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Tracing the History of IRDAI’s Regulations on Suitability and its Interpretations by Market Participants – Part 2

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Abstract

In our previous post, we aimed to trace the history of IRDAI’s regulations regarding suitability assessments for life insurance. In this blog post, which is the second part of the two-part series, we studied the suitability formats of four life insurance companies[1] and found many contrasts in the manner in which IRDAI’s suitability regulations of 2019 has been implemented. The table below captures these differences:

Parameters Life Insurance Corporation (LIC)[2] ICICI Prudential Life Insurance[3] Shriram Life Insurance[4] Tata AIA Life Insurance[5]
Does the form capture all the information required by IRDAI in its circular? No. Some of the details like premium payment term and the financial & family goals are not captured in the form. No. Life stage and financial & family goals are not captured in the form. No. The form does not capture the financial & family goals. No. Life stage, financial goals, investment objectives are not captured.
What is the basis of determining the risk profile of the customer? The customer needs to determine her risk profile through her own assessment without any support from insurer. The customer needs to determine her risk profile through her own assessment without any support from insurer. However, in case the policy is being purchased through the ICICI bank channel, the risk profile as per the ICICI bank records can be selected. Risk profile is not captured. Risk profile not captured.
Is suitability determined based on the insurer’s own assessment of the financial situation of the customer, or based on the risk profile as mentioned by the customer? The determination of suitability is unclear. Suitability is determined based on the information provided by the customer, including the risk profile. Suitability is determined by the intermediary based on the analysis of the information provided by the customer.    Suitability is determined by the intermediary based on the analysis of the information provided by the customer. The intermediary signs off confirming she has carried out necessary suitability analysis while advising this product to the proposer and that the product is suitable to the proposer.
Are there any checks and balances / rules of thumb built into the format to help the customer? The form includes a Need Analysis to calculate the maximum allowable insurance for a customer based on their income, outstanding liabilities and age. The form provides recommendations regarding annual premium amount, policy term and premium payment term. No such checks and balances / rules of thumb included in the form. No such checks and balances / rules of thumb included in the form.
Is information on liabilities captured and assessed? Liabilities are captured but the assessment is unclear. Liabilities are not captured. Liabilities are not captured. Liabilities are not captured.
Does the form contain an explicit written recommendation by the intermediary? No. No. While the form contains a full printed list of products, there is no explicit requirement on the intermediary to highlight/circle the product she is recommending. No. No.
Is the customer given the option to supersede the recommendation of the intermediary? Yes. Yes. No. No.          
Is the customer given the option to not provide the details required by the insurer for suitability assessment? Yes. No. No. No.
What is the nature of the declaration to be made in the form? The form contains a declaration by the intermediary that she has explained the product terms and conditions to the customer.   There is no declaration required to be made by intermediary that what she has recommended is suitable.   There is a declaration by the customer that she has ‘understood the selection of product’.   The form contains a declaration by customer that she has ‘understood the features of the product and believe it would be suitable for her/their insurance objective. No declaration by the intermediary. The customer needs to declare that they have understood the features of the recommended product, but the intermediary is responsible to ensure suitability. The customer needs to declare that they have understood the features of the recommended product, but the intermediary is responsible to ensure suitability.
Is the intermediary required to declare that the recommended product is suitable for the customer? No. Not directly, but this is done indirectly by the intermediary as the intermediary has to provide her signature next to the customer’s signature. Yes. Yes.
Is customer first provided a recommendation by the intermediary / insurer before she waives the need for suitability assessment by intermediary / insurer? No. In choosing to waive, the customer Is also choosing explicitly to declare that she does not wish to fill up the questionnaire. Yes. the insurer/intermediary makes a recommendation, and the customer can choose to supersede this recommendation. Customer does not have an option to waive the need for suitability assessment. Customer does not have an option to waive the need for suitability assessment.

As can be seen, there is wide variation in the manner in which IRDAI’s suitability regulations have been implemented.

Life insurance companies also often leave it to the customer to determine their own risk profile, which the intermediaries often use as an input to conduct suitability assessments (for instance, both LIC and ICICI Prudential[6]). They also put the onus of final decision on the customer, without making sure that the product has been explicitly recommended by intermediary after carrying out a suitability assessment. LIC for instance, provides a waiver option for the customer, which has significant potential to be misused by the intermediary. Only the smaller insurers such as TATA AIA and Shriram seem to place an explicit obligation on the intermediary to declare that the recommended product is suitable for the customer. While LIC completely exempts the intermediary (and LIC itself) from taking on this obligation, ICICI Prudential does not place an explicit obligation on the intermediary but does so indirectly by requiring the customer to sign off that such an obligation has been met by the intermediary.

