New insurance premium is waning, says Sunaina Vasudev at BS. Overall, nwe premiums have fallen 21% with Reliance, Bajaj and ICICI seeing their new premiums cut but more than a third.
In quantity, LIC is the biggest player out there with about 36,000 cr. in new premiums, down from 45,000 earlier. But of the rest:
IRDA has released guidelines for “web aggregators”. (I’ve written about this earlier) These are final guidelines and will be applicable from February 2012.
There has been some consternation regarding these guidelines. Medianama believes that these are “disastrous for the industry”. PolicyBazaar.com – which will have to get regulated now – is unhappy and says “the guidelines will result in companies like us not to function”. But before we go around getting knee-jerk reactions on overregulation, note that this is not really huge information.
Simplified:
Aggregators are web sites that give information on insurance products of multiple insurers. One part of their business model is to get money from the actual insurers or from large agents, on a per-lead basis - users compare products and like some of these products; a "lead" is thus generated, for which the insurer or agent might be happy to pay.
According to industry sources, the average pay per lead today is Rs. 80 to Rs. 100 (fairly generous if you ask me)
Lead-gen is ONE business model for aggregators. There are many more:
a) Advertisements. Sadly the industry wants to get ads from insurers. What a dumb model that is. How can you be an unbiased comparison site if you allow ads from some insurers to be prominently displayed? It’s like going to a competition where a judge is a close friend of one contestant’s mother. [According to me, an online insurance lead is much more likely to buy books, or clothes, or watches, or a car; get those ads instead.]
b) Charge the customer: This model has, quite simply, not worked for a pure comparison site. But consider that any insurance advisor – or financial advisor – needs to offer the best kind of solution to her customers. So if you have technology to aggregate information, and an advisory layer on top that provides the hand-holding and the decision support, you can charge the customer for advice.
(Note that the above three models are independent of each other.)
IRDA has no jurisdiction on web sites which are a media property. If I’m not an insurance broker,agent or insurer, IRDA cannot regulate me, period. It can huff and puff, but it can’t blow the house down. The issue of jurisdiction, though, is complex and I’m not a lawyer, but you have to note a few things:
1) IRDA is about regulating insurance. It has power over insurance companies, their products, their commissions, the agents and that ecosystem.
2) IRDA doesn’t even regulate all insurance. Postal insurance and RBI deposit insurance are out of it’s ambit, for instance.
So basically, before we get our knickers in a twist, it’s important to note what IRDA is trying to do here and who they’re planning to address.
They can’t regulate a generic web site. They can, however, control what payments are made to what kind of organization – because if they didn’t, the insurers would easily be skimming off money to agents as commissions (which are regulated strictly now). Commissions are a sore point for insurers, who like to build complex products that no one understands and sell them to people who trust them, and eventually charge 100% of some premium as commissions. To stop that habit, IRDA has grudgingly made rules to compel the insurers to reveal who they pay for what and how much, and restricted total commissions to a certain pre-approved level.
Therefore, yes, IRDA can control who insures and brokers pay.
And it follows that many comparison sites earn from lead-gen, so IRDA can regulate what they do as well, and they stand to lose their revenue source. But only for paid-for-lead-gen sites.
An aggregator that survives on advertising or on charging the customer direct is not going to be subject to these rules. If you choose not to be a lead-generator, you don’t have to follow these rules.
Because while it seems to me that while web sites are complaining, they do have a choice.
You couldn’t get into the press box in the IPL if you didn’t adhere to the strict guidelines of BCCI. You can’t show more than X minutes a day, you can’t do this, you can’t do that. But that doesn’t stop people from covering it after seeing it on TV. Or by being in the regular crowd. No, they wanted the press recognition and the invitation to events, so they decided to go with the rules. That’s the way the game is played.
Apple doesn’t allow you to sell an app on its app store if they don’t like it. In some cases they have no logical reason to deny apps, but they do. And developers CAN get around it, by doing something for Android instead, for instance. There is a choice. If you want to play, you play by rules of those that own the playground.
IRDA ring-fences the insurance playground. So if you want to work with their jurisdiction, you must play by their rules. Otherwise, you can continue to be an aggregator site without getting paid for leads by the insurers or brokers.
Not necessarily. Like I’ve said, it’s dumb to put a 10K fee plus a 10 lakh net worth requirement. Dumb, because it’s pandering to the rich. Today, anyone can create a comparison site – technology, greps and calculations are all it takes. But then, as I’ve said, this guideline only applies if you’re willing to give up any lead-gen based revenue – which I argue is a short-lived concept in India anyhow.
