Response to IRDAI’s Exposure Draft on Insurance Product Regulations, 2023

The Insurance Regulatory and Development Authority of India (Insurance Products) Regulations, 2023, hereafter “Draft Regulations”, was released by the Insurance Regulatory and Development Authority of India (IRDAI) in December 2023. These draft regulations seek to repeal existing product regulations, including IRDAI (Micro Insurance) Regulations, 2015; IRDAI (Unit Linked Insurance Products) Regulations, 2019; and IRDAI (Non-Linked Insurance Products) Regulations, 2019. 

The draft regulations have been published in the backdrop of IRDAI’s larger effort towards enhancing “the ease of doing business and simplifying regulations by moving towards a principles-based regime”. Specifically, IRDAI outlines the following as the key objectives of the regulations – 

1. 1. To facilitate insurers to respond faster to emerging market needs, to promote ease of doing business and to improve insurance penetration.
   2. To protect the policyholders’ interest by enabling insurers to adopt good governance while designing and pricing the products.
   3. To ensure sound and responsive management practices for effective oversight and adequate due diligence with regard to insurance products, including innovative products considering the interests of policyholders. 

In this blog post, we present a summary of our response, which pertains to – a) the principles of design and pricing of insurance products outlined in the draft regulations and b) our comments on gaps and issues that need attention in the life insurance sector. 

We observe that IRDAI’s proposal to include a set of principles at the design and pricing stage of insurance products is commendable. Although the principles cover several aspects that are key to protecting and promoting the interests of the policyholders, we find that – 1) a key principle on the protection of policyholders’ interests lacks a clear definition, 2) suitability or, more broadly, appropriateness of product design is missing from the list of principles, 3) the principle requiring simple to understand products appears to be misplaced, and 4) the link between the principle on appropriateness and fairness of market conduct and product design and pricing principles is unclear. 

Linked to product design, the second part of our response highlights issues with one of the prevalent products in the life insurance sector, i.e., traditional life insurance plans and the need to evaluate them critically. We observe that multiple studies over the years have questioned whether these plans deliver any value for the insured and her household on both life cover as well as returns on savings. This holds especially true for low-income households. Further, mis-selling on the back of front-loaded commissions has meant that in addition to customers losing out on returns on their savings, the unsuitability of products and the resultant lapsation of policies have also meant a loss of capital on account of high surrender charges. However, we do commend IRDAI’s proposal in the draft regulations to increase the surrender value on these plans.

Beyond product design, several processes determine how these products are targeted and sold to different customer segments. Here, there are two key areas at the product sale stage where the interests of policyholders may be compromised – a) determining product suitability at the point of sale and b) disclosing appropriate product information to customers. The draft regulations seek to repeal existing product regulations under the provisions of which IRDAI had issued an important circular, ‘Circular on (a) Benefit Illustration; and (b) other market conduct aspects’ dated 26th September 2019. This circular covers the abovementioned two aspects of market conduct as they specifically relate to life insurance. While the circular was significant in making product suitability an integral part of the insurance sales process and bringing in improvements to product benefit illustrations, critical gaps remain unaddressed – 1) our analysis of IRDAI’s suitability regulations and their implementation by life insurers points to significant gaps that may prove detrimental to the protection of policyholder interests, and 2) disclosure standards with regard to traditional life insurance plans are opaque on the following – a) allocation of premium money between insurance and savings component, b) commissions payable to intermediaries, c) accurate disclosure of returns on savings component, and d) benchmarking of product benefits.

To address all the above gaps, we make the following recommendations in our response –

A. Principles of design and pricing of insurance products 

• We recommend IRDAI to elaborate on the principle of protecting policyholders’ interests clearly and separately. In doing so, it should outline the design and pricing characteristics of insurance products that insurers should take note of at the product development stage in order to adhere to this principle. 

• We recommend that suitability or, more broadly, appropriateness of product design be included under the list of principles under Regulation 4. Alternatively, this can be folded under Principle i(e) on the protection of policyholders’ interests as one of the product design and pricing characteristics. 

• We recommend that product simplicity as a design principle be removed from the list of product design and pricing principles. IRDAI should instead ensure that regardless of the complexity of products, the objective of comprehensibility of products to customers is achieved through quality product disclosures that are accurate and complete, delivered in a comprehensible manner. This can be met by having a customer disclosure comprehensibility test in place. Such a test can be in the form of a minimum set of principles that insurers have to demonstrate adherence to in their product disclosures as part of IRDAI’s product approval regulations. 

• We recommend that the regulations provide clarity on how market conduct constitutes a product design and pricing principle. Further, we also recommend that the regulations elaborate on the design and pricing characteristics of insurance products that insurers should take note of at the product development stage in order to adhere to this principle.

B. Globally unsuitable products in life insurance – critically evaluate traditional life insurance plans

• IRDAI should critically evaluate traditional life insurance plans that are currently being sold in the market against the value they deliver for households on both life risk cover and savings. Where found necessary, it should either withdraw such products or propose significant modifications to the product features that align better with meeting the insurance and savings needs of households. 

C. Protecting policyholders’ interests in life insurance – beyond product design 

• Ensuring product suitability
  
• The responsibility for determining the risk profile of customers should be explicitly placed on the insurer.

• An explicit written product recommendation and declaration by the insurer/ intermediary of having completed the suitability assessment be made mandatory. 

• The insurer be allowed to bypass suitability assessment in cases where the following conditions are satisfied – 

• The retail customer must state in writing to the financial services provider that they wish to be treated as a professional customer either generally or in respect of a particular financial product, financial service or a type of financial product or financial service. 

• The financial services provider must give the retail customer a clear written warning of the protection that the retail customer may lose if they wish to be treated as a professional customer. 

• The retail customer must state in writing, in a separate document from the contract they are entering into with the financial services provider, that they are aware of the consequences of losing such protections. 

• The financial services provider undertakes an adequate assessment of the expertise, experience and knowledge of the retail customer that gives reasonable assurance, considering the nature of the financial product or financial service or type of financial product or financial service requested, that the client is capable of making their own financial decisions and understands the risks involved. 

• IRDAI undertake supervisory audits of the suitability assessment process and penalizes, through monetary and non-monetary ways, institutional and intermediary processes and behaviours that do not meet the regulatory requirements.
• Further, we recommend that the requirement to conduct suitability assessments be extended to pure-risk products as well.
• Product disclosures through benefit illustrations in traditional life insurance plans
• We recommend that disclosures for traditional life insurance plans be made more transparent in terms of the allocation of premium money towards the cost of providing a life cover and the embedded savings component. 

• We recommend that IRDAI examine the issue of the lack of harmonized disclosures of intermediary commissions across different life insurance products. This can help provide information on potential conflicts of interest and consequently facilitate informed purchase decisions by customers. 

• We recommend that the requirement to disclose the returns on participating life insurance plans at assumed returns of 4% and 8% be done away. Instead, IRDAI should consider disclosures that provide customers with a more realistic picture of the returns they can expect. 

• We recommend benefits under all savings-embedded insurance products be benchmarked against similar products available in the market to allow customers to make an informed purchase decision. While life cover can be benchmarked against a pure-risk product of similar cost, the savings component can be benchmarked against average historical returns of the same/ similar traditional life insurance plans, bank savings and deposit accounts, and public provident fund accounts, for instance.

The full response is available here.