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Life Insurance - Can insurance documents be simplified?

14 Mar 2013

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Policy details can be reduced and simplified but may be not to a few pages like other financial products

 
Anyone who has bought an insurance policy knows how big the policy document can be. Often, it runs into 30-40 pages, is full of jargon and difficult to comprehend. But, there is no getting away from it, because a standard policy document of a life or non-life insurance product contains preamble of the insurer, terms & conditions, coverage, premium details and exclusions. The customer is expected to read through carefully before signing. The terms and conditions are mentioned to avoid mis-selling. Still, the number of complaints in life insurance rose from 9,656 (FY2010-11) to 309,613 (FY2011-12). Most complaints were against traditional policies. And agents cannot always be blamed. If customers read the policy document, mis-selling isn’t possible.

A policy document is of two types -- standard and personalised. A standard document contains ’benefit illustration’ and ’terms & conditions’ of the product. Higher the premium paying term, longer will be the illustration. This one is given to the customer before selling the policy. A personalised document contains the documents that a standard policy has and more, which is the personal details of the policyholder. It is issued after the policy is sold. GV Nageswara Rao, managing director and chief executive of IDBI Federal Life Insurance, says the volume of a policy document depends on the product. "For instance, Ulip document is bulkier because information like the product-type, features opted, benefits and surrender value are all mentioned."

There are two issues with policy documents -- volume and language. There is a case for simplifying the policy documents while reducing the size. However, it can’t be reduced to a few pages as in the case of other financial products. Reason: Insurance is a contract between the insurer and the insured, and hence needs to spell out all details and be elaborate. According to Ashvin Parekh, partner - tax at Ernst & Young, policy wording in India is adopted from those in foreign countries, which doesn’t indicate the liability of the insurer clearly. There is also a need to issue separate policy documents to entities and individual policyholders. Certain words can be simplified. For instance, the policy document often says ’methods in which costs are recovered from insured’.

This means, these are charges/costs that are levied by insurers like commissions, fund-management charges and policy servicing. Insures say, such complex jargons can be simplified so that customers know what it means and how much they need to pay at a time. Insurers suggest that standard inclusions which are expenses, accounting standards and other review regulations should be removed from the document. And customers should be made aware of it through advertisements or awareness campaigns. Reason: This makes the document very technical, voluminous and difficult to interpret. Parekh of E&Y suggests policy documents should focus only on exclusions, as that’s what matters most to customers. But in some cases the wordings have to be same.

"The documentation is same for an individual and a company’s motor policy, because the risk of automobiles remains the same," says K K Mishra, chief executive officer of Tata AIG General Insurance. The new Irda chairman is working on simplifying the policy document to make it customer friendly.

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