I also find the “only two insurers” excessive. Instead, IRDA should improve its ombudsman and actually respect complaints.
Much of my arguments are the same as earlier, which you’ll find here. To summarize, I think IRDA needs to increase its addressing actual misselling and fraud, instead of putting blanket rules. Also I think IRDA is probably within its limits to restrict payments from entities they control.
(Note: my advice of having a sister entity that does an actual agency still applies – while aggregators can’t be brokers, brokers can have an aggregation web site that has the no-ads/no-opinion content criteria of the regulation)
Much is lost in the translation. Mechanisms to rate insurers, or to regulate the income of aggregators for leads, or to disallow advertisements have been railed against, but what was missed was that you don’t need to be paid for leads.
If you don’t get paid for leads, then yes, you can compare, you can rate, you can put ads. IRDA is not in the picture.
Some will say, boss, there is no money in client advice or ads. But the flip side is that lead-gen creates issues with malpractice. An aggregator might push one product because of higher commissions, even subtly. Ads will confuse the user about site bias. IRDA has a right to regulate this where they can.
Finally, the business model of getting paid to give a name and phone number itself is very very shady (I always enter ASDF and a random birthday or phone number on all these sites anyway). There is spam abuse, and also abuse of trust – aggregators today might liberally share your information without fear of a law to restrict them.
That these rules are too restrictive or that regulators are getting too high handled needs to be understood better. We often accept silly, arbitrary regulation in other places (App Store, IPL, even Abhishek and Aishwarya’s baby media coverage) because it’s what you “pay to play”. I expect that this regulation will be toned down eventually as the market matures.
Meanwhile, web aggregators have to explore different models. I personally think IRDA is doing them a favour and stopping what I think is a dead ended model anyhow (lead-gen)
Insurers have been losing some steam over the last two years, but how much? Taking new premium over all products, bought by individuals since 2009 shows us how things are:
August saw a strange spike last year in individual single premium policies last year so the –61% looks like an anomaly. (And indeed, therehave been a huge incerase in “group” single premiums this year in August too).
But the overall graph has a downward trend and the degrowth is informative. Watch insurer stocks for notes as well. (ICICI, Bajaj Finserv, HDFC etc.)
IRDA has produced "draft" guidelines on Web Aggregators (HT: Medianama) that will regulate "web aggregators. I now discuss the points in the guidelines (download here):
Aggregators are web sites that give information on insurance products of multiple insurers. One part of their business model is to get money from the actual insurers or from large agents, on a per-lead basis - users compare products and like some of these products; a "lead" is thus generated, for which the insurer or agent might be happy to pay.
Of course, IRDA has no regulation on web sites - it's a media property that IRDA has absolutely no jurisdiction to regulate - so IRDA is simply trying to regulate payments to such entities from insurers and agents that it regulates. If you build such a site and want to get paid anyone in the industry, you'll have to adhere to the guidelines (which are "draft", not final).
No one knows. The IRDA has very little experience with actual regulation, considering the massive amounts of mis-selling that happens even now with insurance schemes. I get a call a day - I know.
The only thing I can think of is the IRDA wants to be known as doing its job with an entity that is barely surviving online (aggregator web sites) and who really don't have the money to fight back. All insurers meanwhile are getting their agents to sell money-back policies as great investment products.
This is a silly idea, in my opinion. You have to pay 10K to IRDA to register. That's 10K down the drain, and a process that can be stalled under random whims and fancies. And then you can get inspected at any time. This is a sure way to create corruption - demand that every business entity get itself a "license". Already, insurers and brokers need to be licensed from IRDA, now even people who give information do? We're back to the license-raj anyway.
The Aggregator has to have a net worth of 50 lakhs, for the past three years, and on an ongoing basis. Why? This is a strange requirement for a business which needs capital of less than a lakh to start - heck, you could write a full policy comparison and lead-gen engine for about Rs. 5,000 (the cost of the domain name and some PHP/database hosting). You don't even need a physical office. In fact, you're not selling the insurance, so you aren't even liable for the sale (for misinformation, yes, but there's a fraud law against that, and that's criminal procedure, not IRDAs domain) Why 50 lakhs? As Medianama says, this needs to go.
An Insurer / Broker shall not pay the web aggregator fees or remuneration, by whatever name called, towards the costs incidental to the web aggregator’s activities including maintenance of the data base, infrastructure, training, entertainment, development, communication, advertisements, sales promotion etc.
