Source: liveMint
Allahabad High Court asked Irda to scrutinise SBI Life’s policies, and if found guilty of a breach, to wind up its business.
It also held Irda remiss in its duties of upholding consumer interest.
“Irda completely failed in exercise of its statutory duty in allowing
the unilateral amendments in the policy on a mere advice of a switch
over option to all the policy holders. …an advice of Irda could not be
the basis of change in the policy, which is a contract unless written
consent of policyholder was obtained. Irda failed to carry out its
statutory duties in allowing such unilateral change by mere information
without insisting upon written consent of the policy holder,” the
judgement noted (edited excerpt).
As a scientist at the National Botanical Research
Institute in Lucknow, Virendra Pal Kapoor, now 72, spent years
developing eco-friendly, toxin-free, herbal products. Ironically, as an
investor, he contaminated his own portfolio by making the cardinal
mistake of buying insurance when not needed. To be fair to the
scientist, he was taken in by the advice given by his life insurance
agent, whom he met in the premises of his bank.
Kapoor, now retired, is a happy customer of State Bank of
India and has built a relationship of trust over decades with the bank.
“I met this agent at my bank, and since SBI is government owned, I
thought that the companies that he represented (SBI Mutual Fund and SBI
Life Insurance Co. Ltd) would also be backed by the government,”said
Kapoor.
In 2007, at the age of 64-plus, Kapoor bought a
unit-linked insurance plan (Ulip) on the advice of his agent. According
to Kapoor, his agent, Vinod Kumar Harjai, who is an independent
financial adviser (IFA), suggested that he buy SBI Life Unit Plus-II
single-premium Ulip for a term of five years. The rationale offered was
that the Ulip would not only help Kapoor invest in equities just like
mutual funds, but also provide insurance cover at a nominal cost, almost
free. So, Kapoor, who didn’t need insurance at all, bought the Ulip and
opted for the growth fund with an equity exposure of 40-100%, instead
of a mutual fund since the Ulip came with free insurance. “I invest to
save on taxes. Before I bought the Ulip, I used to invest in mutual
funds, which were also recommended by the same agent. But when he told
me about this Ulip that would also give me insurance for free, I was
interested. I didn’t need insurance, but since it was free I didn’t see
any harm in taking it,” said Kapoor.
Harjai said he did not give such advice: “I told him he
didn’t need insurance, but he wanted this plan. I only sell term plans
but since he had made up his mind, I told him to buy it from me only”
Cost of insurance
Insurance for a senior citizen is very expensive, but in
Kapoor’s case, what added to the burden was that he inadvertently opted
for a higher sum assured. “I didn’t know I could choose the sum assured.
I was told that this was the standard sum assured that comes with the
policy,” said Kapoor. So, instead of going for the minimum sum assured
of 125% of the premium, Kapoor opted for a sum assured of 625%, or
around `3.13 lakh. The result: in five years, his investment of `50,000
was reduced to `248.
Ulips typically come with four cost heads. The first is a
premium allocation charge, which is deducted straight from the premium.
The other three costs—policy administration charge, fund management
charge and mortality charge or insurance charge—get deducted from the
invested fund. Mortality charge varies across individuals depending upon
age and amount of insurance taken. The older the person, the riskier
she becomes and so insurance becomes more expensive. These costs bite
more in case of a single-premium plan because no fresh investments are
made to offset the burden of costs.
What’s more, since the rules at the time Kapoor bought
the policy didn’t mandate a customized benefit illustration to show how
the charges would eat into the fund value, he was not made aware of
them. So, when he got just `248 in his account, he was shocked.
“With mutual funds, I used to get regular statements. But
after I bought this policy, I didn’t get any statement. I had
absolutely no idea how my money was doing,” said Kapoor. Even
communications with the agent didn’t help. “I would ask the agent and
every time he would tell me the NAV. But I had no clue about my money,”
said Kapoor. Net asset value (NAV) can be misleading as it reflects the
net value of the underlying asset, while the actual fund value would
depend also on the units held by the investor. For instance, if the NAV
of a fund is, say, `10 per unit and the investor has 10 units, the fund
value will be `100. In an insurance policy, the insurer deducts charges
by cancelling the units. So, while the NAV may go up, the fund value may
actually come down due to units being used to pay for the charges. In
Kapoor’s case, the particular fund’s NAV rose from `17.15 to `19.24 in
five years giving an annual return of 2%. For Kapoor, the insurance cost
was big—but it didn’t reflect in the NAV, and he didn’t receive any
fund value statement either.
In fact, even close to the policy’s maturity, Kapoor
didn’t receive any communication from the insurer. So, he approached SBI
Life at its Gomti Nagar branch of Lucknow. “I went to their office to
remind them that my policy was due to mature. They didn’t tell me my
fund value even then. In fact, they kept saying the system had some
problem and that they would not be able to tell me the fund value,” said
Kapoor. “Instead, I was asked to fill up a maturity claim form, and
they specifically asked me to keep the amount column blank. After about a
week, `248 was credited to my bank account,” he added.
From there on it was a battle with the insurer as Kapoor
decided to seek an explanation for how his money was reduced to ashes.
