IRDAI push for standard products: Regulator must educate masses to increase awareness on protection needs

The Insurance Regulatory Development Authority of India (IRDAI) is forcing a major change in the insurance landscape of India by prompting insurers to come out for more easy-to-understand standard insurance covers.

In a recent move the insurance regulator has asked non-life insurance companies to offer a standard personal accident insurance policy from April 1, 2021 on the lines of standard health and standard term life insurance.

The move comes close on the heels of a similar directive to life insurance companies in October 2020 to launch standard term life insurance policy offerings – Saral Jeevan Bima Policy (SJBP) – with the name of the insurance company prefixed with the product title.

The push for a standardised alternative in the product bouquet in important insurance categories is a move in the right direction. Financial literacy remains low in India and many find it difficult to comprehend the nuances of financial products. This inhibits them from purchasing important insurance covers that would keep them safe in the event of any unforeseen mishap.

Also Read: IRDAI asks health, general insurers to bring standard cover from April

The Economic Survey of 2020-21 has highlighted the abysmally low level of insurance penetration in India. It has pointed out that the penetration (insurance premium as a percentage of GDP) in the non-life segment has slipped to 0.94 percent from 0.97 percent in 2018. In the life insurance segment the penetration level was slightly higher at 2.82 per cent from 2.74 in 2018.

This pales in comparison with countries such as Taiwan, Hong Kong, South Africa, United States and United Kingdom where the overall insurance penetration level is in double digits.

Complex and diverse offerings by insurance companies also often lead to agents and brokers misselling the products by misleading the buyers of their features and benefit.

The ‘sachetisation’ of products within some categories will go a long way in helping the common person to understand the policy features and benefit and thereby making it easier for them to purchase them. This sachetisation approach would especially work while serving the customers at bottom of the pyramid. They need these covers the most and they have limited purchasing power.

There are chances that the cover may get discontinued due to non-payment of premium for a month or a quarter. Hence there should be a facility to reinstate the cover quickly upon payment of premium. Standard policies need to be made more customer-friendly.

However the responsibility of the regulator and the industry does not end there. There are a few more expectations from them. Accident insurance products are not aggressively marketed by insurance intermediaries given the low commission payouts in absolute terms.

IRDAI needs to encourage the insurers and intermediaries to market these ‘low ticket-big impact’ products. Fin-Tech platforms too should be encouraged by insurers to successfully distribute such products. The use of technology can bring down the cost and more consumers can be tapped.

Despite efforts to educate the buyers the tendency is to purchase insurance primarily to save taxes or as an investment. Unfortunately, the protection needs, which should be the primary reason for insurance purchase, are often overlooked. Standalone personal accident insurance policies offered by non-life insurance companies do not offer any tax benefit nor is there any investment component. It is also not pushed by agents given small commissions. No wonder, they are not top of the mind items to be purchased.

The IRDAI can take a cue from the mutual fund industry which was directed to spend at least two basis points of their assets under management towards investor education. A focused effort to raise awareness of protection needs and linking them to standardised products should be undertaken by the insurance industry under the guidance of IRDAI.

(Views expressed are personal)