So an insurer can't even advertise or pay to register. IRDA thinks this will avoid confusion to customers. But of course, IRDA won't even bother to address actual mis-selling of banks selling insurance policies to customers, disguised as fixed deposits, not even ACKNOWLEDGING the problem with a press-release or anything. Well done.
So if I want insurance but don't know which, then there are stranger regulations proposed. You can only share info with one broker or five insurers, not both. This is micro-regulation at its finest. Imagine if TRAI were to tell you that you can speak to five friends per day, or two business partners, otherwise you have to buy a new phone.
Yes, lead duplication is a problem but this kind of regulation isn't a way to solve it. If users complain, then act on individual complaints. (remember, it was the user who went and said I don't know which insurer, but I'm interested, tell them to contact me!) The warning/fine/suspension argument situation is fine.
Yeah, yeah, I know, if I think these regulations are nuts, what else would I suggest?
No registration required. No minimum net-worth. No payment term regulations. No concept of scrutiny. Just a statement saying you're all welcome, but if you are found guilty of mis-selling, fraud, spam or such, we will Warn + Fine + Blacklist you, and create a mechanism for appeal and whistleblowing. Finished. That's all you need, plus one or two heavy enforcements of big players - suddenly everyone behaves.
But if these regulations actually go through, what to do? You can't be in the "lead-gen" business alone, that's for sure. You have to be a broker. But since getting one composite license to service multiple insurers is a pain in the neck, you need to setup 10 companies to get 10 different insurance agent licenses. Then, have another company to run the information web site, but don't let it get paid by the agent/broker companies - transfer leads to them, and they'll make money from the lead conversion anyhow, and as a "group" you'll make money.
You need to make money from actual transactions, not from leads. But the lead-gen model is full of fraud in India anyway, so you wouldn't make much from it in the longer term.
This is crazy, I know, but eventually regulations will change. When they do, you can work at merging entities. I know from experience that this is not difficult or costly; you need a good accountant, that's all. But it does raise the bar - this is no longer a basement/garage business, and you'll need a few lakhs to get this working.
It turns out(*) that the new guidelines for ULIPs in 2010 have claimed another victim: Cover Continuance.
The concept, prior to September 2010: if you bought a ULIP and stopped paying premiums after say 5 years, you could choose to continue to have
Now, with the new regulations this is no longer allowed. If you stop paying premiums, you have to take back your money. Subramoney also mentions this in his blog.
What this means now is: there is no way to stop payments and still continue cover. Let's look deeper.
ULIPs had horrendous surrender charges, upto 100% of fund value. IRDA said boss, you can't charge more than Rs. 6,000. And you have to pay back the fund value to the customer, or if five years are not completed, leave it in at 3.5% interest and then give it back. That prompted the question: what, exactly, is a "surrender"? If you stop paying premium, that is equivalent to a surrender.
Now, ULIPs must return the money or move it over to a low grade investment area if you stop paying premiums. What is required, perhaps, is a tweak to the regulation that allows users to continue (at their own behest) the risk cover. The specific wording of the current regulation is:
A policyholder shall be entitled to exercise one of the following options upon discontinuance of the policy:
(i) Revival of the policy, or
(ii) Complete withdrawal from the policy without any risk cover.
This could be augmented with (iii) Continue with the risk cover, with mortality charges being reduced from the fund value from time to time, and the option to withdraw completely from the policy under (ii) above at any time.
Most ULIPs had absolutely crappy insurance limits, and in practice, almost everyone took 5x of annual premiums as cover. Many ULIPs provided the sum assured OR the fund value, whichever was higher. For them, the continuance meant very little insurance - probably 3x-4x annual premiums - practically, if you paid Rs. 50,000 you would have cover for about 2 lakhs, which, one must admit was unreasonably small.
Some others offered risk cover of sum assured PLUS fund value, which is where the continuance option may be useful, so let's explore some more.
Let's say you were paying Rs. 100,000 for a sum assured of Rs. 10 lakhs, and after year 5 you decide to stop premiums.
In a cover continuance scenario, you would get the Rs. 10 lakh cover to continue. With age, your mortality charge increases - that's how ULIPs work - and eats into your fund value. From the Rs. 3,000 a year if you were 35, it will go to Rs. 10,000 a year if you're 55. Even at that, the cost is reasonable.
