In July 2019, the IRDAI notified the IRDAI (Non-Linked Insurance Products) Regulations 2019 ("NL Regulations 2019") and the IRDAI (Unit Linked Insurance Products) Regulations 2019 (collectively, the "2019 Regulations") based on the feedback received from various stakeholders on the exposure draft of IRDAI (Non-linked Insurance Products) Regulations 2018 and the IRDAI (Linked Insurance Products) Regulations 2018 of 26 October 2018 (collectively "Exposure Drafts"). The 2019 Regulations supersede the IRDAI (Linked Insurance Products) Regulations 2013 and IRDAI (Non-Linked Products) Regulations 2013 (collectively "2013 Regulations").
The 2019 Regulations are aimed towards recognising new trends in life insurance product structures, modern customer needs and preferences, and on-going innovations, in addition to ensuring that design and price life insurance products in the best interest of policyholders, by complying with sound, responsive and prudent practises. The 2019 Regulations also aim at simplification of existing as well as new life insurance products, such as modification in the product categorization.
The product classification prescribed under the 2019 Regulations is considerably amended to narrow down the product categorization under both the unit linked and non-linked platform.
At a common level, we note that the erstwhile category of 'Variable Insurance Products' under the 2013 Regulations, ie, products where the benefits would partially or wholly depend on the performance of approved external index/factors linked to such products, has now been completely omitted, under both the unit linked and non-linked platforms. For the product classification of non-linked insurance products, this change appears to have a direct impact, where unlike the 2013 Regulations, the NL Regulations 2019 now expressly define (i) "pure risk premium products" as those products where there is no savings element and no benefits on survival or maturity are available, and (ii) "savings products" as those other than pure risk premium products, thereby clearly demarcating non-linked insurance products as either pure risk term insurance products or savings products.
Amongst other significant areas of impact, the categorization of non-linked products as strictly "pure risk term insurance" or "savings" also imposes a challenge on the continued issuance of existing term insurance and protection products that offer a savings element. The impact of this categorization appears to not only affect the benefit structure of products, but would also vary the extent of permitted expenses incurred, commissions payable, and other administration operations in relation to such products. As a consequence, this has resulted in various business level as well as product level decisions required to be taken by Insurers to ensure compliance with the NL 2019 Regulations.
Highlights of 2019 Regulations
A majority of the alterations proposed under both the Exposure Drafts appear to have been welcomed by Insurers and stakeholders, and this has reflected in the 2019 Regulations closely mirroring the proposed provisions under the Exposure Drafts. Some of the noteworthy changes, as from the 2013 Regulations, are set out herein below:
- Under a unit linked policy, after the payment of five annual premiums, a policyholder may now be given an option to decrease the premium by up to 50% of the annualized premium (subject to the minimum premium limits prescribed under such policy).
- The minimum sum assured on death for regular premium products is required to be at least 7 times of the total premiums paid, and for single premium products at least 1.25 times of the total premiums paid, irrespective of the entry age of the life assured.
- A non-linked policy will now acquire a surrender value on receipt of at least two consecutive policy years' premium, and such surrender value is subject to the premium paying term of the policy.
- Policyholders have a period of three years to revive a unit linked policy with lapsed status, and a period of five years to revive a non-linked policy. The increase in the time period within which lapsed policies may be revived appears to be widely welcomed by both Insurers and policyholders as it may result in decrease in the number of dead policies, and also provide policyholders a wider revival window.
- Partial withdrawal may now be opted under unit linked pension policies. Further, on surrender of a pension policy, the policyholder can now commute up to 60% of the proceeds, and utilise the rest to purchase annuity products.
- The difference between the maximum and minimum charges collected by Insurers during the first five years of a unit linked policy can now vary up to 3 times, which is double the erstwhile 1.5 times limit.
- The norms on discontinuance of a policy due to non-payment of premium have also been considerably revised.
- Group policy administration will now be in accordance with the "Group Life Insurance Products and other operational matters" of 26 September 2019, which stipulate norms such as the categories of payments that may be paid to a group master policyholder, and the norms and procedure for claim payment under lender-borrower group insurance schemes.
- As discussed above, there will no longer be 'Variable Insurance Products' as a product classification, and products offered on the non-linked platform will now have only two categories of products, pure risk term insurance and savings products.
In light of the changes brought by the 2019 Regulations, the IRDAI has issued the "Implementation of IRDAI (Non-Linked insurance Products) Regulations 2019 and IRDAI (Unit Linked insurance Products) Regulations 2019" of 26 July 2019 ("Implementation Circular") which lays down the procedure to be followed for filing new and modified insurance products or riders, and prescribes the format of certifications and requisite procedures for certification.
In order to make the implementation of the 2019 Regulations smooth and efficient, the IRDAI has expressly allowed certain modifications to approved and existing products and riders without the requirement for a undergoing the usual File and Use procedure, vide its circular on "Use and File Procedure for certain modifications under existing products and riders offered by Life Insurers" of 26th July 2019 ("Modification Circular"). The Modification Circular permits specific limited modifications to approved products and riders, inter alia, changes in the premium rates/charges and/or benefit amounts necessitated on account of the 2019 Regulations, changes in assumptions relating to lapses, surrenders and paid-up states, mortality, morbidity, and policy expenses in respect of non-linked products, changes in premium paying frequency, addition of approved riders, revision of distribution channels, and addition of approved funds to existing unit linked products. The Modification Circular simplifies the approval procedure for the modifications expressly envisaged therein, and also lays down general and specific norms required to be satisfied in respect of each such minor modifications. It is to be noted that for "any other modification" other than modification specified under the Modification Circular, Insurers are required to seek the IRDAI's approval under the existing File and Use procedure.
The 2019 Regulations aims at Insurers having in place and following sound, responsive and prudent practices in place, especially while designing and pricing life insurance products. Insurers are required to ensure complete regulatory compliance of all existing products and riders, and are required to withdraw any product that is not in conformity with the 2019 Regulations on or before 30th November 2019.
With the limited relaxations permitted under the Modifications Circular, the practical impact of the 2019 Regulations remains to be seen with respect to the new products proposed to be offered by Insurers, and the consequent changes required in their existing portfolios to ensure compliance with the provisions of the 2019 Regulations for their existing portfolio of life insurance products offered within the timeline stipulated.
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