IRDA’s focus on needs-based life insurance sales

IRDA’s focus on needs-based life insurance sales—Will it really work or increase confusion?

The Insurance Regulatory and Development Authority (IRDA) recently announced guidelines on development and implementation of prospect product matrix by life insurance companies, which will help in needs-based sales. Will this help?

Sale of life insurance policies based on customer needs would surely help. There is a lower chance of buying a wrong policy and painful policy surrenders. IRDA’s step in this direction is welcome, but combining needs analysis and proposal in one form will be cumbersome to both customers and intermediaries. After all, the proposal form is needed only when the customer has agreed to buy a specific product while the needs analysis form will be used to determine the customer’s requirement which will be used to recommend one or more insurance products.

According to Vijay Sinha, senior vice president and head, marketing, Tata AIG Life Insurance, “IRDA’s initiative is most welcome as all mature insurance markets like the UK already have needs-based sales. The needs analysis and proposal form should be separate as its importance comes at different stages in the sales process. The fact-finding stage of the sales process should involve a needs analysis form. After understanding the customer’s requirements, the intermediary can come up with solutions and recommend product. When the customer approves the product, the proposal form will be used. It will confuse the customer if the needs analysis and proposal form are combined.”

IRDA exposure draft specifies that an insurer or a distributor must make “reasonable efforts” to obtain a consumer’s suitability information prior to making a recommendation. It means that customer suitability information is optional which will entail most of the customers bypassing the questions or intermediaries making half-hearted attempts to get answers. Suitability information means information that is reasonably appropriate to determine the suitability of a recommendation. E.g. age, annual Income, financial resources used for funding the purchase of the life insurance product, intended use of the life insurance product, financial objectives with time horizon, existing assets including investment and life insurance holdings, liquidity needs, liquid net worth, tax status, risk tolerance and so on.

Many insurance companies are not happy to adopt a standard proposal-cum-needs analysis form. While they agree on the need to have some mandatory questions to seek customer information, they feel that there should be flexibility in structuring the remaining questions. Insurance companies want to apply their own ingenuity in having questions framed in a sales-oriented manner; the fact finding will naturally lead to sales. They feel that IRDA approach should be flexible rather than prescriptive.

Online life insurance buying is popular with term life insurance as well as ULIPs. The exposure draft is silent about online life insurance. Will the ‘prospect product matrix’ be applicable to online life insurance sales, too? If not, what prevents an aged person from buying long-term online ULIP that is clearly not suitable for his/her needs?

An insurance intermediary is not a financial planner in most cases and hence a customer may be queasy about sharing financial information, especially giving income proof, expected inheritance, details of liabilities, expenditure and so on (as per the proposed form).

According to a senior official in one insurance company, “The customer should have the flexibility to refuse sharing of financial information in the needs analysis form. The prospective customer should state in writing that he wishes to buy the product without sharing his financial information. If it is made mandatory, it will turn-off some customers or the intermediary may end up filling something just to meet the requirement, both the things being undesirable.”