But think about it - for someone who can afford Rs. 100,000 a year: is a 10 lakh cover worth it? You obviously need more - if you can save 1 lakh a year for insurance, chances are that you spend more than 5 lakhs a year (15% saving) and therefore, the 10 lakh insurance is utterly useless. In current ULIPS, though, you may be allowed to take on a larger insurance cover, and to that extent, there is likely to be a practical need.
By the way, policy administration charges nowadays can be substantial (sometimes, 3% a year, of the premium amount!).
The cover continuance option could be useful for those who are younger, and gives them the ability to stop paying premiums; and I would definitely recommend that it be made available as an option.
With the caveats : This should not be the default option. It should not be allowed less than 5 years from the policy date. It should also let you exit fully at any time.
Till then of course, your options are:
Overall, the current regulation must be augmented, to allow cover continuance if you stop paying premiums after 5 years.
* I got this information from a survey being conducted by Money Life.
A small story at Yahoo on the choice: Ulips or Mutual Funds.
(Posted in entirety)
It was the day they’d talked about 9 years ago. The first day of 2011.
“I’m on my way.”
Ganesh Raghupathi sighed. He had known Arnold would be late. But then, Arnold had two kids, and you always give that species a little more respect, and a little more time.
Arnold D’Souza was looking forward to the meeting. He walked in to the coffee shop, while Ganesh was clumsily switching on his laptop.
“Over here”, said Ganesh, raising his hand.
“Hi Guns!”, said Arnold. “Happy New Year! Let’s get started. To recap – it’s the 1st of January, 2011 and we are here to compare our retirement choices. I chose a Unit Linked Insurance Plan (ULIP) and you bought something else. Let’s see where we are today.”
“Thanks for the wishes, Arnie, and the same to you.”, said Ganesh. “Let’s see the chart:”
|
|
Arnold |
Ganesh |
|
Plan |
Invest 50,000 per year for retirement |
|
|
Option |
ULIP |
Mutual Fund + Term plan for insurance cover |
|
Insurance |
5 lakhs |
10 lakhs |
|
Premium |
Part of the money paid Ceases when fund>5lakhs. |
Separately, Rs. 3,000 per year. 47,000 left for investment |
|
Investment choice |
Zurich India Equity Fund (Now HDFC Equity Fund) |
|
(This is an article I wrote recently, so here you go!)
The new ULIP regime is here, and insurers must be balking in fear. The changes? Spread commissions over the lock-in period of the scheme, the minimum of which is now five years from the earlier three; a cap on surrender charges to a maximum of 6% (or Rs. 6,000); a guaranteed 4.5% on pension products and forcing investors to buy annuities on exit; and higher minimum sums-assured on ULIPs.
The one aspect that must trouble insurance companies the most is the cap on surrender charges. For many insurers, this has been a significant source of revenue, since these fees directly line insurer pockets. Prior to September 1, a significant number of ULIPs would charge huge amounts as surrender charges – from 100% of your fund value if you exited in year 1, grading down to 5% in year 5 and so on. The idea was something like:
Phase 1: Entrapment
“Sir, you should invest in this ULIP. All you have to do is pay for three years, and you’ll get a tax-saving, and a fantastic deal! Just 20,000 a month.”
Phase 2: Realization
“Mr. Agent. It’s been a year now, and I’ve paid Rs. 240,000 in premiums. The Sensex has gone up 20% in the last year. So why does my account balance show just 120,000?”
“Well, there was 60% first year premium allocation charges, which meant only 96,000 was left; that grew to 120,000 which is pretty good growth!”
“Good? What good? I pay 240K and am left with 120K and that’s good?”
Phase 3: Exit!
“Get me out of this plan now.”
“Sir, if you stop paying your premium you will lose another 50% of whatever is left, as surrender charges”.
“Oh. Wait. I don’t care. I’ve been cheated!”
People still surrender their policies, sometimes choosing to pay two or three more years of premiums before doing so – and primarily because they had been sold a “three-year” policy, which turned out to be a much longer, 20 year product instead. The surrender charges they paid after three years may be small – of the order of 5% or so - or massive, in some cases losing whatever little was left after commissions. When you’ve lost 90% of your money, you’re unlikely to pay more for a few more years just to recover what’s left (and pay even more commissions).
Insurance companies are seeing tremendous amounts of money leave through surrendered policies. Look at the L-7 (“Benefits Paid Schedule”) of most insurers (eg. ICICI, Birla Sun Life) and you will find that more than 90% of money going out is on account of surrenders. A further look at L-22 (Analytical ratios, Persistency) shows that only about 1/3rd of customers choose to continue policies after the 36th month.
