IRDA’s Rs275 crore refund order to SBI Life proves botched product approval process

IRDA has asked SBI Life to refund Rs275 crore for collecting premium upfront on a policy, which had two premium payment terms. But why did IRDA approve this product which was cleverly designed to earn hefty commission for SBI?

 

The Insurance Regulatory and Development Authority (IRDA) has ordered SBI Life to refund Rs275.29 crore to the policy holders as the money was collected from them in violation of norms.
 

The product had two premium payment term (PPT).  Yet, in nearly 95% of the policies sold, SBI Life had collected the second year premium for its policy Dhanaraksha Plus Limited Premium Paying Term in the first year itself. What is worse, this policy was sold to those who availed of home loans from SBI and its associate banks during the period 2008-2011. The policy was intended to cover the outstanding loan in case of death of the policyholder during the term of the loan. As every one who has taken a mortgage in recent times knows, there is also an element of indirect coercion to take these policies to secure the borrowing.
 

SBI Life also had a single premium version of the product, but it did not provide an informed choice to the buyer. The reasons were simple. The single premium policy earned only 2% commission for intermediaries, which in this case was mainly SBI and its associate banks. The two PPT policy earned hefty 40% of the first year premium as commission and 7.5% of the second year premium as commission to banks which sold the policy. Clearly, the two PPT policy was bound to be much more expensive than the single premium policy if the commission levels have such huge difference.
 

It can be concluded that SBI and its associated banks did not act in best of customer interest by offering a cheaper option. SBI Life crafted a product with two PPT which could not have been for customer convenience. It would have been justified if the PPT was for two-thirds or at least half of the loan repayment period. In that case, there is respite to the customer in having flexibility to pay premium over a period of time. But, what is the advantage of two PPT versus single premium for customer? It is disadvantageous as the premium paid over two years would be higher than single premium due to inbuilt humongous difference in commission levels.
 

So, why did IRDA permit the two PPT toxic product to be launched at all? Did the regulator fail to anticipate that the product was structured to be mis-sold and is completely against customer interest? While IRDA may seem to have helped investors by asking for the premium to be refunded, this is a fit case for holding the regulator itself accountable. In fact this would also be a fit case for class action, both against SBI Life as well as the regulator. 
 

Did IRDA expect that the consumers can easily find out that single premium option was available? Approving a toxic product can remind one of ULIPs before September 2013 which even had high upfront charges of up to 70% and mind-boggling surrender charges.
 

Getting a loan application approved itself is a task and the customer is at mercy of the bank which ensures that the customer accepts whatever loan and property insurance is offered. Any resentment from the consumer can even be deal breaker for loan application. It can be seen from the fact that 93% of second year premiums were received in advance along with first year premiums in the year 2008-09, 94% in the year 2009-10 and 97% in 2010-11. Thus the premium collected is more on lines of a single premium than two yearly regular premiums against the approved File and Use features.
 

Making the two PPT product work as single premium by taking the second year premium upfront is a violation of approved File and Use features, but the insurer may argue that paying second year premium in advance was allowed by IRDA till 2013. But, SBI Life cannot be exonerated from its culpability to offer toxic insurance product; it casts a shadow over other life insurance products offered by the insurer.
 

IRDA order states the following issues (a) Dhanaraksha Plus Limited Premium Paying Term product was sold as single premium policy in violation of approved File and Use features, (b) Paying excess commission to Corporate Agents over and above the eligible 2% commission they would have been otherwise eligible had the single premium version of the policy been offered. (c) No informed choice given to the members of these group insurance policies as envisaged under Regulation 3(2) and 3(3) of IRDA (Protection of Policyholders’ Interests) Regulations, 2002. Thus it is concluded that these violations were detrimental to the interests of members of group insurance schemes of the concerned master policyholders.
 

SBI Life will be appealing against the IRDA order as per the recourse available to them.

