Insurers to adopt uniform definition of policy expiry

HYDERABAD: Domestic life insurers may have to adopt a uniform definition for expiry of insurance policies to give more leeway to policyholders on premium payments. IRDA has recommended a uniform grace period of 30 days for policyholders paying their premium every quarter, half-year or every year. A 15-day grace period has been suggested for policy holders paying monthly premium. An insurance policy lapses when the subscriber does not pay the premium within the grace period. IRDA has recommended re-instatement of a policy if the premium is paid within the revival period of two to five years, as per the internal practice of the insurer. Currently, companies have different definitions on expiry of policies and this creates a lot of confusion. The suggestion to life insurers to adopt a uniform grace period and lapse definition has been made in IRDA’s first occasional paper on lapsation of insurance policies and its impact on the domestic industry. Lapsation of insurance policies is of world-wide concern and impacts all stakeholders. IRDA chairman J Hari Narayan reckons that results thrown up in such research studies could help stimulate a policy debate and make course corrections, if need be. The occasional paper has been authored by a team led by R Kannan, member, actuary, IRDA. The recommendations, if adopted by insurers, would give more leeway to policyholders and curb policy lapses. The study reveals that the lapse rate in terms of the number of policies increased from 5.62% in 2002-03 to 6.64% in 2006-07. The lapse rate of premium rose from 4.4% to 6.95% during the period under review. The lapse rate in Unit Linked Insurance Plans (ULIPs), 18% in terms of number of policies and 10% by premium was also much higher compared to most traditional plans. ULIPs are popular savings instruments that offer flexibility to the policy-holder in terms of investment and also a life cover. A part of the premium is invested in equities or government bonds, depending on the choice of the policy-holder. Term assurance products showed the highest rate of lapse, while pension policies had the lowest lapsation rate. The lapse rate for non-medical policies was, however, higher than that of medical covers. When a policy lapses, the policy holder forfeits the premium paid and the insurance cover. The agent loses the renewal commission. It also impacts the growth of the insurance business and solvency margins of the insurer. Solvency margin refers to the excess of assets over liabilities that an insurer maintains as a prudential measure in the interest of policyholders.