improvements and reforms in a phased and consistent manner after properly studying and taking a balanced view of the entire scenario.

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Finally, the Report clearly gives an impression that the major portions of the Report and the recommendations have been authored by someone with fierce pre-conceived anti-insurance and anti-LIC views. Everybody has fundamental right to have their own views, however imposing such myopic views on an industry with much appreciated proven track records for decades will be absolutely disastrous for the consumers, for the industry and for the nation at large.

In view of the above reasons Life Insurance Agents Federation of India finds the Report of the ‘Committee on Curbing Mis-selling and Rationalizing Distribution Incentives in Financial Products’ baseless, arbitrary and completely devoid of any logic. Lack of due application of mind is very obvious in the Report and the recommendations. We strongly condemn the recommendations and appeal to scrap all the suggested changes.

Yours faithfully,

(S.B. Sreenivasa Chary)

President, LIAFI,

Flat No. 202, 2-2-185/56/C/3 Satya Sai Apartments,

Baghamberpet, Hyderabad- 500013

Copy to:

1. Shri.,Arun Jaitley, Honourabl’e Minister for Finance, Govt of India for kind Notice and not to implement the Recommendations made by the Sumit Bose Committee in the interest of the Insurance Industry.

2. Shri. T S Vijayan, Chairman Insurance Regulatory Development Authority of India, Hyderabad for kind information and favourable action.

3. Shri. S K Roy, Chairman, LIC of India, Central Office, Yogakshema, Mumbai for Kind information and favourable action.

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2-2-185/56/C/3, Flat No.202, Satya Sai Apartments, Opp Red Building, Bagh Amberpet, Hyderabad-500 013.

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