POLICY TRADING IS FINE, BUT REGULATE IT

A recent Bombay High Court ruling lets you sell a life insurance policy to anyone you want. Previously, it could only be to an entity that had some insurable interest in you — like a bank you took a loan from. For you, it’s a shot of liquidity, as you can sell a life insurance policy in case of an emergency, even get something more for lapsed policies than what insurers offer. For insurers, the development of a secondary market means servicing lapsed policies, translating into lower profits. Sam Ghosh, chief executive officer, Bajaj Allianz Life Insurance says the issue is not more payouts, but the absence of regulations that will prevent misrepresentation and fraud. In an interview to Deepti Bhaskaran, Ghosh talks about how policy trading is useful for policyholders and what needs to be done to make it safe. Even before the court ruling came in, there wasn’t any law that prohibited policy trading. So then, why did life insurers discourage it?It wasn’t insurers, but LIC (Life Insurance Corporation), which was the sole life insurer till a few years ago. LIC insisted on the presence of the principle of insurable interest policyholders could assign a policy only to entities that had an insurable interest in them. When a policyholder sells a policy, his rights in the policy get transferred to the buyer. So, if the policyholder dies, his death benefit goes to the buyer, instead of the beneficiary. Free trading goes against the principle of insurable interest, and that’s why LIC didn’t allow policy trading. The insurance regulator also agreed with LIC’s argument. So, when the life insurance sector was opened to private players, we took this as the norm. Of late, the number of lapsed policies has increased, and policyholders are the losers — they paid premiums for some part of the policy tenure, but they forfeited the entire gains due to them. Trading will help such policyholders get some money for their policies. Also, by giving liquidity during the tenure, it enables policyholders to review their reasons for buying the policy. Yes, it does. As a policyholder, when you can’t afford to pay premiums, you either accept the surrender value being offered by the insurer or the policy lapses. The policy has acquired some value. If the policy can be sold and a higher amount realised, it is good for you. Even the buyer can manage higher returns. We are not opposed to trading in life insurance policies. But we would like to see rules in place before it begins However, the problem with policy trading is that it could lead to moral hazards. Since the policy benefits get transferred to the buyer, the unscrupulous could buy a policy and then kill the seller to get the sum assured. Having said that, chances of such incidents are rare. The other problem for insurers is that, in the absence of an insurable interest, it is difficult for us to keep a track of the policy once it reaches the secondary market. When does it make sense for policyholders to sell their policy? Only in one case: if you are facing a severe cash crunch and can no longer service your policy. For you, trading is helpful, as it helps you get some value for your policy, and it is only fair that you do. If you took a policy that you now think is inappropriate for you, a secondary market offers an exit route. The flip side to this is that if this becomes the overriding principle, the secondary market will be all over the place. Take Ulips. With every fall in the market, policyholders will try to sell off their Ulips, and vice versa. Are you suggesting only some kinds of policies be traded?No. Since trading happens during hardships, there’s no reason why any policy shouldn’t be traded if it is not being serviced. More than the type of the policy, what is more important is the reason behind selling the policy. How important do you think will the intermediaries be who help people buy and sell policies? Once the secondary market picks up, we need a pricing mechanism that ensures fairness to both policyholders and buyers. Intermediaries will do the pricing. But how that pricing will be done, what conditions will enable selling, what will be the commissions of the intermediaries need to be decided. Right now, there is nothing in the regulations that can ensure fairness. Once the secondary market picks up, the regulator will introduce guidelines on selling. In developed countries, there’s an active secondary market in insurance policies. Some of those insurers are in India and they are opposed to introducing it here. Isn’t that double standards?That’s not true. Overseas markets are active, but there are guidelines in place for brokers and policyholders. Once guidelines are introduced for trading in India, the skepticism will go. But is the reservation only about guidelines? Or, is it also because insurers will now have to pay for policies they had thought had died?Well, this is a very small issue. Moreover, the way we look at business, it is profitable for us if premiums come to our books and a policy stays alive for its entire tenure. Any lapse is seen as bad. So, revival is really not an issue with us. The only problem is when it is traded carelessly. What about tax laws? Will the same tax laws apply to the secondary market as in the primary market?That still needs to be decided. A meeting of the Life Insurance Council shortly will touch on these issues.

Source: Express Money, April 10, 2007