Experts say that the proposed norms can deter unethical sales practices; however, it will be practically impossible for policyholders to replace their existing policy even if they were mis-sold.
In a bid to check mis-selling and encourage fair business practice, IRDA has come out with a draft regulation in which it has tightened norms for replacing existing life insurance policy with a new one.
In the draft circular, IRDA said, “No life insurance agent, insurance intermediary or an insurer is permitted to replace a life insurance policy, except, if it is in the interest of the policyholder and in according to the guidelines.”
IRDA has proposed that intermediaries need to furnish a written consent from a prospect for replacing existing policy. Before taking such consent, they have to disclose the consequences of replacement. The intermediary should notify old insurer 15 days prior to submitting a new proposal along with the consent letter of prospects and explain to them the reason behind replacing existing policy.
Insurance companies have been asked to advise the prospect not to surrender, lapse or make paid up of an existing policy.
Old insurer whose policy is proposed to be replaced should send a communication to policyholder within seven days from the date of receipt of replacement form. This communication can contain advantages of continuing with the existing policy so as to discourage any inadvertent consequence of replacement.
GN Agarwal, Whole Time Director, Future Generali India Life Insurance is of the view that such norms can reduce mis-selling and encourage fair business practice. “In the recent past, such instances of replacement have increased. Keeping this in mind, IRDA has drafted a regulation which will help reduce unethical sales practices.”
However, some people have a different opinion. A senior official from a private life insurer told Cafemutual that such norms can be a deterrent in replacing mis-sold policies. Citing an example, he said, “If a policyholder has a term plan of ABC Life for which he was paying Rs. 10,000 annually and a similar benefit is available in XYZ Life at a comparatively low premium of Rs. 7,000 then the policyholder cannot replace the policy easily. It’s practically impossible for them to replace policy if he/she was mis-sold due to cumbersome process and numerous hassles.”
Suresh Sadagopan of Ladder7 Financial Advisories, “After going through the guidelines, replacing a policy seems very cumbersome. The intention is good. They do not want customers to be misled in surrendering old products and buying new ones. But, there are so many mis-selling cases in insurance that customers who have been missold, on realising it, cannot even surrender easily and take a policy which is suited to them. They will have to go through the entire procedure as outlined in the guidelines which would be painful, on top of having been mis-sold a product. Also, there is nothing that stops an unscrupulous agent from first selling a product and then asking a client to surrender another insurance product. This guideline will not be triggered in that case. Lastly, regulators across the spectrum think that they can protect consumers by laws alone. That is impossible. Only when the customer is aware, they can save themselves - which is a long way to go when it comes to buying financial products.”
IRDA has sought feedback from stakeholders before July 20, 2014 in this regard.