We recommend that the responsibility for determining the risk profile be placed on the insurer and an explicit written recommendation and declaration of having completed suitability assessment by the insurer / intermediary be made mandatory. Further, in our paper titled Universal Conduct Obligations for Financial Services Providers Serving Retail Customers we also recommend that the insurer may be allowed to bypass suitability assessment in cases where the following conditions are satisfied[7]:

  • The retail customer must state in writing to the financial services provider that he/she/it wishes 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 he/she/it wishes to be treated as a professional customer;
  • The retail customer must state in writing, in a separate document from the contract he/she/it is entering into with the financial services provider, that he/she/it is 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 his/her/its own financial decisions and understands the risks involved.

Mis-selling of unsuitable products by insurers to customers who may not have sound financial knowledge has been one of the major issues in the Indian insurance sector. In this light, mandatory suitability assessment is a laudable step towards by IRDAI towards enhancing consumer protection. However, as we discuss above, there remains room for considerable improvement in which the suitability process is implemented.  Customers of life insurance can still find themselves in a vulnerable position, till such time they are required make their own financial decisions without adequate advice from the insurer/intermediary. Thus, to fulfil the aim of suitability assessment, IRDAI must place greater responsibility on the insurer to gain an understanding of the state of financial situation and needs of the customer and provide a recommendation that can be scrutinized for suitability. One way this can be done is by undertaking supervisory audits of the suitability assessment process and penalizing, through monetary and non-monetary ways, institutional and intermediary processes and behaviors that do not meet the letter and spirit of the suitability regulations.  Once incorporated, these checks will help in ensuring that the products recommended are truly suitable and beneficial for the customer, and in bringing down complaints under the category of unfair business practices, which today forms 26% of complaints in IRDAI’s Integrated Grievance Management System[8].

[1] The authors were unable to locate suitability formats online for other prominent life insurers such as HDFC Life, Max Life, Bharti Axa, SBI Life and so on. The 4 life insurers we studied (except for Shriram Life) fall among the top 10 life insurers in India.

[2] See LIC’s Form for Suitability  Analysis. Accessble at: https://investmenthub.asia/images/pdf/4_5886343947223041947.pdf

[3] See ICICI’s Customer Suitability Form. Accessible at: https://www.iciciprulife.com/content/dam/icicipru/download-centre/applicationforms/Customer_Suitability_Form.pdf

[4] See Shriram Life Insurance’s proposal form. Accessible at: https://shriramlife.com/wp-content/uploads/2017/11/SHRIRAM-PROPOSAL-FORM-ENGLISH.pdf

[5] See Tata AIA’s Master Proposal Form. Accessible at: https://www.tataaia.com/content/dam/tataaialifeinsurancecompanylimited/pdf/download-centre/english/others/Master-Proposal-Form.pdf    

[6] Only in instances where ICICI Bank is not the channel)

[7] See “Universal Conduct Obligations for Financial Services Providers Serving Retail Customers” (Deepti George, 2019). Accessible at:  https://dvararesearch.com/wp-content/uploads/2019/05/Universal-Conduct-Obligations-for-Financial-Services-Providers-Serving-Retail-Customers.pdf

[8]IRDAI’s Annual Report 2019-20. In its annual report, IRDAI defines unfair business practices to include mis-selling complaints as well as complaints related to tampering records/ forging signatures.

Cite this Item:

APA

Anukriti Tiwari, D. G. (2021). Tracing the History of IRDAI’s Regulations on Suitability and its Interpretations by Market Participants – Part 2. Retrieved from Dvara Research.

MLA

Anukriti Tiwari, Deepti George. “Tracing the History of IRDAI’s Regulations on Suitability and its Interpretations by Market Participants – Part 2.” 2021. Dvara Research.

Chicago

Anukriti Tiwari, Deepti George. 2021. “Tracing the History of IRDAI’s Regulations on Suitability and its Interpretations by Market Participants – Part 2.” Dvara Research.

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