The insurer wasn’t very forthcoming. “Every time I went there, I was
told that the authority concerned was busy,” he said. After several
harassed visits, Kapoor approached Dhruv Kumar, an advocate and an
insurance activist.
Kumar worked as a branch manager with United India
Insurance Co. Ltd and also got a degree in law. He took voluntary
retirement to practice law in 2005. “The biggest challenge for any
insurer is to pay the claim. Having being in the business, I saw
first-hand how policyholders got harassed with half-baked information.
So, I decided to start my own practice as a lawyer,” said Kumar. As a
first step with Kapoor, he lodged a complaint with insurance watchdog,
Insurance Regulatory and Development Authority (Irda).
“Irda gave a routine reply that the complaint had been
forwarded to SBI Life and that the company would get back to us,” said
Kapoor. The insurer did get back to them with an explanation. Sadly, it
was even more cryptic than the policy.
“We had asked them in simple words to explain the charges
and how `50,000 became `248. They sent us a letter that was very
difficult to understand,” said Kumar. Unable to make any headway, Kumar
took the matter to court; on behalf of Kapoor, he filed a writ petition
in Allahabad High Court in September 2013.
The problem was not limited to wrong advice; Kumar found
loopholes in the policy itself, which violated regulatory guidelines.
For instance, the policy offered two minimum sum assured: 125% and 625%
of the premium. Kapoor had no clue about the choice, and the agent opted
for the higher sum assured on his behalf.
The second clause in the policy document referred to a
safety net. The original policy stated that if anytime during the term
of the policy the fund value fell below `10,000, the policy would get
terminated and the money would be returned to the policyholder at no
extra cost. However, the insurer later amended the clause to just offer a
switch to another fund. Irda, which allowed the amendment, asked the
insurer to inform policyholders. Kapoor said he didn’t receive the
communication, but the insurer stated in the judgement that the
information was sent.
The verdict
Given the manner in which the policy was sold and
subsequently serviced, the Allahabad High Court found SBI Life guilty of
wrongdoing. In its judgement dated 29 May, the court observed that the
insurer could not satisfactorily reply as to whether the terms and
conditions of the policy were properly explained by the insurance agent.
“In case the calculations were explained, he would certainly not have
opted for a policy which would ultimately lead to completely wiped (sic)
out his investment. No prudent person, if he was explained the
consequence of deduction of mortality charges at 625% risk, would have
subscribed to the policy, which in any case, even if the NAV had risen,
would not give any return at all,” the judgement noted.
The court further ruled that the insurer couldn’t
unilaterally make amendments to the policy since it was a contract
between the policyholder and the insurer. “Clause provided for
termination of the policy, if the investment fell below `10,000. It
could not have been changed unilaterally even on the advice of Irda. The
written consent of the policyholder was required for deletion of the
clause,” said the judgement.
It also held Irda remiss in its duties of upholding
consumer interest. “Irda completely failed in exercise of its statutory
duty in allowing the unilateral amendments in the policy on a mere
advice of a switch over option to all the policy holders. …an advice of
Irda could not be the basis of change in the policy, which is a contract
unless written consent of policyholder was obtained. Irda failed to
carry out its statutory duties in allowing such unilateral change by
mere information without insisting upon written consent of the policy
holder,” the judgement noted (edited excerpt).
Kumar added: “SBI Life, being a commercial organization,
will aim at profits. But Irda, being a statutory authority, is duty
bound to look after the customers and to ensure that they aren’t
cheated. However, the regulator supported SBI Life before the high
court, despite knowing that it had violated its guidelines. Therefore,
the regulator is a bigger culprit.”
Calling the policy “unconscionable”, the high court has
declared the contract illegal and void and has asked the insurer to
return `50,000 to Kapoor along with `10,000 towards expenses in filing
the writ petition. It has also asked Irda to scrutinise SBI Life’s
policies, and if found guilty of a breach, to wind up its business. The
court has asked Irda to examine the policies for any hidden terms and
charges with an objective to deceive the policyholder, and if found
guilty, to direct SBI Life to discontinue such policies and return the
entire amount invested to the investors. “In such case, it will be open
to the central government to initiate prosecution against the management
of SBI Life in accordance with the law,” the judgement noted.
Mint Money take
This is a landmark judgement in the interest of
policyholders which hasn’t been shy of even pulling up the insurance
regulator for being remiss in its duties. “Strict action should be taken
by Irda against the intermediary in case of mis-selling or where the
policy is sold without considering the risk profile of the policyholder.
Also, it’s important that products are simple to understand by a common
person,” said Pankaj Mathpal, managing director, Optima Money Managers
Pvt. Ltd, a financial planning firm. It’s important that complex
products such as insurance be sold not only under watertight regulations
but also through responsible sellers. Accountability is important so
that such products don’t turn toxic by going into the wrong hands.
We contacted both Irda and SBI Life for the story. While
Irda didn’t respond, SBI Life officials said they were not in a position
to comment as the company has filed a Special Leave Petition in the
Supreme Court and the matter is now subjudice.
No comments:
Post a Comment