Policy Trading: Free or Macabre?

Last week the Bombay High Court adjudged that insurance policies can be freely assigned to a third-party for a price. Reactions to this judgement based on a 70-year-old law have been varied. While some see this as a validation of individual rights in a free market, others fear the birth of a macabre market where investors take bets on the lives of others. The suit was the fallout of LIC’s decision in 2003 to not assign policies in favour of an investor who saw an arbitrage opportunity between low surrender values on lapsed policies. Arbitration was possible by purchasing the maturity benefits through assignment. Assignment entitles the third-party to receive the maturity value of the policy as well as receive claims amount in case of a claim. There’s, however, a catch. The original policyholder continues to remain the insured party and claims can arise only when this policyholder meets with an accident or expires. This third party, however, will have to continue to pay premium for the policy, till it matures or the original policy holder /insured files a claim. LIC officials have objected to assigning policies to investors on three grounds — the practice is not suited for the social milieu in India. Secondly, it goes against the principles of insurable interest and amounts to gambling and it creates a moral hazard. Principles of insurable interest require that the beneficiary of an insurance policy should suffer an emotional or financial loss if the insured event occurs. “Without insurable interest , there could be cases where the beneficiary may put the original policyholder in a situation which could lead to claims — a situation which will require police intervention,” said a senior official from Kotak Mahindra Old Mutual Life Insurance. Sam Ghosh from Bajaj Allianz Life Insurance said, “Allowing trade makes these policies liquid, but the ‘moral hazard’ aspects are also there. But I guess such events would be rare. We need to examine how it is done in the US or the UK.” Nevertheless, the regulator — IRDA — feels it is alright to trade insurance policies but cautions that it should be practised with some sort of safe guidelines .
Source: Times News Network