 

Comments
kkdammala
1 decade ago
First of all let us appreciate IRDA for this kind of bold step.
Here the plan is sold by the banks and not the SBI Life Insurance itself. Instead of penalizing the Insurance Company. As per the IRDA the Insurance company is authorized to collect the premium of 2nd year in advance. The option of single and 2 premium is available to the customer, its customer's choice to take either of it, But the banks might have sold only the 2 year plan only to get high commission, Hence the banks (or corporate agents)are responsible for any wrong selling of the product, then why penalize the Life Insurance leaving the High commission earners and mis-selling agents. The Present action by IRDA is only a temporary solution, what about the permanent solution to this kind of issues? is cancelling the licence of the banks is the only answer? never not at all.
Suresh Ramasubramanian
Replied to kkdammala comment 1 decade ago
The seller in this case is SBI Life. They are responsible for any act of commission or ommission by their agents.
Krish
1 decade ago
It goes to say that even public sector undertakings including big banks are not exceptional in looting the public knowing that they are in need of loan. It is not about the refund to the policy holders, all the officials involved including the CEO should be punished for resorting to such unethical practice. What a shame that most revered bank in India doing such blood sucking practices in violation of its principles and customer rights.

IRDA should do one more favor as it is proven that every bank which got insurance license are resorting to impose high commission policies when customers are approaching the bank to seek loan. Whether it is a education loan, home loan, auto loan, personal loan or even for locker, they are forcing customers to buy an insurance policy.

It is high time to ban insurance licenses given to banks and bank premises should never be used to solicit insurance business from the customers. The current IRDA action is only a temorary solution and root cause is not addressed.
Nilesh KAMERKAR
1 decade ago
25% - 40% commission to life insurance agents and nobody calls it 'anti policy holder'

Whereas 2.25% commission becomes anti investor for selling Mutual funds?
KUSHAL JAIN
1 decade ago
SBI LIFE'S license should be cancelled as they are miss leading its clients.The clients should get interest on premium paid in advance.

SBI LIFE are very much aware of IRDA policies and if they voilate it purposely means they have taken IRDA for granted. And if IRDA relaxes these rules & penalties than other insurance companies will also follow similar practice.
suda bhanu prasad
1 decade ago
irda should allow individual agents to sell multiple insurance company products.
Suresh Ramasubramanian
1 decade ago
First, it is quite ironic to see a sbi life ad just below this article's headline on your main page :)

Also - I was sold this exact same policy with 2 years premium collected in advance as a single premium, in conjunction with my home loan in 2010.

I saw a note in 2012 where sbi life was penalized 6 lakhs by IRDA for offering this product. I approached their ombudsman requesting a refund, which they denied citing that "this was a technical decision by IRDA, it is a good policy and they decline to refund it"

Now I am going to approach them again on the same subject. Let us see how this goes on ..
raj
Replied to Suresh Ramasubramanian comment 1 decade ago
Please do so & keep us updated.
Suresh Ramasubramanian
Replied to raj comment 1 decade ago
I sent a letter to the SBI life people asking for a refund, and then marked a copy to the insurance ombudsman as it was a continuation of a year old complaint. The ombudsman sent me a letter today morning saying that "We would like to inform you that this forum is a quasi judicial authority constituted under the RPG rules 1998 with defined mandate. As per these rules, the subject matter of your complaint viz: alleged missale and request for cancellation of policy and refund of amount paid, do not come under the purview of insurance ombudsman"

They also suggested that as IRDA has passed an order to refund the excess commission I can wait for the timeframe defined in the order, for SBI Life to refund me the excess commission.

I thought the ombudsman office was where complaints on misselling were to be directed?
sathyacumaran
Replied to Suresh Ramasubramanian comment 1 decade ago
sathya cumaran
thanks to moneylife in bring out all the allegations of capital market related scandals if my case is not handled by you we would like to bring the india biggest scam of stock market where the officicals of sebi bse nse are main culprits apart from stock brokers who are pron for cheating would be exposed and that would be end of india capital market scenario and no FII would be interested in indian capital market would be exposed this would be an disgrace for new govt and our country but we have no other option to expose as we have the records of all the credentials of all the officials past and preaent would be released from our platform where there would not be any threat for our life
sathyacumaran
Replied to Suresh Ramasubramanian comment 1 decade ago
sathya cumaran
thanks to moneylife in bring out all the allegations of capital market related scandals if my case is not handled by you we would like to bring the india biggest scam of stock market where the officicals of sebi bse nse are main culprits apart from stock brokers who are pron for cheating would be exposed and that would be end of india capital market scenario and no FII would be interested in indian capital market would be exposed this would be an disgrace for new govt and our country but we have no other option to expose as we have the records of all the credentials of all the officials past and preaent would be released from our platform where there would not be any threat for our life
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