We don’t know what the average surrender charge is – but for most policies before September 1, these charges were pretty hefty – let’s say the average is around 10-20% when you consider all surrenders. When this drops to a maximum of 6% (or Rs. 6,000) for policies above Rs. 25,000 premium, this will impact all insurers. The three insurers I checked – HDFC, Birla Sun Life and ICICI – had surrenders of 430 cr, 330cr and 2,400 cr. respectively; the surrender fees are likely to be above 50 crores for each insurer, just for the last quarter.
Consider now that the high salaries in the sector have largely been justified by the high fees. Salaries are sticky – no one likes to take a pay cut – so the obvious impact will be to retrench; and going by the grapevine, that retrenching is already happening. The impact of the Direct Tax Code is also negative, starting 2012, with the loss of tax-saving status of most existing policies (the DTC provides tax-saving coverage to policies with a premium of less than 5% of sum assured – most ULIPs don’t qualify). Plus there’s a tax deduction at source for insurance maturity payments, making them less attractive.
What about agents? They complain that commissions are now sub-10% which is very less. Well, the point is this – no other financial product offers even half the “lower” insurance commissions. So there is really nowhere to run anymore – insurance still provides a multiple of what they would get otherwise.
Why is this relevant to you?
What is important to understand is how the dynamics of the industry changes – and therefore what new spiel you’re going to receive, and how to decode it.
Endowments: We’ll get to hear about traditional endowments – non-unit-linked – as a great way to invest. I wouldn’t even bother – endowments are opaque products with very high but hidden charges. Additionally, surrendering the policy early costs a very large amount – usually you would be happy to see even 1/3rd of what you’ve paid should you want a premature exit. Endowments might have their uses (for example, a “waiver of premium” rider helps continue a policy in case of disability, or a cheap way to transfer wealth when you die) – but for the purpose of investment, it is a fairly useless product.
Why sell them, you ask? Agents continue to get great commissions and the non-transparency of the product and high fees ensure you get stiffed without your realizing it.
The sales pitch of the ULIP might change – to force you to pay higher premiums, or to disguise the product as something it is not. With bankers who would gleefully sell you a ULIP when you ask for a fixed deposit, you have to be careful! So here’s a set of steps
First, don’t sign a document if it contains the word “insurance” unless you receive the complete detailed brochure for the investment.
Second, check for phrases that steal your money away from you: Premium allocation charge means they’ll take that much away. Policy Administration Charge is another premium stealing measure; earlier it used to be miniscule but now they have “tweaked” the policies around. “Administration” charges can add up to 5% of your fund value per year and what you will see is 0.4% per month, another dirty way to hide theft. Fund management charges apply at about 1.5% per year, which is okay – this is charged even by mutual funds. Mortality Charges are, again, okay because this is what the real charge of insurance is – what they take to give you the sum assured in case you die.
Lastly, add up the charges (other than mortality). Most policy charges will add up to 10-15% in the first year. Then, throw all these documents away.
I would invest in a long-running, diversified mutual fund instead; because paying 10-15% for investing your money is financially stupid, when you’ll pay only management fees in a mutual fund. (For funds like HDFC Top 200 or HDFC Equity, the total recurring fees, including trustee, registrar and other fees, adds up to 1.8%)
Yes, you will ask me about insurance – for that, I would buy a term plan; online term plans are available from ICICI Prudential and Aegon Religare for extremely low premiums. (A policy of 1 crore for a 35 year old will cost less than Rs. 25,000 per year) More insurers will offer low cost term plans, and as our life expectancy grows with better medical care, we will find premiums coming down over the next few years. I don’t like ICICI and Religare Claim payout ratios are horrible so I’ll wait.
My method does not help the profitability of insurers either, especially those who wanted to make money stealing it from us. The good old method of making profits from the practice of insurance must take center stage; the method of making money without killing us in the process.
ICICI Launches an online iProtect plan – for a 35 year old, the premium is just 24,000 for a 30 year, 1 crore term insurance. This is bought entirely online (no agents).
This is fairly cheap, but the only problem I have is that this is ICICI insurance and I’ve had a bad experience with their claims process.
Their comparable other product, the offline Pure Protect, offers 50 lakhs of insurance for 18,000 (30 year term). The online product, for the same conditions is 30% cheaper at 12,850.
I like this competition to Religare’s iTerm, and I really hope LIC jumps in. I trust them a lot.
Copyright (C) Deepak Shenoy 2011
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