Pvt. Life Insurers increase mortality charges

Life insurers have tossed ethics out of the window, and the insurance regulator seems to be looking the other way.

In a concerted move, a number of life insurance companies have quietly increased the mortality charges on their unit-linked plans (Ulips) from September 1.

The Insurance Regulatory and Development Authority (IRDA) didn’t find anything wrong with that and cleared a passel of new plans recently.

The move is another blow for investors in Ulips — the product that stormed the mutual fund bastion a couple of years ago and sparked a tussle for regulatory oversight between the IRDA and capital market watchdog Sebi earlier this year.

Earlier, the life insurers raised the entry barriers for Ulips by increasing the minimum monthly premium on a policy to anywhere between Rs 1,500 and Rs 3,000 a month from Rs 500 to Rs 2,000 earlier. Clearly, the insurers were looking to target the well-heeled through the new Ulip plans.

But in an even more sinister move, they have raised the mortality charge, which is the cost deducted from the premium you pay to cover the payment of death benefits.

Why to worry?

Let us suppose you have bought a policy with a sum assured of Rs 10 lakh and the total premium (or the investment fund value in the case of a Ulip) paid till now is Rs 2 lakh. If you happen to die now, the risk of death benefit payment on the insurer is Rs 8 lakh.

To cover this risk, the insurer deducts the mortality charge from your premium. While the mortality premium is calculated on the sum at risk (Rs 8 lakh in our example), the premium rate is determined by the mortality table.

Mortality measures the probability of death, and the mortality premium rate increases with the increase in the age of the policyholder.

From September 1, the insurers have increased the mortality premium rates for each age category steeply compared with the Ulips they sold before.

For example, the mortality charge for a 20-year old policyholder was Rs 1.122 per Rs 1,000 sum at risk in the case of Bajaj Allianz Life’s Max Gain policy. The insurer has now more than doubled it to Rs 2.57 per Rs 1,000 sum at risk in its new Ulip Max Advantage.

The insurers have a glib explanation for this move.

“We have increased the mortality charges because the minimum sum assured has now gone up to 10 times the annual premium from five times earlier. Under our new Ulips, we are giving both the sum assured and the fund value as death benefit. Besides, there is a built-in accident death cover,” said a senior official with Bajaj Allianz Life Insurance Company.

However, this argument is a little woolly because almost all insurers had earlier been offering a sum assured under their Ulip plans of as high as 20 times the annual premium.

Type II Ulips — where both the sum assured and the fund value are given on the death of the policyholder during the policy term — have always been around and nobody used this as an excuse to raise the mortality charge. For example, SBI Life’s Unit Plus Elite II didn’t slap differential mortality charges.

The insurers’ argument can also be easily demolished. If the sum at risk goes up at any given point of time, the mortality premium, calculated at a given rate, automatically goes up. So why tweak the rate?

“The mortality premium rates can vary if the underwriting conditions change or if the insurer experiences a high claim ratio in a particular product,” said G.N. Agarwal, chief actuary of Future Generali Life Insurance Company.

“We have also noticed some companies increasing their mortality charges. This should not have happened. It isn’t proper,” said Agarwal, who formerly was an actuary with the Life Insurance Corporation of India. “I don’t understand how the regulator approved these products without seeking clarifications from the insurers.”

S.B. Mathur, secretary-general of the Life Insurance Council, the lobbying body of life insurance companies in the country, said he was not aware of this development. But he added, “This should not have happened. I am not aware of this. So, I cannot make further comments. I’ll take a look at it.”

Sinister purpose

In its revised circular issued in August 2009 that capped charges relating to Ulips, the insurance regulator excluded mortality charges from the overall cap on expenses while determining the investment returns of policyholders.

The first circular in July 2009 had, however, included mortality charges within the overall cap on expenses.

After August 2009, insurers such as SBI Life increased the mortality charges while reducing its premium allocation and other charges.

“After the new regulations came into place from September 1, insurers have been increasing their mortality charges to make profits which otherwise would have suffered,” Agarwal explained.

What the insurer doesn’t tell you is that profits earned from the investment of mortality premium accrue to the shareholders of the insurance company and not to its policyholders.

Therefore, an increase in mortality charges imply more investible fund for an insurance company and, hence, greater distributable profits to shareholders. “This could be another reason why insurers are raising their mortality charges,” admits Agarwal.

Source: The Telegraph